Things are looking up for Low & Bonar.
Small cap company Low & Bonar (LSE: LWB) has come through a transformational period. It reported a 'significant improvement' in its operational performance and financial position when it released full-year results on Tuesday.
Metamorphosis
Five years ago, Low & Bonar was a plastics and floors group, with a small technical textiles division.
Today, after various acquisitions and disposals, it is an international performance materials business focused on technical textiles.
The restructured company has two divisions:
- Performance Technical Textiles (70% of sales) supplies products such as geotextiles, artificial grass yarns, carpet tile backing and construction fibres to the civil engineering, carpet tile manufacturing, leisure and construction sectors.
- Technical Coated Fabrics (30% of sales) supplies products such as advertising banners, awnings, marquees and tarpaulins to the print, architectural and transport markets.
The group has been expanding beyond its traditional geographical markets of Western Europe and North America.
Over 20% of sales now come from outside these regions, and a recently-announced Saudi Arabian joint venture will give the company access to new markets in the Middle East and the Indian subcontinent.
Material improvement
The benefits of the restructuring of the business to focus on performance materials are coming through, as the results highlights show:
- Revenue £345m (+13%)
- Underlying operating margin 7.5% (2009: 7.3%)
- Underlying pre-tax profit £18.6m (+18%)
- Underlying earnings per share 4.41p (+1%)
- Full-year dividend 1.6p (+33%)
- Net debt £62m (2009: £67m)
The earnings per share (EPS) figure doesn't look quite as hot as the rest, but reflects a 15% increase in the weighted average number of shares in 2010 compared to 2009.
There was a £30m placing and open offer in 2009 to bolster the company's balance sheet, and the financial position has since been further improved with a €45 million private placement of loan notes and the refinancing of banking facilities through to 2015.
Net debt of £62m at the year end looks manageable and is comfortably within the private placement and banking covenants.
Shareholder support
For a small cap company Low & Bonar has an impressive roll of institutional shareholders on its register, including the activist Hermes Specialist UK Focus Fund and Aberforth Smaller Companies Trust (LSE: ASL), one of the top performing small cap investment trusts.
As well as the business transformation, Low & Bonar's board of directors has undergone significant change, with a new chairman, chief executive and finance director all being appointed in the last couple of years.
Steve Good, who had been managing director of the Technical Textiles Division, overseeing the development of that division into the Group's core business activity, was appointed chief executive in 2009.
Changes to personnel, remuneration policies and business targets suggest to me that the activist Hermes fund -- whose engagement strategies I've written about before -- has been quietly working behind the scenes, perhaps with other institutional shareholders, to focus the company on delivering value for shareholders.
Prospects
Low & Bonar's restructuring isn't quite complete. Yarns, a sub-division of Performance Technical Textiles, is currently loss-making, but the company is confident it can be returned to profitability by the closure of a manufacturing facility in Ostend and the transfer of production to a site in Abu Dhabi.
The company is facing inflationary raw materials headwinds, and passing on costs to customers in some markets remains challenging.
Nevertheless, the directors are bullish on the outlook for the year ahead:
"Following a year in which partial recovery in many of the Group's end markets was augmented by organic growth, we are now in a good position to push ahead with our initiatives to deliver margin improvement and growth in our chosen niche markets and geographies. The success of these initiatives is not reliant on further market recovery and the Board is therefore confident of continuing to make progress in 2011."
Valuation
At 58p, Low & Bonar's share price is up 50% since I noted Aberforth had upped its stake in the company six months ago. And with the market being unmoved by Tuesday's results, which were trailed in a trading update before Christmas, is the company fairly valued at the current price?
Ahead of the results, consensus forecasts were for EPS of 5.4p in 2011 and 6.2p in 2012, representing price/earnings multiples of 10.8 and 9.4, respectively. Not absolute bargain territory, but quite attractive when pitched against forecast earnings growth.
Certainly, buyers of the shares at the current price are unlikely to be disappointed if the company meets its medium-term sales, margin and asset efficiency targets:
- Organic sales growth: 1.5x – 2.5 x GDP;
- Percentage of sales from outside Western Europe and North America > 25%;
- Operating margin > 10%; and
- Return on capital employed > 17%
Consensus analyst forecasts don't appear to give full credit to the company's stated growth targets, though, so a cautious investor may be inclined to hold off for any short-term price weakness to add a margin of safety.
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