Still plenty of growth opportunities in motorsports
There is still plenty of room for PWR Holdings (PWH) to grow in Formula One, with management estimating they currently supply only 55% of the available Formula One market for cooling solutions. PWH also provides cooling solutions to racing teams in IndyCar, NASCAR, WRC, V8 Supercars and more, but there are many other active motorsports championships it does not currently service. As the world leader in their field, we believe PWH can leverage their expertise to expand into many other racing categories over time.
Early days but US aftermarket feedback is positive
The US automotive aftermarket segment is a large growth opportunity for PWH. Management estimates the US automotive aftermarket for cooling products is worth around US$300m pa and through PWH's acquisition of C&R Racing in 2015, provides the company with a strong platform to launch into this segment. PWH sells under the C&R Racing brand in the US through two main retail distribution channels – Summit Racing and JEGS. A look at these websites shows customer feedback for C&R Racing radiators has been very positive.
Strong upside from a falling AUD/GBP
While the rise in the AUD/GBP over the past 12 months on the back of Brexit will have a negative impact on earnings in FY17, we do note that the opposite also applies when the AUD/GBP falls. On average, we estimate a 1p fall in the AUD/GBP increases revenue by 1% while EBITDA rises 3%. Should the AUD/GBP continue to weaken, this will provide strong upside to our earnings forecast.
Investment view – high quality growth business
PWH's track record of delivering organic revenue growth is well demonstrated by its historical 3-year CAGR of 24% (FY13-16A). While currency headwinds and investments into resources (staff and equipment) will weigh on earnings in FY17, we believe the company is positioned well for strong growth in future years. Given that, we maintain our Add recommendation and share price target. Key risks include: increased competition, product failure, loss of reputation and FX movements.
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Disclaimer(s): Analyst owns shares.
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