Mixed market conditions and FX movements provided a challenging backdrop to FY15 trading, but Low & Bonar delivered the expected progress. Improving profitability from core operations in FY16 is likely to come mainly from well-flagged internal initiatives, in our view. We have trimmed estimates modestly, including a lower JV contribution. The P/E rating is sub-10x from FY17 and suggests that translating strategic change into faster earnings growth would be a catalyst for outperformance.
In mixed market conditions, Low & Bonar successfully navigated its traditionally stronger second half trading period, delivering results at the upper end of expectations. Underlying progress (constant FX: revenue +2.4%, EBIT +9.7%) was partly masked by adverse translation effects although, after transaction effects, the profit impact was modest. Divisionally, Interiors & Transportation had a particularly strong year, while Civil Engineering returned an improved H2 performance. Overall, Low & Bonar delivered a 2.3% EPS increase and 3.0% DPS uplift, ending FY15 with £102m net debt. The key business developments during the year were a structural reorganisation and a significant investment programme, which is ongoing.
In FY16, Low & Bonar should begin to demonstrate the benefits of strategic change to the group operating structure. Additional capacity coming on stream in Interiors & Transportation (in China) and Civil Engineering (construction fibres in Europe) should also be a key element of performance. We expect to see good operating profit progress (overall global business unit [GBU] contribution unchanged against previous estimates, with increased central costs) with some y-o-y improvement from the Saudi JV (but more modest than anticipated now). Factoring in tax effects also, our EPS estimates have been reduced by 7.9% for FY16 and 5.5% in FY17. That said, our three-year EPS CAGR is still 8% and c 6% for DPS.
Having reached a 2015 high of 75p, Low & Bonar’s share price is now at similar levels to a year ago, having significantly outperformed the FTSE All-Share Index over this period. On our revised estimates, Low & Bonar is now trading on a current year P/E of 10x, EV/EBITDA (adjusted for pensions cash) of 6.6x and a prospective yield of 5.1%. The current share price also represents a premium to NAV of just 13%. With the full benefits of a new GBU structure and investment programme to come, gathering earnings momentum can translate to a further period of outperformance.