FY18 results met market expectations but PTSG’s share price performance over the last six months has been weak, in contrast with rising earnings estimates over this period. Acquisitions have been a good fit in our view and with a prospective net debt:EBITDA below 1x we still consider the company’s financial position to be set conservatively. A PEG of c 0.7x and FY19 P/E of 7.2x provide a gauge of the weakness of sentiment for PTSG, which we expect to deliver a double-digit three-year earnings CAGR.
Normalised FY18 PBT grew by 40%, EPS +22% and DPS +13% and matched our expectations in each case. Double-digit organic progress was enhanced by both annualised and in-year acquisition effects with Electrical Services and Fire Solutions becoming the largest divisional profit contributors. Underlying cash flow was good – with improving debtor metrics – and, with total M&A spending and new equity proceeds at broadly similar levels, year-end net debt was £14.3m, down c £5m y-o-y.
Acquired businesses appear to have settled in well and management has ambitious plans to build on the enhanced platforms created by the additions of Guardian Electrical Compliance (acquired October 2018) and, subsequent to the year end, Trinity (January 2019) supporting confident outlook comments. Our FY19 estimates are substantially unchanged, while we have nudged up our FY20e PBT by c 4%, with small mix changes. As a result, our new three-year EPS CAGR (rolled forward to include FY21e for the first time) is now almost 12%. A rising proportion of multiyear agreements (building recurring test, inspection and compliance-based revenues) and further operational and customer-facing IT platform developments are all examples of qualitative business improvements supporting future progress.
After a positive initial response to the FY18 results announcement, PTSG’s share price has given up all of its recovery since mid-February and is currently sitting at a 12-month low. Equity proceeds raised in October have been fully reinvested in acquired companies (with an expected FY19 ROI in excess of 20%); our FY19 and FY20 earnings are c 5% and, c 13% higher than when we initiated coverage in October and, while our absolute net debt projections have increased, relative to EBITDA our expected year-end multiples are 0.8x and 0.5x respectively for these years. In valuation terms, the company is trading on a single digit P/E of 7.2x and EBITDA of 6.0x for FY19 with good earnings growth to come thereafter.