Low & Bonar announced a fully underwritten £54m placing and open offer (c £50m net) alongside FY18 results. The new equity funding goes a long way towards resolving balance sheet net debt constraints and allows the relatively new management team to execute its updated strategic plan. Our revised estimates incorporate the funding effects, more gradual EBIT margin recovery and reset dividends in line with the stated policy.
FY18 results themselves were broadly in line with our estimates – albeit with a lower final dividend – as was year-end net debt. Input price increases and production issues (in Building & Industrial and Coated Technical Textiles) were a drag on financial performance though the return to Civil Engineering profitability is a welcome development ahead of the intended disposal of that division. The final dividend was below our expectations but understandable given the requirement to raise fresh equity funding to repair the company’s balance sheet. For the record, net debt at the end of FY18 was £128.5m, c £10m lower than a year earlier.
Management actions to change the group structure and reduce costs were barely visible in the FY18 results but they should further benefit operating and financial performance. The re-financed balance sheet will support capex to upgrade core manufacturing operations and product innovation with the aim of growing ahead of GDP in the regions served. With a full agenda for the new senior management team, we have further trimmed our divisional margin estimates for FY19 and FY20 giving rise to 7–8% EBITDA reductions and adjusted for lower interest costs after the equity raise. Our estimates also reflect an increased number of shares in issue (+ c 360m to c 690m) and a re-set dividend cover policy of approximately 2.5x.
The announcement to raise new equity has brought some relative stability to Low & Bonar’s share price, which had tracked lower during 2018. On our revised estimates, which assume that the equity issue is approved by shareholders, the company’s EV remains below 0.5x revenue and sits at 5.5x FY19 EBITDA (adjusted for pensions cash); these multiples are comparable to the levels for FY18 in our December note. On a P/E basis, the FY19 multiple is 8.1x, and applying the restated dividend policy generates a 5.0% dividend yield at the current share price. We project an NAV of 27p for the end of FY19, with primary adjustments for the additional shares in issue and FY18 impairment charges compared to our last note.