FW THORPE: Record FY 2023 Delivers 21st Consecutive Annual Dividend Increase, Suggests SchahlLED Acquired At 5x Ebitda And Justifies £35m Cash Reserve To ‘Some Shareholders’

3 thoughts on “FW THORPE: Record FY 2023 Delivers 21st Consecutive Annual Dividend Increase, Suggests SchahlLED Acquired At 5x Ebitda And Justifies £35m Cash Reserve To ‘Some Shareholders’”

1. Thanks very much for your latest analysis on F W Thorpe. I certainly agree with your comments that businesses with substantial cash should now be earning notable interest. With my comparatively minor sums of cash I can currently get 4.66% interest in an instant access account via the Hargreaves Lansdown Active Savings platform, if Thorpe could get anywhere near this figure for their cash it would make a worthwhile difference. I wonder if their banking arrangements restrict their ability to invest their cash elsewhere as the interest rates they report appear derisory.

   • Thanks John. My experience with HL Active Savings is the money takes c2 days from withdrawal request to land in my current account, so not quite true instant access but the spread of rates are good. I am not entirely sure how exactly quoted companies go about their banking and I dare say there is more to consider than for personal banking, but the NatWest account I highlighted in the blog post above seems quite straightforward and pays close to 2% on more than £10m. Aldermore for example pays 3.25% easy access but the account limit is £1m. My conversation with CLIG shareholder George Karpus touched upon how inadequate UK companies are managing their cash reserves for interest, and that is becoming apparent now rates have increased to normal levels.

     Maynard

2. FW Thorpe (TFW)

   Publication of 2023 annual report

   Here are the points of interest beyond those noted in the blog post above:

   ——————————————————————————————————————

   1) WHO WE ARE

   The same text as last year, but the phrase “each company works autonomously“…

   “We specialise in designing and manufacturing professional lighting systems. We currently employ over 900 people and although each company works autonomously, our skills and markets are complementary.”

   …does suggest a degree of decentralisation within the group. I wonder if TFW has ambitions to become the Halma of the commercial-lighting industry. This great speech from former Halma boss David Barber explains how Halma’s acquisition strategy — and allowing the subsidiaries to operate independently with a minimal head office — worked wonders for shareholders.

   2) OUR INVESTMENT CASE

   The same text as last year, except for additional CAGR information:

   “• Consistent revenue growth – Compound Annual Growth Rate (CAGR) across the last five years of 10.0%, ten years 12.3%, 15 years 8.5%.”

   The investment case remains
   • ‘Product innovation’;
   
• ‘Our focus on sustainability’;
   
• ‘Means we are positioned for sustainable long-term growth’, and;
   
• ‘Financial performance’

   3) OUR APPROACH TO SUSTAINABILITY

   TFW’s timeline within this section reiterates the group introduced its first energy-saving product 30 years ago:

   “1994: First energy saving products introduced, controlling lighting and reducing energy consumption“.

   The commentary is tweaked this year to confirm TFW is “independently verified” as carbon neutral. The group’s net-zero target was previously “by 2050” but this report now confirms an “aim to achieve [net zero] by 2040“.

   4) WHAT WE DO

   The same text as last year, and still with an emphasis on “high-quality” and “excellence“:

   “Focus on high-quality products and good leadership in technology
”
   “Continue to grow the customer base for Group companies”
   “Focus on manufacturing excellence”
   
”Continue to develop high-quality people”

   5) OUR BUSINESS

   This year’s report includes an introduction to SchahlLED:

   “SchahlLED Lighting is a turnkey provider of intelligent LED solutions for the industrial and logistics sectors with more than 50 years of lighting and 20 years of LED experience.The company is based in Unterschleißheim near Munich and has sales offices in Cologne and Weyhe close to Bremen. As both manufacturer and full-service provider, SchahlLED plans lighting concepts and supplies intelligent LED lighting systems.”

   SchahlLED’s key products are:

   “• Recessed, surface and suspended luminaires
   
• Emergency lighting systems

   • Hazardous area lighting

   • High and low bay luminaires
   • Lighting controls
   
• Exterior lighting”

   SchahlLED’s market sectors are: Industrial, Logistics and Manufacturing.

   6) MARKETPLACE

   This year’s report replaces the Q&A from last year with standard commentary. Snippets include fewer product redesigns…


   “There has been less focus on redesign this year, allowing our engineering teams to focus on product development. We continue to differentiate ourselves with product and system innovation, combined with our ability to service our markets through the life cycle of a project.”

   …and competitors being able to raise prices:

   “Across our domestic and international markets we face competition from listed multinationals as well as solid private businesses. Where information is available, we have seen improved financial performance of our main competitors perhaps buoyed by the ability to increase sales prices in the current economic climate.”

   7) BUSINESS MODEL

   A reminder of TFW’s “peace of mind” business model:

   “Customers come to us for peace of mind. They want the correct technical solution, professional service, sustainability of products/services and the ability to provide support during a product’s warrantable life and beyond.

   Our business model is focused on the needs of customers and the marketplace, with a robust capital structure that underpins our ability to deliver sustainable growth, innovative products and excellent customer service.”

   No text changes for this year, but worth repeating TFW receives its orders through the following specifications: “renovations, new build, energy saving, compliance, technology adoption“.

   Note also TFW’s general product features:

   “• Energy efficiency
   
• Low maintenance
   • Rapid installation

   • Longevity of product
   • Low total cost of ownership”

   

I always translate “Low total cost of ownership” to mean a higher up-front cost but low/no ongoing service expenses. Little ongoing service revenue could make revenue more unpredictable for shareholders, but TFW’s long-term record suggests customers are happy, which in turn makes it hard to argue against the model. Text elsewhere in the report says product warranties last between 5 and 10 years.
   

   8) STRATEGY

   No changes to the overview text, and I still like how TFW places shareholders ahead of employees and customers (not every quoted company lists the three in the same order!):

   “The Group management team is passionate about developing the business for the benefit of the shareholders, employees and customers.”

   Important parts of the strategy include:

   “ • FW Thorpe has been built on product innovation – design and product development is fundamental”
   “ • The Group is product led. This enables us to maintain competitive advantage with market-leading products,”
   “ • Control of the manufacturing processes is of utmost importance – key processes are kept in-house with targeted investment in new machinery as required.”
   “ • Family principles and how we treat our people is fundamental to our success.”

   Within the supplementary strategy text, a few tweaks.

   a) A new line about EVs:

   “Electric vehicle charging and road safety products now to be marketed by a number of Group companies”

   b) Now aiming to sell Thorlux products into France (via Zemper):

   “Targeted approach in the Netherlands and France with Thorlux industrial product and controls portfolio”

   c) Updates on completed projects and a new Zemper facility:

   “• Famostar facility extension project successfully completed
   • Completed solar investment at Thorlux
   • Expanded injection moulding facility at Zemper Spain to support the manufacture of select components for the Group“



   d) Re-emphasising the importance of employing “high-quality people“:

   “One of our main sources of competitive advantage, it is imperative we continually develop and retain talent within the business.”

   On the people front, new bullet points include “Training and development” and “Inter-company collaboration teams to develop a broader understanding of the whole business.”

   9) STRATEGY IN ACTION

   a) An impressive case study of illuminating the Big Ben clock faces.

   Text says TFW was approached about the work during 2016 for what was a five-year refurbishment programme… which just goes to show some project work can take a long time to complete. I note usage of the SmartScan system resulted in “less cabling and therefore less damage to the historic building fabric“.

   b) Some introductory text about SchahlLED, including “In 2019, financial investor Active Capital Company acquired a majority stake in SchahlLED to support the company in its strategic growth plan.“.

   I am always a little nervous when quoted companies buy from investors (the latter may ‘plump up’ their businesses specifically for sale). But TFW did purchase its Dutch businesses from private equity and they have worked out well with the private-equity seller actually now represented on the main board.

   The SchahlLED investor was invested for less than four years, oversaw two smaller acquisitions by SchahlLED, and announced its disposal to TFW here.

   This annual report says “SchahlLED and Thorlux have worked together since 2019, distributing SmartScan products primarily into the German market.“, so presumably TFW knew SchahlLED well before the purchase.

   TFW’s original SchahlLED purchase announcement did not mention the identities of the owners.

   c) I do like this — TFW encounters a supply problem and casually decides to build a new factory to resolve the issue:

   “To address the challenges faced by several Group companies
in sourcing plastic moulded components externally, a strategic decision was taken to leverage the expertise and production facilities of Zemper. However, Zemper’s plant in Almagro had insufficient production capacity and space to meet the increased demand. The most viable solution was to construct a new factory adjacent to Zemper’s main facility in Ciudad Real, to produce all Zemper’s plastic components.”

   A new warehouse has been built for Dutch subsidiary Famostar, too.

   10) KEY PERFORMANCE INDICATORS

   The same six KPIs as last year, with C02 emissions (down 13% on a revised calculation) and renewable energy usage (up a surprisingly low 1%) being notable ‘green’ measures.

   11) OPERATIONAL PERFORMANCE

   A few snippets here:

   a) Zemper profits were slightly below those of the comparable year, but this text nonetheless claimed the subsidiary “performed well“:



   “Zemper performed well in its first full financial year as part of the Group; with strong performance in France and an improved second half performance in Spain, the company delivered results in line with expectations.”

   I hope the better H2 Spanish performance can be maintained to justify what could be a significant £37m total eventual payment for Zemper. I note Zemper traded strongly in France, which may prioritise that particular market for TFW’s next acquisition.

   b) An extra cost-of-living payment for staff:

   “Employee costs continued to increase, driven by wage increases; this will continue for the coming months until headline inflation rates come under control. Within the Group, companies take pride in paying above minimum wage levels. This year, an additional special cost-of-living payment was also made in December across the Group, targeted at those suffering hardship from increased domestic bills.”

   c) TFW has lifted its prices in a kind manner, but some clients remain conscious of costs despite the high-quality products:

   “Selling prices have been increased where possible, in a fair and responsible manner, to combat inflationary pressures, but negotiating these increases through to the order book has been more successful with some companies than others”

   d) TFW confirms a trio of new recruits among its smaller UK ‘Other’ businesses:



   Philip Payne: “New Philip Payne managing director Nick Revell is welcomed to the Group. Nick is charged with continuing the many years of stability and profitable growth delivered under the stewardship of David Taylor, who retired at the end of the 2022/23 financial year. The Group looks forward to Nick moving the business forward from solid foundations built by David and the team over many years”

   Portland Lighting: “Traditional outdoor sign lighting sales were down, and the development of a new selection of products to target the road and traffic sign market has yet to deliver the growth planned. However, with a new dedicated person now leading the road safety division, there were some promising signs as the Group closed the financial year and started 2023/24.”

   TRT Lighting” “The new operational leader at TRT has made a positive impact. Service levels are good, and the business continues to improve its ability to respond to peaks in customer demand.”

   Collectively, these smaller UK ‘Other’ businesses have experienced very mixed fortunes over time and are gradually making less and less impact on the group. I hope the new recruits can enhance their respective businesses, otherwise these businesses may prove a distraction to the main board that has obvious ambitions to expand overseas.

   e) Confirmation that Zemper has greater facilities that should benefit other group subsidiaries:

   “The [Zemper] business is deeper into the value chain than most Group companies: with its ability to injection mould its own plastic components and populate finished printed circuit boards; it also has its own robotic final assembly and testing process.There has been further investment in these facilities during the year, with the addition of injection moulding capacity that will support the Group as well as additional investment in surface mount machinery that will also facilitate synergy projects for the wider group. ”

   12) PRODUCT SPOTLIGHT

   I did not know TFW lights could last for more than 11 years of constant use:

   “The principles of circularity aim to eliminate waste by keeping as much of the original product material in use for as long as possible, which is why the SkyCore family has been designed to provide a long and reliable life of at least 100,000 hours.”

   For perspective, a Philips LED light I bought recently for domestic use has a usage lifetime of up to 15,000 hours.

   13) SECTION 172

   This text is unchanged from last year, but under ‘shareholders’ I see the bullet point “Trading updates at appropriate times” — I can’t recall TFW publishing a standalone trading update beyond its usual AGM statement!

   The bullet point “Investor meetings and presentations, including company visits” sounds as if TFW undertakes conventional City roadshows (although presentation slides are not published on the website):

   Pretty sure TFW is the only holding in my portfolio that engages with local politicians: “Engagement with local MPs and Chambers of Commerce”

   14) SUSTAINABILITY

   This report witnessed a step-change to TFW’s Sustainability section.

   The prior year’s Sustainability section consisted of 11 pages, but this year’s Sustainability section ran to 24 pages that included a mammoth 14-page Task-Force on Climate-Related Financial Disclosures (TCFD) report.

   This section is important to TFW; the group markets its products on their energy efficiency, and TFW’s operations ought to boast superb ‘green credentials’ to help champion environmental matters to customers.

   a) Sustainability in action

   Contains the same four areas of focus as the previous year (Products, Operations, Business Model and People), with the accompanying bullet points enhanced for this year.

   This year TFW confirms its sustainability drive will spread to suppliers:

   “Group companies are working with key suppliers to embed sustainable practices and remove single-use plastic from the supply chain”

   But I note last year’s Operations bullet points “Ability for certain staff to work at home – reduced travel” and “Flexible working” have been removed. Everyone is seemingly back in the office.

   Within the Business Model bullet points, I have noticed TFW’s customer-financing offer before: “Several Group companies offer financing models for customer projects.” This link reveals a third party takes on the funding risk.

   I quite like the People bullet point indicating most of the workforce can achieve a bonus: “All employees are paid above the minimum wage rates and the majority are enrolled in some form of bonus scheme.”

   b) Products

   No major changes within the main People text, although the number of “mainline” suppliers (100) and “non-product” suppliers (500) are omitted this year.

   c) Operations

   A few changes to the Operations text:

   Electricity is now almost all derived either from TFW’s solar panels or renewable sources:

   “The Group has installed solar PV units on the roofs of most of its UK manufacturing facilities, as well as at Lightronics and Famostar in the Netherlands and Zemper in Spain. The units have the capability to deliver over 2 million kWh per annum, reducing the Group’s consumption from traditional electricity sources. All remaining significant electricity consumption is now derived from renewable sources.”

   The sustainability drive reads as if money could be saved:

   “With improved planning, the Group has been able to manage inventory, reduce excess, consolidate deliveries, and eliminate the purchase of unnecessary items – all of which will reduce the amount of supplier delivered waste.”

   The proportion of ‘green’ company vehicles is now over 50% (was 47%)…

   “To date, over 50% of company vehicles are either electric or hybrid.”

   …although given TFW’s Ratio joint venture develops EV charging points, the proportion should really be moving faster to 100%.

   15) TCFD

   A whole new revamped TCFD section spanning 14 pages! A few snippets:

   a) Overview

   TFW introduces the ‘green’ measures as necessary to keep the group competitive:

   “The Group commenced its sustainability programme in
 2009 and recognises the need to continually invest in greener solutions for its factories, enhance component sourcing and management, foster circular design practices, and develop energy-efficient product offerings to maintain a leading position in the market.”

   A warning that environmental-reporting matters are likely to become complicated:

   “The Group will be modelling the likelihood and severity of potential impacts on its operations from flooding, storm patterns, precipitation, mean temperatures and sea level rise, to fully understand the threats and establish a mitigation strategy to safeguard the future of the business against climate change.”

   b) Governance

   Climate change will become a formal management matter:

   “Sustainability is a standing agenda item at Board level and is discussed in every Board meeting. From the next reporting year, climate change will become a separate additional agenda item at the quarterly board meetings at each Group company.”

   A group ESG committee might be formed:

   “Next financial year the Group will consider establishing a formal ESG committee that will include representatives from the Board and key roles relevant to the topic.”

   Options and bonuses might soon be linked to TCFD progress:

   “The Group’s Board remuneration is currently not directly linked to climate/ sustainability, but any future share options granted will contain a specific performance condition around carbon reduction. FW Thorpe is currently reviewing incentives across the Group to consider a potential link to sustainability targets in 2023/24.”

   And options are now linked to ESG matters (point 19)

   c) Risk

   I am not surprised a TCFD consultant has been hired:

   “For a wider assessment of climate-related risks, FW Thorpe has procured an external consultant, to help it understand the risks and opportunities. The consultant will conduct a climate scenario analysis in the next reporting year, and provide the Group with a comprehensive, long-term picture of the potential impacts.”

   The consultant will no doubt help TFW prepare the following:

   “In the next financial year, the Group will conduct a climate scenario analysis. Three-time horizons will be used to provide the analysis with a suitable level of granularity and coverage. Best, worst and moderate case scenarios will be used to consider a broad range of eventualities.”

   The following climate-related risks have been identified:



   • Policy & Legal: Mandates on and regulation of products and services

   • Markets: Increased cost of energy and materials

   • Technology: Cost to transition to lower emissions technologies
   
• Reputation: Increased stakeholder concern



   Also noted are Physical Risks. TFW says its HQ is not in great weather danger: 

”A high-level assessment of the primary site in Redditch indicates that the likelihood of extreme weather events at the Redditch site is low.”

   Interesting that high temperatures are already causing additional “business disruptions“:

   “As a result of rising mean temperatures, the Group has experienced an increase in business disruptions. Rising mean temperatures will increase energy usage, leading to increased operating costs for the business and associated operational emissions.“


   d) Opportunities

   Climate opportunities will be assessed formally during FY 2024, but for now here is a useful snippet:

   “Lighting accounts for 5% (2.5 billion tonnes) of global CO2 emissions. A global switch to energy efficient light emitting diode (LED) technology could save over 1,400 million tonnes of CO2 and avoid the construction of 1,250 power stations.”

   e) Metrics and targets

   Some bold targets:

   “• Reduce absolute Scope 1 and 2 emissions by 42% by 2030, from a 2021 base year on a market- based approach.
   
• Reduce Scope 3 emissions per £m revenue 51.6% by 2030, from a 2021 base year.

   • Reduce Scope 1, 2 and 3 emissions by 90% by 2040 from a 2021 base year, in line with reaching net-zero with a maximum of 10% of emissions being offset by this date.”

   The emission charts are heading in the right direction:

   

   

   TFW claims it is three years ahead of schedule with its 2040 net-zero target:

   

   A very comprehensive “Carbon Balance Sheet“:

   

   The major decline to ‘use of sold products’ is due to TFW customers using greater renewable energy for their lights. Scope 2 emissions are created through electricity purchased by TFW and have significantly reduced due in part through TFW’s solar panels.

   16) PRINCIPAL RISKS AND UNCERTAINTIES

   As befits the TCFD text, an extra ‘Sustainability & climate-related’ risk has been introduced this year to take the principal risks to 11.

   The description of the new risk is:

   “The Group has potential exposure to climate-related risk that could impact both its operations and the products it promotes.”

   The mitigation of the new risk is as follows:

   

”• Sustainability targets are set each year for Group companies.

   • Education of employees to further develop sustainability and climate-related understanding, evolving knowledge of the related risks.
   
• Targeted reduction of total GHG emissions, reducing the impact of its operations.
”

   The possible impact of the new risk is deemed ‘Medium’.

   Among the other 10 risks, ‘Price changes’ and ‘Cyber security’ have been increased from ‘Medium’ to ‘High’.

   On ‘Cyber security’, two new bullet points state:


   “ • Third party specialists engaged to provide enhanced support and advice
   
• Critical applications protected by multi-factor authentication and all connectivity is through the Virtual Private Network (VPN)”

   The only other risks deemed ‘High’ are ‘Adverse economic conditions’ and ‘Business continuity’ (a significant level of revenue is generated from one site).

   New mitigation points among the existing risks include:

   “• Energy efficient products with shorter payback periods, and;
   • Leveraging increasing footprint in Europe
”

   The other principal risks remain legislation, competition, bad debts, currency movements, Brexit and Ukraine.

   17) BOARD OF DIRECTORS

   This report carries the bio of new non-exec Frans Haafkens:

   “Frans holds a Master’s degree in Mechanical & Control Engineering and an MBA. He is Managing Partner at Dutch investment firm i4hi, a company having direct investments in manufacturing and technology businesses. He spent his formative years with McKinsey & Co. as well as working for a short period in the UK lighting industry.

   Frans is a Dutch national who has worked with the Group in recent years supporting the continued success of its Dutch entities, Lightronics and Famostar, both as a consultant and an investor.”

   

Mr Haafkens is a welcome appointment, being the first person from outside the UK, outside the Thorpe family and outside the ranks of TFW employees to join TFW’s main board.

   The board has now been slimmed down to six people. Mr Haafkens sits with three Thorpe family members (1 exec, 2 non-exec), the non-exec chairman and the chief exec/finance director. The recent amalgamation of the chief exec/finance director role is very odd and a matter I plan to investigate further.

   18) CORPORATE GOVERNANCE

   No changes to TFW’s compliance to the QCA’s 10 principles.

   TFW is partially compliant on two principles.

   This is the first:

   

”Maintain the Board as a well-functioning, balanced team led by the Chair:

   • Total of eight directors, four executive directors and four non-executive directors.
   
• The non-executives are not considered fully independent. The Board considers that the non-executive directors are appropriate as they bring significant experience and expertise in the sector. In addition, as the directors retire on a three-year rotation, shareholders have a regular opportunity to ensure that the composition of the Board is in line with their interests.
   
• There is a Remuneration Committee but no Audit Committee, with matters that would normally be tabled at an Audit Committee put to the full Board.”

   And this is the second:

   “Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement:

   • There is no formal evaluation process; however, the Chairman is responsible for Board performance and accordingly actively encourages feedback on the content and function of board meetings.
   • The composition and succession of the Board are subject to constant review, considering the ever-changing needs of the Group. In addition, the directors retire by rotation every three years giving shareholders the opportunity to ensure that the Board is aligned with their interests.”

   I am not quite sure why TFW implies Mr Haafkens is not an independent non-exec. My blog post refers to TFW describing Mr Haafkens as the group’s “first recognised independent” non-exec. Maybe TFW has since reconsidered Mr Haafkens’ status given his business relation with TFW through Ratio Electric.

   Directors seeking re-election every three years is very old-school and best practice today is to seek re-election every year. The lack of an audit committee has not hindered TFW delivering some fundamentally appealing accounts over time.

   The absence of a formal board evaluation process has not really hindered TFW’s progress either, and I would like to think the appointment of Mr Haafkens shows some fresh thinking from what has seemed in the past somewhat of an insular board.

   Among the other QCA bullet points, shareholder visits appear to be welcomed:

   “Meetings are held with shareholders as required; this includes visits to our various company locations being organised and encouraged where possible”

   19) REMUNERATION REPORT

   No commentary changes to what remains a very terse remuneration report.

   Basic pay for executives M Allcock (then exec chairman and joint-CEO), C Muncaster (then FD and joint-CEO) and JE Thorpe (Thorlux business development) increased a substantial 17%:

   

   Interesting that Messrs Allcock and Muncaster enjoyed the same £235k basic pay during FY 2019, but Mr Muncaster’s pay has since advanced to £305k while Mr Allcock’s pay (despite being executive chairman and therefore the senior executive of the two) has advanced to only £274k.

   Maybe the pay differential was a signal that Mr Muncaster was taking on more of the joint-CEO workload than Mr Allcock, and why Mr Muncaster has since become sole CEO as well as FD.

   Pension “compensation” (which is excluded from the table above) may also explain the differential between Messrs Allcock and Muncaster:

   “During the financial year the Company paid pension compensation to M Allcock of £180,953 (2022: £170,358), C Muncaster £51,770 (2022: £44,439), D Taylor £17,266 (2022: £19,546) and to J E Thorpe £23,150 (2022: £12,016).

   Bonuses were chunky and exceeded the basic pay of all three executives. But I can live with such bonuses as the price to pay for TFW growing at an underlying c10% (as it did during the year). The bonus calculation remains suitably vague:

   “The bonus is made up of two elements. The first element relates to the operating profit of the business unit for which the director
has specific performance responsibilities. The second element relates to the operating profit of the Group as a whole.”

   Note the bonuses can (unusually) be included in the calculation to determine a director’s pension:

   “The defined benefit section aims to provide a maximum pension of two-thirds of pensionable salary at normal retirement date. M Allcock’s and D Taylor’s pensionable salary includes an average of the previous three years’ profit bonus. Defined contribution members contribute up to 5% of basic salary and the Company contributes up to 17%.”

   That policy will help Mr Allcock following his retirement from July this year. Pension contributions can be steep at up to 17% of salary, a contribution level that Mr Muncaster enjoyed this year.

   Don’t often see the type of table below with my shares:

   

   Seems as if the higher earners within the group are having their pay lifted in line with the top executives, with the lower and middle earners slipping behind. The higher earners also seem to collect relatively higher bonuses, given their total remuneration (£93k) is much higher than their base salaries (£52k).

   Director options amounted to 80,000, but these have all since been exercised.

   Authority was granted during April 2024 to issue up to 2.1m options to the group’s workforce, and 1.925m options were awarded during May 2024. The executives were issued 400,000 options.

   The main vesting target is to increase EPS by CPI +2%, which does not appear outrageously ambitious. Minor vesting targets are based on total shareholder return and ESG progress. Dilution is 1.6%, with almost 1.6m shares already held in treasury to be used to satisfy the option vesting. Options awarded by the previous scheme are now minimal and were based on pre-tax EPS growing at RPI +3% (point 37).

   20) INDEPENDENT AUDITORS’ REPORT

   a) Scope and materiality

   Auditor PwC did less digging this year than last. Famostar was given a full-scope audit last year but had only “specified procedures performed” this year:

   “An audit was conducted of the complete financial information of the three reporting units: Thorlux Lighting (the Company, located in the UK), Lightronics Participaties B.V. (located in the Netherlands), and TRT Lighting Limited (located in the UK).

   • The audit work performed at these three reporting units (2022: four reporting units), together with specified procedures performed on Electrozemper S.A. (located in Spain), Famostar BV (located in Netherlands) and SchahlLED Lighting GmbH (located in Germany) and additional procedures performed on centralised functions at the Group level, including audit procedures over the consolidation, gave us the audit evidence we needed for our opinion on the Group financial statements as a whole.

   • This provided coverage of 70% (2022: 91%) of profit before tax from the full scope audits.”

   At least overall materiality was kept at the standard 5% of pre-tax profit (£1.375m).

   b) Key audit matters

   All changed for this report. Out go the matters from the previous year as the risk of them causing problems is now deemed “low“:

   “Valuation of warranty provisions, Capitalisation 
of internal development costs, Impairment considerations over intercompany receivables and the accounting related to acquisitions of a subsidiary and a joint venture, which were key audit matters last year, are no longer included because of no issues being identified in prior years and the risk of material misstatement in these balances are low. As such, they are not considered to be of most significance in the current year.”

   Key audit matters for this year are the pension scheme, SchahlLED intangibles and the Zemper earn-out:

   “• Defined Benefit Pension Obligation valuation – Liability assumptions (group and parent)
   • Valuation of intangible assets acquired in the acquisition of Lumen Intelligence Holding GmbH (group)
   • Valuation of the future consideration payable for Electrozemper S.A. and Lumen Intelligence Holding GmbH (group and parent)”

   All three entries in the accounts were deemed appropriate by PwC.

   21) ACCOUNTING POLICIES

   A few minor additions and changes.

   a) New text: TFW discloses the profits attributable to the minority shareholders of Zemper, SchahlLED and other acquisitions as finance expenses (point 25) prior to becoming 100% TFW owned:

   “The group does not recognise non-controlling interests in an acquired entity when there is a commitment and obligation to acquire the non-controlling interests of the acquired entity. The acquired entity is consolidated as if it is wholly owned by the Group since acquisition. Any profits attributable to non-controlling interests, if any, are treated as finance expense of the Group.”

   Profits earned by minorities are typically identified at the earnings line.

   b) Amended text: the amortisation rate for ‘Customer Relationships’ is now 7%-17% rather than simply 7%. Pretty sure the addition of 17% reflects the SchahlLED purchase.

   c) New text: raw materials can be used to produce other raw materials:

   “Raw materials include items that are both used in the production of finished goods and items used in the production of other raw material items”

   d) New text: This may help calculate the SchahlLED earn-out (point 34):

   “The Group has the obligation to purchase the remaining shares of the Lumen business in tranches over the next 2 years. To calculate the expected repurchase value the Group has considered the recent and budgeted future performance of the Lumen business analysing forecasted EBITDA, revenue and costs upon which the obligation is based. This analysis is reviewed and updated each year and, if necessary, adjustments are made to ensure that the provision value reflects the best current estimate of settlement with movements recognised as a share-based payment charge. If the forecast EBITDA assumption were to increase by 5%, the resulting contingent consideration would increase by £330,000.”

   22) SEGMENTAL ANALYSIS

   a) Geography

   The SchahlLED purchase has led to ‘Germany’ now being separated from ‘Rest of Europe’:

   

   UK revenue represented 51% of total revenue, the lowest proportion ever. With a full 12-month contribution from SchahlLED, FY 2024 looks set to see overseas revenue exceed UK revenue for the first time.

   b) Revenue

   SchahlLED looks to have brought with it service revenue of nearly £4m:

   

   Service revenue comprises “surveying, project management, installation and commissioning” and TFW has often said such work is very low margin compared to manufacturing lights. SchahlLED is a (Thorlux) lighting installer, not a lighting manufacturer, which explains its greater service income versus the rest of the group (c£4m versus total SchahlLED revenue of £16.9m).

   23) OPERATING EXPENSES

   a) Cost of inventories

   Most interesting figure here is the cost of inventories at £73m:

   

   The cost of inventories absorbed 41.3% of revenue, the highest since FY 2017 (42.2%). But TFW has commendably ensured its inventory costs have been reasonably tight versus revenue, with a range of 38.4% to 42.8% witnessed since FY 2010.

   Assuming cost of inventories are expensed entirely within cost of sales, other cost of sales items have typically offset any greater cost of inventories. For example, this FY’s gross margin is 44.1% versus 44.0% for the prior FY, despite the higher cost of inventories. TFW’s gross margin has ranged between 43.8% and 47.0% since 2010, which seems reasonably consistent and tight to me for a multinational manufacturer.

   b) Audit expenses

   Despite undertaking one less full-scope subsidiary audit (point 20), PwC lifted its total audit fee by 29% to £374k:

   

   I suppose the extra fees were charged due to SchahlLED becoming part of the group. For perspective, total audit fees were £195k for FY 2018 and have advanced 92% since. At least the £374k audit fees represent only 0.2% of revenue.

   24) EMPLOYEES

   As per the blog post above, revenue per employee reached a new £187k high.

   As also noted in the blog post above, the headcount since FY 2013 undertaking a sales and distribution role has increased from 22% to 27% of the workforce, while the headcount undertaking an administration role has declined from 30% to 27%:

   

   I calculate since FY 2013, the number of production employees is up 85%, the number of sales and distribution employees is up 147% and the number of admin employees is up 77%.

   All told, the total number of employees is up 96% since FY 2013, but their total expense is up 194% — with wages up 187% and social security costs and other pension costs up 239% and 229% respectively.

   I am therefore pleased TFW is ensuring the extra headcount and their associated extra costs are being counterbalanced by extra revenue — total employee costs at 27.1% of revenue was the lowest since FY 2016 (26.6%).

   25) FINANCE INCOME AND EXPENSE

   This note lists the income from TFW’s range of assets:

   

   As noted in the blog post above, interest of £236k was equivalent to only 0.6% interest on the £38m average year-end cash position. I expect a company such as TFW to be earning a greater rate during FY 2024.

   Dividend income of £209k is generated from financial assets of c£3.4m (point 31), which implies a 6% yield from what I believe are mostly listed UK equities. The dividend income was lower this year versus the previous year, but in line with the 10-year average (£195k).

   Net rental income is generated by an investment property (point 28) and it seems by also sub-letting surplus space within operational properties. The investment property generated net rent of £84k, leaving £19k from another property.

   Loan interest income arises from various loan notes (point 29). I suspect the bulk of this £168k relates to a £1.8m loan note issued at 4% plus the BOE bank rate. This £1.8m loan note was repaid to TFW during the year, perhaps not surprisingly given the trajectory of base rates. Other loans are to Ratio Electric and a very small and troublesome Spanish investment, the income from which will become identifiable during FY 2024.

   Interest payable of £94k does not seem onerous given the collection of small financial liabilities accompanying Zemper and SchahlLED averaged about £2.5m during the year (i.e. sub 4% interest).

   Non-controlling interests of £755k represent the profits earned by the minority investors in Zemper (from 37% to 23.5% ownership) and SchahlLED (20% ownership) (point 21). £755k looks plausible given Zemper reported a £1.9m operating profit (after acquisition adjustments), and a 30% average Zemper minority stake gives £570k leaving £185k for the 20% SchahlLED investor.

   26) PROPERTY PLANT AND EQUIPMENT

   Freehold property has a £22m carrying value:

   

   Text elsewhere in the report suggests the £22m valuation is well below today’s market value:

   “The directors are of the opinion that the market value of the freehold land and buildings is in excess of their net book value. Whilst it is considered that the market value is significantly greater than the net book value for many of the Group’s properties as a result of being acquired between one and over 20 years ago, management considers that undertaking formal valuation exercises would be costly for limited value and consequently no formal exercise has been undertaken.”

   If memory serves, the last property revaluation was undertaken in the 1990s.

   27) INTANGIBLE ASSETS

   Development costs and software are the major ‘internal’ intangible expenses (as opposed to ‘external’ acquired intangibles):

   

   The carrying value of these two intangibles has increased by £3m to £7m during the last five years, and £3m being diverted to the balance sheet rather than the income statement is very small beer versus aggregate annual profits of £104m during the same time.

   TFW’s fishing rights on the River Wye — probably a unique intangible among quoted companies — remain at £182k.

   Within the accompanying text…

   “Included in goodwill are amounts of £285,000 (2022: £285,000) arising from the acquisition of Solite Europe Limited in 2009, £2,618,000 (2022: £2,618,000) arising from the acquisition of Portland Lighting Limited in 2011, €7,784,000 (£6,692,000) (2022: €7,784,000 (£6,698,000)) arising from the acquisition of FW Thorpe Nederland B.V. (formerly Lightronics Participaties B.V.) in 2015, AU$478,000 (£252,000) (2022: AU$478,000 (£262,000)) arising from the acquisition of Thorlux Australasia Pty Ltd in 2016, €5,057,000 (£4,348,000) (2022: €5,057,000 (£4,351,000)) arising from the acquisition of Famostar Emergency Lighting B.V. in December 2017, €21,273,000 (£18,289,000) (2022: €21,273,000 (£18,304,000)) arising from the acquisition of Electrozemper S.A. in October 2021 and €16,616,000 (£14,286,000) (2022: €nil (£nil) arising from the acquisition of Lumen Intelligence Holding GmbH in September 2022. This goodwill is not amortised.”

   …goodwill details are now given for Solite and Thorlux Australia (presumably both missed in the previous year) and SchahlLED.

   Portland’s goodwill is now tested using a 10.94% discount rate (previous year: 10.06%) and an impairment would occur if the discount rate is lifted to 17.5% (previous year: 34.4%).

   All the other goodwill is tested on 6x Ebitda…

   “A multiple based on a six times EBITDA, that we consider a reasonable multiple for the sector, is used in these computations, except for Zemper CGUs and Lumen CGUs where an EBITDA multiple of ten and eight, respectively, have been used in accordance with the agreement upon which the contingent consideration is based.”

   …aside from Zemper (10x) and SchahlLED (8x). Goodwill headroom at Zemper is £25m above the carrying value, up £4m on the previous year. SchahlLED headroom is £13m.

   28) INVESTMENT PROPERTY

   The investment properties seem undervalued in the books at £2m:

   

   The freehold of an investment property is valued at £1.3m…

   “Investment property of £1,296,000 (2022: £1,296,000) is freehold land and therefore not depreciated; the property element includes accumulated depreciation of £298,000 (2022: £278,000) which relates to the property occupied by Mackwell Electronics Limited. This investment property has been independently valued and has a market value that is not materially higher than its cost.”

   …while the area for entertaining clients on the River Wye plus the land for planting trees in Wales enjoyed a £0.3m value uplift to £2.3m during the year:

   “An external fair value exercise of the land by the River Wye and the land in Monmouthshire was last undertaken in June 2023 resulting in a valuation of £2.3m, which is greater than the carrying value of those specific investment properties.”

   Gross rental income of £141k gives a 7% gross rental yield at the £2m book value.

   29) FINANCIAL ASSETS AT AMORTISED COST

   These assets are loan notes issued by TFW to various ventures and investments, and they finished the year with a £2.9m carrying value:

   

   a) Ratio Electric

   Can’t say this text is encouraging.

   TFW issued extra loan notes of £1.68m to Ratio during the year, which with accrued interest (i.e. Ratio is not paying back interest to TFW!) now amounts to £1.347m + £1.266m = £2.613m outstanding:

   “Pursuant to the investment in Ratio Holding B.V., the Group has issued loan notes of €1,500,000 (£1,290,000) (2022: €1,000,000 (£860,000)) to help fund the development of this business. With accrued interest, the balance at 30 June 2023 is €1,566,000 (£1,347,000) (2022: €1,012,000 (£872,000)).
   

   During the current year, the Group has issued loan notes of £1,250,000 to Ratio EV Limited, a wholly-owned subsidiary of Ratio Holding B.V., to help fund the development of its business. With accrued interest, the balance at 30 June 2023 is £1,266,000.

   The debt investments have shown no significant increase in credit risk since the inception of the loans, and therefore the impairment provision is determined as 12 months expected credit losses. As at the date of these financial statements, no provision was recorded.”

   As per my blog post above, TFW saying “No further analysis of the joint ventures has been provided as the activities are not considered material to the Group does suggest Ratio is not performing as well as expected.

   b) Mackwell



   After some years of waiting to be settled and at times no interest being paid, this £1.8m loan has finally been cleared:

   “Mr N Brangwin, a director and main shareholder in Mackwell Electronics Limited, has loans outstanding of £nil (2022: £1,800,000), with interest payable at 4% over the Bank of England base rate. This loan was secured against Mr Brangwin’s shareholding in FW Thorpe Plc and was fully repaid during the year.”

   c) Luxintec

   Still a disaster, but at least no further mishaps arose this year.

   A £746k loan note is still carried at £240k following the previous year’s £507k loan write-off. My notes say this Spanish operation suffered a £529k impairment in FY 2021 and a £407k impairment in FY 2020.

   
30) EQUITY ACCOUNTED INVESTMENTS AND JOINT ARRANGEMENTS

   This is essentially the Ratio joint-venture investment and is in the the books at £5.6m. As per my blog post above, TFW’s 50% share of Ratio equated to a £520k loss versus a £290k profit for the previous year:

   

   31) FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

   Essentially a collection of UK equities with a £3.4m carrying value. I vaguely remember credible bulletin-board talk years ago from an AGM where the board said the equities were blue-chip high yielders. The dividend income was 6% during the year (point 25). The portfolio’s value — which does include minor Spanish investments — has bobbed around the £3m-4m mark for the last 10 years:

   

   32) INVENTORIES

   Nothing much to add to my blog post above, but year-end stock of £33m is equivalent to 18.9% of revenue — only the second time since FY 2009 the proportion has come in below 19% (the other was FY 2021 at 17.3%):

   

   Maybe stock as a proportion of revenue will now be lower than in the past as SchahlLED — as an installer rather than a manufacturer — may not need significant levels of inventory to operate.

   33) TRADE AND OTHER RECEIVABLES

   Nothing obviously amiss here:

   

   Year-end trade receivables represented 17.3% of revenue, the lowest (and most favourable) level since FY 2020 (16.7%) and towards the lower end of the somewhat wide 16.3%-24.7% range witnessed since FY 2013.

   Receivables past due but not written down decreased to £2.3m — to represent 7.6% of trade receivables and within the typical 5-10% range witnessed since FY 2014. The figure for FY 2021 had risen to an all-time high of 13%.

   The net bad-debt figure charged to the P&L was only £75k.

   34) TRADE AND OTHER PAYABLES

   Nothing obviously amiss here as well:

   

   Trade payables down 5% when revenue advanced 23% is not ideal, but the prior year saw trade payables surge more than 50% when revenue gained 22%. So TFW appears to have slightly reversed its extension towards paying suppliers.

   The ‘Other payables’ are almost entirely estimated earn-outs for Zemper (£10.853m), SchahlLED (£6.455m) and Ratio (£860k):

   “Included within other payables are commitment to purchase the remaining outstanding shares (redemption liability and contingent consideration) in Electrozemper S.A. of €12,623,000 (£10,853,000) and Lumen Intelligence Holding GmbH of €7,508,000 (£6,455,000). Of these amounts €6,248,000 (£5,372,000) is included in current liabilities and €13,883,000 (£11,936,000) in non-current liabilities. Other payables also includes €1,000,000 (£860,000) deferred consideration for the investment in Ratio Holding B.V. which is within current liabilities.”

   35) FINANCIAL LIABILITIES

   The following liabilities all relate to Zemper and SchahlLED:

   

   The £1,030k ‘Factoring’ liability is new. Text elsewhere in the report reads as if Zemper exchanged trade receivables of £1.436m for immediate factoring cash of £1.03m:

   “The carrying amounts of the trade receivables for the Group company Zemper France S.A.R.L. include receivables which are subject to a factoring arrangement. Under this arrangement, the company has transferred the relevant receivables to the factor in exchange for cash and is prevented from selling or pledging the receivables. However, Zemper France S.A.R.L. retains the late payment and credit risk. The Group therefore continues to recognise the transferred assets in their entirety in its balance sheet. Zemper France S.A.R.L. only receives money from the factor when needed and the amount repayable under the factoring agreement is presented as secured borrowing. The Group considers that the ‘held to collect’ business model remains appropriate for these receivables, and hence it continues measuring them at amortised cost. The relevant carrying amounts for transferred receivables are €1,670,000 (£1,436,000) (2022: €1,161,000 (£999,000)) and the amount received from the factor as secured borrowing is €1,197,000 (£1,030,000) (2022: €nil (£nil)).”

   36) PENSION SCHEME

   After another look at the pension scheme, I have become somewhat more concerned.

   As per the blog post above, TFW employs an unusual hybrid plan whereby defined-benefit and defined contribution payments are paid into the one scheme:

   “The Group operates a funded hybrid pension scheme for employees in the UK….
   …
   The contributions of the pure defined contribution, the defined benefit underpin and pure defined benefit elements are paid into one pension scheme, where the contributions and assets are segregated and ring-fenced from each other.“.

   TFW shows the defined-benefit obligation movements, including benefits paid of £3.5m:

   

   I therefore interpret this £3.5m as relating to the defined-benefit element of the scheme only.

   Therefore, with plan assets showing a corresponding £3.5m benefits-paid movement…

   

   …TFW’s scheme may well have to fund yearly £3.5m defined-benefit payments to members — which is likely to be a tall order with plan assets of just £31m.

   I doubt TFW’s pension scheme will evolve into a ‘black hole’ that will upset the wider group, but it’s an issue that needs further investigation. If my (revised!) interpretation of the figures is right, employer contributions must be a lot higher than last year’s £537k to ensure the plan’s assets are not eroded further by hefty benefit payments. I am therefore slightly concerned employer contributions are set to be reduced for FY 2024:

   “The Group expects to pay £364,000 contributions (2022: £361,000) into the pension scheme during the forthcoming year.”

   37) SHARE-BASED PAYMENT CHARGE

   A reminder that TFW’s existing option scheme had inflation plus 3% as an CAGR target:

   “The Executive Share Ownership Plan (ESOP) allows for the vesting of options subject to the achievement of performance targets, being annual growth of pre-tax Earnings per Share in excess of RPI plus 3% over a five-year period.”

   TFW had awarded more than 2m options by FY 2017, but the number still to vest has since dwindled significantly to 110k and I think is probably very close to zero right now. No wonder a new scheme was arranged (point 19).

   38) RELATED PARTY TRANSACTIONS

   An interesting snippet — the dividends paid by three of the ‘Other’ UK subsidiaries are disclosed:

   

   All three payments are lower than the previous year (£250k, £100k and £350k), which is not encouraging. The bulk of TFW’s dividends must be generated by Thorlux, but that division is not listed (Thorlux Lighting Limited is the Irish operation).

   Back to the auditor’s report (point 20), and we have this text:

   “In establishing the overall approach to the Group audit, we identified two reporting units, which, in our view, required
an audit of their complete financial information both due to their size and risk characteristics. These are Thorlux Lighting (the Company, located in the UK), and Lightronics (located in the Netherlands).”

   Ah ha! Thorlux Lighting operates as the top-level company, and therefore all the top-level company figures — which I typically ignore because top-level companies often have no trading operations and only own subsidiaries — in fact divulge lots of information about Thorlux!

   I have owned TFW shares for 10-plus years and have only just noticed this, although I had wondered why I could never find Thorlux on Companies House (argh!)

   Lots of extra Thorlux analysis will now be forthcoming.

   39) BUSINESS COMBINATIONS

   Full details of the SchahlLED purchase:

   

   The only fair-value adjustment concerned warranties and amounted to an extra £440k provision.

   The earn-out to acquire the remaining 20% is £6.609m, which I think is the un-discounted amount versus the £6.455m cited within ‘Other payables’ (point 34).

   40) EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE

   More land for trees has been acquired:

   “On 17 July 2023, the Group completed its commitment to purchase a piece of land in Wales for a consideration of £2.0m. The land will be used to plant trees as part of the Group’s effort to reduce its carbon emission footprint.”

   And another Zemper payment:

   “On 3 October 2023, the Group paid the third tranche of payments for the acquisition of Electrozemper S.A. totalling €5.0m (£4.3m).“



   TFW spent an initial £19.9m to buy a 63% share of Zemper that included cash of £5.3m. A further £6.4m was spent during this FY, with another £4.3m spent during October that leaves a further £6.6m to be spent (based on the £10.853m figure within ‘Other payables’ (point 34)).


   Maynard

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