IMI continued on delivering encouraging results in H2, reflecting a solid result from its ongoing restructuring. FY19 was in line with our expectations, while the operating margin came in 3.9% above. Like many corporates, IMI was unable to quantify the ultimate impact of the Coronavirus outbreak on its supply chain and demand. We, however, appreciate the good progress delivered by the company.
Rolls-Royce Holdings (RR. LN, £15.0bn) | IMI (IMI LN, £2.9bn) | John Wood Group (WG. LN, £2.5bn) | Senior (SNR LN, £788m)
Companies: RR/ IMI WG/ SNR
IMI Plc has reported a weak set of H1 figures. This was highly expected as the benefits from restructuring will be in H2 19, coming essentially from the Hydronic business where business improvement initiatives should pay off. A tricky equity story given the current tough environment.
IMI Plc presented its New Product Development program as a key focus for the company, while the Value Engineering processes are expanding their addressable markets. Although the situation has been quite tricky with tough markets, the aftermarket was strong and largely contributed to growth. We confirm our positive view on the stock.
D4T4 plc (D4T4.L, 145p/£55.1m) Finals: Impressive H2 performance | IMI Mobile plc (IMO.L, 260p/£160.2m) Prelims: RCS potential | Redcentric plc (RCN.L, 85p/£126.5m) Prelims: Work in progress |
Companies: D4T4 IMI RCN
H2 17 results: revenue came in at £903m (flat yoy), and operating profit was £135m (+2% yoy), both in line with consensus expectations.
Outlook for 2018
- H1 organic revenues should be higher than in H1 17, with a modest margin improvement.
- Management has confirmed that the improved market conditions in Precision Engineering should continue in 2018.
- The full year should benefit from H2 thanks to rationalising savings and normal seasonality.
Organic revenues were 3% higher than in Q3 16, mainly driven by the solid growth in the Precision Engineering segment (organic revenues +9% yoy). Sales in Industrial automation were 11% higher than in Q3 16 with growth across all three regions.
Guidance by segments:
Critical Engineering: organic revenue in H2 should be lower than H2 16, FY margin should slightly increase vs. last year, both of which are in line with expectations.
Precision Engineering: organic revenue and margin are expected to be higher than last year at constant currency due to the ongoing cost reductions and improved market conditions.
Hydronic Engineering: organic revenue in H2 is expected to be higher than in H1 17, and margins should be slightly lower than in H2 16 due to the higher costs and investments for growth (vs. margins expected to improve previously).
H1 results: Revenue came in at £846m (+11% yoy), in line with consensus expectations, and the operating profit was £106m, also in line with consensus. The results were ahead of management’s expectations.
• Critical Engineering: revenues were up 3% yoy, to £308m; the operating margin was 11.2% (vs. 11.3% in H1 16). The order intake increased by 11%, mainly driven by a strong Petrochemicals and good orders for Gas Processing and Refinery projects in China and North America.
• Precision Engineering: revenues increased 14% yoy, to £388m; the operating margin came in at 15.8% (-0.9% yoy), impacted by the ongoing difficulties in oil & gas.
• Hydronic Engineering: revenues grew by 13% yoy, to £150m, supported by the improvement in the European residential and commercial construction markets and also the good performance in China, Australia and Singapore.
Organic revenue will still be below last year’s thanks to the phasing of orders in Critical Engineering.
H2 margins will be stronger than in the same period in 2016, mainly driven by both rationalisation of savings and improved market conditions in Precision Engineering.
Management anticipates the full year 2017 results will be modestly above the market’s current expectations.
Current trading is consistent with the consensus for the year.
Q1 revenues at constant currencies grew by 4% yoy (+18% including exchange rates).
Outlook for 2017:
- H1 organic revenues to show a smaller reduction vs. H1 16 (vs. “a similar percentage decline” previously), with margins slightly lower than in H1 16 (confirmed);
- Full year to benefit from H2 thanks to restructuring and normal seasonality (a confirmation).
H2 16 revenue was £890m (+12.4% yoy). The operating profit was £131m, slightly above consensus estimates. The net profit came in at £77m, broadly in line with expectations.
1) Critical Engineering: H2 16 revenues rose 9% yoy, to £366m; the EBIT margin was 14.0% (vs. 15.9% in H2 15). The order intake fell by 7% yoy, led by Oil & Gas (-13% yoy for the full year) and Fossil Power (-23%).
2) Precision Engineering: revenues were £367m (+14.7% yoy). The EBIT margin was 16.7% (vs. 16.9% in H2 15). Several product launches are planned for 2017.
3) Hydronic Engineering: revenues grew by 15.4% yoy, to £157m; the EBIT margin was 19.4% (vs. 21.2% in H2 15).
- H1 organic revenues to show a similar percentage decline as in H1 16, with margins slightly lower than in H1 16;
- Full year to benefit from H2 thanks to restructuring and normal seasonality.
This points to 2017 revenues of c. £1,620m (-1.7% yoy) and operating profit of c. £220m, both in line with consensus.
Q3 Interim Management Statement: quarterly revenues declined 8% yoy organically but the reported figures were similar, thanks to currency movements.
- expectations for the year consistent with market estimates;
- based on current exchange rates, sales and profits would gain c. 12% from currency translation;
- H2 revenues and margins should be higher than in H1 but lower than last year (a confirmation);
- adjusted constant currency EPS 2016 in line with the outlook from the H1 results.
H1 16 revenue came in at £759m (-5% yoy organic), broadly in line with consensus expectations.
Operating profit was £96m (-23% yoy).
1) Critical Engineering: H1 16 revenues declined 7% yoy, to £285m; the EBIT margin was 10.8% (vs. 13.9% in H1 15). The order intake fell by 14% yoy, a trend led by Oil & Gas (-25% yoy) and Fossil Power (-26%) and bucked only by the petrochemical segment (+37%) thanks to a PTA contract in China.
2) Precision Engineering: revenues were £341m (-5% yoy). The EBIT margin was 16.7% (vs. 18.9% in H1 15). Product development is accelerating, with several launches planned for 2017.
3) Hydronic Engineering: revenues were flat yoy, at £133m; the EBIT margin was 16.1% (vs. 17.9% in H1 15).
Guidance of 2016 results “in line with current market expectations”:
- H2 organic revenues to have a “comparable percentage reduction to H1” (-5%);
- H2 EBIT margin similar to H2 15 (which was 15.6%).
H2 15 revenues declined by 10% yoy, to £1.6bn, slightly below consensus expectations.
The operating profit came in at £123m (-24% yoy), slightly above consensus.
1) Critical Engineering: H2 15 revenues were down 11% yoy, to £336m, the EBIT margin was 15.8% (vs. 18.2% in H2 14).
2) Precision Engineering: revenues were down 10% yoy, to £320m. The EBIT margin was 16.9% (vs. 17.9% in H2 14), impacted by the unfavourable sales mix. The company expects demand in Europe to remain neutral in 2016, but with weak markets in the US and Asia.
3) Hydronic Engineering: revenues fell by 6% yoy, to £136m, the EBIT margin was 21.2% (seasonal strength vs. H1), up from 19.9% in H2 14.
- H1 revenues to post a decline similar to the 2015 organic (-5%; i.e. around £727m organic); the EBIT margin is 250bp lower than in H1 15 (i.e. 12.7%; c. £92m);
- in H2, restructuring should result in better revenues and margins vs. H1.
H1 revenues came in at £765m (-5% yoy, organic -2%), EBIT at £116m (-15% yoy, organic -9%); both figures missed consensus. The net profit was £77m, slightly below consensus.
1) Critical Engineering: organic revenues were down 6% yoy, to £278m, the EBIT margin was 14.7% (vs. 17.2% in H1 14). Orders were -6% yoy (to £292m): the division was affected by low demand in the Nuclear, Petrochemical and Fossil Power markets, but overall Oil & Gas orders (including stronger LNG, in the US and the Middle East) were +8% and Aftermarket +5% (46% of the order intake).
2) Precision Engineering: revenues were down 1% yoy, to £342m; Automation (-3%), Oil & Gas (-5%) and Food and Beverage (-11%) were a drag, while Commercial Vehicle (+4%), Rail (+20%) and Life Sciences (+9%) posted healthy growth. The EBIT margin was at 18.6% (vs. 20.1% in H1 14), partly diluted by higher volumes of Commercial Vehicle (lower margin).
3) Hydronic Engineering: revenues increased by 1% yoy, to £128m, the EBIT margin was 18.0%, slightly down from 18.5% in H1 14.
Guidance: management expects the decline in organic revenue in H2 15 to be in line with the first half. Margins should be similar to H2 14 (seasonal improvement in Critical and new product sales in Hydronic).
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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Full-year results were at a record level and slightly ahead of expectations by £0.2m at the adjusted PBT level, or 2.8% better at the EPS level. Cash generation was also stronger than expected, resulting in net cash of £3.2m. The dividend was maintained – a sign of confidence. Good strategic progress was made, helped by the integration synergies of Pacer and new product development programmes. Our forecast and price target remain under review given COVID-19-related uncertainties.
Companies: Solid State
The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
Companies: Avon Rubber
Brick and concrete products manufacturer Forterra has raised c. £55m gross in an equity placing in order to maintain its strong balance sheet and support the Group's continued investment programme. It was accompanied by, in our view, a reassuring trading statement which we believe is backed by yesterday’s brick industry data and comments from housebuilders, which suggest that demand has been recovering from its lockdown lows, before the PM’s promises to “build, build, build” housing and infrastructure.
Successful K3 Capital placing to raise £30.45m (gross) at 150p to fund the £9.3m acquisition of Randd UK Ltd, an R&D tax credit specialist with an LTM EBITDA of c.£2.0m, with a margin of c.50% and revenues typically contracted for 5 tax years with many recurring thereafter, followed by future potential deals in SME exposed markets. K3 has established itself as an innovative company that is able to effectively gather, generate and mine large quantities of data in order to scale up M&A services to SMEs. Transferring these lead generation capabilities to adjacent SME markets can allow rapid growth from proven models, at scale.
Companies: K3 Capital Group
Blackbird plc* (BIRD.L, 19.25p/£64.7m) | Mirada plc* (MIRA.L, 92.5p/£8.2m) | Tern plc* (TERN.L, 10.75p/£29.0m) | Checkit plc (CKT.L, 39.5p/£24.5m)
Companies: BIRD MIRA MIRA TERN CKT
Further Profitable Growth to Come
discoverIE reported FY20 results ahead of our forecasts for underlying operating profit and EPS. Looking through short-term COVID-19-related disruption, the company has set new strategic targets for the next five years. These are a continuation of the strategy to grow the Design & Manufacturing business organically and via acquisition and include the target to increase the group operating margin from 8.5% (pro forma) to 12.5%. We maintain our normalised operating profit and EPS forecasts.
Companies: Discoverie Group
Smart Metering Systems (SMS) has announced that it has emerged from the recent Covid-19 uncertainty in a strong financial position and taken the decision to return funds received from the Government under the Coronavirus Jobs Retention Scheme. Current net cash of £48m (not including furlough grant) is ahead of previous expectations and underlying profitability for the year to 31 December 2020 is expected to be in line with expectations prior to lockdown, despite the obvious interruptions to meter installation activity that it has caused. During lockdown essential emergency field engineering work continued and SMS completed the sale of a proportion of its meter asset portfolio for a gross cash consideration of £291m (£282m net). In March 2020, SMS announced that it would rebase its dividend to 25p (prospective yield 4.3%), index linked to FY24 and commencing payments in October 2020, quarterly thereafter. A phased resumption to meter installation activity commenced on 1 June 2020.
Companies: Smart Metering Systems
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
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Marlowe has raised £40m in new equity to finance the acquisition of Elogbooks (£7.3m cash upfront and up to £6.8m contingent deferred) and accelerate consolidation of their markets. We update our forecasts to reflect this transaction and COVID-19 trading conditions (FY21E Adj EBITDA unchanged at £24m).
Updating forecasts following 2019 results
Companies: Trackwise Designs
Full year results ahead - robust position against uncertain near-term backdrop
Solid State is a manufacturer of computing, power and communications products, and value added distributor of electronic components. This morning, the group has released full year results with PBT and EPS slightly better than our upwardly revised forecasts had assumed and reflecting a strong margin performance in the year. As previously flagged, cash generation was particularly strong. The group entered FY 2021E with a strong order book, which is reported to have stood at £37.9m as at 31 May 2020, an increase of some 5.6% from a year earlier. With little in the way of cancellations or deferrals of orders, Q1 2021E revenue has held up well, whilst order intake has been just under 15% lower than the prior year, which suggests a weaker revenue performance in Q2/Q3 but with the tender pipeline implying a potentially stronger Q4. Reflecting the present uncertainty, we leave our forecasts under review for the time being. Fundamentally, and backed by a strong balance sheet, we believe that Solid remains well positioned to come through the current crisis and will emerge as one of the winners when normal service resumes.
The Smart Zones customer base is expected to reopen, to a large extent, this weekend. The reopening of pubs will bring forward a revised billing profile and markedly improve the Smart Zones revenue base. Smart Machines continues to operate profitably and the group's Business Interruption Loan should buttress the balance sheet through this year. While our forecasts remain withdrawn we can see an encouraging pathway to normalised trading next year.
Companies: Vianet Group
As flagged in the April trading update, Solid State’s FY20 results showed a 19.7% growth in revenues and 34.3% jump in adjusted profit before tax. Demand from the medical and food retail sectors is strong but weakness in the oil & gas and commercial aviation sectors related to the coronavirus pandemic is likely to result in lower year-on-year sales during Q2 and early Q321. While management sees potential for a Q4 recovery, the current range of FY21 profit outcomes is wide, so it is not providing guidance.