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.
- Event link and share data
- Why I own TFW
- Results summary
- Revenue, profit and dividend
- Current trading and product developments
Event link and share data
Event: Interim results for the six months to 31 December 2018 published 21 March 2019
Shares in issue: 116,120,658
Market capitalisation: £372m
Why I own TFW
- 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.
Revenue, profit and dividend
- November’s AGM statement had already predicted these half-year figures would show operating profit down 10%.
- The results did indeed reveal operating profit down 10%, with revenue 1% lower.
- Exclude the purchase of Famostar, and revenue would have dropped 8% while operating profit would have dropped 15%.
- “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%.
- 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.
- 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%.
- Following initial stellar progress, profit at Lightronics has now stagnated since 2016.
- Attempts to sell Thorlux equipment through Lightronics have yet to really succeed.
- TFW’s seven smaller divisions delivered aggregate revenue down 18% but profit up 3%.
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- 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.
- 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.
- 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.”
- 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.
- Various other product innovations and factory upgrades are underway that may also support future progress.
- 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.
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Disclosure: Maynard owns shares in FW Thorpe.