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At the end of last week, it was announced that Libra Bidco (wholly owned subsidiary of TVH) had acquired 15.4m Lavendon shares, representing 9.0% of the share capital. Approximately, half of these shares were acquired from GVQ, which had provided an irrevocable undertaking to accept TVH 205p offer. This morning Loxam SAS, a French asset based rental operator, has indicated it has entered into discussions with Lavendon which may (or may not) lead to an (counter) offer.
Lavendon Group
TVH, the international parts distributor and equipment rental business, has made an all cash share offer for Lavendon. The 205p offer was initially going to be 200p but it was raised following various conversations with management and certain investors. Lavendon management are not recommending the offer but irrevocable’s have been received from GVQ and Unicorn (combined holding 12.3%). The offer (+47.5% premium to last nights close) values the business on a forward EV/EBITDA of 4.7x, which compares with 4.6x forward multiple over the last three years.
Lavendon, the largest pan-European provider of powered access, is ‘trading ahead of expectations’. The detail contained within the third quarter update is also likely to please investors. Germany: due to restructuring of the division sales were down but have now moved back into profit. Middle East rental revenues +17% LFL basis, generating positive cash flow. UK rental revenues LFL +8%, consistent with Q2. With trading marginally ahead of expectations we will be reviewing our forecasts following the analyst call (scheduled for 8:00 am).
Lavendon, the leading pan-European powered access provider, will announce its 3Q16 update on 15th November. Management is also hosting a sell-side analyst dinner on the same day. Overall we anticipate the message will mirror that given at interims: trading in-line, UK gaining market share, Germany work-in-progress, Middle East delivering growth, but working cap ratios in the region not improving. The shares are marginally up from their summer lows but at the moment lack the momentum to breakout. That said, Germany and Middle East are probably now at the stage that they represent opportunities rather than insurmountable problems.
We are expecting news from both Lavendon (half year trading update – 14th July) and Speedy (AGM statement – 13th July) next week. Having highlighted our concerns on 27th June regarding the outcome of the EU Referendum, we are cautious ahead of next week’s announcements. We expect both Speedy and Lavendon to signal that it is too early to predict the full repercussions of Brexit, in line with recent statements from many construction and housebuilding companies. Despite this, recent data suggests that the construction market is already beginning to feel the impact of Brexit uncertainty, with the Markit UK Construction PMI registering its weakest reading for seven years in June (46.0 vs. 50.7(F) and 51.2 last). The construction market accounts for c.49% of Lavendon’s sales and c.48% of Speedy’s. Both Lavendon and Speedy have customers across all tiers (major contractors down to SMEs). The outlook for both UK businesses is therefore highly uncertain and whilst we leave our forecasts unchanged, earnings risk is clearly to the downside. Negative sentiment towards both companies’ shares is likely to persist in the short term, but we believe that tangible book value should provide a sensible share price floor. We therefore set our price targets accordingly (FY1 tangible book values: Lavendon – 114p, Speedy Hire – 35p) and remain at Hold in both cases.
Lavendon Group Speedy Hire Plc
Lavendon, the leading powered access rental business (e.g. “cherry pickers”) has started the year on an up note with rental revenues +9% (CFX basis). This compares with +1% 3Q15 and +5% 4Q15. Since the year end net debt increased (£147m vs £119m), reflecting phasing of capex. Crucially, the working cap profile in the Middle East has marginally improved and represents an important catalyst for investors.
This morning’s Q1 update highlights a solid start to FY’16, in line with expectations. The main bright spot was the UK which saw strong growth in volumes after a number of quarters of lower YoY volumes in FY’15. The Middle East benefited from an enlarged fleet which drove acceleration in revenue growth as growth in the UAE, Kuwait, Oman and Qatar more than offset a decline in Saudi. Additional fleet investment in FY’15 has impacted margins, but this is expected to improve over the course of the year. Lavendon’s share price has fallen around 6% since we moved to Hold on 18th March. The Group’s valuation looks undemanding, and we believe attractive on a medium to long term view. In the near term, however, we expect Middle East uncertainty and the resultant risk to consensus forecasts to continue to weigh on the shares. We therefore remain at Hold.
We believe that Lavendon is a good quality company, with a strong management team and an attractive UK business. However, we have near term concerns over payment terms, pricing pressure and the economic outlook for the Middle East in a period of sustained low oil prices. We therefore make significant pre-emptive downgrades to our FY’17 forecasts (downgrading PBT by 16%) and introduce an FY’18 PBT forecast 16% below consensus. After these downgrades, Lavendon’s valuation looks undemanding, and we believe attractive on a medium to long term view. In the near term, however, we expect Middle East concerns and the resultant risk to consensus forecasts to continue to weigh on the shares. We therefore move to Hold from Buy with a new target price of 151p (from 244p).
Lavendon’s full year results are slightly ahead of our expectations, with adj. PBT of £38.5 vs. our forecast of £37.8m and £34.1m last year. Strong revenue growth in the Middle East and a notable margin improvement in the UK were the key performance drivers in FY’15. In our preview note yesterday, we said that we expected the Group to maintain guidance at this early stage in the year driven by continued growth in the UK, but that payment terms and pricing in the Middle East were likely to have deteriorated further. Today, the company has confirmed that this is the case. Guidance has been maintained and the company notes increased uncertainty in the economic outlook, with an increased working capital requirement in the Middle East moderating the rate of investment in the region. It is encouraging to see a further improvement in returns across the year, but we are also cautious on the Middle East and see potential risks to outer year forecasts. However, we believe that after significant price falls, any weakness originating from the Middle East is more than priced into the shares. We remain at Buy on valuation grounds.
Lavendon’s full year results are due out tomorrow. The results should contain no surprises after the positive trading update on 14th January in which the Group indicated that results were expected to be at the top end of expectations. The focus will be on the outlook statement, with recent share price weakness highlighting investor concerns. In the UK, we expect Lavendon to reassure and to continue to deliver growth. In the Middle East, we believe investors’ concerns have some foundation and would not be surprised to see a further deterioration in both pricing and payment terms. Overall, at this early stage in the year, we expect earnings guidance to be maintained. However, with spending cuts being implemented across the gulf states, we see potential risks to outer year forecasts. We estimate that a Middle East sales downgrade of 50% would put the Group on an FY’17 P/E multiple of 11.8x (sub-sector: 10.4x). We believe the quantum of any downgrade would be much smaller than this and therefore continue to see value in the shares.
Lavendon has issued a full year trading update that states that the Board expects results for the year ended 31st December 2015 to be at the top end of market expectations, with profitability, margins and ROCE continuing to improve. The main concern for Lavendon in recent months has been over the outlook for Saudi Arabia. However, revenue continues to grow in the Middle East, increasing 10% in Q4 and 7% across the year. Pricing pressure seen in Saudi continues to be more than absorbed by strength in the other regions, especially Qatar and the UAE. Notably, the Group saw a return to growth in Q4 in the UK, with revenue increasing by 1%. Lavendon has used 2015, a time of market uncertainty to invest for growth in 2016 and we should start to see the benefit of the accelerated capex programme coming through in FY’16. Whilst Saudi remains a concern, on an FY’15 P/E multiple of 7.4x and trading at a discount to book value (130p in FY’14 vs. the current share price of 127p), we believe the shares are undervalued.
This morning’s Q3 update confirms a period of continued revenue growth and improved profitability, margin and ROCE (now firmly above WACC). Group rental revenue in the nine months to 30 September was up 1% and the Board remains confident of delivering its profit expectations for the year. Encouragingly, the Group has continued to see growth in the Middle East, with a wider regional spread offsetting pricing pressure in Saudi. We continue to believe that Lavendon’s shares are undervalued on a Cal ’16 EV/EBITDA of 4.0x vs. the sector on 4.6x, and on a Cal ’16 P/E of 7.3x vs. the sector on 12.4x.
Lavendon has released a trading in-line update for the nine months to Sep-15. Overall group revenue like-for-likes were +1% during Q3 (vs 2% in Q2). Margins and returns are improving (though as with other Q3 updates no metrics were provided). The business has clearly avoided the bumps in the road experienced by some of the other UK quoted rental businesses (e.g. HSS and Speedy) and we maintain our 236p TP and Buy recommendation.
After recent warnings from HSS Hire and Speedy Hire, share prices in the equipment hire sub sector have been under pressure at a time of wider market turmoil. On Friday, Lavendon broke the trend, reporting a solid set of interim results that were in line with expectations. The second half is said to have started well, the targeted capex programme should drive further revenue growth, returns continue to improve and, in our view, the medium term outlook is positive. We consider the shares attractively valued, trading on a Cal ’16 EV/EBITDA multiple of 4.8x, in line with the sector and on a c.7% discount to the sector excluding HSS.
This morning’s interim results are in line with our expectations. Continued improvements in profitability drove an increase in underlying operating profit of 13% YoY. Underlying PBT was up 18% to £14.5m and underlying EPS increased by 17% to 6.60p. Significant improvements in ROCE (up 210 bps to 12.7%) are encouraging. Trading in H2 has remained in line and the Group remains confident of achieving the full year forecasts. Outlook is encouraging after recent disappointments in the sector and strong growth trends in the Middle East and France continue. However, we note a change in the mix of activity in the Middle East, with Saudi cooling. The capex programme remains on track, with an additional £20m announced at the pre-close. We expect a strong second half and conservatively leave forecasts unchanged.
Against a backdrop of recent disappointing updates from the peer group (Speedy Hire and HSS), Lavendon has released a credible set of interims revealing progressive improvement throughout the first half which builds on the momentum established in 2014. PBT was £14.5m representing growth of 18%. For the full year we currently expect PBT of £35.4m - consensus PBT for 2015 prior to the interims was £38m. Following the update the consensus will remain unchanged, suggesting our current numbers are light. The interims confirmed continued operational improvements with operating margins expanding from 10.4% to 14.1% and more importantly ROCE increased from 10.6% to 12.7% and remains above the WACC. Net debt at £96m was in-line with full year expectation and the interim dividend was up 21%. Furthermore, the outlook remains positive with the Board confident that it is well positioned to deliver on expectations for 2015 – a stark contrast to the peer group which is experiencing material PBT declines. We re-iterate our Buy recommendation on Lavendon and our 236p target price.
Lavendon Group (LVD LN) In line interim results highlight a period of improved profitability | Restaurant Group (RTN LN) In line interims; soft start to Q3; no forecast change | Summit Therapeutics (SUMM LN) Q2 2016 results highlight continued development progress
LVD RTN SMMT
As expected, yesterday’s update was reassuring, with strong growth in the Middle East and France and a return to growth in Germany. In our recent note we said that upgrades would be driven by further fleet investment. We are therefore encouraged by Lavendon’s accelerated fleet investment (£20m brought forward from 2016) and remain supportive of the Group’s strategy. We have refined our model to reflect the H1 trends and slightly upgrade EPS by c.4% for FY’15, c.2% for FY’16 and c. 1% for FY’17. We reiterate our 244p TP and Buy recommendation.
Lavendon has issued a positive Q2 trading update this morning. Group revenue for H1 was +3% on a constant currency basis and excluding ex-fleet equipment sales. Profitability and margins have continued to improve, driving ROCE further above the Group’s WACC. In our note on Tuesday we cited that fleet investment would underpin further revenue growth for the Group. Today’s update confirms that fleet investment will be accelerated to bring forward c.£20m from 2016 to 2015. As we said in our recent note, we favour companies with diverse end markets and geographies, and today’s update reinforces our view. UK revenue declined slightly in H1, but this was more than offset by growth in Europe and the Middle East and we expect the UK to return to growth in H2 post a likely General Election effect. We expect to retain our forecasts and remain strongly supportive.
Contrasting with recent negative sector news flow, confirmation of further margin improvement in the UK and evidence that fundamentals continue to improve should act as positive catalysts for the share price following today's H1 trading update. We are encouraged by the evidence of improved trading performance in H1 and plans to accelerate fleet investment in H2 to capitalise on improving market conditions. We expect to leave our forecasts unchanged and retain our 236p target price and Buy recommendation.
We initiate coverage on Lavendon with a Buy recommendation and a target price of 244p. The recent flurry of profit warnings from sector peers has weighed on Lavendon’s share price, down c.8% since 1st July, making it the worst performer that hasn’t issued a profit warning. We anticipate an in line trading update on the 16th July and see value in the shares, with significantly improving returns and a focus on revenue generation. Lavendon trades on a one year forward EV/EBITDA multiple of 4.7x vs. the sector average of 5.4x, leaving Lavendon at an unwarranted discount of 14%.
It has been an exciting couple of weeks for the equipment hire subsector. Recent IPO HSS Hire warned, blaming the weather and the General Election. Northgate hit a wall of depreciation and currency headwinds while also flagging internal issues in its UK business. Worse still, Speedy Hire collapsed for multiple company-specific reasons, prompting the resignation of newish CEO Mark Rogerson. It is unlikely that recent profit warnings from Speedy and HSS are entirely unrelated but the common theme is most likely to be a temporary General Election effect. Despite the strong performance of the past few years, in our view the cycle has further to run with recent share price movements creating some attractive opportunities. We are strong supporters of Lavendon (Initiated as Buy), Northgate (Hold to Buy) and Vp (Corporate).
LVD VP/ AHT HSS SDY REDD
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