FW THORPE: FY 2024 Declares 22nd Consecutive Annual Dividend Increase After ‘Impressive’ Stock Procurement Improves Gross Margin To 49% While Subdued Outlook And Modest LTIP Targets Leave P/E At Lowest For 10 Years

18 February 2025
By Maynard Paton

FY 2024 results summary for FW Thorpe (TFW):

  • A 1% revenue decline was countered by a 9% profit advance, with H2 profit improving a remarkable 17% to help raise the ordinary dividend 5% and extend the run of annual payout advances to 22 years.
  • TFW’s gross margin improving to 49% through “impressive” stock procurement led to some welcome operating margins, including 20% for Thorlux, 23% for Lightronics/Famostar and 19% for Zemper’s H2, although profitability at the group’s Other subsidiaries remains poor.
  • Very satisfactory cash flow supported cash finishing £18m higher at £53m, which triggered the third special dividend in four years and almost certainly enhances the likelihood of further acquisition activity.  
  • The slimmed-down board with its M&A expertise may wish to consider the success of acquisition specialist Halma, which assesses its ‘capital allocation’ through return on total invested capital and includes the KPI as an LTIP measure.
  • The 15x P/E is the lowest rating for ten years, and seems more influenced by TFW’s subdued near-term prospects and modest LTIP targets rather than the group’s distinguished operating history and longer-term demand for energy-saving lighting. I continue to hold.

Contents

News links, share data and disclosure

  • Share price: 310p
  • Share count: 118,935,590
  • Market capitalisation: £369m

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.
  • Management overseen by family non-execs who boast decades of board experience, steward a 43%/£158m shareholding and occasionally favour special payouts.
  • Conservative accounts display healthy operating margins, substantial cash reserves, impressive 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 subdued H1 that anticipated an “improved situation at the year end“…

[H1 2024] “At the time of writing, the general order book and revenue for the Group as a whole are good. Within the Group, therefore, we look forward to an improved situation at the year end, providing there are no sudden changes to the economic outlook.” 

  • …had already suggested this FY might deliver a better H2.
  • After H1 adjusted operating profit slipped 2%, H2 adjusted operating profit remarkably gained 17% to £20.1m to set a new H2 record:
  • FY adjusted operating profit therefore advanced 9% to £32.4m to set a new FY record.
  • TFW’s adjusted operating profit excludes the amortisation of acquired intangibles and, for this FY, a £1.4m accounting gain to reflect the reduced earn-out provision for Zemper (see Zemper):
  • The adjusted profit improvement was not supported by higher revenue, but was instead driven by a higher margin through “impressive results” from TFW’s procurement team alongside a “targeted reduction of material spend” (see Financials: margin and employees).
  • FY revenue in fact dipped 1% to £176m after H2 revenue declined 2%:
  • TFW’s progress was complicated by SchahlLED, which was purchased during September 2022 and contributed for the full twelve months during this FY but for nine months during the comparable FY.
  • SchahLED experienced a difficult FY, with its revenue contribution £1.5m lower at £15.4m despite the extra three months of ownership (see Thorlux and SchahlLED).
  • The flat FY revenue performance was described by TFW as “consolidation“…

“Following a few years of significant organic and acquisitive growth, this year has been one of consolidation.” 

  • …and seemed to be caused by a lid being kept on product pricing:

“Generally, market selling price increases for luminaires have slowed…
…
“Competition is in a variety of forms, from private businesses to listed multinationals and from the information available, financial performance has been muted given that the last few years were supported by sales price increases.”
…
“Diversification of Group revenue sources… has delivered solid revenue and… resulted in a growth in operating profit despite selling price increases being limited this year, hampering the Group’s ability to offset cost pressures.“

  • Divisional performances were mixed. Thorlux and the Dutch operations enjoyed the bulk of the profit progress, while Zemper has still to show its full potential and the various Other subsidiaries continue to perform poorly:  
  • The final dividend was lifted 5% to match the H1 increase:
  • The ordinary FY dividend therefore enjoyed its 22nd consecutive annual advance and has not been cut since at least 1991:
  • This FY’s highlight was a special 2.5p per share dividend — the third extra payout in just four years — and somewhat of a surprise following the significant recent expenditure acquiring 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:
  • The division has operated since 1936 and attracts customers through innovative products, manufacturing excellence, bespoke designs and high-quality service (point 4) that combine to provide buyers with “peace of mind” (point 7).
  • Thorlux’s lighting offers a “low total cost of ownership“, with modest maintenance requirements, extended working lifetimes and, increasingly, significant energy savings (point 7):
  • This FY’s case studies included a university building in London, within which Thorlux replaced “outdated fluorescent” lighting to generate an astonishing 94% energy saving:

“The Rhind Building houses several lecture rooms and meeting spaces that are in regular use by the university. However, the lighting system comprised outdated fluorescent technology and required updating… [T[he university sought to improve energy efficiency and reduce carbon output.
…
Thorlux retrofitted 1,260 luminaires in the Rhind Building, resulting in an energy saving of 94% compared with the old lighting system, with the potential saving of £194,498 of electricity each year.”

  • Emphasising Thorlux’s ‘green’ credentials, this FY’s annual report devoted 25 pages to TFW’s “sustainability journey“, which recapped the Light Line retrofit product boasting a 2.9 TM66 ‘circularity’ score, the purchase of another 195 acres of tree-planting land and the benefits of a new cardboard-box-making machine. 
  • Despite helping customers achieve up to 94% energy savings, this FY witnessed Thorlux’s revenue decline 2% to £99m after H2 revenue fell 3% to £53m:
  • But Thorlux’s FY adjusted operating profit commendably improved 11% to £20.0m after H2 adjusted operating profit climbed a remarkable 26% to £12.6m:
  • Thorlux’s performance is complicated by SchahlLED, which was acquired during the comparable FY and amalgamated into the division.
  • Thorlux started working with SchahlLED during 2019, after which the German lighting installer quickly became Thorlux’s largest customer:
  • SchahlLED’s customers tend to be large industrial companies. For example, 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“:
  • TFW purchased 80% of SchahlLED for €14.6m plus an “additional amount” based upon SchahlLED’s Ebitda during the comparable FY: 

[RNS 2022]  “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.“

  • TFW has confirmed to me the “additional amount” came to €1.2m and was paid during this FY and disclosed within the cash flow statement under ‘payment of exit earn-out of a purchased subsidiary’ (£606k) and ‘payment of non-controlling interests’ (£452k).
  • This FY clarified the outstanding 20% SchahlLED earn-out, which is:
    • Estimated using a “forecast EBITDA assumption“;
    • Currently expected to be €6.3m, and:
    • Set to be paid from September 2025.

“Lumen (SchahlLED) non-controlling interests
The Group has the obligation to purchase the remaining shares of the Lumen business from September 2025. 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 in the profit or loss. If the forecast EBITDA assumption were to increase by 5%, the resulting contingent consideration would increase by £267,000. “
…
“Included within other payables are commitment to purchase the remaining outstanding shares in Electrozemper S.A. of €6,000,000 (£5,087,000) (2023: €12,623,000 (£10,853,000)) and Lumen Intelligence Holding GmbH [SchahlLED] of €6,327,000 (£5,362,000) (2023: €7,508,000 (£6,455,000)”

  • SchahlLED’s FY revenue of £15.4m implied its H2 revenue dived 38% to £6.3m:
  • This FY blamed a difficult domestic economy for SchahlLED’s reduced performance:

“SchahlLED’s main market, Germany, is in recession, and therefore its operating profit has reduced slightly; nevertheless, the business is making a healthy contribution.
…
A new IT system was introduced and Thorlux Germany personnel integrated into SchahlLED, distracting effort for parts of the year.” 

  • This FY did not formally disclose SchahlLED’s profitability, but did indicate SchahlLED and Zemper combined to deliver a £4.8m adjusted FY operating profit:

“Both of our most recent acquisitions, Zemper and SchahlLED, made positive contributions of £4.8m (2023: £4.1m), before amortisation of acquisition, related intangible assets.” 

  • This FY also stated Zemper reported a £2.9m adjusted operating profit versus £2.8m for the comparable FY (see Zemper).
  • SchahlLED therefore seemed to earn a £1.9m profit (i.e. £4.8m less £2.9m) for this FY versus £1.3m (i.e. £4.1m less £2.8m) for the comparable FY. 
  • SchahlLED’s profit advancing from £1.3m to £1.9m contradicted other text from this FY that indicated a “slightly” lower subsidiary profit…

“SchahlLED’s main market, Germany, is in recession, and therefore its operating profit has reduced slightly; nevertheless, the business is making a healthy contribution.” 

  • …and also contradicted text from the comparable FY that had said SchahlLED’s profit was £2.3m (and not £1.3m):

[FY 2023] “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.“

  • TFW has confirmed to me SchahlLED’s profit during the comparable FY had incurred “a couple of one-off adjustments, reducing results from circa £2.0m to £1.3m“. 
  • Excluding SchahlLED, FY Thorlux revenue appeared to drop 1% to £84m but gain 5% to £47m during H2:
  • Note that within the chart above, inter-company sales from Thorlux to SchahlLED are included within Thorlux’s revenue for FYs 2020, 2021 and 2022, but are excluded for FYs 2023 and 2024 following the SchahlLED purchase.
  • TFW has confirmed to me inter-company sales from Thorlux to SchahlLED were £4.2m during this FY. I calculate the figure for the comparable FY to be £4.1m, which may suggest SchahlLED’s lower revenue for this FY could be due to selling less non-Thorlux equipment.
  • Thorlux’s flat FY revenue but higher FY profit reflected a welcome margin improvement, which may have been supported by:
    • Now selling direct into Germany through SchahlLED, and/or;
    • Not incurring the same “one-off adjustments” that TFW told me SchahlLED had incurred during the comparable FY.
  • This FY showed Thorlux enjoying a 20% adjusted operating margin, with a super 24% reported for H2:
  • The 20% FY margin was the highest since FY 2018:
  • The initial €14.6m plus the additional €1.2m to acquire 80% of SchahlLED, alongside the remaining €6.5m 20% earn-out, gives a total €22.3m (£19.3m) cost for SchahlLED
  • SchahlLED therefore appears to have been acquired at 10x the subsidiary’s  £1.9m adjusted operating profit for this FY.

Lightronics and Famostar

  • TFW’s Dutch businesses — Lightronics and Famostar — represented 28% of group profit during this FY.
  • 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 £38m versus less than a combined £18m at the time of their purchases.
  • Aggregate Lightronics/Famostar adjusted operating profit for this FY was £8.8m versus a combined £2.3m at the time of their purchases:
  • FY Dutch profit of £8.8m from a total £30m Dutch investment now generates TFW a very satisfactory 29% pre-tax return.
  • TFW described this FY’s Dutch progress as “excellent“, with Lightronics being deemed the group’s “standout performer” following “growth in the wall and ceiling division“.
  • FY Dutch revenue increased 5% and lifted FY Dutch adjusted operating profit by 22% to set new records for both measures:

(Famostar acquired during H1 2018 but reported within Netherlands from H2 2019)

  • This FY’s Dutch adjusted operating margin was a healthy 23%, buoyed by a terrific 26% for H2:
  • TFW commendably widened its boardroom composition during October 2022 after appointing Frans Haafkens as the group’s “first recognised independent” non-executive (see Boardoom: composition):
  • During the 2024 AGM, Mr Haafkens made the following points about his time at TFW:
    • TFW’s board is “very easy” to work with;
    • He supports TFW’s philosophy of “buying good companies with good management and making them stronger through cooperation“;
    • Competitors in contrast buy businesses but instead can “destroy the organisation“;
    • He sold the Dutch businesses to TFW “too cheap“, which was “not very Dutch“;
    • The Dutch businesses have been a “really good investment” for TFW, due in part to the way the integration has been managed, and;
    • TFW has a “great model that you do not see very often, but it seems to work extremely well“.
  • The past few years have witnessed TFW’s main board slimmed down from nine directors to six, which may allow Mr Haafkens and his private-equity background to exert greater influence over the group’s direction (see Boardroom: acquisition strategy and KPIs).

Zemper

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

[RNS 2021] “FW Thorpe has paid an initial consideration of €20.3m (circa £17.5m), plus an amount for certain balance sheet items. An additional €1.1m will be paid subject to EBITDA performance in 2022“

  • A further 13.5% was purchased for €6.1m during the comparable FY:

[H1 2023] “On 12 September 2022, the Group purchased a further 13.5% of the share capital of Electrozemper S.A. with a cash payment of £5.3m (€6.1m), as part of its commitment to acquire the remaining shares.“

  • Another 13.5% was then purchased for €5.0m during the preceding H1:

[H1 2024] “On 3 October 2023, the Group purchased a further 13.5% of the share capital of Electrozemper S.A. with a cash payment of £4.3m (€5.0m), as part of its commitment to acquire the remaining shares.“

  • Paying €1.1m less for 13.5% during H1 2024 versus H1 2023 does not suggest Zemper’s performance has lived up to expectations.
  • This FY clarified the remaining 10% Zemper earn-out, which is:
    • Now reduced from €7.6m to €6.0m;
    • Estimated using a “forecast EBITDA assumption“, and;
    • Set to be paid from September 2025:

“Zemper non-controlling interestsThe Group has the obligation to purchase the remaining shares of the Zemper business from September 2025. To calculate the expected repurchase value the Group has considered the recent and budgeted future performance of the Zemper 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 in the profit or loss. If the forecast EBITDA assumption were to increase by 5%, the resulting deferred consideration would increase by £258,000.
…
Included within other payables are commitment to purchase the remaining outstanding shares in Electrozemper S.A. of €6,000,000 (£5,087,000) (2023: €12,623,000 (£10,853,000))...” 

  • The remaining 10% earn-out reducing from €7.6m to €6.0m was reflected by the ‘changes in fair value of redemption liability in respect of acquisition of Zemper Group’ of £1.4m taken through the income statement:
  • In order to ‘balance’ the accounts, reductions to earn-outs are recognised as gains through the income statement while increases to earn-outs are recognised as losses through the income statement. 
  • I don’t know whether TFW’s estimated €6m to purchase the remaining 10% of Zemper is realistic. After all, €5m was paid to acquire an additional 13.5% during this FY.
  • This FY described Zemper’s progress as “solid“, with the division still representing approximately 10% of the group after FY revenue was unchanged at £19.4m and FY adjusted operating profit improved 3% to £2.9m:
  • Although Zemper’s H2 revenue slipped 2% to £10.4m, the division’s H2 adjusted operating profit climbed a commendable 21% to £1.9m.
  • The H2 profit advance reflected an H2 adjusted margin of 19% — much better than the 10% H1 adjusted margin and perhaps an indication Zemper’s return on sales can one day match that of Thorlux and the Dutch operations:
  • Perhaps Zemper’s work with other TFW subsidiaries helped its H2 margin. The comparable FY had suggested Zemper’s “synergy projects” might bear fruit during this FY:

[FY 2023] “Synergy projects continue, and the Zemper team has added some significant emergency lighting knowledge and technical expertise to the Group. 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.”

  • This FY referred to Zemper collaborating with other group subsidiaries through the ‘Firefly‘ project: 

“Zemper continues to make good contributions and started the new financial year with a good order book, supported by its host of new products. It is also contributing to some Group collaboration projects where several companies have pooled know-how and developed new products with shared, and hence reduced, costs.

The Firefly project was a collaboration, led by Zemper in Spain, with engineers from all emergency lighting businesses in the Group.” 

  • Firefly is a “pivotal” emergency lighting system that includes “enhanced” lithium-battery technology and “more optical distribution variations to help eliminate or reduce risk to escapees“:
  • The comparable FY noted Zemper’s “state-of-the-art manufacturing equipment“:

[FY 2023] “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.”

  • Board remarks at the 2024 AGM confirmed Zemper’s impressive facilities:

[AGM 2024] “When we bought Zemper, we were blown away by the technology that they have within their company — the software capabilities and the automation of manufacturing.

  • Attendees at the 2024 AGM were told Firefly manufacturing would be “moving out to Zemper in the Spring“.
  • Board remarks at the 2024 AGM revealed Zemper winning a project for Brussels Airport. Attendees were told:
    • The project involved “dynamic emergency lighting“;
    • Unlike a conventional emergency-exit sign pointing towards a fixed direction, such ‘dynamic’ lighting uses electronic screens that can be controlled to display the most suitable escape route, and;
    • These ‘dynamic’ signs could sell for up to €600 each versus €50-€100 for a conventional emergency-exit sign.
  • Certainly TFW’s outlay to purchase Zemper suggests a fair amount of successful projects and/or synergies are expected from the Spanish subsidiary.
  • To date TFW has paid €32.5m (€20.3m + €1.1m + €6.1m + €5.0m) for 90% of Zemper, and paying TFW’s estimated €6.0m for the remaining 10% would take the total Zemper purchase to €38.5m or approximately £35.6m. 
  • A £35.6m total purchase versus this FY’s group adjusted operating profit of £32m makes Zemper a very significant acquisition.
  • A £35.6m total purchase is 12x this FY’s £2.9m Zemper adjusted operating profit.
  • For perspective, the £30m paid for the Dutch subsidiaries is 3.4x their £8.8m adjusted operating profit for this FY.  
  • Despite this FY reporting the £1.4m earn-out reduction for Zemper, the Spanish operation has progressed during its three years within TFW.
  • At the time of purchase, Zemper’s Ebitda was €4.2m and was £4.6m or approximately €5.5m (+30%) during this FY.

Ratio Electric

  • Ratio Electric is headquartered within the Netherlands and develops electric-vehicle charging systems:
  • Electric-vehicle charging is a departure from TFW’s lighting expertise. At the time of the Ratio investment, TFW said:

[RNS 2021] “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” seems only to have brought high costs.
  • TFW acquired 50% of Ratio during December 2021 for £5.8m, with a loan note issued for £0.9m “to help fund the development of [the] business”.
  • The comparable FY then revealed the loan note had increased to £1.3m, with a further £1.3m loan note issued to Ratio’s UK operation.
  • This FY revealed the loan note issued to Ratio’s UK operation had extended from £1.3m to £2.2m:

Ratio Holding B.V. and Ratio EV Limited
Pursuant to the investment in Ratio Holding B.V., the Group has issued loan notes of €1,500,000 (£1,272,000) (2023: €1,500,000 (£1,290,000)) to help fund the development of this business. With accrued interest, the balance at 30 June 2024 is €1,626,000 (£1,379,000) (2023: €1,566,000 (£1,347,000)). In addition, the Group has issued loan notes of £2,165,000 (2023: £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 2024 is £2,245,000 (2023: £1,266,000).

  • Issuing extra loan notes is not encouraging, and sure enough Ratio recorded a £1.7m loss for this FY following a £1.0m loss for the comparable FY:

“In the year to 30 June 2024, the joint venture, Ratio Holdings B.V. generated a loss after tax of €1,987,000 (£1,706,000) (2023: €1,199,000 (£1,041,000)).

The Group has recognised its 50% share of loss of €993,000 (£853,000) (2023: €599,000 (£520,000)) in the Income Statement, plus changes in fair value of deferred consideration of €31,000 (£27,000). 

  • TFW’s 50% share of Ratio’s FY loss was £826k, which indicated the H2 loss was encouragingly reduced to £229k following the £597k loss for H1: 
  • This FY acknowledged Ratio had “struggled” and taken longer to establish than expected:

“The Group’s joint venture with Ratio Electric has struggled to make good contributions, but it has achieved significant growth in its Smart charger products, and it has established the Ratio UK company design and production facilities and product range. The io7, Ratio’s adaptation of the Thorlux Passway lighting bollard to integrate EV charging and lighting, has started to sell in much larger numbers, and even featured on the BBC’s One Show and a high profile electrical installers’YouTube channel. New projects and companies always seem to take longer to start and be harder to establish than one first believes.” 

  • This FY showed total loans to Ratio standing at £3.4m:
  • After registering the aforementioned FY £826k loss, TFW’s Ratio equity investment is carried presently at £4.7m:
  • Board remarks at the 2024 AGM gave further insight into Ratio. Attendees were told:
    • Due to “complaints” of TFW “having too much cash“, the board looked for activities beyond lighting but which had some synergies with the group’s expertise;
    • The logic was to combine TFW’s lighting technology with EV charging in order to “develop a big business“;
    • A lighting competitor coincidentally created an EV-charging business at the same time, and has performed much better, and;
    • Ratio has recently received a “breakthrough” order with a distribution company.

Other companies 

  • TFW’s Other companies consist of:
    • TRT Lighting, which supplies lighting for roads and tunnels, and earns revenue of approximately £9m;
    • 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.
  • This FY made clear the combined efforts of the Other companies were not satisfactory:

“The Board would like to see better contributions from all its smaller UK companies – especially, but not only, TRT Lighting. All these smaller companies have undergone changes to their subsidiary board structures in recent times, and improvements to, or diversification of, their product ranges where required. The Board looks forward to these changes enabling bigger contributions to Group profits from these businesses in the future.“

  • The largest Other subsidiary, TRT Lighting, suffered a poor FY with sales down 15% leading to losses:

“TRT Lighting was loss-making in the year, due to a revenue decline of 15%. A new sales director and a whole new sales team are in place with targets to increase new business into local authority regions, which is currently sporadic. TRT Lighting, as a UK designer and manufacturer of street lighting, should encourage all UK local authorities to buy its excellent locally made sustainable products. To assist, investment in products has continued, with further investment in marketing resources. The TRT board looks forward to the company’s improvement in performance, but is also cognisant of the time it will take to bed in new salespeople. Performance may get a little worse before it improves for the long term.” 

  • FY TRT Lighting revenue of £8.5m was within the £8.3m-£8.8m range reported between FYs 2015 and 2019.
  • Total FY Other revenue declined 2% to £19m while total FY Other adjusted operating profit slumped 37% to £0.7m: 

(Includes Famostar for FY 2018 and H1 2019)

  • H2 was particularly disappointing, showing Other adjusted profit down 50% to £0.4m.  
  • The sub-£1m FY adjusted profit leaves the Other subsidiaries as a sideshow to Thorlux, the Dutch businesses and Zemper.
  • 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:
  • Board remarks at the 2024 AGM provided some insight into the prospects of the Other companies. Attendees were told:
    • “We need them to step up their game“;
    • Management changes have been made to “stir them up“;
    • All have a £5m minimum revenue target [versus current revenue of £4m or less for Solite, Portland and Philip Payne];
    • “There’s nothing stopping them. We have the cash to invest, we have the market to go at. It’s just a case of them managing their situation more professionally.”;
    • Portland’s road-sign lighting could have potential for “tens of millions“, and;
    • The plan is to develop the Other companies, rather than sell or close them.

Financials: margin and employees

  • The aforementioned “impressive results” from TFW’s procurement team alongside the “targeted reduction of material spend” was reflected by TFW registering an FY 49% gross margin — the highest since at least FY 1996:
  • Within TFW’s cost of sales, the cost of inventories expensed during this FY declined a remarkable 18% to £60m — the equivalent of 34% of FY revenue and by far the lowest proportion since TFW began disclosing cost of inventories during FY 2010:
  • The lower cost of inventories could be maintained by Zemper manufacturing more components for wider group use:

“Zemper’s recent investment into injection moulding capacity has started to come to the fore in recent projects. Certain Group components, which would have been sourced externally, are now starting to be manufactured at Zemper, reducing both the cost and certain risk factors to the Group.” 

  • The higher gross margin was counterbalanced slightly by distribution costs and administration expenses climbing 10% to £53m:
  • Distribution costs and administration expenses absorbed 31% of revenue — equalling the record proportion set during FY 2021:
  • All the different costs left the group’s FY adjusted operating margin at 18.4% — the highest since FY 2015 (18.7%).
  • The group’s H2 adjusted operating margin was 21.5% — the highest for any H1 or H2 since H2 2012 (25.2%):
  • The improved margin was achieved despite total employee costs advancing 9% to £52m and absorbing 30% of revenue — the highest proportion since FY 2005 (31%):
  • TFW’s headcount increased by 18, and I am pleased 20 new recruits took on sales and distribution positions while eight people left administration roles:
  • Administration roles now represent 26% of the workforce versus 32% during FY 2019:
  • Despite the higher sales/distribution headcount, FY revenue per employee dropped £4k to £183k:
  • TFW has demonstrated impressive long-term employee management by matching higher staff costs with greater workforce productivity.
  • Between FY 2014 and this FY for example, the total cost per employee has increased 54% (to £54k) while revenue per employee has increased 53% (to £183k).
  • On the employee front, Thorlux has sustained its sales per head above a useful £200k…
  • …while revenue per employee at the other divisions has slid to £178k following the Zemper purchase:
  • At the time of purchase, Zemper operated with 120 people and reported revenue per employee of €169k or £145k.
  • In contrast, at their respective times of purchase:
    • Lightronics operated with 45 people and reported revenue per employee of €309k or £226k, and;
    • Famostar operated with 31 people and reported revenue per employee of €219k or £196k.

Financials: balance sheet and cash flow

  • This FY reiterated TFW’s policies to “maintain a strong capital basis” and “not utilise debt”:

“The Group’s policy has been to maintain a strong capital basis in order to maintain investor, customer, creditor and market confidence. This sustains future development of the business, safeguarding the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders.
…
The Group has a long-standing policy not to utilise debt within the business, providing a robust capital structure even within the toughest economic conditions. The Group’s significant cash resources allow such a position, but also require close management to ensure that sufficient returns are being generated from these resources.” 

  • The “strong capital basis” was underlined by cash finishing this FY almost £18m higher at £53m. 
  • Financial liabilities — relating entirely to items acquired through Zemper or SchahlLED — meanwhile remained less than £3m:
  • The £53m cash included £19m sat within term accounts of at least three months:
  • Bank interest earned during this FY came to £585k, implying a rather low 1.3% interest rate on the average £44m balance:
  • Loans of £3.4m issued to Ratio generate interest at approximately 4%, other loans earn approximately 6% while dividends from the group’s £3.8m equity portfolio yield approximately 5%.
  • Cash of £53m is equivalent to 30% of this FY’s revenue, which is reassuringly high compared to most quoted companies but relatively low for TFW:
  • Cash of £53m is more than enough to cover the £10m or so TFW estimates will cover the final earn-outs for Zemper and SchahlLED… and leave enough for another sizeable acquisition (see Boardroom: acquisition strategy and KPIs).
  • Cash of £53m also justifies the aforementioned 2.5p per share special dividend, which will cost approximately £3m.
  • Board remarks at the 2024 AGM provided a little more insight into the payment of special dividends. Attendees were told:
    • There is no particular level of cash that triggers a special payment;
    • Special payments depend on “what else is going on“, not least acquisitions, and;
    • “We look at the cash position periodically and take a view on it.“
  • One balance sheet entry commendably reduced during this FY was stock, which declined from £33m to £29m to perhaps reflect the aforementioned “impressive results” from TFW’s procurement team:
  • Stock finished this FY equivalent to 16.5% of revenue — the lowest level since FY 2006 (15.8%).
  • Stock turn also dipped below 2x for the first time since FY 2020:
  • A stock turn of 2x implies the raw materials, purchased components and finished goods sit in the warehouse for an average six months before they are sold. 
  • Six months is not a short time for holding stock, but this FY did say “strategic stock levels of certain components” were “still carried for protection“.
  • TFW’s stock can become obsolete relatively quickly. This FY disclosed the expected amount of stock to be written down increased by £1.3m to £6.5m:

“The value of the inventory provision is £6,467,000 (2023: £5,122,000) for the Group and £3,737,000 (2023: £2,785,000) for the Company.“

  • Cash flow was very satisfactory during this FY, with adjusted earnings of £26m translating favourably into free cash of £34m.
  • Very welcome cash movements during this FY included:
    • A working-capital inflow of £7m, supported mostly by the reduction to stock levels, and;
    • Cash capex of £6.8m matching the £6.8m depreciation and amortisation charge (excluding IFRS 16 depreciation and acquisition-related amortisation):
  • FY free cash of £34m funded the aforementioned €1.2m (£1.1m) “additional amount” paid for SchahlLED, the aforementioned €5m (£4.3m) spent purchasing 13.5% of Zemper, the aforementioned £1m loaned to Ratio Electric, some £2m spent on additional tree-planting land and nearly £8m paid as dividends.
  • Cash flow on a five-year view appears very respectable:
  • Between FY 2020 and this FY, cash flow from operations totalled £158m and (impressively) required no additional working-capital investment, supported capex of £37m and incurred tax of £23m… 
  • …which allowed £59m to be spent on acquisitions and £40m to be paid as dividends…
  • …and left the cash position only £4m lighter.
  • TFW’s five-year £37m cash capex compares to the five-year £30m depreciation and amortisation expensed against earnings.
  • The £7m difference is due mostly to TFW purchasing freehold properties (£8m since FY 2020), the value of which ought to be maintained over time but incurs only a small depreciation expense every year. 
  • Underlining a conservative depreciation policy, TFW declares consistent ‘profit on disposal of property, plant and equipment’ entries:
  • In other words, property, plant and equipment is written down on the balance sheet to valuations below their eventual disposal proceeds.
  • TFW’s capex includes capitalised R&D, the amount for which carried on the balance sheet has increased by only £3m to £6m since FY 2020 and may have flattered adjusted operating profit in the meantime by a lowly 3%. Amortisation of such development expenditure is conducted over a prudent three years.
  • During the five years to this FY, Thorlux appeared the better cash flow generator versus the rest of the group.
  • I calculate Thorlux:
    • Generated greater operating cash flow (£87m versus £71m);
    • Enjoyed a more favourable working-capital movement (a £7m inflow versus a £7m outflow)
    • Paid less tax (£9m versus £14m);
    • Spent less on capex (£15m versus £21m), and;
    • Finished this FY with more cash (£38m versus £15m).
  • An insightful balance sheet entry is TFW’s warranty provision, which hints at very few technical product problems. Introduced through IFRS 15 during FY 2018, the sum set aside to replace faulty equipment remains at a steady 2% of revenue with regular “surplus released” entries:
  • The cash, Ratio investments and equity portfolio are complemented by freeholds, which are carried at £21m, and investment properties, which are mostly woodland for tree planting and carried at £4m.

Financials: pension scheme

  • TFW’s defined-benefit pension scheme is thankfully not too problematic.
  • This FY showed pension assets exceeding pension liabilities by £4m:
  • TFW’s scheme has reported scheme assets exceeding scheme liabilities every year since FY 2011.
  • The comparable FY showed annual benefits of £3.5m being paid from scheme assets that had been reduced to £31m:
  • With contributions of only £0.8m, the scheme had looked to require an ambitious 9% annual return to sustain benefits of £3.5m or risk its assets facing permanent erosion.
  • But this FY reported benefits paid of £2.0m from scheme assets that increased to £32m:
  • With contributions of £0.7m, the scheme now looks to require a more achievable 4% annual return to sustain benefits of £2.0m or risk its assets facing permanent erosion.
  • Mind you, the general trend for the scheme’s benefit payments is up while the general trend for the scheme’s contributions is down:
  • This FY’s cash at £53m and adjusted operating profit of £32m should be able to easily mitigate any adverse movements to the scheme’s assets and projected liabilities.
  • For some perspective on the long-term cost of defined-benefit pensions, TFW and its employees have contributed an aggregate £22m into their scheme between FYs 2007 and this FY…
  • …while the scheme’s assets have advanced by £18m during the same 17 years after aggregate investment gains of £23m were more than absorbed by aggregate benefits paid of £27m.
  • 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.

Boardroom: composition

  • TFW’s boardroom has experienced a number of changes during the last few years.
  • The aforementioned Frans Haafkens was appointed as the group’s “first recognised independent” non-executive during October 2022.
  • Three directors then retired during 2023 and 2024, which slimmed the main board down from nine directors to six:
  • TFW raised eyebrows last year when the roles of chief executive and group financial director were combined: 

[RNS 2024] “FW Thorpe Plc announces the following changes to the board structure, to become effective from 1 July 2024:

Mike Allcock will step down as Executive Chairman and Joint Chief Executive and take up the role of Non-Executive Chairman.

The position of Chief Executive will be assumed by Craig Muncaster whilst retaining the role of Group Financial Director.  Craig has been Joint Chief Executive since 2017 and Group Financial Director since 2010.“

  • I still can’t recall a quoted business the size of TFW — market cap of £369m, revenue of £176m and adjusted operating profit of £32m — deciding to amalgamate its two top executive positions.
  • TFW has always employed a somewhat unconventional board.
  • For example, few quoted businesses employ joint chief executives — yet TFW has employed the following joint chief executives since FY 2001:
    • Andrew Thorpe and Peter Mason to FY 2010, then;
    • Andrew Thorpe and Mike Allcock to FY 2017, and then;
    • Mike Allcock and Craig Muncaster to FY 2024. 
  • Mr Thorpe and Mr Allcock also served as executive chairmen — a corporate governance no-no — for many years.
  • Other board features that contravene corporate-governance best practice include the absence of a nomination committee, the absence of board ‘diversity’ and the absence of directors standing for AGM re-election every year.
  • Appointing Mr Muncaster to the combined role of chief executive and group finance director creates three worries.
  1. Mr Muncaster may become stretched with his extra executive responsibilities and certain tasks could be overlooked;
  2. Mr Muncaster obtains significant management power, which reduces the scope for different executive opinions at board level, and;
  3. Mr Muncaster has limited technical knowledge of TFW’s products. 
  • This FY said the slimmed-down main board was counterbalanced by “strengthening the subsidiary boards“:

“The Board’s head count has naturally decreased in recent years in favour of strengthening the subsidiary boards at the operating companies and promoting a focused group of managers from within that can support Group activities when called on.”

  • Board remarks during the 2024 AGM provided further explanation of the management changes. Attendees were told:
    • Group operations throughout the UK and Europe had become “quite difficult to manage“, due to their “intricate nature“, for the main board;
    • The subsidiary boards were therefore “strengthened” to become “self-managing entities“, and the main board now “just oversees them“;
    • Re-jigging the subsidiary boards was performed in part by “elevating some individuals to have more of a group role” especially on the innovation side;
    • The group’s finance function has been enhanced, including the new role of Thorlux finance director, and;
    • The chairman becoming a non-executive was “planned“.
  • Other board remarks at the 2024 AGM included:
    • “The board structure is pretty much the same as it was previously… the same people are around the table holding us to account.”;
    • “We don’t like to bring people in from outside. We like to develop from within.”, and;
    • “We’ll see how things develop as to whether we split the CEO role back to joint CEOs.”
  • The appointment of Mr Muncaster as chief executive/group finance director ultimately has the blessing of the two Thorpe non-executives, both of whom:
    • Have spent their careers at TFW;
    • Are now in their 70s, and;
    • Have (presumably) accrued plenty of knowledge about management recruitment during the last few decades.
  • I doubt the Thorpe non-executives would risk their combined 43%/£158m shareholding on a mis-judged chief executive appointment.
  • I continue to speculate the board re-jig signals a different approach to group strategy and ‘capital allocation‘. 
  • After all, Mr Muncaster (alongside Mr Haafkens) is deemed by this FY to have “Mergers & Acquisitions” expertise…
  • …and major boardroom decisions of the last ten years have included purchasing Lightronics, Famostar, Zemper and SchahlLED for what could be an aggregate £80m-plus.
  • I get the impression the earlier private-equity deals between Mr Muncaster and Mr Haafkens will now set the tone for TFW’s future expansion.
  • Mr Muncaster has overseen some very appealing group accounts since he joined TFW during FY 2010. Perhaps Mr Muncaster has helped impose greater financial discipline and workplace efficiency throughout the group.
  • Indeed, my primary observation from the 2024 AGM factory tour was nobody was talking or standing still:
  • Mr Muncaster is 51 years old, so time should be on his side to develop TFW for the long run.

Boardroom: acquisition strategy and KPIs

  • The purchases of Lightronics, Famostar, Zemper and SchahlLED for what could be an aggregate £80m-plus have dominated TFW’s ‘capital allocation‘ during the last ten years.
  • Board remarks at the 2024 AGM explained how the acquisition plan developed. Attendees were told:
    • The directors felt TFW was “bordered by the island of the UK” during the 2008/9 banking crash;
    • An “active decision” was then taken to reduce UK exposure by investing abroad;
    • The “good experience” with the Dutch businesses prompted further purchases in Spain and Germany, and;
    • The approach “de-risks” the group and seems to “have worked“. 
  • Board remarks at the 2024 AGM also described the acquisition checklist. Attendees were told:
    • Likely targets are lighting businesses that are stable, successful and not directly competing with other TFW operations;
    • Possible synergies, including integrations with SmartScan, are half-way down the checklist, and;
    • “We are not business turnaround specialists“.
  • This FY did not rule out the aforementioned £53m cash position funding another acquisition:

“Whilst there are no firm plans, the cash reserves give the Board the opportunity to consider further acquisitions if a suitable situation arises.“

  • My aforementioned sums indicate:
    • The £30m paid for the Dutch subsidiaries currently delivers an £8.8m adjusted operating profit — equivalent to a 29% pre-tax return;
    • The estimated £36m total purchase price for Zemper currently delivers a £2.9m adjusted operating profit — equivalent to an 8% pre-tax return, and;
    • The estimated £19m total purchase price for SchahlLED current delivers a £1.9m adjusted operating profit — equivalent to a 10% pre-tax return.
  • Board remarks during the 2024 AGM did not reveal any particular way of measuring the returns from the acquisitions. Attendees were told:
    • Acquisitions are bought for the long term and can contribute to the group through various synergies;
    • TFW’s philosophy is about “return on sales and not being busy fools“;
    • The board does ask “what dividends are we getting?” from the acquisitions, and;
    • There is no strict IRR calculation to measure an acquisition’s progress.
  • Perhaps the gold-standard acquisitive business on the stock market is Halma (HLMA).
  • ShareScope shows the specialist engineer delivering wonderful share-price gains…
(Source: ShareScope)
  • …as well as quite possibly the most consistent dividend record among quoted companies (45 years of 5%-plus increases):
(Source: ShareScope)
  • HLMA’s success is based upon:
    • Buying leading businesses in “global niche markets”, and;
    • Operating a “decentralised model” that allows managers to expand their subsidiaries with minimal head-office interference:

[HLMA FY 2024] “The third element is the benefits we derive from our decentralised model, where our leaders are entrepreneurs and empowered to grow in their specific market niches as if each business were their own. This leads to a highly agile, innovative and proactive culture, as our companies look to understand the issues our customers are facing and help to solve them with their application knowledge and innovative technologies. 

And finally, talent and culture are crucial. Our decentralised model requires that we have the very best people in our companies, operating in an entrepreneurial, high‐performing, yet collaborative and supportive culture.” 

  • I do wonder if TFW is shifting towards a “decentralised model“, given attendees at the 2024 AGM were told:
    • Group operations throughout the UK and Europe had become “quite difficult to manage“, due to their “intricate nature“, for the main board, and;
    • The subsidiary boards were therefore “strengthened” to become “self-managing entities“, and the main board now “just oversees them“.
  • HLMA has spent more than £2b on acquisitions during the last 30 years…
(Source: ShareScope)
  • …since when operating profit has rallied from £25m to £370m:
(Source: ShareScope)
  • HLMA utilises return on total invested capital (ROTIC) as one of its key performance indicators (KPIs):
  • ROTIC is calculated by dividing adjusted earnings by net assets with acquisition-related amortisation added back:
  • The calculation gives some indication as to the level of return HLMA has achieved through its reinvestment and acquisition spend.
  • Underlining ROTIC’s importance to HLMA, the measure determines 50% of management’s LTIP payout:
  • In contrast, this FY reiterated TFW’s KPIs do not evaluate the effectiveness of the group’s ‘capital allocation’:
  • Using HLMA’s ROTIC formula, I calculate for this FY:
    • TFW’s adjusted earnings were £26m;
    • TFW’s total invested capital (with acquisition-related amortisation added back) was an average £172m, and;
    • TFW’s ROTIC was therefore 15%.
  • A 15% ROTIC matches that of HLMA, and may even underplay TFW’s reinvestment ability given the £53m cash position appears to earn only 1% interest.
  • For further perspective, between FY 2014 and this FY, TFW has increased its earnings by £14m and increased its shareholder equity by £99m:
  • Retaining £99m within the group to advance earnings by £14m implies TFW has reinvested shareholders’ money at a useful 14%.

[LTIP Circular 2024] “The plan allows the vesting of Options to be subject to performance conditions. The vesting of these initial Options will be subject to the achievement of the following performance targets: 

Earnings per Share (“EPS”) 

The percentage of the Option that Vests pursuant to the EPS Performance Condition is 80%. 

The EPS Growth Target will be measured annually on the Performance Measurement Date over a period of 5 years. 

The EPS Growth Target will be CPI plus 2% each year.“

  • The other 20% of the LTIP is dependent on total shareholder return and ESG progress.
  • EPS can of course increase through acquisitions even if they are purchased at exorbitant prices, which is why class-act HLMA includes ROTIC within its LTIP to help ensure its acquisitions provide value for money.
  • Note that TFW’s LTIP uses statutory EPS rather than adjusted EPS as a performance condition. Statutory EPS includes acquired-intangible amortisation, which is not correlated to the acquisition’s underlying trading performance.
  • Maybe using statutory EPS is why TFW’s LTIP demands five-year EPS to advance at CPI + only 2% per annum, which at the moment equates to just 5%.
  • Targeting a 5% five-year EPS CAGR seems another feature of a ‘boilerplate‘ LTIP that does not really challenge management to deliver superior returns to all shareholders…
  • …especially when adjusted earnings delivered an approximate 10% CAGR during the five years to this FY.
  • At least the new LTIP scheme will award options equivalent to only 1.8% of the current share count.

Valuation

  • This FY supplied a “modest growth” outlook:

“All Group companies are charged with growth; as ever, this is their target. With so many companies in the Group, there will be inevitable ups and downs in various locations. All the larger companies are in good shape with stable and experienced leadership teams with good order books at the start of the new financial year. Costs are generally under control, although people cost pressures remain and the companies need to keep working hard to find efficiency improvements. 

The smaller companies have all struggled somewhat to get themselves back on a plan for growth in recent years. Changes have been made and each company has a plan to grow. 

The change in governments in various Group locations raises a few questions about the future, but the Group setup gives good resilience overall. 

Consolidated as a whole, the outlook is positive with modest growth expectations.”

  • November’s AGM then reinforced the subdued prospects:

[AGM 2024] “Since the beginning of the new financial year, orders and revenue are modestly ahead of the same period last year, with the usual ‘ebb and flow’ across the Group. The Board expects half‐year results to be marginally ahead of last year.

Thorlux has started the year positively, as has Zemper. The Dutch operations are struggling to replicate the fantastic performance of 2023/24 but are endeavouring to improve. TRT is demonstrating some positive signs of improvement with a renewed sales team and new product introductions but continues to trade below expectations.

The Group continues to target profitable growth utilising its broad sector and geographical coverage, supported by its comprehensive product portfolio.”

  • Applying the 25% standard UK tax rate to this FY’s £32m adjusted operating profit gives earnings of £24m or approximately 20p per share. 
  • The 310p shares therefore trade at 15x my earnings estimate, which is the lowest multiple for ten years:
(Source: ShareScope)
  • Note that patent box relief helped this FY register a 19% tax rate:
  • A 19% tax rate would convert this FY’s £32m adjusted operating profit into earnings of £26m, or 22p per share, to support a 14x multiple.
  • My calculations could be fine-tuned further for the £50m net cash and £10m aggregate forecast earn-out for Zemper and SchahlLED.
  • Indeed, subtract the £40m of ‘surplus capital’ from the £369m market cap, and the underlying business could be valued at 12-13x ‘operational earnings’.
  • Further tweaks could be applied to cater for:
    • The Ratio investment (£5m), loan notes (£4m) and losses (£1m);
    • The investment properties (£4m) and equity portfolio (£4m), and;
    • Potential operating improvements at Zemper and the Other subsidiaries…
  • …but such adjustments would probably confirm TFW’s recent valuation has become somewhat reasonable for the first time in many years.
(Source: ShareScope)
  • During my time as a shareholder, TFW has:
    • Evolved through acquisitions from a UK-centric business into a pan-European operator;
    • Lifted operating profit from £11m to an adjusted £32m;
    • Extended its run of consecutive dividend increases to 22 years and declared five special payouts, and;
    • Increased its market cap from approximately £94m to £369m.
  • Maybe those twelve-plus years of positive progress could mean the chances of buying at a 10x-or-less multiple have become much less likely.
  • I would venture today’s multiple may not entirely reflect TFW’s:
    • Long-time operational resilience, as demonstrated by those 22 years of consecutive dividend increases;
    • Appealing returns from acquisitions purchased on low multiples (e.g. Lightronics and Famostar);
    • Possible growth opportunities through Zemper synergies and cross-selling into different European territories, and;
    • Future orders supported by new product launches and ongoing concerns about elevated energy costs.
  • The bear case beyond general economic challenges include:
    • Zemper, SchahlLED and Ratio not performing quite as expected following significant purchase expenditure;
    • Mr Muncaster and Mr Haafkens undertaking ambitious acquisitions without adhering to a suitable KPI;
    • A slowing transition to energy-saving lighting;
    • Reduced public spending on schools, hospitals and other prominent TFW sectors;
    • The board’s desire to “promote from within“, which may preclude innovative thinking from outside of the group, and;
    • The LTIP’s CPI+2% EPS target implying moderate growth prospects.
  • As the board ponders how to employ the £53m cash position, the 310p shares trade at a level first achieved during late 2016…
(Source: ShareScope)
  • …while this FY’s 6.78p per share ordinary dividend supplies a modest 2.2% income. 

Maynard Paton

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