PWR Holdings Limited - Morgans

Auto & Parts - Overall│Australia│Equity research│February 23, 2018

PWR Holdings Limited Cruisin’ in the fast lane

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

A$2.45 A$3.10 A$3.10 26.4% PWH.AX PWH AU US$191.6m A$245.0m US$0.23m A$0.30m 100.00m 54.5%

Average daily turnover: Current shares o/s Free float: Key changes in this note FY18F revenue up by 4%. FY18F EBITDA unchanged. FY18F NPAT up by 1%. Price Close

Relative to S&P/ASX 200 (RHS)

2.80

122.0

2.60

114.0

2.40

106.0

2.20

98.0

2.00

90.0

1.80 6

82.0

Vol m

4

2 Feb-17

May-17

Aug-17

Nov-17

Source: Bloomberg

Price performance Absolute (%) Relative (%)

1M -2.4 -1.8

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

3M -3.6 -3.8

12M 11.4 7.7

■ PWH’s 1H18 result was broadly in line with our expectations. ■ The result was driven by 11% organic revenue growth (GBP sales +22%, USD sales -11%, AUD sales +17%) primarily driven by motorsports and OEM.

■ Our earnings forecasts remain largely unchanged. ■ We maintained our Add rating and A$3.10 target price.

Result was broadly in line with our expectations 1H18 underlying EBITDA grew 33% to A$4.5m (-4% vs Morgans) while underlying NPAT increased 59% to $2.9m (+4% vs Morgans). Reported NPAT only rose 14% to A$2.1m and was negatively impacted by the write-down of C&R South (-A$0.7m) that is up for sale and a reduction in net deferred tax assets (-A$0.2m) due to the US tax changes. Organic revenue rose 11% primarily driven by increased market penetration in the motorsports and OEM sectors. FX movements had a minor impact on revenue growth (-1.3%) but this was fairly minimal compared to previous periods. The balance sheet remains strong with net cash of A$3.2m while operating cash flow was up 90% to A$2.4m due to working capital improvements. 1H18 DPS of 1.1cps was below our forecast (1.7cps) but we expect a larger dividend in the 2H that should bring the full year payout ratio closer to the board’s target of around 60%.

Getting ready for continued growth PWH has now completed and commissioned the new aluminium heat exchanger core furnace line at C&R Racing in the US and this is now operational. The new furnace has double the throughput capacity of Australia and provides a number of advantages including producing cores for the US aftermarket segment (which are currently being supplied from Australia), alleviating bottlenecks during peak production periods and providing additional capacity to allow Australia to focus on R&D, design and bespoke production. In addition, PWH has leased an additional facility at Ormeau adjacent to its 2 existing facilities. The new facility provides an additional ~2,000m of capacity and will house the specialty product builds and ongoing R&D development. In our view, these investments highlight management’s confidence in the long term growth trajectory of the business and will allow plenty of room to continue to pursue growth opportunities.

Earnings forecasts remain largely unchanged We make minimal changes to earnings forecasts and expect FY18F EBITDA to be up 18% to A$17.4m and FY18F EBITDA to grow by 20% to A$20.8m.

Maintain Add rating Our equally-blended (DCF, EV/EBITDA, PE) target price remains unchanged at A$3.10. We continue to view PWH as a very strong business with global-leading technology, a very experienced management team and impressive financial metrics (FY18F EBITDA margin 33%, ROE 26%). We see the medium term earnings outlook remaining robust (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% 22.59 0.044 1.80% 14.03 NA (20.8%) 6.67 51.7%

Jun-17A 48.12 14.77 9.32 0.09 (14.1%) 26.29 0.056 2.29% 16.03 49.70 (20.3%) 5.98 24.0%

Jun-18F 52.11 17.36 11.29 0.11 21.1% 21.71 0.068 2.78% 13.70 47.99 (15.4%) 5.25 25.8% 1.01% 1.03

Jun-19F 60.33 20.77 13.35 0.13 18.3% 18.35 0.080 3.27% 11.24 20.89 (22.6%) 4.81 27.4% 0.00% 1.02

Jun-20F 69.49 24.75 15.98 0.16 19.7% 15.33 0.096 3.92% 9.25 18.47 (28.3%) 4.34 29.7% 0.01% 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 52.1

AIFRS FY19F 60.3

AIFRS FY20F 69.5

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 -4.4 0.0 11.3 11.3 -0.8 10.5 10.5 6.8 0.0 6.8 100.0%

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 22.5 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 revenue

FY16A 31.0 14.3 2.1 0.0 47.3

FY17A 31.8 12.3 2.2 1.8 48.1

FY18F 33.9 13.8 2.6 1.8 52.1

FY19F 37.1 18.3 3.1 1.8 60.3

FY20F 41.5 22.4 3.7 1.8 69.5

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 -4.4 -1.1 0.0 -1.6 10.3 -5.2 0.0 -5.2 -6.2 0.0 0.0 0.0 -6.2 0.0 -1.1 5.1 5.1 -1.1

FY19F 20.8 0.0 -5.5 0.4 0.0 -1.6 14.1 -2.4 0.0 -2.4 -7.4 0.0 0.0 0.0 -7.4 0.0 4.3 11.7 11.7 4.3

FY20F 24.7 0.0 -6.5 -0.6 0.0 -1.6 16.0 -2.8 0.0 -2.8 -8.8 0.0 0.0 0.0 -8.8 0.0 4.5 13.3 13.3 4.5

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

8.0 3.7 8.3 2.5 22.5

12.3 4.3 7.8 2.5 26.9

16.8 5.0 8.3 2.5 32.5

5.9 14.2 0.0 1.8 21.9 42.2

7.9 14.1 0.0 2.0 24.0 46.3

13.6 14.1 0.0 2.0 29.7 52.2

14.0 14.1 0.0 2.0 30.1 57.0

14.4 14.1 0.0 2.0 30.6 63.1

2.7 0.0 0.4 1.5 4.6

2.9 0.0 0.3 1.5 4.7

3.2 0.0 0.3 1.5 5.0

3.7 0.0 0.3 1.5 5.5

4.2 0.0 0.3 1.5 6.0

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 5.6 46.6

0.5 0.0 0.0 0.1 0.6 6.1 51.0

0.5 0.0 0.0 0.1 0.6 6.6 56.5

25.9 0.5 10.3 0.0 36.7

25.9 0.2 14.9 0.0 41.0

25.9 1.5 19.2 0.0 46.6

25.9 -0.1 25.1 0.0 51.0

25.9 -1.7 32.3 0.0 56.5

ADD Projected return Current share price

A$2.45

Price target Upside (downside) 12mth dividend yield TSR

A$3.10 26.4% 2.8% 29.1%

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

100.0 245.0 FY16A 14.0 15.1 22.6

FY17A 16.0 17.8 26.3

FY18F 13.6 15.1 21.7

FY19F 11.4 12.6 18.3

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

A$3.32 A$3.03 A$2.93

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 9.6 10.5 15.3

4.3% 2.0% 6.3% 1.10 6.0% 12.2% -8.3 236.7 2.5% 9.9%

FY16A 182.9% n.a. 1.8% 1.8% 40.7% 4.6% 28.4%

FY17A 1.6% -14.1% 2.3% 2.3% 60.1% 2.1% 28.2%

FY18F 8.3% 21.1% 2.8% 2.8% 60.0% 2.1% 28.0%

FY19F 15.8% 18.3% 3.3% 3.3% 60.0% 4.8% 29.0%

FY20F 15.2% 19.7% 3.9% 3.9% 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 31.8% 25.8%

FY19F 34.4% 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 0.59

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 1H18 result 1) The result overall was broadly in line with of our expectations, with 1H18 underlying EBITDA up 33% to A$4.5m (-4% vs Morgans) while underlying NPAT increased 59% to $2.9m (+4% vs Morgans). Reported NPAT only rose 14% to A$2.1m and was negatively impacted by the writedown of C&R South (-A$0.7m) that is up for sale and a reduction in net deferred tax assets (-A$0.2m) due to the US tax changes. Organic revenue rose 11% primarily driven by increased market penetration in the motorsports and OEM sectors. FX movements had a minor impact on revenue growth (-1.3%) but this was fairly minimal compared to previous periods. The balance sheet remains strong with net cash of A$3.2m while operating cash flow was up 90% to A$2.4m due to working capital improvements. 1H18 DPS of 1.1cps was below our forecast (1.7cps) but we expect a larger dividend in the 2H that should bring the full year payout ratio closer to the board’s target of around 60%. 2) Europe was the key driver of the result with GBP revenue up 22%. FX was fairly stable during the period so the translation impact was minimal but if the AUD/GBP remains at current levels (spot 56p) then we expect a tailwind in the 2H. Organic growth in Australia was also strong, up 17%, with management expecting momentum to continue into 2H18. The strength in Europe and Australia more than offset a decrease in USD sales of 11%. The weakness in the US was due to the discontinuation of non-core lines following management’s decision to focus on supporting and developing the core business of providing cooling solutions. US sales however are expected to increase in 2H18 due to contributions from deferred NASCAR orders received in Dec/Jan. 3) PWH expands capacity for future growth – PWH has now completed and commissioned the new aluminium heat exchanger core furnace line at C&R Racing in the US and this is now operational. The new furnace has double the throughput capacity of Australia and provides a number of advantages including producing cores for the US aftermarket segment (which are currently being supplied from Australia), alleviating bottlenecks during peak production periods and providing additional capacity to allow Australia to focus on R&D, design and bespoke production. In addition, PWH has leased an additional facility at Ormeau adjacent to its existing facilities. The new 2 facility provides an additional ~2,000m of capacity and will house the specialty product builds and ongoing R&D development. In our view, these investments highlight management’s confidence in the long term growth trajectory of the business and will allow plenty of room to continue to pursue growth opportunities. 4) Partial FX hedging policy implemented – We estimate around 85% of PWH’s revenue is generated from outside Australia so earnings are highly dependent on FX movements that impact the translation of foreign revenue back to AUD for reporting purposes. While an FX hedging policy was not implemented in the past, PWH has now decided to partially hedge its exposure to the AUD/GBP to reduce fluctuations in revenue. The hedge applies to 2H18 which we think makes sense given this is when the majority of revenue is earned. The currency exposure is not 100% hedged so PWH will still benefit if the AUD/GBP depreciates further. On an unhedged (annualised) basis, we estimate a 1p decrease in the AUD/GBP lifts underlying EBITDA by around 3%. 5) Outlook remains positive – Management is positive for the remainder of FY18 as well as into FY19 and FY20 with OEM programs coming on line and demand for profiled cores and billet machined tanking to remain strong. In addition, PWH is seeing increased interest and demand for electric vehicle and emerging technologies cooling which bodes well for longer term growth in this area. For FY18, we expect PWH to maintain its strong growth trajectory and forecast underlying NPAT to be up 21% to A$11.3m.

3


Earnings forecasts remain largely unchanged Given the 1H18 result was broadly in line with our expectations we make minimal changes to earnings forecasts. Our forecasts imply 18% EBITDA growth in FY18 and 20% growth in FY19. Figure 2: 1H18 result summary and earnings forecast changes Morgans (A$m)

FY18F

FY19F

FY20F

1H17A

1H18A

Chg.

1H18F

Diff

Old

New

Chg.

Old

New

Chg.

Old

New

Total revenue

18.6

20.4

9%

19.0

7%

49.9

52.1

4%

58.6

60.3

3%

67.5

69.5

3%

Operating costs

-15.2

-15.9

4%

-14.3

-11%

-32.5

-34.8

-7%

-37.8

-39.6

-5%

-42.8

-44.7

-5%

EBITDA

3.4

4.5

32%

4.7

-4%

17.4

17.4

0%

20.8

20.8

0%

24.7

24.7

0%

D&A

0.7

0.7

-6%

0.8

-13%

1.7

1.7

0%

2.0

2.0

0%

2.3

2.3

0%

EBIT Net interest

Chg.

2.7

3.8

42%

3.9

-2%

15.7

15.6

0%

18.8

18.8

0%

22.4

22.5

0%

-0.1

-0.1

-19%

0.0

n.m

0.0

0.0

0%

0.0

0.0

0%

0.0

0.0

0%

PBT

2.6

3.7

45%

3.9

-5%

15.7

15.7

0%

18.8

18.8

0%

22.5

22.5

0%

Tax

-0.8

-0.8

6%

-1.1

-30%

-4.6

-4.4

-4%

-5.5

-5.5

0%

-6.5

-6.5

0%

Normalised NPAT

1.8

2.9

61%

2.8

5%

11.2

11.3

1%

13.4

13.4

0%

16.0

16.0

0%

Abnormals (after-tax)

0.0

-0.8

n.m

0.0

n.m

0.0

-0.8

n.m

0.0

0.0

n.m

0.0

0.0

n.m

Reported NPAT

1.8

2.1

17%

2.8

-24%

11.2

10.5

-6%

13.4

13.4

0%

16.0

16.0

0%

EPS - normalised (cps)

1.8

2.9

61%

2.8

5%

11.2

11.3

1%

13.4

13.4

0%

16.0

16.0

0%

EPS - reported (cps)

1.8

2.1

17%

2.8

-24%

11.2

10.5

-6%

13.4

13.4

0%

16.0

16.0

0%

DPS (cps)

0.9

1.1

22%

1.7

-34%

6.7

6.8

1%

8.0

8.0

0%

9.6

9.6

0%

EBITDA margin

18.2%

22.0%

3.8ppt

24.6%

-2.6ppt

34.9%

33.3%

-1.6ppt

35.4%

34.4%

-1.0ppt

36.6%

35.6%

-1.0ppt

EBIT margin

14.5%

18.8%

4.3ppt

20.6%

-1.9ppt

31.4%

30.0%

-1.4ppt

32.0%

31.1%

-0.9ppt

33.2%

32.3%

-0.9ppt

NPAT margin

9.7%

14.3%

4.6ppt

14.7%

-0.4ppt

22.4%

21.7%

-0.7ppt

22.8%

22.1%

-0.6ppt

23.7%

23.0%

-0.7ppt

SOURCES: MORGANS ESTIMATES, COMPANY REPORTS

Maintain Add rating Our equally-blended (DCF, EV/EBITDA, PE) target price remains unchanged at A$3.10. With a 12-month forecast total shareholder return of 29% we maintain our Add rating. Key positive 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): -

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