FW Thorpe: 2019 Results Declare Record £57m Cash Hoard Despite Slowing LED Sales And Brexit Reducing Profit By 10%

18 October 2019
By Maynard Paton

Results summary for FW Thorpe (TFW):

  • Ongoing economic uncertainty” caused by Brexit led to flat sales and lower profit. 
  • Talk of a “healthy order book” provides hope that trading won’t deteriorate into 2020. 
  • Comments concerning new products imply slowing LED growth and a plucky move into non-lighting applications.
  • Accounts boast enormous £57m cash hoard that could be used for acquisitions — or (fingers crossed) further special dividends.
  • Underlying P/E of 19 seems optimistic given recent progress. I continue to hold.

Contents

Event link and share data
Why I own TFW
Results summary
Revenue, profit and dividend
Divisions
Financials
Product development
Valuation

Event: Preliminary results for the twelve months to 30 June 2019 published 19 September 2019

Price:
280p
Shares in issue: 116,160,658
Market capitalisation: £325m

Why I own TFW

  • Manufactures commercial lighting systems with a long-established reputation for high product quality, leading technical innovation and top customer service.
  • Board led by veteran executive and assisted by family non-execs that steward a 50%/£163m shareholding.
  • Conservative accounts showcase sturdy asset-flush balance sheet, respectable margins and illustrious dividend history.

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

Results summary

Revenue, profit and dividend

  • First-half figures that showed revenue down 1% and profit down 10% had already suggested these annual results would not be spectacular.
  • In the event, the 2019 statement revealed full-year revenue up 1% and operating profit down 10%.
  • Revenue attained a new record for the sixth consecutive year, although operating profit is now back to pre-2017 levels:
Year to 30 June20152016201720182019
Revenue (£k)73,54488,946105,448109,614110,643
Operating profit (£k)13,71815,95918,18919,22517,357
Net finance income (£k)72775(249)1013
Other items (£k)(303)2354112412,209
Pre-tax profit (£k)14,14216,26918,35119,56719,569
Earnings per share (p)9.9011.2412.5413.9113.91
Dividend per share (p)3.654.054.905.405.53
Special dividend per share (p)-2.0---
  • The performance was assisted by the first full-year contribution from Famostar, a Dutch firm purchased during December 2017.
  • The results RNS did not divulge the exact Famostar contribution, but did claim the subsidiary had recorded an “excellent” performance after “increasing its own profits considerably and making a real impact on the overall figures”. (Note: TFW’s preceding interim figures did divulge Famostar’s first-half contribution.)
  • The 2018 annual report said Famostar’s 2017 profit before tax was €1.3m — or perhaps approximately £1.2m before tax.
  • Full-year operating profit may have dropped by 13% or more had Famostar not been acquired.
  • A “significant general downturn in [UK] market conditions” — blamed on Brexit — was cited for the subdued group performance. 
  • A more concerning remark about the lack of growth was “customer interest in LED luminaire technology has peaked because of the smaller improvements in LED chip performance; in particular, short-payback retrofit projects are fewer.” (See Product development below.)
  • At least TFW “entered the new financial year with a healthy order book”.
  • The annual dividend was lifted 2% — TFW’s 17th consecutive payout increase:

Divisions

  • TFW’s divisions delivered mixed performances.
  • Thorlux generated 56% of revenue and 66% of operating profit for the entire group during 2019 — the lowest proportions since the division’s contributions were first disclosed ten years ago. 
  • Thorlux’s revenue and profit dived 4% and 15% respectively during the year. However, the second-half did witness revenue up 5% and profit fall by ‘only’ 10%:
ThorluxH1 2018H2 2018FY 2018H2 2019H2 2019FY 2019
Revenue (£k)32,29832,34764,64528,44233,86262,304
Operating profit (£k)5,9487,66313,6114,6596,91911,578
  • Thorlux’s £11.6m profit was the division’s lowest for four years.
  • TFW claimed Thorlux had suffered extra costs following a factory closure and “reduced efficiency due to managing the slowdown followed by a sudden ramp-up of production”. The division apparently enjoyed an “excellent recovery in orders in the second half”.
  • Thorlux’s 18.6% full-year operating margin was the division’s thinnest for at least ten years. The second-half margin improved to 20% following the 16% H1 effort.
  • Progress improved at Dutch subsidiary Lightronics during the second half. Following a mixed H1, full-year revenue and profit gained 11% and 15% respectively:
LightronicsH1 2018H2 2018FY 2018H1 2019H2 2019FY 2019
Revenue (£k)10,21010,65020,86011,86911,28523,154
Operating profit (£k)1,1029482,0501,0661,2912,357
  • Lightonics’s profitability now matches its 2017 peak.
  • TFW’s eight smaller operations — which include Famostar — delivered aggregate full-year revenue and profit up 4% and 7% respectively. 
OtherH1 2018H2 2018FY 2018H1 2019H2 2019FY 2019
Revenue (£k)10,66213,44724,10912,35812,82725,185
Operating profit (£k)7822,6253,4071,2202,4413,661
  • All of this ‘Other’ progress was achieved during the first half, with 5%-7% revenue and profit declines recorded during the second.

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Financials

  • The weaker Thorlux performance left the wider group margin at 15.7% — the lowest since 2005:
Year to 30 June20152016201720182019
Operating margin (%)18.717.917.217.515.7
Return on average equity* (%)27.626.227.226.524.0

(*Adjusted for cash, various investments and Lightronics/Famostar earn-outs)

  • Return on equity was also chipped lower as profit fell while the asset base expanded.
  • The five-year incremental return on equity is a worthwhile 13% (additional earnings of £6m were produced from additional shareholder equity of £45m). 
  • TFW’s balance sheet remains robust.
  • Cash in the bank and fixed-term accounts ended the year at a record £57m, while debt remains at zero.
  • Despite the enormous cash/investment position and lack of borrowings, finance income of £1,049k was almost entirely counterbalanced by financing costs of £1,046k. 
  • Financing costs have previously consisted mostly of a “share appreciation right distribution” — which reflects the dividends associated with the earn-out payable to the former owners of Lightronics and Famostar.
  • The 2019 cash flow statement did not refer to a “share appreciation right distribution”, and the 2018 annual report does not make clear whether the entry will one day become a real-life payment or is simply the ‘bookkeeping cost’ of the earn-out. The forthcoming 2019 annual report may shed some extra light on the matter.
  • Balance-sheet assets also include a £2m investment property, a £4m share portfolio and £4m of loan notes.
  • TFW’s major liabilities are the Lightronics and Famostar earn-outs that total up to £13m.
  • Cash flow was assisted by a £3.8m property disposal and the £2.6m receipt from a loan note (point 17).
  • Working-capital movements released £2.2m, which supported total cash generation of £19m. Dividends of £6.4m left approximately £13m to be added to the cash position.
Year to 30 June20152016201720182019
Operating profit (£k)13,71815,95918,18919,22517,357
Depreciation and amortisation (£k)2,7723,8003,9994,5955,022
Cash capital expenditure (£k)(4,892)(4,307)(7,286)(7,819)(5,473)
Working-capital movement (£k)(3,151)(909)1(241)2,234
Cash (£k)28,53433,20541,65943,95857,290
  • Total capital expenditure once again exceeded the deprecation and amortisation charged against earnings. 
  • However, past differences have been due to TFW purchasing property— which should not lose its value in the way other plant and equipment would.
  • During the last five years, TFW has spent £11m acquiring freehold assets — representing the difference between the aggregate capex expense and the associated depreciation and amortisation charge. 
  • In total, some £24m has been added to the cash position since 2014.
  • Net cash and investments is arguably £57m (cash) plus £10m (loans/shares/investment property) less £13m (acquisition earn-outs) = £54m, equivalent to 47p per share or 17% of the current market cap.
  • Management has never really explained why such a huge level of cash is needed.  
  • Acquisitions still appear the most likely reason — the results RNS claimed “numerous acquisition opportunities have presented themselves”. The purchase of 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 net cash and investments stood at £33m. 
  • A 2p per share special dividend would cost £2.3m.
  • A £54m net cash/investment hoard is by no means the worst problem to handle in the stock market. 
  • TFW’s defined-benefit pension scheme remains in surplus, although a £183k cash contribution by-passed the income statement.

Product development

  • The results RNS admitted: “Customer interest in LED luminaire technology has peaked because of the smaller improvements in LED chip performance.”
  • The remark suggests previous years had enjoyed an LED tailwind that will not be repeated.
  • TFW claimed LED lighting now uses up to 70% less power than its predecessors, and “systems now need to provide greater benefits in addition to energy saving alone”. 
  • Future products may one day provide “data and status information… for example, users’ presence-detection profiling to determine operational efficiency improvements, and automatic emergency lighting testing to provide health and safety compliance.” 
  • TFW also mentioned “warehouse dock door monitoring and solar panel energy logging”.
  • Developing systems that oversee non-lighting devices may cause TFW to stray outside its circle of competence. The benefits of linking warehouse dock doors and solar panels to a lighting system are not obvious.
  • Mind you, Thorlux has installed 909 photovoltaic panels on its factory roof, so perhaps the solar panel link actually has some merit:
  • Maybe TFW’s recent leadership change has sparked the interest in non-lighting applications. Long-time boss Andrew Thorpe became a non-exec earlier this year.
  • TFW was optimistic the new products could work:

“If we can help people be more efficient and provide an environment in which they can be more productive, through good quality lighting, then that can deliver a return on investment more quickly than energy savings ever did.”

  • A new range called Flex System — which boasts a “radical approach to lighting” — has recently commenced full production:

The Flex System breaks with convention and takes the lighting outside of the ceiling tile aperture offering freedom and flexibility of scheme design. It is possible to light spaces with fewer luminaires than a conventional scheme. Fewer luminaires means fewer items of costly control gear keeping capital costs low and with fewer power connections labour costs are reduced too.

  • TFW’s SmartScan emergency-lighting product is set to be launched within Lightronics and Famostar. SmartScan sales doubled during 2018 to represent 13% of group revenue (point 1).

Valuation

  • TFW did not appear too optimistic about the year ahead:

We are, at this moment, however, subject to unpredictable economic conditions, particularly in the UK, with the threat of a disorderly exit from the EU and the Government in disarray. Whilst we have some plans in place to mitigate these impacts, current uncertainty only serves to weigh on our customers’ confidence to invest in capital projects. We can only hope that, whatever the outcome over the next few months, any downturn in some sectors will be offset by some reinvigoration in government-led investment.

  • I am hopeful TFW’s 2020 operating profit can match the £17.6m level recorded for 2019.
  • If so, and using the 18% tax applied in these results, earnings could be £14.6m or 12.5p per share.
  • Subtract the 47p per share net cash and investments from the 280p share price, and the underlying P/E could be 19.
  • The valuation appears optimistic given revenue has stalled and profit has reversed.
  • The 5.53p per share full-year dividend provides a 2.0% income. 

Maynard Paton

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Disclosure: Maynard owns shares in FW Thorpe.

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