Low & Bonar (LWB) offers an alluring combination of an attractive yield, low earnings multiple and solid growth prospects based on a combination of self-help and improving end markets. But a key factor over which it has no control is the weather, and this affected some parts of the business in the first half when cold conditions put a brake on outdoor construction activities. With trading now picking up, the share price's drift downwards since the market got wind of the weather-related woes now looks like it provides an excellent entry point.
- Attractive dividend
- Considerable barriers to entry
- Re-organisation benefits still to show through
- Niche market means pricing power
- First-half hit by poor weather
- Yarns business facing tough competition
The solid underlying progress being made at the group was evident in the first half from the fact that non-weather affected parts of the business have performed well. So well, in fact, that given the traditional bias towards a stronger second half, chief executive Steve Good believes that results for the full year will meet earlier expectations.
The company's core products centre around geotextiles, which provide a wide range of applications, and Low's expertise and technology know-how provide significant barriers to entry. Products range from artificial grass to roofing tiles.
To accelerate the rate of growth outside Europe, last year Low & Bonar combined the two major businesses within the Performance Technical Textiles division, Colbond and Fabrics to create a new division called Bonar, which accounted for 63 per cent of 2012 sales and 84 per cent of profit. Management has been beefed up, notably in sales and marketing. However, while some benefits have been evident, overall progress in the first half was delayed by the appalling weather in Europe which affected sales to the civil engineering, building and agricultural sectors - 80 per cent of Bonar's European sales - and profits fell by a third. However, as the weather has improved so have sales, and in the past six weeks of the first half, group sales per working day were 7 per cent higher than in the previous year, and the trend has continued into the second half.
| LOW & BONAR (LWB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 63p | MARKET VALUE: | £187m | |
| TOUCH: | 63-64p | 12M HIGH: | 78p | LOW: 49p |
| FWD DIVIDEND YIELD: | 4.4% | FWD PE RATIO: | 9 | |
| NET ASSET VALUE: | 56p | NET DEBT: | 62% | |
| Year to 30 Nov | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 345 | 18.6 | 4.41 | 1.60 |
| 2011 | 389 | 23.4 | 6.00 | 2.10 |
| 2012 | 380 | 24.5 | 6.30 | 2.35 |
| 2013** | 393 | 26.0 | 6.50 | 2.59 |
| 2014** | 408 | 28.0 | 6.80 | 2.75 |
| % change | +4 | +8 | +5 | +6 |
Normal market size: 3,000 Matched bargain trading Beta: 0.56 *Underlying EPS and PBT figures **Numis estimates | ||||
Meanwhile, on the technical coated fabrics side, which makes products such as marquees and banners and accounts for 30 per cent of turnover, a combination of higher sales and margins lifted operating profits by 10.2 per cent in the first half, despite weakness in demand from hard-hit southern Europe. And, encouragingly, the yarns business, principally artificial grass and carpet yarns accounting for 7 per cent of sales, turned last year's small loss into a £200,000 profit, thanks to a 14.7 per cent jump in sales.
Strong early season demand and greater operational efficiency bodes well for the second half. And while the yarns business faces price competition, more generally the niche markets that the group operates in offers protection. Low should also benefit from its Saudi Arabian joint venture with the National Petrochemical Industrial Company coming on stream this month. This will provide a strong platform to access the fast-growing civil engineering market in the Middle East.
Confidence for the second half - the more usual 40/60 split in first/second-half profits is likely to be nearer 30/70 this year - is encouraging. And while the group's operating return on capital, on an annualised basis, slipped from 16.5 per cent to 14.1 per cent, this is expected to recover to close to 17 per cent by the year-end.
