1H18 result – 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 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. Currency movements had a negative 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 existing facilities. The new facility provides a approximately 2000sqm of additional 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.
We continue to view PWR Holdings Limited (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 with a 2-year forecast EPS CAGR of 20%.
We retain our Add recommendation.
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