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’

11 February 2024
By Maynard Paton

FY 2023 results summary for FW Thorpe (TFW):

• A record FY performance bolstered by acquisitions that showed total revenue up 23%, adjusted profit up 16% and the ordinary dividend lifted for the 21st consecutive year.

• Largest division Thorlux continued to fare well, expanding by almost 30% helped by SchahlLED acquired at a possible 5x Ebitda.  

• Mixed progress was experienced elsewhere, with Dutch profit down 8%, Zemper yet to show its full potential and the EV-charging joint venture going from profit to loss.

• Despite acquisition payments of £19m, very respectable cash conversion left cash only £6m lower at a very useful £35m — a figure that required justification to ‘some shareholders’. 

• A possible 20x P/E seemingly reflects TFW’s distinguished operating history and the persistent demand for energy-saving lighting rather than doubts about the significant acquisition expense and near-term prospect of subdued trading. I continue to hold.

Contents

• News links, share data and disclosure
• Why I own TFW
• Results summary
• Revenue, profit and dividend
• Thorlux and SchahlLED
• Netherlands
• Zemper
• Ratio Electric
• Other companies
• Financials: balance sheet and cash flow
• Financials: pension scheme and employees
• Valuation

News links, share data and disclosure

• Annual results for the twelve months to 30 June 2023 published 12 October 2023;
• AGM statement published 16 November 2023;
• Directorate changes published 04 July 2023, and;
• Directorate change published 16 Jan 2024.

• Share price: 375p
• Share count: 118,935,590
• Market capitalisation: £446m

• Disclosure: Maynard owns shares in FW Thorpe. This blog post contains SharePad affiliate links.

Why I own TFW

• Develops professional lighting systems with a long-established reputation for high product quality, leading technical innovation, first-class service and sustainable manufacturing processes.

• Board led by a veteran executive and assisted by family non-execs who steward a 43%/£191m shareholding and favour special payouts.

• Conservative accounts typically display useful operating margins, substantial cash reserves, consistent working-capital management and illustrious rising dividend.

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

Results summary

Revenue, profit and dividend

• A record H1 performance that anticipated a “quite positive” H2…

“High energy costs and the imminent ban on the sale of fluorescent lamps in the UK and EU are both stimulating activity in the Group’s key market sectors. The outlook for the second half remains quite positive, although the revenue growth percentage is unlikely to be maintained at such a high level due to the good performance in the second half of last year.”

• …had already heralded a satisfactory FY 2023. 

• This FY set new highs for both revenue, up 23% to £177m, and operating profit, up 13% to £28m:

• Progress was boosted by two acquisitions:
  • Zemper, which was purchased during October 2021 and contributed for nine months during the comparable FY and twelve months during this FY, and;
  • SchahlLED, which was purchased during September 2022 and contributed for nine months during this FY.

• TFW reckoned growth adjusted for the two acquisitions was 9%-11%:

“Excluding Zemper and SchahlLED acquisition effects, for comparison’s sake, like-for-like revenue increased by 11% to £159.1m and operating profit by 9% to £26.9m.“

• TFW described this FY as “less turbulent“, with a greater supply of components — notably microchips — allowing an order backlog to be fulfilled:

“Financial performance overall was strong, with significant organic revenue increases for most companies, primarily due to much improved material availability and the consequential fulfilment of the previous year’s order backlog“ 

• Divisional results were mixed. Thorlux, which now encompasses SchahlLED, was the best performer. Zemper, the Dutch operations and various Other subsidiaries meanwhile did not fare quite so well:  

• The ability to pass on cost increases to customers seemed to dictate the differing divisional efforts:

“All companies wrestled with inflationary effects on material and labour costs, and some were better able than others to adjust selling prices to maintain margins.“

• TFW reiterated its reported operating profit was hindered by acquisition adjustments:

“Given the Group has committed to acquiring the remaining shares over the next few years, we account for 100% of the revenue derived by these companies but adjust the operating profit for intangibles valued at acquisition and profit before tax to reflect the minority shareholding. For added complexity, SchahlLED predominantly distribute Thorlux products, so there are further adjustments at a revenue and operating profit level.“

• The adjustments involve the amortisation of acquired intangibles as well as (I believe) changes to earn-out provisions. TFW helpfully disclosed operating profit before and after such adjustments:

• FY operating profit before the acquisition adjustments in fact gained 16% to £29.8m.

• H2 set new six-month records for both revenue, up 18% to £95m, and operating profit, up 5% to £17.2m before acquisition adjustments. 

• Excluding SchahlLED, H2 revenue would have gained approximately 6% to almost £85m.

• The final dividend was raised 5% to match the 5% H1 dividend lift and ensured TFW registered its 21st consecutive annual dividend increase: 

• The payout has not been cut since at least 1991. 

• The ordinary dividend has expanded at an 8% CAGR during the last 10 years:

• Special payouts were declared during FYs 2021 and 2022, but understandably ceased following significant expenditure on SchahlLED, Zemper and joint-venture Ratio Electric (see Financials: balance sheet and cash flow).

Thorlux and SchahlLED

• Thorlux manufactures a wide range of professional lighting equipment — most notably the SmartScan system — and represents approximately 60% of the group:

• Thorlux reported a record divisional effort, with FY revenue up 29% to £102m and FY operating profit up 28% to £17m:

• Thorlux started working with SchahlLED during 2019, after which the German lighting installer quickly became TFW’s largest customer before being acquired by TFW:

• A SchahlLED case study involving KraussMaffei reported an 85% reduction to energy costs through installing Thorlux lighting. The customer apparently enjoyed a “high return on investment with a payback period of less than 3 years“:

• SchahlLED was amalgamated into Thorlux and delivered the following nine-month contribution:

“In the year, SchahlLED added nine months of revenue to the consolidated figures of £16.9m and operating profit of £2.3m before acquisition adjustments.”

• SchahlLED’s twelve-month revenue was €23.9m/£20.8m:

“If the acquisition had occurred on 1 July 2022 the consolidated pro-forma revenue and profit before tax for the year ended 30 June 2023 would have been €23.9m (£20.8m) and €1.3m (£1.1m) respectively.”

• €23.9m compares well with the €15.9m recorded during calendar 2021 that was stated at the time of acquisition:

“During the last financial year ending 31 December 2021, SchahlLED achieved revenues of €15.9m with EBITDA of €2.8m.“

• TFW looks set to pay €7.5m/£6.6m for the outstanding 20% of SchahlLED to take the total payment to €22.1m/£19.5m:

“On 23 September 2022, the Group acquired 80% of the share capital and hence control of Lumen Intelligence Holding GmbH, a company that holds 100% equity interest in SchahlLED Lighting GmbH, a turnkey provider of intelligent energy saving lighting products for the industrial and logistics sectors.

The company was acquired for an initial consideration of €14.6m(£12.9m). There is a fixed commitment to acquire the remaining shares, based on current best estimates, a further €7.5m (£6.6m) could be payable, which is subject to future performance conditions.”

• The €7.5m/£6.6m earn-out for SchahlLED was calculated at eight times 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.”

• The acquisition announcement said the SchahlLED earn-out would be based upon Ebitda generated during this FY: 

“FW Thorpe has paid an initial consideration of €14.6m (circa £12.8m) and could pay an additional amount to be determined by SchahlLED’s EBITDA performance in the year ending 30 June 2023.”

• Paying €7.5m/£6.6m for 20% of SchahlLED based upon eight times Ebitda implies 100% of SchahlLED’s Ebitda for this FY was €4.7m/£4.1m ((€7.5/£6.6m)*5/8)). 

• €4.7m compares well with the €2.8m recorded during calendar 2021 that was stated at the time of acquisition:

“During the last financial year ending 31 December 2021, SchahlLED achieved revenues of €15.9m with EBITDA of €2.8m.“

• Paying a total €22.1/£19.5m for SchahlLED Ebitda of €4.7m/£4.1m equates to an Ebitda multiple of less than 5.

• TFW’s return on its SchahlLED investment could be fine-tuned for the subsidiary’s depreciation, amortisation and taxation, its loans of €2.6m (now repaid) and the gross margin now captured by Thorlux, but my single-digit Ebitda multiple already suggests the deal was not extravagant.

• Thorlux’s FY revenue without SchahlLED gained 8% to £85m, although the division’s H2 revenue without SchahlLED advanced only 3% to £45m:

• Thorlux’s FY operating profit (before acquisition adjustments) without SchahlLED gained 17% to £16m. 

• Thorlux’s FY operating margin (before acquisition adjustments) without SchahlLED was therefore 18.6% (£16m/£85m).

• Thorlux’s FY operating margin (before acquisition adjustments) with SchahlLED was 17.7% (£18m/£102m).

• The 17.7% divisional margin for this FY was the highest since FY 2019 (18.6%)…

• …but was a few percentage points below the 21%-plus scored regularly up to FY 2018.

• Note that Thorlux also supplies products to different group subsidiaries, and the profit generated when those products are sold to the final customer may accrue to those different subsidiaries and not to Thorlux:

• Products worth £3.6m were sold to other subsidiaries during this FY, and the yearly figure has typically bobbed between £3m and £4m since FY 2017.

• Thorlux’s margin may have been assisted by fewer supply and redesign headaches:

“With the improvement in component availability, Thorlux’s engineering resource has been able to move the focus away from sourcing and redesigns, to more forward-looking activities supporting product innovation.” 

• Wider Thorlux progress appeared supported by SmartScan…

“The SmartScan platform has delivered strong revenue growth again this year, with new features added as part of the generation 2 launch. New products include a commercial luminaire range with reduced material usage and energy consumption, underpinning Thorlux’s sustainability credentials.”

• …alongside favourable environmental/regulatory trends.

“Whilst energy costs are slowly reducing, there is still a push for both carbon reduction and data reporting – areas where the SmartScan system excels and has a proven track record. Along with the impending ban on fluorescent lamps across the UK and the EU, these factors should counteract any slowdown in general capital investment commitments.” 

• This FY unveiled a top-secret Thorlux lighting project at the Houses of Parliament: 

“Thorlux developed special products between 2016 and 2022 which provide colour-tuneable illumination of all four clock faces and the balconies above, a new Ayrton Light (a special lighthouse style lamp used to indicate when Parliament is sitting), illumination of the clock mechanism, the bells, including floodlighting the Big Ben bell itself, all internal rooms, and the 340 steps, and all emergency lighting. SmartScan features heavily in the controls for ancillary areas.

The project has been kept secret until now, even during the 2023 New Year celebrations.” 

• TFW said the Elizabeth Tower installation provided a 60% energy saving.

• More day-to-day Thorlux projects involved a factory, some healthcare offices, a warehouse and a cricket school: 

Netherlands

• TFW’s Dutch businesses — Lightronics and Famostar — represent a quarter of group profit.

• Lightronics manufactures mostly street lighting and was acquired during FY 2015 for an initial £8.3m that included a £1.9m debt repayment.

• Famostar manufactures mostly emergency lighting and was acquired during FY 2018 for an initial £6.3m:

• A £15m earn-out payment during FY 2022 took the total Dutch acquisition cost to £30m. 

• Both Lightronics and Famostar appear to have performed well within TFW.

• Aggregate Lightronics/Famostar revenue for this FY was £36m versus less than a combined £18m at the time of their purchases.

• Aggregate Lightronics/Famostar operating profit for this FY was £7.2m versus a combined £2.3m at the time of their purchases.

• The Dutch businesses sadly did not deliver a fantastic FY.

• FY Dutch revenue increased 4% to £36m, but FY Dutch profit (before acquisition adjustments) fell 8% to £7.2m:

^{(Famostar acquired during H1 2018 but reported within Netherlands from H1 2020)}

• Mind you, Dutch profit of £7.2m from a total £30m Dutch investment still generated TFW a very satisfactory 24% (or possibly more) pre-tax return.

• Higher supply costs at Lightronics were blamed for this FY’s Dutch profit shortfall, although actions have been taken:

“The main challenge during the year has been managing increases to supply chain costs. Some progress was made both in improving selling prices and reducing costs, but there is work to do. The commercial organisation continues to develop under the leadership of Lightronics’ new commercial director.

Margins improved in the second half of the year; Lightronics expects this to continue into the new financial year, following some positive results on purchase price negotiations in the supply chain. The business starts the new year with a solid order book, with a clear target of improving operating returns in 2023/24.” 

• The Dutch operating margin (before acquisition adjustments) was still an appealing 20% for this FY, albeit lower than the 23% enjoyed during the comparable FY and the 22% for FY 2021.

• TFW commendably widened its boardroom talent during October 2022 after appointing Frans Haafkens as the group’s “first recognised independent” non-executive:

• Mr Haafkens has worked with TFW since TFW bought Lightronics from his private-equity group during FY 2015.

• Mr Haafkens’ investment firm co-purchased Famostar with TFW during FY 2018, and bought a majority stake in Ratio Electric a year before TFW bought a 50% stake during December 2021 (see Ratio Electric).

• I trust Mr Haafkens’ “hands-on” private-equity approach can assist TFW with further acquisitions… although he has yet to buy any TFW shares:

• TFW’s board may now have room for extra non-execs. Two non-execs have retired so far during FY 2024, leaving only Mr Haafkens and two Thorpe family members as non-execs at present. 

• A second “recognised independent” non-exec with European lighting experience could be the ideal appointment to complement a board dominated by Thorpe family members and veteran UK employees.

Zemper

• Encouraged perhaps by the success of the Lightronics and Famostar acquisitions, TFW purchased Spanish emergency-lighting group Zemper during October 2021:

• TFW spent an initial £19.9m to buy a 63% share that included cash of £5.3m. A further £5.3m was spent during September 2022 to purchase another 13.5%.

• This FY forecast the remaining 23.5% would be acquired for €12.6m/£10.9m:

“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).“

• But the comparable FY anticipated the remaining 23.5% would be acquired for €13.9m/£12.0m:

“Included within other payables is a commitment to purchase the outstanding shares (redemption liability and contingent consideration) in Electrozemper S.A. of €20,046,000 (£17,248,000). Of this amount €6,123,000 (£5,268,000) is included in current liabilities and €13,923,000 (£11,980,000) in non-current liabilities.”

• I believe the €1.3m/£1.1m difference reflects an extra payment for Zemper during H2 to take this FY’s follow-up payment to £6.4m:

• TFW said Zemper recorded a flat FY performance:

“Zemper’s profit contribution to the Group in 2022/23 was marginally lower than forecast, with orders down in the first half year; however, various new products and marketing supported growth in the second half to recover the full year’s numbers to be in line with the prior year’s numbers.“

• TFW added Zemper “synergies” ought to emerge during FY 2024:

“Projects include in-sourcing of troublesome plastic components, standardisation of product offerings across multiple territories, and continual development of shared product ideas. These synergies take time to implement, but the Group expects to see some benefit later in the new financial year.”

• The initial £19.9m payment plus the follow-up £6.4m payment plus the forecast £10.9m payment gives a £37.2m total anticipated payment for Zemper. 

• A £37.2m total purchase price versus this FY’s £29.8m group operating profit (before acquisition adjustments) makes Zemper a very significant purchase.

• Zemper produced a £4.2m Ebitda for this FY, which values Zemper at nearly 9 times Ebitda based upon a £37.2m total purchase price:

• Nearly 9 times Ebitda is higher than my estimated sub-5 times multiple paid for SchahlLED and what is now sub-4 times paid for Lightronics/Famostar.

• Zemper’s higher valuation may reflect the subsidiary’s high-spec factory…

“Zemper’s facility in Spain is a credit to its founding family’s professionalism. The company is very self-sufficient, with ownership of all its intellectual property, and with its own laboratory test facilities and state-of-the-art manufacturing equipment.”

• …and/or the lengthy 15-year longevity of acquired ‘customer relationships’ (point 31), which suggests loyal clientele and reliable orders. 

• For comparison, SchahlLED’s ‘customer relationships’ have a useful life of six years. 

• Zemper’s higher valuation could also reflect intriguing commentary about future “premium connected technology“:

“[S]ome significant technological projects are underway to harness Zemper’s design, technical and manufacturing know- how. These projects will support the Group’s electronic operations and its aspirations for premium connected technology in the emergency lighting sector.”

• Zemper may well be involved with a SmartScan equivalent for emergency lighting.

• I would like to think the aforementioned “synergies” will soon improve Zemper’s 14% operating margin (before acquisition adjustments), and enlarge the subsidiary to represent more than the present c10% of the wider TFW group.

Ratio Electric

• TFW acquired 50% of Ratio Electric during December 2021 for £5.8m, with a loan note issued for £0.9m “to help fund the development of [the] business”.

• Ratio is headquartered within the Netherlands and develops electric-vehicle charging systems:

• This FY revealed the loan note had increased to £1.3m, with a further £1.3m loan note issued to Ratio Electric’s UK operation:

“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. “

• Issuing extra loan notes does not sound promising, and sure enough Ratio recorded a £1m loss for this FY:

“In the year to 30 June 2023, the joint venture, Ratio Holdings B.V. generated a loss after tax of €1,199,000 (£1,041,000) (2022: profit after tax of €683,000 (£588,000)).

The Group has recognised its 50% share of loss of €599,000 (£520,000) (2022: profit of €342,000 (£290,000)) in the Income Statement, less costs in the parent company of £nil (2022: £62,000).” 

• This line was somewhat concerning:

“No further analysis of the joint ventures has been provided as the activities are not considered material to the Group.” 

• The comparable FY had presented a simple income statement for Ratio…

• …despite the joint venture’s £683k profit for that FY also not being material to the group.

• Electric-vehicle charging is a departure from TFW’s lighting speciality. At the time of the Ratio investment, TFW said:

“This is an exciting opportunity for the Group. FW Thorpe’s know-how in electrical engineering, manufacturing and lighting, combined with Ratio’s experience in electrical vehicle charging will allow the introduction of new products into the UK market as well as supporting growth in Ratio’s existing markets.

We see similarities in technology and engineering skills, giving the Group the opportunity to diversify into new areas of engineering with high growth potential.”

• Ratio’s “high growth potential” may have come with high cost potential to remain competitive. This FY suggested Ratio required greater innovation:

“In the Netherlands, at the Ratio HQ, operations have been adjusting to the fast moving EV marketplace, and investments in smart charging technology and connectivity have dented returns.”

• This FY witnessed Ratio’s UK progress restricted by capacity issues:

“Availability of the new EV charging pillar has been limited due to production capacity restraints, but Ratio hopes to be able to better satisfy the Group’s sales teams in coming months, who are chomping at the bit to get going.“

• The Ratio equity investment is carried presently at £5.6m with the loan notes carried at £2.6m.

Other companies 

• TFW’s Other companies consist of:
  • TRT Lighting, which supplies lighting for roads and tunnels, and earns revenue of approximately £10m;
  • Philip Payne, Solite and Portland, which between them supply emergency lighting, cleanroom lighting and shop lighting to earn combined revenue of approximately £11m, and;
  • A handful of overseas Thorlux offices.

• The best long-term performing Other subsidiary is TRT Lighting, which was established during FY 2012 and by FY 2016 had already become the largest Other subsidiary by revenue.

• But TRT’s recent progress has not been spectacular. The comparable FY admitted to a “marginally above break-even” performance and this FY acknowledged a thin 3% margin following personnel changes:

“TRT Lighting increased its profit but, at only a 3% profit-to-sales ratio, profit remains significantly below Group expectations and must improve. In recent months the TRT Board structure has been altered and strengthened, with a new operations director and new sales director, and the sales team has been refreshed”

• TRT’s low margin has been due to an absence of larger projects, which are expected to return for FY 2024:

“Street lighting projects contributed most of the revenues for this year. Tunnel projects were at lower levels, with only some smaller scale projects in the UK and Australia. Some larger projects have been secured and ordered for delivery in 2023/24; these higher margin projects will make a strong contribution to results for 2023/24.” 

• Philip Payne and Solite put in positive revenue performances, while Portland lost ground as customers for Belisha beacons proved elusive.

• Other-subsidiary profit of only £1.1m on net revenue of £19.3m suggest the Other subsidiaries have struggled collectively with demand, costs and/or competition:

• I speculate Philip Payne, Solite, Portland and possibly TRT are kept on by TFW primarily because they supply products and services to the group’s larger operations:

Financials: balance sheet and cash flow

• TFW’s balance sheet remains flush with cash despite the payments for SchahlLED (£13m net of cash acquired) and Zemper (£6m).

• Cash and short-term deposits ended this FY £6m lower at £35m after cash from operations of £36m invested only £1m into working capital, paid tax of £4m, funded net capex of £9m, spent £19m on acquisitions and distributed £7m as dividends:

• The £35m cash position is not troubled by significant borrowings. ‘Financial liabilities’ (mostly bank debt, factoring liabilities and government loans associated with SchahlLED and Zemper) were £3m.

• This FY answered a common question from “some shareholders” about the substantial net cash position:

“For many years some shareholders have questioned the rationale behind the Group holding large cash reserves. The Board chooses to maintain a large reserve as one never knows what is around the corner, as proven recently by the COVID lockdown. The Board remains prudent, with no plans to move away from this philosophy, and will not fund further growth unless it can do so from cash reserves. 

• Amen.

• TFW in fact has operated with net cash for at least the last 30 years:

• I dare say the conservative approach to cash reserves (and that illustrious dividend record) may be connected to the board’s 45%/£201m shareholding.

• TFW added:

“Although reserves have reduced with recent acquisitions activity and with stock control complexities, even with future earn-out provisions and commitments the Board remains confident that the current £35.0m at the year end, which remains well above its desirable minimum target, will more than suffice.” 

• £35m will indeed suffice to cover the aforementioned £11m to clear the Zemper purchase and £6m to clear the SchahlLED purchase. 

• Mind you, cash at £35m is equivalent to ‘only’ 20% of annual revenue — the lowest proportion since FY 2002 (15%):

• Bank interest amounted to only £236k or 0.6% on this FY’s average £38m cash position.

• However, £236k/0.6% did advance on the comparable FY’s £49k/0.1% and TFW did suggest a further improvement for FY 2024:

“[T]he recent upturn in interest rates have seen returns on our significant cash holding improve in the last quarter of the year.“

• Companies blessed with significant ‘surplus’ cash should now be earning notable interest.

• As a minimum, NatWest for example offers an instant-access business account paying between 1.46% and 1.92% AER (variable), which would pay a useful £650k interest on this FY’s £35m.

• TFW’s ability to fund material acquisition payments while maintaining a significant cash surplus reflects the group’s very respectable cash generation.

• For example, during the five years to this FY, cash and short-term deposits declined just £9m to £35m after cash from operations of £138m invested only £5m into working capital, paid tax of £21m, funded net capex of £35m, spent £54m on acquisitions and distributed £39m as dividends:

• TFW’s working-capital management has been particularly impressive.

• Despite the group growing eight-fold during the last three decades, stock, trade debtors and trade creditors as a proportion of revenue have been remarkably consistent:

• This FY confirmed stock levels were being “actively managed“:

“There are targets around the Group to reduce stock – of components, in particular. The easing of the recent supply shortage situation has now inevitably created an overstock in most Group companies and elsewhere throughout the extensive supply chain. Stock levels are being actively managed, in particular to ensure agility in Group businesses and to reduce possible obsolescence. Whilst stock increased last year from £32.8m to £33.4m, the number reduced from an interim high of £37.9m and will fall further.” 

• TFW does carry the risk of stock becoming obsolete. This FY noted:

“The value of the inventory provision is £5,122,000 (2022: £4,449,000) for the Group and £2,785,000 (2022: £2,477,000) for the Company.”

• A £5m inventory provision equates to 13% of this FY’s stock value of £33m. The 13% is commensurate to previous FYs, but the figures imply £5 of every £38 invested in stock is written off.  

• The cost of inventories expensed against profit for this FY was £73m, which versus average stock held during the year of £33m implied stock was kept in the warehouse for almost six months before sale.

• Such stock turn at 2.2x (£73m/£33m) matches TFW’s longer-term pattern:

• Capital expenditure seems adequately expensed through the income statement:

^{(Depreciation and amortisation for property/plant/equipment, capitalised development and software only)}

• The £9m difference between five-year net capital expenditure of £35m and five-year depreciation and amortisation of £26m can be explained by £11m spent on freehold properties. Total freeholds are carried at a net £22m.

• TFW’s cash flow includes consistent ‘profit on disposal of property, plant and equipment’ entries:

• These entries suggest a conservative depreciation policy, whereby equipment is written down on the balance sheet to valuations below the eventual disposal proceeds.

• The accounts also include investment property of £2m, loan notes of £3m, an equity portfolio of £3m as well as the £6m Ratio Electric investment:

• Calculating TFW’s return on capital (and similar ratios) is fraught with nuances given the significant (and low-earning) cash position, the amortisation of acquired intangibles, the array of non-operational investments and the forecast payments to acquire the rest of SchahlLED and Zemper.

• My best guess at total invested capital is
  • Property, plant and equipment of £38m, plus;
  • Intangibles of £71m, plus;
  • Cumulative acquisition adjustments of £3m, plus;
  • Working capital of £20m, plus;
  • Forecast SchahlLED and Zemper payments of £17m…

• …giving approximately £150m.

• This FY’s operating profit before acquisition adjustments of almost £30m gives an encouraging pre-tax return on invested capital of 20%.  

Financials: pension scheme and employees

• TFW operates a “hybrid” defined-benefit/defined-contribution pension 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.”

• The scheme’s hybrid set-up means shareholders can’t really be sure about the funding risks of the defined-benefit element.

• Scheme benefits paid during this FY jumped by £1.2m to £3.5m:

• Versus scheme assets of £31m, paying benefits of £3.5m a year might normally risk permanent asset erosion for a defined-benefit scheme.

• But the scheme’s assets and benefits include defined-contribution pensions, for which the scheme member — not TFW — takes the investment risk.

• As such, shareholders are left to guess whether the scheme’s assets of £31m remain sufficient to fund the obligations for the defined-benefit members.

• TFW’s pension commentary was very limited:

“The latest triennial actuarial valuation was completed as at 30 June 2021. This valuation showed that the pension scheme position remains in surplus and a funding level for the future has been agreed between the trustees of the scheme and the directors of the Company. The directors consider it unlikely that any changes to the present funding levels will have any significant effect on the strength of the Company’s statement of financial position.” 

• Although the scheme’s benefit payments can fluctuate from year to year, the general trend is up:

• This FY suggested the group’s scheme contributions would not be increased for FY 2024:

“As a result of the most recent valuation, and in light of the non-recognition of the pension scheme surplus, the recovery plan liability of £189,000 (2022: £189,000) is included in other payables.
…
The Group expects to pay £364,000 contributions (2022: £361,000) into the pension scheme during the forthcoming year.“

• The scheme’s next triennial funding review will be calculated as at 30 June 2024. The resultant contribution recommendation will provide shareholders the best insight into the scheme’s financial requirements.

• For some perspective, TFW and its employees have contributed an aggregate £21m into their hybrid scheme since FY 2007… yet the scheme’s assets have advanced by £17m during the same time while the (defined-benefit) liabilities just seem to mirror the progress of the assets:

• TFW’s employee productivity continues to improve.

• Revenue per employee for this FY reached a new £187k high:

• The cost per employee advanced by £4k to £51k, but employee costs were commendably kept to 27.1% of revenue — the lowest since FY 2016 (26.7%).

• TFW’s improving productivity may be due to employing a greater proportion of revenue-earning workers.

• Since FY 2013, the headcount 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%:

• Keeping employee costs at 27% of revenue did not help TFW’s overall margin improve. 

• H2 operating profit as a proportion of revenue was 18% to give an FY margin of 16%, or 17% before acquisition adjustments. The comparable FY margin before acquisition adjustments was 18%: 

• Although a 17% group margin remains healthy, TFW did enjoy an 18%-plus group margin for many years up to FY 2016. A degree of competitive abrasion may have since occurred. 

Valuation

• Outlook comments within this FY statement were muted:

“As a whole, the outlook from the sales teams is positive. At the start of this new financial year, orders are slightly lower than in the same time period last year, and there is some evidence of projects slowing. Costs are under control and some margin improvements have been made, which will provide an improved return on sales. Revenues, however, are expected to see slower growth than in the recent few years. “

• November’s AGM statement reiterated the subdued prospects:

“Since the beginning of the new financial year, orders and revenue are marginally ahead of the same period last year ‐ there being some ups and downs across the Group. We expect half‐year results to be similar to last year.

The sales teams remain positive, the pipeline is good but projects seem a little slower to materialise than in past years.

New product development remains a high priority and various exciting product innovations are under development.

The long‐term picture is always more challenging to determine, however, our geographical and sector diversity combined with our energy saving solutions present opportunities to target profitable growth.”

• A twelve-month contribution from SchahLED would have delivered FY revenue of £181m and an FY operating profit before acquisition adjustments of at least £30m. 

• Applying the 25% UK tax rate to £30m gives earnings of £22.5m or approximately 19p per share. 

• My calculations could be fine-tuned further for the:
  • Net cash (£32m);
  • Forecast earn-outs (£17m);
  • The Ratio Electric investment, loan notes, investment property and equity portfolio (£14m), and;
  • Potential operating improvements at Zemper, TRT Lighting and the other Other subsidiaries…

• …but such adjustments will not make a huge difference to the £446m market cap that my guesswork says is supported by a 20x multiple.

• My decision to purchase TFW between 2010 and 2012 was made much easier because the shares were then valued at a more modest c10x P/E multiple:

• Despite reported earnings advancing 66% between FY 2016 and this FY, the shares at 375p have traded sideways throughout the same period:

• Perhaps today’s buyers are (still) willing to pay a healthy 20x multiple because of TFW’s:
  • Long-time operational resilience as demonstrated by 21 years of consecutive dividend increases;
  • Appealing returns on invested capital, driven in part by acquisitions purchased on low multiples (e.g. Lightronics and Famostar);
  • Ongoing growth opportunities through product innovation (e.g. an emergency-lighting SmartScan equivalent) and cross-selling into new territories (e.g. Europe through overseas subsidiaries);
  • Prestigious contracts such as Elizabeth Tower showcasing first-class business/product credibility;
  • Tip-top environmental credentials, as evidenced by more than 20 pages within the 2023 annual report devoted to ‘sustainability’, and;
  • Order books supported by customer concerns about elevated energy costs.

• On that last point, a SharePad search through the RNS for ‘LED lighting’ continues to show plenty of FTSE 350 companies that may well be (or become) TFW customers:

• The bear case beyond general economic challenges include:  
  • Zemper, SchahlLED, Ratio Electric and potential future acquisitions not performing as expected following significant purchase expenditure;
  • Greater competition leading to higher stock obsolescence and a lid being kept on the group margin;
  • The UK-centric boardroom becoming tested by overseas operations now representing almost 50% of revenue, and;
  • Further share-price stagnation as near-term growth moderates to a pedestrian pace.

• For now at least, shareholders may have to be patient for Zemper and Ratio Electric to prove themselves as wonderful investments. 

• I would also hope TFW allows Zemper and SchahLED to properly bed in before embarking on another substantial acquisition.

• As shareholders await what might be a quiet FY 2024, the 6.46p per share ordinary dividend supplies a modest 1.7% income at 375p.  

Maynard Paton