Improving operating and financial performance and lower net debt are key management objectives. FY18 results should provide some evidence of progress here, although our revised estimates now contain lower margin and dividend expectations in all three forecast years. Balance sheet clarity and margin recovery will be key share price catalysts, in our view.
An end-FY18 trading update pointed to a PBT outturn c 8% lower than our previous estimates although indicated revenue and net debt were slightly better. Divisional comments were similar to before but the recovery of input cost increases (especially polymers and freight) may be more patchy or taking longer to achieve in current markets. Actions taken to improve operating performance in Civil Engineering (CE) and Coated Technical Textiles (CTT), despite fire disruption at one site, appear to be starting to take effect and FY18 should also demonstrate progress with cost and working capital reduction.
We have aligned our FY18 estimates with year-end guidance, chiefly by lowering the CTT and Building & Industrial contributions. No new forward guidance beyond this was provided; we have lowered subsequent years’ estimates by just over 10% to incorporate more modest margin progression although we acknowledge that actions to improve operational performance in some areas could counter this. As part of an ongoing review of capital structure, management has flagged a lower expected final dividend; we now assume it matches the H1 payout and at this level (2.1p for the year and going forward, around one-third lower than before) earnings and cash cover are both c 2x from FY19. A mooted disposal (of CE) and potential equity raise may also have a bearing on balance sheet structure in due course.
Low & Bonar’s share price is around one-third of the level that it started 2018 and most of this decline has occurred in the last three months. At 16.5p, the company’s enterprise value is less than 0.5x revenue and equivalent to 5.1x (adjusted for pensions cash) EBITDA for FY18. It is also at a significant discount to our estimated end FY18 NAV of 49p. In the current climate, gearing and interest cover ratios may not be at comfortable levels for investors (ie net debt: EBITDA 3.3x and P&L interest cover c 4x), who may also be eyeing management comments regarding a potential equity issues as a way to lower perceived financial risk. On our revised dividend profile, earnings cover exceeds 2x in FY19 and is yielding 12%+.
