PWR Holdings Limited - Morgans

Auto & Parts - Overall│Australia│Equity research│January 31, 2018

PWR Holdings Limited Strong underlying growth to continue

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

A$2.52 A$3.10 A$3.10 22.8% PWH.AX PWH AU US$203.9m A$252.0m US$0.31m A$0.40m 100.00m 54.5%

Average daily turnover: Current shares o/s Free float: Key changes in this note N/A

Price Close

Relative to S&P/ASX 200 (RHS)

2.80

117.0

2.60

109.0

2.40

101.0

2.20

93.0

2.00

85.0

1.80 6

77.0

Vol m

4

2 Jan-17

May-17

Aug-17

Nov-17

Source: Bloomberg

Price performance Absolute (%) Relative (%)

1M 0.8 1.5

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

3M -1.2 -3

12M 10.5 4.1

■ PWH will report its 1H18 result on 23 February. ■ We expect the result to be driven by further growth in motorsports, automotive aftermarket, emerging technologies and benefits from OEM contracts.

■ Our earnings forecasts remain virtually unchanged with FY18F NPAT at A$11.2m, implying 20% growth on the prior year.

■ We maintain our Add rating and A$3.10 target price.

1H18 result due 23 February We forecast 1H18 underlying NPAT to be up 54% to A$2.8m. The result will cycle a much weaker pcp (1H17 NPAT -44%) which was heavily impacted by adverse FX movements. Our forecasts imply a 25/75 1H/2H skew which is slightly greater than the historical seasonality of 30/70. Currency is still likely to be a minor headwind in the 1H but given recent trends it should be a slight benefit in the 2H, which is when the majority of earnings falls given the typical motorsports racing schedule. We expect the result to be driven by further growth in motorsports, automotive aftermarket, emerging technologies and benefits from OEM contracts. Our earnings forecasts however no longer include the earnings contribution from the impending divestment of C&R South. We expect the balance sheet to remain strong with net cash to remain at around A$9m and a 1H18 DPS of 1.7cps to be declared.

OEM contracts to support medium term growth 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. During 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 to come in FY19 and FY20 with further opportunities for PWH to add to this medium term pipeline over time.

Earnings forecasts remain virtually unchanged Our earnings forecasts remain virtually unchanged with FY18F NPAT at A$11.2m and FY19F NPAT at A$13.4m.

Maintain Add rating – High-quality growth story Our equally blended (DCF, EV/EBITDA, PE) target price remains unchanged at A$3.10. While PWH’s results have been impacted by adverse currency movements, at its core we believe it is a very strong business with global-leading technology, a very experienced management team and impressive financial metrics (FY18F EBITDA margin 35%, ROE 26%). We see the medium term earnings outlook remaining strong (2-year forecast EPS CAGR 20%) and therefore maintain our Add rating. Financial Summary Revenue (A$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% 23.23 0.044 1.75% 14.44 NA (20.8%) 6.86 51.7%

Jun-17A 48.12 14.77 9.32 0.09 (14.1%) 27.04 0.056 2.22% 16.50 51.12 (20.3%) 6.15 24.0%

Jun-18F 49.95 17.42 11.17 0.11 19.9% 22.56 0.067 2.66% 13.94 36.49 (19.4%) 5.41 25.5% 0.391% 1.02

Jun-19F 58.59 20.76 13.35 0.13 19.5% 18.87 0.080 3.17% 11.48 21.02 (26.9%) 4.95 27.4% (0.000%) 1.02

Jun-20F 67.53 24.73 15.98 0.16 19.7% 15.77 0.096 3.81% 9.44 18.37 (33.0%) 4.47 29.8% (0.001%) 1.01

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 15.7 0.0 15.7 -4.6 0.0 11.2 11.2 0.0 11.2 11.2 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 32.9 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 -4.6 -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 4.6 12.0 12.0 4.6

FY20F 24.7 0.0 -6.5 -0.6 0.0 -1.6 16.0 -2.3 0.0 -2.3 -8.8 0.0 0.0 0.0 -8.8 0.0 4.9 13.7 13.7 4.9

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 28.7

19.4 4.8 8.1 2.5 34.8

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 62.9

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 50.9

0.5 0.0 0.0 0.1 0.6 6.5 56.4

25.9 0.5 10.3 0.0 36.7

25.9 0.2 14.9 0.0 41.0

25.9 0.7 19.9 0.0 46.6

25.9 -0.9 25.9 0.0 50.9

25.9 -2.6 33.1 0.0 56.4

ADD Projected return Current share price

A$2.52

Price target Upside (downside) 12mth dividend yield TSR

A$3.10 22.8% 2.7% 25.5%

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

100.0 252.0 FY16A 14.4 15.5 23.2

FY17A 16.5 18.3 27.0

FY18F 14.0 15.5 22.6

FY19F 11.7 13.0 18.9

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

A$3.34 A$3.05 A$2.90

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 9.9 10.9 15.8

4.3% 2.0% 6.3% 1.10 6.0% 12.2% -8.3 243.7 2.5% 9.9%

FY16A 182.9% n.a. 1.8% 1.8% 40.7% 4.5% 28.4%

FY17A 1.6% -14.1% 2.2% 2.2% 60.1% 2.0% 28.2%

FY18F 3.8% 19.9% 2.7% 2.7% 60.0% 2.7% 29.0%

FY19F 17.3% 19.5% 3.2% 3.2% 60.0% 4.8% 29.0%

FY20F 15.3% 19.7% 3.8% 3.8% 60.0% 5.4% 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 31.9% 25.5%

FY19F 34.5% 27.4%

FY20F 37.4% 29.8%

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

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1H18 result preview Reporting date – 23 February Earnings guidance – No formal earnings guidance has been provided. Morgans versus Bloomberg consensus – No Bloomberg consensus forecast is available. We forecast FY18F NPAT to be up 20% to A$11.2m. Figure 2: 1H18 earnings forecast summary A$m

1H17A

2H17A

FY17A

1H18F

2H18F

FY18F

1H18F vs 1H17A

Revenue

18.6

29.5

48.1

19.0

31.0

49.9

2%

FY18F vs FY17A 4%

EBITDA

3.4

11.4

14.8

4.7

12.8

17.4

38%

18%

D&A

0.7

0.8

1.5

0.8

1.0

1.7

8%

17%

EBIT

2.7

10.6

13.3

3.9

11.8

15.7

45%

18%

Net interest expense

-0.1

-0.2

-0.3

0.0

0.0

0.0

n.m.

n.m.

Tax expense

-0.8

-2.9

-3.7

-1.1

-3.4

-4.6

51%

24%

NPAT Adj.

1.8

7.5

9.3

2.8

8.4

11.2

54%

20%

Net signficant items

0.0

0.0

0.0

0.0

0.0

0.0

n.m.

n.m.

Reported NPAT

1.8

7.5

9.3

2.8

8.4

11.2

54%

20%

Adjusted EPS (cps)

1.8

7.5

9.3

2.8

8.4

11.2

54%

20%

Total dividend (cps)

0.9

4.7

5.6

1.7

5.0

6.7

86%

20%

SOURCES: MORGANS, COMPANY REPORTS

Note that our earnings forecasts no longer include the earnings contribution from the impending divestment of C&R South. Management had forecasted FY18 C&R South revenue of US$2.3m and EBITDA of –US$0.2m.

Key things to look out for at the result:



Headwinds from currency: PWH's 1H18 result at a reported level will be slightly impacted by movements in the AUD/GBP and AUD/USD. However the result will be much less impacted by FX movements compared to 1H17, where Brexit resulted in a large reduction in earnings. As such we will be looking for how the business is performing on an underlying or constant currency basis.



Commentary around OEMs – 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. During 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 to come in FY19 and FY20 with further opportunities for PWH to add to this medium term pipeline over time.



Update on C&R South sale - As part of its focus on aligning its resources to higher margin, cooling activities, PWH said at the FY17 result that it was 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 slightly loss making (FY18F EBITDA –US$0.2m), we believe the divestment makes sense and frees up capacity for higher value cooling solutions. We therefore expect an update on the divestment to be provided at the upcoming result.

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

Balance sheet remains strong – PWH’s balance sheet remains in very good shape with a net cash position of A$9m in FY17. We expect net cash to remain at similar levels in 1H18. The balance sheet has historically been conservatively managed which leaves plenty of capacity to invest in growth opportunities or make acquisitions in the future.

Earnings forecasts remain virtually unchanged We make no changes to underlying assumptions and given average FX rates during 1H18 were broadly in line with our expectations, our earnings forecasts remain essentially unchanged. Figure 3: Earnings forecast changes FY18F

FY19F

FY20F

(A$m)

Old

New

Chg.

Old

New

Chg.

Old

New

Total revenue

49.9

49.9

0%

58.6

58.6

0%

67.5

67.5

Chg. 0%

Operating costs

-32.5

-32.5

0%

-37.8

-37.8

0%

-42.8

-42.8

0%

EBITDA

17.4

17.4

0%

20.8

20.8

0%

24.7

24.7

0%

D&A

1.7

1.7

0%

2.0

2.0

0%

2.3

2.3

0%

EBIT

15.6

15.7

0%

18.8

18.8

0%

22.4

22.4

0%

0.0

0.0

0%

0.0

0.0

0%

0.1

0.1

0%

PBT

15.7

15.7

0%

18.8

18.8

0%

22.5

22.5

0%

Tax

-4.5

-4.6

0%

-5.5

-5.5

0%

-6.5

-6.5

0%

Normalised NPAT

11.1

11.2

0%

13.4

13.4

0%

16.0

16.0

0%

0.0

0.0

n.m

0.0

0.0

n.m

0.0

0.0

n.m

Reported NPAT

11.1

11.2

0%

13.4

13.4

0%

16.0

16.0

0%

EPS - normalised (cps)

11.1

11.2

0%

13.4

13.4

0%

16.0

16.0

0%

EPS - reported (cps)

11.1

11.2

0%

13.4

13.4

0%

16.0

16.0

0%

6.7

6.7

0%

8.0

8.0

0%

9.6

9.6

0%

EBITDA margin

34.8%

34.9%

0.1ppt

35.4%

35.4%

0.0ppt

36.6%

36.6%

0.0ppt

EBIT margin

31.4%

31.4%

0.1ppt

32.0%

32.0%

0.0ppt

33.2%

33.2%

0.0ppt

NPAT margin

22.3%

22.4%

0.1ppt

22.8%

22.8%

0.0ppt

23.7%

23.7%

0.0ppt

Net interest

Abnormals (after-tax)

DPS (cps)

SOURCES: MORGANS ESTIMATES

Maintain Add rating Our blended (DCF, EV/EBITDA, PE) target price remains unchanged at A$3.10. With PWH now cycling the FX impact from Brexit, we expect to see strong growth in FY18. Looking into FY19 and FY20, we believe earnings will be supported by continued strong growth in motorsports, automotive aftermarket and emerging technologies supplemented by additional revenue from OEM contracts. Despite PWH trading on 22.6x FY18F PE we continue to believe the stock is good value given the strong medium term earnings growth outlook. Key catalysts going forward include: announcement of further meaningful OEM contracts, depreciation in the AUD/GBP and AUD/USD, demonstration of the US aftermarkets business, and emerging technology contracts. Key downside risks include: increased competition, product failure, loss of reputation, increase in FX (AUD/GBP, AUD/USD), customer concentration and lack of IP protection.

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Disclaimer The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.

Disclosure of interest Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.

Regulatory disclosures Analyst owns shares in the following mentioned company(ies): PWR Holdings Limited

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