BULL POINTS:
■ Strong demand from emerging markets
■ Niche products mean pricing power
■ Solid finances
■ Yarn business returns to profitability
BEAR POINTS:
■ Rising raw material costs
■ UK and US markets remains weak
Low & Bonar is still emerging from a restructuring that started four years ago, but the benefits are becoming clear. And much of the improvement has come through a dose of self help, whereby costs have been cut, unprofitable parts of the group re-structured and borrowings reduced.
After selling the flooring division two years ago, Low's bosses have concentrated on developing the chemical polymer business, where company boffins shape, colour and process polymers into niche items, such as yarn for artificial grass, carpet-tile backing, awnings and marquees.
| IC TIP RATING | |
|---|---|
| Tip style | Growth |
| Risk rating | Medium |
| Timescale | Long term |
| What do these mean? Find out in our | |
Success has also come from working hard to access high-growth emerging economies. So, for example, in 2009-10, carpet manufacturing sales rose 25 per cent on the year, principally because of strong demand from China; sales of artificial grass were also higher. And management expects the group to make further progress this year without having to rely on recovery in developed economies. That's just as well because, so far, Low sees little sign of improvement in the US and UK.
The group's yarn business has been substantially re-developed, and a loss-making plant in Ostend has been closed. In its place, a new facility has been built in Abu Dhabi. This will not only help to improve profit margins, but also places a factory on the doorstep of a market where there is growing demand. That said, these moves brought with them £7m of re-structuring costs.
| LOW & BONAR (LWB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 65p | MARKET VALUE: | £187m | |
| TOUCH: | 63-65p | 12-MONTH HIGH: | 65p | LOW: 32p |
| DIVIDEND YIELD: | 3.5% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 54p | NET DEBT: | 39% | |
| Year to 30 Nov | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 335 | 2.2 | 39.4 | 1.9 |
| 2009 | 305 | 0.7 | -0.4 | 0.8 |
| 2010 | 345 | 10.2 | 2.2 | 1.6 |
| 2011* | 351 | 22.0 | 5.2 | 1.9 |
| 2012* | 365 | 26.0 | 6.1 | 2.3 |
| % change | +4 | +18 | +17 | +21 |
Normal market size: 4,000 Matched bargain trading Beta: 0.8 *Peel Hunt estimates (Profit and EPS not comparable with historic figures) | ||||
Further developments this year include a joint venture with National Petrochemical Industry Company in Saudi Arabia that will design, make and sell geotextile fabrics for the fast-growing civil engineering markets in the Middle East and India. Full-scale production is expected to start in the third quarter.
Low & Bonar has also had to address the rising cost of polymers. Raw material costs constitute around half of sales, and around 60 per cent of these are related to the oil price. Even so, in 2009-10 profit margins rose from 7.3 per cent to 7.5 per cent, and should rise further once higher selling prices click in. It is one of Low & Bonar's strengths that the specialised nature of its products means the company can make its prices stick.
Group finances are in decent shape, too. Around £36m of cash was generated from trading last year, and the company made improvements to managing working capital. Net debt has come down from £105m in 2008 to £62m last year, and management negotiated €45m (£40m) of unsecured funds through a private placement last year that are not repayable until 2016. Those funds will come with restrictions - interest cover of at least three times, and net debt not to exceed three times cash profits - but the company meets them comfortably.
