SFC released its FY2016 preliminary financial results a few days after my initial post. I took at while to give an update as I wanted to wait for the annual report (which has more information) and to speak to management before updating my valuation.
Here’s the update to my initial post. I recommend reading it first if you haven’t already done so.
Revenue grew by 53% to $155.1 million as expected due to the new programs and EBITDA was $7.2 million excluding one-off expenses of approximately $2.5 million (start up cost for new Slovakian finishing plant, redundancies and write down of decommissioned assets). A summary of the revenue and EBITDA for Howe is as follows:
Management had previously flagged that earnings in FY2016 would take a hit from the operational restructuring exercise and that it will take time to bed down the new programs and get some efficiencies in terms of cutting etc. Nonetheless, the normalised EBITDA margin was still lower than what I was expecting. After a bit of scuttlebutting, I think that the new programs were priced a little sharper to win the work and “get in the door” of a new client.
I have updated my valuation of Howe based on the updated revenue and margin figures. As volumes for 1HY17 is expected to be at the same level as 2HY16, I have used this 12 month figure as a proxy for recurring revenue. My margin assumption was based on the average old program margins for the first $100 million of revenue and then a lower margin for the balance from the new programs. I have also reduced the multiple from 5.5x to 5.0x to reflect the size and margin difference between Howe and Eagle Ottowa (transaction at 6x EBITDA multiple).
There are a few positive tailwinds for Howe:
- Hide costs have come down which should boost margins. There are limits to this given the nature of the supply contract where prices are negotiated annually.
- Lower hide finishing cost and improved working capital efficiency as a result of moving finishing facilities to Slovakia.
- Potential to increase volumes given the entry into Mercedez Benz (expand supply to other models).
Building material division
There have been some signs of improvement in the building material (paving) division but Delta (pre-cast concrete) is still performing poorly due to the subdued construction activity in WA. The segment results have improved over the last two years and I have increased my valuation of this division but maintained some conservatism as it is still not earning a required return on its capital.
The WA construction sector is still subdued but there are some key transport infrastructure work which are in the pipeline.
I have not changed any of my assumptions except to consider the value of the North Coogee property if developed into a 175 unit residential development which is a likely scenario in the next few years if the apartment prices do not totally collapse in Perth. The apartment values have been coming off as a result of the mining downturn but the falls in values have been gradual.
As an undeveloped land, I still maintain that the land is worth circa $15 million (83% attributable interest) but if developed my high level calculation shows that the project could potentially generate after tax profits of $25 – $30 million.
I have updated the sum-of-the parts valuation based on two scenarios, the first scenario assumes the North Coogee land is sold as undeveloped land and the second scenario assumes development of the site.
Although the share price has moved up since my initial post it still trading below these levels.