CNH Industrial’s Q1 net sales declined by 15.3% yoy. Furthermore, the industrial activities fell by 16.8% yoy (to $4.99bn), significantly impacted by the March slowdown. As with most companies, management has not yet provided a renewed guidance for FY20, however, the company is bracing for a worse Q2 in most regions and segments. For the moment (and in line with the company’s current expectations for Q2), we see Q2 20 sales shrinking by about 30% yoy.
Companies: CNH Industrial
CEO Hubertus Mühlhäuser has resigned with immediate effect and CFO Max Chiara is leaving as well. It seems Mühlhäuser’s disappearance has come as a surprise, whereas Chiara will take up a new position outside CNHI.
CNHI released some IFRS numbers, but not detailed accounts. While revenue was bang in-line with our projections, net earnings fell slightly short whereas the EBIT number was marginally higher. As the company reports in US dollars, the strength of this currency took its toll. It intends to pay an unchanged dividend of €0.18. Management sees revenue slightly down or flat at best in 2020 and ‘adjusted diluted’ EPS to range between $0.78 to $0.86 compared to $0.84 generated in 2019.
The company including its Financial Services division is highly indebted. At the end of September 2019, consolidated net debt stood at $20bn, $4bn of this was the net debt of the manufacturing segments.
We have argued for quite a while that CNHI needs to pay attention to cash generation or it will need a sizeable share issue. In fact, cash from operations (based on management’s definition) was a negative $708m in 9M19 compared to a positive $164m last year. As a result, net debt increased by $1.5bn to more than $20bn since the beginning of this year.
Michelin acquired the Canadian rubber track producer Camso for an EV of US$1.7bn which represented about 1.7x revenue. Today, CNHI announces the acquisition of a US producer of rubber track systems. Unfortunately, no revenue number or purchase price are available.
Management has released its 2020-24 business plan which not only refers to splitting up the company but also to investing a huge amount into R&D. Revenue is expected to increase by 5% annually and the EBIT margin to reach 8% by 2022 and 10% by 2024 (we see it just below 7% through to 2021).
While the company’s divisional and consolidated revenue numbers fell slightly short of our projections, earnings were about in line. This is odd as earnings generated in other currencies should have suffered when translated into dollars. In fact, CNHI generates more than 50% of its turnover in EMEA and only 25% in North America. Consequently, changing the reporting currency would make sense.
CNHI’s balance sheet shows substantial gross cash (c. $6bn) but a much larger amount of gross debt ($25bn). This latter number includes the refinancing of Financial Services, i.e. of financing and leasing contracts for its clients.
CNHI has been able to increase its ‘adjusted’ EBIT margins in all of its industrial divisions. The margin improvement ranged between 0.7pp in Agricultural Equipment (the single largest operation) and 2.6pp in Construction Equipment (the smallest division). This is the more astonishing as consolidated revenue was down by 4.7%.
The group’s consolidated revenue increased by 15% to almost $8.0bn in Q1 (Nov 18 through Jan 19). This allowed the pre-tax profit margin to increase from 7.5% to 8.4%. With a ‘normalised’ tax rate of 27%, net earnings were a positive €499m compared to the previous year’s loss of €535m which was burdened by the US income tax reform.
The manufacturing divisions contributed to the pre-tax profit increase. Agricultural & Turf increased turnover by 10% to $4.68bn, but the divisional EBIT margin fell from 9.1% to 7.4%. Management blames currency headwind plus higher warranty-related expenses for the profit decline. In addition, the product mix was less favourable. On the other hand, Construction & Forestry increased its revenue by 31% to $2.26bn and the divisional margin skyrocketed from 1.8% to just above 10%. Divisional revenue growth was supported by the 3-month consolidation (2 months only a year ago) of German Wirtgen, a producer of road construction equipment. This consolidation change contributed 24% of the above divisional revenue growth and the profit improvement stemmed from both Wirtgen and organic growth. Wirtgen had contributed a loss of $92m last year and a small profit of $14m this year. Excluding these profit numbers, divisional EBIT was up by 73% to $215m.
On the other hand, Financial Services increased its turnover by 10% to $927m, but the operating margin fell from almost 26% to just below 21%. Higher borrowing costs are blamed for the divisional profit decline.
The company increased its revenue by 15% to almost $8.0bn in Q1 (November through to January) and the operating result increased by 21% to $769m. Revenue grew disproportionately for construction and forestry machinery (+31% to $2.26bn) but demand was also good for agricultural and turf equipment (+10% to $4.68bn).
The rolling 3-month retail sales show unchanged demand for tractors in Europe but a high single-digit increase for combines. In the USA and Canada, demand was up by double-digits for turf and utility equipment.
CNHI’s generates about 35% of its Agricultural Equipment division in both Nafta and EMEA. Therefore, the above Deere numbers should also support CNHI’s numbers.
A glance at the company’s IFRS accounts show a revenue increase of 7.7% to $29.7bn (+6.7% currency-adjusted) whereas net earnings after minorities more than tripled from $439m to $1.40bn. Our projections had been $31.9bn and $1.19bn. Management intends to release a new strategic business plan during the course of 2019. The guidance for the current year sees revenue of the group’s industrial activities remaining about unchanged and the ‘adjusted’ EPS number to come in between $0.84 and $0.88 compared to last year’s $0.80.
As the group delivered fewer trucks (-8% to some 31k) and the volume growth was hardly visible in agricultural but there was strong growth in construction equipment, Q3 revenue was marginally down by 0.3% to $6.72bn, which brought the ytd number to $21.5bn (+9.4%). In spite of this, adjusted EBIT continued rising by more than 60% to $462m in Q3 and €1.53bn ytd. Net earnings more than tripled in the last quarter to $148m and almost quadrupled ytd to $1.12bn. While the 9M revenue number was just short of our projected $22.3bn, CNHI’s profit numbers were higher ($1.47bn and $1.09bn).
CNHI delivered slightly better H1 18 numbers than we had anticipated. All divisions were able to increase their profit margins. This was particularly true for Agricultural Equipment, the group’s single largest activity, which contributed almost 52% to consolidated EBIT (based on IFRS accounting standards) compared to 48% a year ago.
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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
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.
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
Resilient Trading Update
Companies: Macfarlane 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.
The Norcros operating companies largely performed relatively well in challenging market conditions (in both the UK and South Africa) in FY20 though year end trading was affected by COVID-19 lockdowns, as flagged previously. The group’s financial position appears robust following management actions (including foregoing an FY20 final dividend) and well-placed to both contend with weaker near-term markets and the pursuit of market share gains from a position of relative competitive strength. Our estimates remain suspended at this time.
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
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
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
Salt Lake Potash has received commitments to raise A$15m through the placement of unsecured zero-coupon Convertible Notes to Equatorial Resources (ASX:EQX) and institutional investors. The Convertible Notes have been structured as deferred equity with zero coupon and mandatory conversion into equity at the lower of 45c/share or a 5% discount to any future equity raising of at least A$10m. These funds will enable Salt Lake Potash to continue to develop Lake Way to the project schedule through July as they finalise debt financing. Plant practical completion and first SOP sales remain on schedule for the March 2021 quarter. The debt financing process in its final stages and with an agreement expected to be executed within weeks.
Companies: Salt Lake Potash
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
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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The H1 results were well flagged in the 15th April update. H1 PBT is significantly ahead of last year at £1.3m (H1’19: £0.8m). Driver traded profitably through April to June. Whilst guidance is suspended, with the pipeline maintained, we believe the Group will continue to trade profitably through H2. As flagged in the H1 update, there is no interim dividend, with management seeking to preserve cash. The balance sheet is strong, with net cash of £3.3m at 31st March (improved to c.£5.5m post period end). We believe the medium term outlook is positive, with new CEO Mark Wheeler focused on improving profitability and growing the business. Delays in construction projects as a result of COVID-19 should support near term levels of dispute work, whilst an expected increase in infrastructure spending supports the medium term outlook.
Companies: Driver Group