FW Thorpe: H1 Results Confirm 10% Profit Drop As Cash Piles Up To New £53m Record

29 March 2019
By Maynard Paton

Results verdict on FW Thorpe (TFW):

  • Lower revenue and profit due to “challenging trading conditions” caused perhaps by the collapse of Carillion.
  • The statement’s highlight was management talk of orders having returned to “record levels”.
  • Fresh product developments continue and include “radical” new range of workplace lighting.
  • Accounts showcase huge £53m cash pile while dividend on course for 17th consecutive annual increase. 
  • Underlying P/E of 21 seems optimistic given recent progress. I continue to hold.

Contents

Event: Interim results for the six months to 31 December 2018 published 21 March 2019

Price:
320p
Shares in issue: 116,120,658
Market capitalisation: £372m

Why I own TFW

tfw fw thorpe hy 2019 results g3 pro lighting
  • Manufactures commercial lighting systems and boasts a long-established reputation for high product quality, leading technical innovation and top customer service.
  • Board led by veteran executive and assisted by family management that continues to enjoy 50%-plus shareholding.
  • Conservative accounts offer asset-flush balance sheet and illustrious rising dividend.

Further reading: My TFW Buy report | All my TFW posts

Results summary

tfw fw thorpe hy 2019 results summary

Revenue, profit and dividend

  • The results did indeed reveal operating profit down 10%, with revenue 1% lower.
  • Challenging trading conditions” at Thorlux, the group’s main division, were cited for the shortfall.
  • Management comments within the 2018 annual report (point 1) hinted that the collapse of Carillion may have affected orders.
  • Brexit was also cited for “business confidence” having yet to return to “more normal levels”.
  • Recent trading has thankfully improved. Orders at Thorlux have apparently rebounded to “record levels”.
  • The only first-half number making positive ground was the dividend, up 2%.

Divisions

  • TFW’s divisions delivered very mixed performances.
  • Thorlux’s revenue and profit dived 12% and 22% respectively. The subsidiary represents approximately 60% of the entire group.
tfw fw thorpe 2019 hy results divisional analysis
  • Thorlux’s £4.7m profit was the division’s lowest for six years.
  • Thorlux’s 16.4% first-half operating margin was the division’s thinnest for at least 10 years. Thorlux has typically converted 20%-plus of revenue into profit.
  • Progress at Lightronics was mixed. Revenue gained 16% but profit fell 3%. The Dutch subsidiary appears to be winning less-profitable orders — its margin was just 9%.
  • Attempts to sell Thorlux equipment through Lightronics have yet to really succeed.
tfw fw thorpe hy 2019 results ar 2018 lightronics selling thorlux snippet
TFW annual report 2018
  • TFW’s seven smaller divisions delivered aggregate revenue down 18% but profit up 3%.

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Financials

  • The downturn at Thorlux and the lower-margin Lightronics revenue left the wider group margin at just 13% — the lowest since at least 2007.
  • At least TFW’s balance sheet remains super-impressive.
tfw fw thorpe 2019 hy results balance sheet cash and investments
  • Cash in the bank has surpassed £50m for the first time to reach £53m.
  • Cash flow was assisted by a £3.8m property disposal and a £2m receipt from a loan note (point 17).
  • First-half expenditure on tangible and intangible items was covered by the depreciation and amortisation charged against earnings.
  • Working-capital movements released £2m, which supported total cash generation of £12m before dividends of £4.6m.
  • Balance-sheet assets also include a £2m investment property, a £3m share portfolio and £4m of loan notes. 
  • TFW’s major liabilities are acquisition-related earn-outs that total £11m. 
  • There is no debt.
  • Net cash and investments is therefore arguably £53m plus £9m less £11m = £51m, equivalent to 44p per share or 14% of the current market cap.
  • Management has never really explained why such a high level of cash is hoarded.  
  • Acquisitions seem a likely reason. The purchase of Dutch firms Lightronics and Famostar have cost the group £13m to date.
tfw fw thorpe hy 2019 results trt street lighting
  • Surplus cash could also reassure customers and suppliers that, during recessions, orders will still be completed and bills will still be paid.
  • Could another special dividend be declared?
  • Special payouts were distributed during 2014 (1.5p per share) and 2016 (2p per share), when my calculation of net cash and investments stood at £40m.
  • A £51m net cash/investment position is by no means the worst problem to face in the stock market. 
  • TFW’s defined benefit-pension scheme remains in surplus and current ‘catch-up’ contributions are only £160k a year.

Current trading and product developments

  • Supported by the aforementioned upturn at Thorlux, current trading conditions are “more buoyant than… previously predicted” and a “strong finish to the year” is now anticipated.
  • A new lighting range that will “reinvigorate the workplace” may soon derive extra sales. 
  • This “radical” new range is called Flex System and “breaks from convention [by] taking the lighting outside of the ceiling tile, offering freedom and flexibility of scheme design.
tfw fw thorpe hy 2019 results example flexsystem setup
  • In addition, the system’s “dual light engine… brings a touch of the outside inside with its illuminated picture window.” 
  • Meanwhile, orders for wireless lighting control systems “rocketed” last year (point 1) and I dare say may continue to do so this year.
tfw fw thorpe hy 2019 results data from smartscan wireless product
Example data from TFW’s Smartscan lighting system.
  • Various other product innovations and factory upgrades are underway that may also support future progress.
tfw fw thorpe hy 2019 results thorlux development centre

Valuation

  • TFW still reckons underlying operating profit for 2019 will not match that reported for 2018. 
  • The trailing twelve-month operating profit is £18.4m. The 2018 operating profit was £19.2m. 
  • Applying the 19% tax applied in these results to the trailing £18.4m operating profit gives earnings of £14.9m or 12.8p per share.
  • Subtract the 44p per share net cash position from the 320p share price, and the underlying P/E could be 21.
  • The 21x multiple appears optimistic given revenue and profit have come to a standstill.
  • Nonetheless, perhaps TFW will extend the “strong finish” of this year right through into 2020 — with earnings growth amplified as higher revenue leads to a margin rebound.
  • The 2% interim divided lift gives a trailing 5.43p per share payout and a meagre 1.7% income.
  • Assuming the final payout is not cut, the 2019 results will deliver TFW’s 17th consecutive annual dividend increase.
tfw fw thorpe hy 2019 results sharepad dividend chart

Maynard Paton

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Disclosure: Maynard owns shares in FW Thorpe.

2 thoughts on “FW Thorpe: H1 Results Confirm 10% Profit Drop As Cash Piles Up To New £53m Record

  1. Tony akram

    Hi Maynard ,

    Great article we meet briefly at London Mello we spoke about Andrew Sykes and Fulham Shore not if you remember .

    I am keen to learn I am a holder in FWT

    ”Net cash and investments is therefore arguably £53m plus £9m less £11m = £51m, equivalent to 44p per share or 14% of the current market cap”

    Can you please tell me how to work out the 44p per share bit ?

    Thanks
    Tony

    1. Maynard Paton Post author

      Hello Tony

      Yes, I remember. You featured on a conkers3 Mello video, so I then matched the name to the face :-) Hopefully the debts and leases won’t prove a problem at FUL, but if earnings do wobble then problems could occur. I should know — I own shares in TAST.

      The 44p is calculated by dividing the £51m by the number of TFW shares in issue.

      I used 116,120,658 as per this RNS which gives £51m/116m = 44p.

      Maynard

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