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19 Sep 18. Babcock says revenue growth on course after cutting targets. Babcock International said it was trading in line with expectations and was on course to deliver “low single digit” underlying revenue growth as the engineer sought to reassure investors after cutting its full-year targets in July. The FTSE-250 company on Wednesday also said its order book and pipeline remained strong with a combined value unchanged at around £32bn for the period from 1 April. Around 87 per cent of revenue is now in place for 2018/19 and around 57 per cent for the year 2019/20, Babcock said. The trading update came after the company unnerved investors in July when it cut its full-year revenue targets. Shares in Babcock dropped by 10 per cent on the day to 720p at one stage after the marine division, which provides specialist support to Britain’s defence ministry and other governments, was hit by delays in government spending on submarines. The company’s shares closed at 692p on Tuesday. Babcock on Wednesday also said its underlying earnings guidance remained unchanged, with both revenue and cash flow performance weighted towards the second half of the year. It expects its net debt to earnings before interest, tax, depreciation and amortisation ratio to be around 1.4 times by the end of the year. The company confirmed it had exited two small, low-margin business, including the sale of a business which provides services to broadcasters and content owners for around £30m. It expects to exit its powerlines business in South Africa in the second half of the year and said it would “reshape” its oil and gas crew change business. A further update will be made at the company’s half year results in November. Babcock last year refocused the group into four sectors – marine, land, aviation and Cavendish nuclear – a move which it said intensified its concentration on “core higher-margin businesses”. It said on Wednesday it had secured a number of new defence orders in the period, including additional contracts worth around £120m with the Ministry of Defence to maintain equipment. (Source: FT.com)
13 Sep 18. Melrose in it for the long term. At its core, Melrose Industries’ (MRO) business model sounds simple: buy plateauing industrial firms, improve their margins and sell them at a profit. The reality tends to be more complicated. The strategy will always – and quite rightly – face intense scrutiny, even if the charges of ‘corporate raider’ and ‘asset stripper’, which dogged the FTSE 100 group in its recent takeover of GKN, lack clarity or evidence. Reshaping sprawling businesses, while juggling global industrial and economic cycles is a high bar for any management team. And that’s before we get to the risks of leverage. But on balance Melrose has tended to deliver for its investors. Half-year results provided early signs that the GKN era will see a continuation of this trend.
Those wanting proof of Melrose’s track record need only look at its c-suite’s latest pay packet. In May 2017, its top four directors were handed £160m-worth of shares as part of a share-price-linked incentive plan. That may seem obscene – and indeed a sizeable bloc of shareholders baulked at the executives’ remuneration at the annual meeting – but it at least shows that management interests are aligned with ordinary investors’. In the five years covered by the plan, Melrose bought metering firm Elster for £1.8bn and sold it for £3.3bn, tripled its money on several smaller businesses, and returned the proceeds to investors through a series of special dividends. By the group’s calculation, it has created £3.6bn in shareholder value since being incorporated in 2003 when it had a £13m market capitalisation.
For the next five years, the focus will be on GKN, which Melrose snapped up after a string of profit warnings from the UK-based aerospace and driveline specialist with a leadership vacuum and a depressed share price. Melrose sees the UK stalwart as a group of “world-leading, but currently underdeveloped businesses”, and believes it can lift trading margins from around 7 per cent to over 10 per cent by 2022, a commitment renewed in last week’s half-year results. Should the targets be hit for GKN, Melrose’s top four directors could land £285m. For this to happen, investors’ holdings would have to appreciate substantially, too.
So what’s the story thus far? At the half-year stage, GKN’s financial contribution was limited to 73 days of trading, but included all acquisition costs – not just stamp duty and Melrose’s professional fees, but the £129m GKN spent defending the takeover. And while ownership is nascent, each GKN division – aerospace, automotive and powder metallurgy – is now operating on a standalone basis. Melrose has also promised to plug GKN’s legacy pension deficit, and invest in projects including a new aerospace technology centre in the UK and an engine repair facility in Malaysia. Most encouragingly, perhaps, a hampered due diligence process appears not to have missed any corporate or operating “black holes”.
Still, the deal has caused a surge in net debt, from £572m at the end of 2017 to £3.4bn at the end of June this year, meaning Melrose needs to improve GKN’s profitability fast.
As you’d expect, the group already has a plan. In aerospace, losses in North America are narrowing, while the broader market outlook remains positive, and initiatives have been launched to tackle weak pricing, onerous contracts and procurement issues. In automotive, management has kick-started focused price increases, global cost base reductions and investment in the eDrive business, all in the face of global headwinds. And in powder metallurgy, the one part of GKN that was performing well, Melrose thinks it can push margins from 10.4 to 14 per cent, and begin a sale process this year. Added to this, divisional managers across the group have had their “incentive arrangements realigned”.
For aerospace, which on a pro-forma basis contributed 22 per cent of Melrose’s operating profit in the first half, Numis believes operating margins can double to 14 per cent. That would match the current profitability of ventilation and security business Nortek, which Melrose bought for £2.2bn in 2016. Since then its margins have climbed six percentage points thanks to central cost savings, better returns on capital and cuts to low-margin sales.
IC View
In May, broker Numis cautioned that while GKN offers value, Melrose’s backers might need more patience than past takeovers – as is already proving the case with Nortek and Ergotron. Given GKN’s scale, that seems appropriate. A long-term horizon also helps to move the focus from near-term earnings to a sum-of-the-parts valuation. The latter assumes Melrose can and will sell GKN when margins peak in about five years’ time, and when the combined value of its subsidiaries is worth 337p. Before then, Numis thinks Melrose could net £6bn from the sale of Nortek, Ergotron and the powder metallurgy businesses. Doing so might help to improve investor confidence, and remind the market of the shares’ average annual return of 22 per cent since Melrose was incorporated. Buy. Last IC View: Hold, 224p, 20 Feb 2018. (Source: Investors Chronicle)
13 Sep 18. Ricardo plc – Preliminary results for the full year ended 30 June 2018.
HIGHLIGHTS
- Record order intake at £413m, up £47m on FY 2016/17;
- Record year-end order book at £288m, up £40m on June 2017;
- Revenue up 8% to £380.0m;
- Underlying PBT up 2% to £39.0m on FY 2016/17;
- Strong performance in Asia and electric vehicle order intake, with a good mix of orders across our market sectors;
- Acquisition of Control Point to enhance US defence business;
- Disposals of Chicago and Southern Germany engine test facilities, to balance asset mix with the trend towards electrification;
- Order flow disruption in the second half and the close out of some challenging projects impacted performance in our UK Automotive business. Changes made and swiftly addressed;
- Strong working capital management has reduced net debt to £26.1m from £37.9m at June 2017 (after £6m acquisition of Control Point); and
- Outlook is positive with a good pipeline – dividend increased by 6% to 20.46p from 19.30p.
Commenting on the results, Dave Shemmans, Chief Executive Officer said:
“In this financial year, Ricardo saw solid revenue growth and an increase in the order book to record year-end levels. We also successfully acquired and integrated Control Point Corporation. Our global presence and strategy of sector diversification helped the business to mitigate the continued impact of uncertainty in the UK market. Our growing order intake, particularly in Asia, reflects our clients’ continued demand for our high-quality products and services.
“Our test facilities in Chicago and Southern Germany were sold during the year to ensure we continue to move with the trend towards electrification. Actions were taken in our UK Automotive business to respond to issues relating to a disrupted flow of orders in the second half of the year and a small number of challenging projects relating to the new WLTP emissions legislation.
“We enter the new financial year with a more agile business and a confident and positive outlook. Ricardo’s global capabilities and presence in a number of growing markets, together with its strong order book, all provide a solid foundation for continued growth.”
Investors Chronicle Comment: Shares in Ricardo (RCDO) were down this morning after the group reported sharp drops in statutory profits and EPS, brought about by restructuring and challenges in the automotive sector. However, both the order intake (new contracts won) and order book (work yet to be completed) grew to record levels in the year. And cash conversion remained strong, sending net debt down 31 per cent. The long-term drivers are still in place. Buy.
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Odyssey is an independent corporate finance firm which advises on acquisitions, business sales, management buy-outs and raising finance, typically in the £5m to £100m range. We have extensive experience in the niche manufacturing sector with our most recent completed deal being the sale of MacNeillie to Babcock Plc. Details can be seen at: http://www.odysseycf.com/case-study-macneillie/
As a result of this and related projects we have developed relationships with buyers and funders looking to acquire or invest in the sector. We would be happy to share further insights into the sector and to carry out reviews of businesses whose shareholders are considering an exit, acquisition or fundraise.
The review will include:
* Valuation
* Market review
* Comparative deals and structures
* Initial thoughts on buyers/ investors/ targets
* MBO viability
* Feasibility review and identification of any issues to be addressed pre-deal
There is no charge for this review.
If this is of interest we would be happy to meet at your convenience.
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