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Low & Bonar ready to boost profits

Low & Bonar has been busy ironing out problems and output as its China facility is set to increase
October 20, 2016

Low & Bonar (LWB) has spent the past year or so sorting out less productive parts of the business and investing in new capacity. Under Brett Simpson, appointed chief executive around two years ago, the emphasis has been to get out of lower-margin businesses and invest in higher-return activities with the aim of getting the group's operating margin above 10 per cent, compared with 8.3 per cent last year. But the shares have hardly moved in 2016, and do not reflect the earnings potential that is now embedded in the business model.

IC TIP: Buy at 65.25p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Low-margin Grass Yarns business sold
  • Net debt set to fall
  • Attractive dividend payout
  • Chinese production expanding
Bear points
  • Production issues yet to be resolved
  • Saudi joint venture underperforming

In July Low & Bonar made the significant step of selling its artificial yarns business - which formed the majority of the low-margin Sports and Leisure business unit - for €27m (£24m). This is expected to reduce net debt by around £22m in the second half, while a successful refinancing will reduce annual interest costs by around £1m. The significant effect on net debt means even though capital expenditure is expected to remain high this year as the group invests in doubling capacity in China by 2018, borrowings are expected to drop from 2.7 times cash profits to about 1.8 times.

 

 

The near-halving of profits in the first half in the coated technical textiles division, which accounted for a third of profit last year and 30 per cent of revenue, has also been addressed - £2.6m of the £3.5m first-half profit drop reflected manufacturing problems, and action taken to resolve production issues are already having an effect.

LOW & BONAR (LWB)
ORD PRICE:65.25pMARKET VALUE:£215m
TOUCH:65.25-65.75p12-MONTH HIGH:71pLOW: 55p
FORWARD DIVIDEND YIELD:4.6%FORWARD PE RATIO:9
NET ASSET VALUE:51pNET DEBT:80%

Year to 30 NovTurnover (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
201340325.35.92.6
201441126.35.42.7
201540028.45.22.8
2016*38828.55.92.9
2017*40733.57.03
% change+5+18+19+3

Normal market size: 5,000

Market makers: 7

Beta: 0.20

*Peel Hunt forecasts, adjusted figures for PTP and EPS

Steps are also being taken to exit Bonar Natpet, a geotextile joint venture in Saudi Arabia, and an £8.2m impairment was taken last year. This business has been blighted by the significant fall in oil prices together with the Saudi conflict with Yemen, which has led to a dramatic downturn in regional spending on infrastructure projects.

Importantly, there is also plenty of good news coming from the group, which suggests the new management's strategy is working. The interior and transportation division, which provides technical fabrics used for interior flooring and accounted for 23 per cent of sales and 34 per cent of profit last year, increased profits by nearly a third in the first half. And this trend is expected to continue as the new Colback plant in China increases output.

The building and industrial business (16 per cent of sales and 22 per cent of profit), which provides products used for building, roofing, air and water filtration as well as agricultural products, increased profits by two-thirds in the first half, driven primarily by strong US sales, and boosted by a major customer win. Profits are also underpinned by favourable raw material pricing, principally polypropylene, polyethylene, polyester and nylon, due to significant supplier overcapacity.

In the civil engineering business (22 per cent of sales and 8 per cent of profit), which provides materials used in road and rail building, as well as land reclamation and costal defence, profits more than trebled in the first half, albeit to just £1m, on near-flat sales. The improvement in profits reflects a drive to increase higher-margin sales and a move to extend geographical sales for construction fibres.