Laird (LRD) makes electromagnetic interference shielding materials - the parts that stop your smartphone or tablet overheating and interfering with other devices. Apple is the company's biggest customer, but destocking caused by lower volumes affected the company's first half. That, however, has been more than priced in and the shares look cheap given that gathering momentum makes a dramatic recovery in the second half look likely.
- Far stronger second half expected
- Stream of new product launches
- Automotive demand is strong
- Sector-leading dividend
- US public spending cuts
- Apple's contribution still disproportionate
Apple chipped in 15 per cent of first-half revenue, but that is lower than normal and underlying operating profit at the performance materials division fell by 30 per cent, or £6.6m to £15.1m. With research and development (R&D) spend up 28 per cent, operating margin sank nearly 400 basis points to 8.6 per cent, all of which left group underlying operating profit down 32 per cent at £21m. But this poor result was expected and it's what happens in the next six months that matters.
And Laird is prepared. Analysts at JPMorgan expect extra R&D and new capacity to help Laird generate 19 per cent more revenue in the second half than in the first six months of the year. The broker believes this growth will help propel margins to 15 per cent in the second half, followed by 13.3 per cent in 2014 as a whole and 14 per cent the year after.
Traditionally, the final half of the year is better for Laird as electronics manufacturers release new products in time for Christmas, and this year looks like being especially busy. Apple said in April it was putting device launches on ice until the autumn, and talk is that a new low-cost iPhone for emerging markets will appear in a month or two. October's third-quarter update will tell us more.
Laird's expected trading turnaround is not just an Apple story, though. Four customers already generate at least $25m (£16.4m) each and a couple more are "knocking on the door", says chief executive David Lockwood. A consumer gaming contract will generate "significant" revenue in the second half and demand for cooling devices has helped the thermal business, too. Telecoms giants AT&T and China Mobile have earmarked $50bn for investment in infrastructure, and the roll-out of wireless 4G networks will be huge for Laird.
LAIRD (LRD) | ||||
|---|---|---|---|---|
| ORD PRICE: | 209p | MARKET VALUE: | £558m | |
| TOUCH: | 208-209p | 12-MONTH HIGH: | 253p | LOW: 170p |
| FORWARD DIVIDEND YIELD: | 6% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 170p* | NET DEBT: | 27% | |
| *Includes intangible assets of £551m, or 206p a share | ||||
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 414 | 40.2 | 11.8 | 6.30 |
| 2011 | 491 | 51.7 | 16.1 | 8.00 |
| 2012 | 520 | 60.7 | 19.1 | 10.0 |
| 2013*** | 552 | 61.6 | 19.4 | 12.0 |
| 2014*** | 580 | 70.7 | 21.9 | 12.5 |
| % change | +12 | +15 | +13 | +4 |
Normal market size:5,000 Matched bargain trading Beta:1.2 **Adjusted PBT and EPS figures ***JPMorgan estimates | ||||
The lead times at performance materials tend to be short and new business is already showing up in the order book. Group order intake jumped 14 per cent in June and July was strong as well. New telematics contracts will benefit the wireless division, too. Laird already supplies six of the world's largest car manufacturers and a first order with a wholly-owned Chinese manufacturer is hugely significant.
There are headwinds, though. Europe is quiet and US budget delays have held back public safety spending, hitting sales of Laird's infrastructure antennae systems. Remote control systems used by miners, in cranes and on railways have also fallen. However, budgets will be agreed soon which should release pent-up demand, and quoting activity is already picking up.
Even after reducing its organic growth forecasts, JPMorgan thinks underlying EPS will jump 13 per cent, leaving the shares valued at just 9.5 times 2014 forecasts. That is well below an average of 16.6 times for a comparable international peer group. In fact, Laird's own rating was almost double the current level before the credit crunch and the current rating is a long way off its two-year average 12-month forward PE ratio of 12.1 times.
