Lower profitability in Entu's H115 results has been well explained, as have the reasons for expecting an improvement in H2 and beyond. We believe that momentum in commercial contracts should ultimately outweigh limited drag from changes to industry incentives. However, in the current year, we have elected to lower EPS by 4.3%. Ahead of demonstrating regained momentum in H2, the 7% prospective yield should appeal to investors.
Headline financial results came in lower y-o-y overall. The important Home Improvement division demonstrated good EBIT progress from the delivery of operational efficiencies but reduced ECO funding (in Insulation) and staff-related changes (in Energy Generation & Saving) more than offset this in H115.Entu declared a 2.7p interim dividend and reiterated its commitment to an 8p payout for the full year. A normal seasonal working capital outflow – primarily increased debtors – explained a reduction in cash balances to £3m (no debt was drawn down) at the end of H115. Otherwise, there was a modest underlying inflow offset by the net cash effect of some non-recurring items.
In the near term, Entu expects an improved performance in the seasonally stronger H2 trading period supported by chiefly by a significant increase in commercial contracts. We consider that a slow start to FY15 will not be fully regained in H2, even though we have upgraded our expected contributions in other divisions. While industry background newsflow appears to have been unhelpful, the potential impact on Entu's trading is not considered to be material by management.
After performing well in the months following IPO (at 100p) in October 2014, Entu’s share price suffered from some industry-related nervousness in the run-up to H115 results. It has subsequently stabilised at the level before the announcement although, at 114p, it remains c 15% lower over the last month overall. On our revised estimates, the current year P/E of 9.0x and EV/EBITDA of 6.1x reduce to 7.7x and 4.9x respectively one year out. Looking through the mixed H115 performance and factoring in good momentum with commercial order intake, resumed progress from FY16 onwards, together with an intact and market-leading 7% prospective dividend yield, offer investors good growth and income exposure.