The new management team has a clear focus on improving financial and operational performance across the group and individual business units. H1 results bear testament to a number of challenges faced in the period but also showed signs that actions are beginning to take effect. We have reduced our EPS estimates (by c 20% this year, c 10% in the following two) to reflect more conservative margin assumptions.
Headline group revenue was modestly lower y-o-y in H118 but reported operating profit was down 42% (or £5.5m) compared to H117. Revenue mix accounted for around half of this reduction and unrecovered rising polymer input prices almost all of the remainder. Other effects – including higher volumes and initial cost saving actions – broadly netted out. Business unit themes were largely consistent with previous updates. A £19.7m exceptional charge (£18.2m net) including £13.3m goodwill impairment at Coated Technical Textiles (CTT) plus a number of other smaller-cost items was taken as the new management team seeks business improvement in a number of areas. Net debt stability is one indicator of progress here. The interim dividend was held at the prior year level.
Rectifying CTT performance and divesting the Civil Engineering activities are headline business unit targets. Improving organisational efficiency, reducing net debt and investing in growth areas are fundamental strategic objectives to position the group for the future. In the near term, an affirmation of strong market positions (eg recovering higher input costs) and progress with portfolio management would be taken as positive indicators of progress. For now, we have reduced our EPS expectations by c 20% for FY18 and c 10% in the following two years pending further evidence that management’s initial actions are taking effect.
Low & Bonar’s share price has rebounded from recent lows (around 43p) and is now down c 7% YTD. This is perhaps the beginning of a buy-in to the business improvement strategy although there is still some ground to be regained in the context of a c 80p price a year ago. On our revised estimates, the current year P/E and EV/EBITDA (adjusted for pensions recovery cash) are 10x and 6.4x respectively and a maintained dividend (covered 1.7x by earnings) would provide a prospective 6% yield. Lastly, we note that the current share price is only trading slightly above the current 49p NAV.