The first results of the new five year planning period were encouraging. The company has demonstrated that it has the potential to leverage its manufacturing expertise and intellectual property in order to expand its presence in higher margin niche markets and extend its global reach. There are still significant economic headwinds and potential implementation risks attached to the new strategy but, through a combination of organic growth and selected M&A activity, there are grounds for future optimism. The current rating is still reflecting historic trading difficulties and the subsequent uncertainties of a new management team and a revised strategy. However, there was sufficient evidence in the FY2015 results to suggest that a more optimistic view is now appropriate.
The full year results from Low & Bonar were a touch ahead of the market consensus and our own estimates. Revenue declined by 3.6% to £395.8m compared with our estimate of £402.2m, although in constant currency terms it was up by 2.4%. Operating profit improved by 3.5% (+9.7% in constant currency) to £32.8m with the group margin improving by 60bps to 8.3%. Adjusted profit before tax was up by 5.6% to £26.6m compared with our own forecast of £26.2m
EPS and DPS were in-line with expectations at 5.61p (+2.7%) and 2.78p (+3%) respectively. Return on capital employed improved form 11.4% to 12.0%. In-line with company guidance, net debt increased from £88.0m to £102.1m reflecting the increase in capital expenditure during the year primarily in China, where the new Colback factory has recently commenced commercial operations, but also in Hungary.
Divisional performance was encouraging with the decline in European civil engineering markets now having stabilised and strong growth in the other business units. Revenue in the Civil Engineering division fell by 5% in the second half compared with a decline of 16% in the first half. Operating margin was 5.8% in 2H15 compared with 0.8% in 1H15. Elsewhere, constant currency EBITA was up in all four divisions, with particularly strong performances in Interior & Transportation (+30.7% to £13.2m) and Sports & Leisure (+33.3% to £1.2m)
The results show that the newly restructured Group is making progress against its objectives despite receiving little help from prevailing economic conditions. On our 2016e estimates the shares are trading on a prospective PER of 9.6x, EV/EBITDA of 6.0x and yield 5.1%. On a peer group comparative valuation we believe that a share price of 71p, based on peer group comparison, is justifiable at this stage.