PWR Holdings Limited - Morgans

Auto & Parts - Overall│Australia│Equity research│August 25, 2017

PWR Holdings Limited Keeping its cool despite FX headwinds

ADD (no change) Current price: Target price: Previous target: Up/downside: Reuters: Bloomberg: Market cap:

A$2.21 A$3.10 A$3.00 40.2% PWH.AX PWH AU US$174.5m A$221.0m US$0.14m A$0.19m 100.00m 54.5%

Average daily turnover: Current shares o/s Free float: Key changes in this note FY18F revenue down by 7%. FY18F EBITDA up by 7%. FY18F NPAT up by 6%. Price Close

Relative to S&P/ASX 200 (RHS)

3.20

112.3

2.70

92.9

2.20

73.4

1.70 6

54.0

Vol m

4

2 Aug-16

Nov-16

Feb-17

May-17

Source: Bloomberg

Price performance Absolute (%) Relative (%)

1M -1.8 -2.1

3M 12M 7.3 -24.3 8.1 -27.9

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PWH’s FY17 result was well ahead of our expectations.

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The standout of the result was continued solid constant currency revenue growth of 11% with the core Motorsports division up 15%. The main negative was the FX impact (-A$4.4m to revenue).

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We increase FY18F underlying EBITDA by 7% and underlying NPAT by 6%.

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Maintain Add rating on an increased A$3.10 target price (from A$3.00).

FY17 result ahead of expectations FY17 underlying EBITDA was down 13% to A$14.7m (+13% vs Morgans), while underlying NPAT fell 14% to $9.3m (+12% vs Morgans). As expected, the result was weighed down heavily by adverse FX movements (especially the AUD/GBP), which reduced revenue by A$4.4m on a like-for-like basis. Excluding the FX impact, we estimate underlying NPAT was up 22%, which was a strong result in our view and highlights the good momentum experienced by the underlying business. The result was driven by strong organic growth in GBP denominated revenue (+28%) despite generally flat USD (-1%) and AUD revenue (+4%). The balance sheet remains strong with a net cash position of A$9m. Operating cash flow was down 18% to A$13.5m due to the drop in earnings and an increase in net working capital to support revenue growth in future years. FY17 DPS of 5.6cps represented a 60% payout ratio (up from 50% previously) and was above our forecast of 4.2cps.

Core Motorsports division delivers strong growth Motorsports was again the key driver of the result, with constant currency sales up 15% to A$36.0m. The result was driven by new and existing customers in both Formula One and other motorsports categories as well as increased take-up of complete assemblies instead of core only. Automotive aftermarket constant currency sales fell 3% to A$8.8m. However, excluding the C&R South business up for sale, sales grew 8%. Emerging Technologies and OEM both delivered strong results, with sales up 49% and 57% respectively. We believe PWH’s investments into resources (staff and equipment) sets all sales categories up for continued solid growth in future years.

Changes to earnings forecasts Alexander LU, CFA T (61) 2 9043 7901 E [email protected]

Changes to our earnings forecasts see FY18F revenue fall 7% to A$49.9m while underlying EBITDA rises 7% to A$17.4m as we remove the earnings contribution from the impending divestment of C&R South. In addition, adjustments to FX assumptions also have a negative impact on revenue and earnings, which partially offsets the earnings upgrades from the better-than-expected FY17 result.

Add rating maintained – High quality growth company On the back of upgrades to earnings forecasts our equally blended (DCF, EV/EBITDA, PE) target price rises to A$3.10 (from A$3.00). While currency headwinds and investments into resources (staff and equipment) weighed on earnings in FY17, we believe the company is well positioned for strong growth in future years. We therefore maintain our Add rating. Financial Summary Revenue (A$m) Operating EBITDA (A$m) Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth FD Normalised P/E (x) DPS (A$) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) ROE % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x)

Jun-16A 47.35 16.92 10.85 0.11 28.0% 20.37 0.044 2.00% 12.61 NA (20.8%) 6.02 51.7%

Jun-17A 48.12 14.77 9.32 0.09 (14.1%) 23.71 0.056 2.53% 14.40 44.83 (20.3%) 5.40 24.0%

Jun-18F 49.87 17.36 11.13 0.11 19.4% 19.86 0.067 3.03% 12.21 31.97 (19.5%) 4.75 25.4% 6.4% 1.09

Jun-19F 58.59 20.76 13.35 0.13 20.0% 16.55 0.080 3.62% 9.98 18.39 (26.9%) 4.34 27.4% 8.2% 1.09

Jun-20F 67.53 24.73 15.98 0.16 19.7% 13.83 0.096 4.34% 8.18 16.02 (33.1%) 3.91 29.7% 10.4% 1.14

SOURCE: MORGANS, COMPANY REPORTS

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Figure 1: Financial summary Income statement (A$m) Revenue

AIFRS FY16A 47.3

AIFRS FY17A 48.1

AIFRS FY18F 49.9

AIFRS FY19F 58.6

AIFRS FY20F 67.5

EBITDA Depreciation & amortisation EBIT Net interest expense Pre-tax profit Tax expense Minorities NPAT pre-abnormals EPS pre-abnormals (cps) Abnormal items after tax Reported NPAT Reported EPS (cps) DPS (cps) - ordinary DPS (cps) - special DPS (cps) - total Franking (%)

16.9 1.2 15.7 -0.6 15.1 -4.3 0.0 10.8 10.8 -2.1 8.7 8.7 4.4 0.0 4.4 100.0%

14.8 1.5 13.3 -0.3 13.0 -3.7 0.0 9.3 9.3 0.0 9.3 9.3 5.6 0.0 5.6 100.0%

17.4 1.7 15.6 0.0 15.7 -4.5 0.0 11.1 11.1 0.0 11.1 11.1 6.7 0.0 6.7 100.0%

20.8 2.0 18.8 0.0 18.8 -5.5 0.0 13.4 13.4 0.0 13.4 13.4 8.0 0.0 8.0 100.0%

24.7 2.3 22.4 0.1 22.5 -6.5 0.0 16.0 16.0 0.0 16.0 16.0 9.6 0.0 9.6 100.0%

Segmental revenue (A$m) Motorsports Automotive Emerging Technologies Other Total underlying EBIT

FY16A 31.0 14.3 2.1 0.0 47.3

FY17A 31.8 12.3 2.2 1.8 48.1

FY18F 32.8 12.6 2.7 1.8 49.9

FY19F 36.2 17.4 3.2 1.8 58.6

FY20F 40.5 21.3 3.8 1.8 67.5

Cash flow statement (A$m) EBITDA Net interest paid Tax paid Working capital Dividends received Other Operating cash flow (1) Total capex (2) Other Investing cash flow Cash dividends paid (3) Equity raised / (repurchased) Net borrowings / (repaid) Other Financing cash flow FX impact Net cash flow Free cash flow (1-2) per share Deployable cash flow (1-2-3)

FY16A 16.9 -0.3 -3.8 -0.6 0.0 0.3 12.5 -1.3 0.1 -1.1 -0.6 20.4 -23.4 0.0 -3.6 0.0 7.8 11.2 11.2 10.6

FY17A 14.8 0.0 -4.5 0.4 0.0 -1.6 9.0 -3.9 0.2 -3.6 -4.7 0.0 -0.4 0.0 -5.1 0.0 0.2 5.1 5.1 0.4

FY18F 17.4 0.0 -4.5 -0.7 0.0 -1.6 10.5 -3.6 0.0 -3.6 -6.2 0.0 0.0 0.0 -6.2 0.0 0.8 6.9 6.9 0.8

FY19F 20.8 0.0 -5.5 0.3 0.0 -1.6 14.0 -2.0 0.0 -2.0 -7.4 0.0 0.0 0.0 -7.4 0.0 4.7 12.0 12.0 4.7

FY20F 24.7 0.1 -6.5 -0.6 0.0 -1.6 16.1 -2.3 0.0 -2.3 -8.8 0.0 0.0 0.0 -8.8 0.0 5.0 13.8 13.8 5.0

Balance sheet (A$m) Current assets Cash Receivables Inventories Other current assets Total current assets Non-current assets Property, plant and equipment Intangible assets Derivative financial instruments Other non-current assets Total non-current assets Total assets Current liabilities Payables Derivative financial instruments Interest bearing liabilities Other current liabilities Total current liabilities Non-current liabilities Interest bearing liabilities Deferred tax liabilities Derivative financial instruments Other non-current liabilities Total non-current liabilities Total liabilities Net assets Shareholders equity Issued capital Reserves Retained profits Minority interest Total shareholder funds

FY16A

FY17A

FY18F

FY19F

FY20F

8.8 4.1 6.7 0.6 20.3

9.1 3.4 7.3 2.5 22.3

9.8 3.6 8.0 2.5 23.8

14.5 4.2 7.6 2.5 28.8

19.5 4.8 8.1 2.5 34.9

5.9 14.2 0.0 1.8 21.9 42.2

7.9 14.1 0.0 2.0 24.0 46.3

12.0 14.1 0.0 2.0 28.2 52.0

12.0 14.1 0.0 2.0 28.2 56.9

12.0 14.1 0.0 2.0 28.2 63.1

2.7 0.0 0.4 1.5 4.6

2.9 0.0 0.3 1.5 4.7

3.0 0.0 0.3 1.5 4.9

3.6 0.0 0.3 1.5 5.4

4.1 0.0 0.3 1.5 5.9

0.8 0.0 0.0 0.1 0.9 5.4 36.7

0.5 0.0 0.0 0.1 0.6 5.3 41.0

0.5 0.0 0.0 0.1 0.6 5.4 46.6

0.5 0.0 0.0 0.1 0.6 6.0 51.0

0.5 0.0 0.0 0.1 0.6 6.5 56.5

25.9 0.5 10.3 0.0 36.7

25.9 0.2 14.9 0.0 41.0

25.9 0.8 19.9 0.0 46.6

25.9 -0.8 25.9 0.0 51.0

25.9 -2.4 33.1 0.0 56.5

ADD Projected return Current share price

A$2.21

Price target Upside (downside) 12mth dividend yield TSR

A$3.10 40.2% 3.0% 43.2%

Shares on issue (m) PWH market cap (A$m) Trading multiples (x) EV/EBITDA EV/EBIT PE

100.0 221.0 FY16A 12.6 13.5 20.4

FY17A 14.4 16.0 23.7

FY18F 12.3 13.6 19.9

FY19F 10.2 11.3 16.5

Valuation summary DCF Sum-of-the-parts PE-relative

A$3.37 A$3.03 A$2.89

DCF inputs RF rate Debt premium Cost of debt Beta MRP Cost of equity Net debt (A$m) EV (A$m) L/T growth WACC

Key earnings ratios Revenue growth YoY EPS growth (adjusted) Dividend yield - ordinary Dividend yield - total Payout ratio Free cash flow yield Effective tax rate

FY20F 8.6 9.5 13.8

4.3% 2.0% 6.3% 1.10 6.0% 12.2% -8.3 212.7 2.5% 9.9%

FY16A 182.9% n.a. 2.0% 2.0% 40.7% 5.1% 28.4%

FY17A 1.6% -14.1% 2.5% 2.5% 60.1% 2.3% 28.2%

FY18F 3.6% 19.4% 3.0% 3.0% 60.0% 3.1% 29.0%

FY19F 17.5% 20.0% 3.6% 3.6% 60.0% 5.4% 29.0%

FY20F 15.3% 19.7% 4.3% 4.3% 60.0% 6.2% 29.0%

FY16A net cash net cash net cash net cash 27.2x

FY17A net cash net cash net cash net cash n/a

FY18F net cash net cash net cash net cash n/a



Working capital metrics Inventory/sales Debtor days Creditor days

FY16A 14.2% 31.5 20.5

FY17A 15.1% 26.1 22.2

FY18F 16.0% 26.1 22.2

FY19F 13.0% 26.1 22.2

FY20F 12.0% 26.1 22.2

Return metrics Return on assets Return on equity

FY16A 42.7% 51.7%

FY17A 30.1% 24.0%

FY18F 31.8% 25.4%

FY19F 34.5% 27.4%

FY20F 37.4% 29.7%

Key assumptions Currency AUD/USD AUD/GBP

FY16A

FY17A

FY18F

FY19F

FY20F

0.73 0.49

0.75 0.59

0.77 0.60

0.75 0.59

0.74 0.55

Balance sheet debt metrics Net debt Gearing (ND/Equity) Gearing (ND/ND+Equity) Net debt/EBITDA EBIT interest cover

SOURCE: MORGANS RESEARCH, COMPANY

2


Five key points from the FY17 result 1) The result overall was ahead of our expectations, with underlying EBITDA down 13% to A$14.7m (+13% vs Morgans), while underlying NPAT fell 14% to $9.3m (+12% vs Morgans). As expected, the result was weighed down heavily by adverse FX movements (especially the AUD/GBP), which reduced revenue by A$4.4m on a like-for-like basis. Excluding the FX impact, we estimate underlying NPAT was up 22%, which was a strong result in our view and highlights the good momentum experienced by the underlying business. The result was driven by strong organic growth in GBP denominated revenue (+28%) despite generally flat USD (-1%) and AUD revenue (+4%). The balance sheet remains strong with a net cash position of A$9m. Operating cash flow was down 18% to A$13.5m due to the drop in earnings and an increase in net working capital to support revenue growth in future years. FY17 DPS of 5.6cps represented a 60% payout ratio (up from 50% previously) and was above our forecast of 4.2cps. 2) Most sales categories saw strong revenue growth - Motorsports was again the key driver of the result, with constant currency sales up 15% to A$36.0m. The result was driven by new and existing customers in both Formula One and other motorsports categories as well as increased take-up of complete assemblies instead of core only. Automotive aftermarket constant currency sales fell 3% to A$8.8m. However, on a continuing operations basis (ie. excluding the C&R South business up for sale), sales grew 8%. US aftermarket was up 16%, Europe increased 31% and Australia was flat. Emerging Technologies constant currency sales rose 49% to A$2.6m, which was driven by increasing use of cold plate and battery cooling technology in motorsports and electric vehicles. We believe PWH’s investments into resources (staff and equipment) sets all sales categories up for continued solid growth in future years. 3) OEM contracts – Niche, low production run OEM contracts have supplemented revenue growth in the past and given PWH’s strong track record and reputation, the company is increasingly being called upon to provide cooling solutions to these specialised programs. In FY17, OEM constant currency sales jumped 57% to A$2.5m as PWH delivered on a number of smaller programs and commenced supply to some larger OEM programs. Some of the larger contracts include being selected as cooling assembly supplier for a niche, high-end, supercar program in the US, a medium sized program (also in the US) and a niche, high-end, Formula One inspired hypercar program in UK/Europe. Overall, while there will be some contribution from these OEM contracts in FY18, we expect more meaningful contributions will come in FY19 and FY20. 4) PWH to exit low margin business in the US – As part of its focus on aligning its resources to higher margin, cooling activities, PWH advised it is currently in negotiations to sell the operating assets of C&R South in the US. C&R South was acquired as part of PWH’s acquisition of C&R Racing in 2015 and is primarily involved in drivetrain rentals to motorsports teams. Given this is a non-cooling business and is also lower margin (we estimate EBITDA margin of