A capital markets day (CMD) earlier this year refreshed Low & Bonar's (LWB) existing group strategy and laid down longer-term management aspirations for accelerated growth under a new organisational structure. Subsequent to the CMD, FY15 guidance was reiterated with H115 results. The share price has seen a partial re-rating this year and, with rising earnings expectations, there is scope for this to continue, in our view.
New CEO Brett Simpson joined in September 2014 and has been a catalyst for an organisational realignment that retains all current operations in a new marketfocused structure. This more clearly makes customer relationships the focal point of the business, with group resources and services in support. We view this as a logical step consistent with the existing objective of achieving faster growth rates outside Europe and we detect no discernible change of strategic direction. We expect limited headline financial impact in the short term and the success of this move will be measured by the medium/long-term group growth rates that are achieved.
After the new business structure was outlined at a capital markets event in May, H115 results were announced in July. During the first six months of the year, there was good local FX progress from four of the five new global business units (GBUs) with Civil Engineering still the laggard, as expected. A seasonal working capital increase, together with rising capex, resulted in net debt of £102m at the end of H115. At that time, management reiterated guidance for the full year (including a 40:60 EBIT split H1:H2) and our estimates were unchanged, albeit with a different mix.
From a low starting point, Low & Bonar’s share price has risen by over 30% ytd, but is down from the highs in the middle or the year. Estimates have barely changed during this time period, so the company has seen a partial re-rating. The current year P/E is 12.1x followed by 10.5x for FY16. A three-year PEG of c 1.5x suggests the share price is anticipating earnings ahead of our anticipated 8.5% CAGR. Building upgrade momentum would be an endorsement of the new organisational structure and support further share price progress, in our view.