Media Equity United Kingdom

Transcription

1 18 February 2016 Price 58.00p TDIM LWB Market Cap 190.5m Net Debt 102.1m Free Float 98.5% Avg Daily Volume 351.5k Broker Peel Hunt Listing LSE Share Price Performance Source: Bloomberg An international business to business manufacturer and supplier of performance materials for use in a broad range of manufacturing and construction applications. Kevin Lapwood kevin.lapwood@capitalaccessgroup.co.uk Low and Bonar Full Year Results Beginning to deliver on the new strategy The first results of the new five year planning period were encouraging. The company has demonstrated that it has the potential to leverage its manufacturing expertise and intellectual property in order to expand its presence in higher margin niche markets and extend its global reach. There are still significant economic headwinds and potential implementation risks attached to the new strategy but, through a combination of organic growth and selected M&A activity, there are grounds for future optimism. The current rating is still reflecting historic trading difficulties and the subsequent uncertainties of a new management team and a revised strategy. However, there was sufficient evidence in the FY2015 results to suggest that a more optimistic view is now appropriate. Year to Sales Adj. PBT EPS Net Cash/(Debt) P/E(fd) EV/EBITDA Yield Nov m m p ( m) (x) (x) (%) FY15a (102.1) FY16e (107.0) FY17e (104.5) FY2015 results were in-line with expectations The full year results from Low & Bonar were a touch ahead of the market consensus and our own estimates. Revenue declined by 3.6% to 395.8m compared with our estimate of 402.2m, although in constant currency terms it was up by 2.4%. Operating profit improved by 3.5% (+9.7% in constant currency) to 32.8m with the group margin improving by 60bps to 8.3%. Adjusted profit before tax was up by 5.6% to 26.6m compared with our own forecast of 26.2m New Colback facility opens in China EPS and DPS were in-line with expectations at 5.61p (+2.7%) and 2.78p (+3%) respectively. Return on capital employed improved form 11.4% to 12.0%. In-line with company guidance, net debt increased from 88.0m to 102.1m reflecting the increase in capital expenditure during the year primarily in China, where the new Colback factory has recently commenced commercial operations, but also in Hungary. Profit up in four out of five divisions Divisional performance was encouraging with the decline in European civil engineering markets now having stabilised and strong growth in the other business units. Revenue in the Civil Engineering division fell by 5% in the second half compared with a decline of 16% in the first half. Operating margin was 5.8% in 2H15 compared with 0.8% in 1H15. Elsewhere, constant currency EBITA was up in all four divisions, with particularly strong performances in Interior & Transportation (+30.7% to 13.2m) and Sports & Leisure (+33.3% to 1.2m) Making progress on strategic objectives The results show that the newly restructured Group is making progress against its objectives despite receiving little help from prevailing economic conditions. On our 2016e estimates the shares are trading on a prospective PER of 9.6x, EV/EBITDA of 6.0x and yield 5.1%. On a peer group comparative valuation we believe that a share price of 71p, based on peer group comparison, is justifiable at this stage. This document provides information on Low & Bonar plc - it is not a solicitation of an offer to buy or sell securities. See the disclaimer on the back page. Media Equity United Kingdom Bloomberg WSTH<GO>

2 Investment Thesis A potentially strong position in global market supported by knowledge and expertise Over reliant on weak European markets New CEO has implemented a group-wide restructuring Leveraging the expertise Strong balance sheet to back strategic initiatives Undemanding rating Low and Bonar is a well-established UK company that offers exposure to a wide range of global manufacturing and construction markets through the production and distribution of specialised woven and non-woven textiles. Its products are employed across the world in a diverse range of industries including civil and infrastructure engineering, commercial building, auto manufacture, transport and leisure. It has developed leading positions in many of its markets due to the strength of its process and manufacturing expertise. In the past, the company has admitted that it has weaknesses, chief among which was lack of global reach. In some operating divisions, it had become too reliant on Europe where continued economic weakness has resulted in poor performance, particularly in its Civil Engineering business. This was exacerbated by the slower than expected sales growth from its Saudi joint venture and these combined factors led to the reduced profit expectations in 2014 that has adversely affected the share price in recent months. However, Low and Bonar has for some time worked towards increasing its global market presence in its higher value niche products, an initiative which was given new impetus by the arrival of the new CEO in At its Capital Markets Day in May 2015, the company outlined the steps it has taken to restructure its businesses following the strategic review undertaken by the new management team. Recognising that Low & Bonar had a strong fundamental base, underpinned by its investment in innovation and development, the group has been restructured on a global basis in order to drive efficiencies, improve routes to market and commercial execution. Part of this process will involve investment in new capacity to support geographic expansion and diversification away from Low & Bonar traditional European and US markets. This will be supported by selective M&A activity and marketing initiatives to leverage the group higher margin products. The effect of this new approach has yet to become fully apparent but the latest financial results show some encouraging signs. The FY2015 demonstrated the ability of the company to generate revenue growth and margin improvement against a difficult economic background. The targeting of higher value niche markets will take some time to fully implement but the first evidence that the strategy is working are now apparent. The company has the financial strength to implement its plans with net debt/ equity at 59.4% and interest costs covered 7.5x. Operating cash flow conversion was 127% in FY2015 and free cash flow before capacity expansion expenditure was Net debt/ EBITDA was 2.3x In the meantime, the company is trading on a very undemanding rating against its peers. On our FY2016 estimates, it is trading on 9.6x prospective earnings, EV/ EBITDA of 6.0x and yields 5.1% with a progressive dividend policy. A comparative peer group analysis would suggest a price of 71p, representing upside of 18% from the current level, but this would be higher when further improvements come through from the structuring. 2 Capital Access Group

3 Company Description Development From jute to geosynthetics - evolution into an international business to business performance materials group. Low and Bonar can trace its history back to the first decade of the 20 th century when it was founded in Scotland as a supplier of jute products. However, its modern day genesis can be traced to the early years of the current century when the company began the process of streamlining its business profile to focus on its performance materials operations. It divested its Packaging, Plastics and Floors divisions and acquired several specialist materials companies like Colbond in 2006 and MTX Group in In so doing, it established a manufacturing and sales footprint in the USA, Europe and the Asia Pacific region. Through its Bonar subsidiary, the company is a leading producer and supplier of highquality nonwovens, wovens, knitted fabrics, three-dimensional polymeric mats, construction fibres and composites for applications in civil engineering, interiors, transportation, construction, agriculture and industry. Its production facilities are based in The Netherlands (Emmen and Arnhem), Belgium (Lokeren and Zele), Germany (Obernburg and Gro Ippener), Hungary (TiszaœjvÆros), Slovakia (Ivanka pri Nitre), the USA (Asheville) and through joint ventures in China (Jiangsu) and Saudi Arabia (Yanbu). The company operates a global network of regional sales offices and operates product research, development and application centres in Arnhem, Zele and Asheville. Low & Bonar employs more than 2,000 people worldwide, with 1,200 people working in Bonar and its joint ventures. New Group Structure The group recently reorganised its operations into five global business units that cover a wide range of specialist textile markets: Civil Engineering: 21.6% of revenue, 8.0% of EBITA. Margin 3.6% The but plans are in place to improve margins and sales Early attempt at geographic diversification has been slow to show progress Civil Engineering The company manufactures and supplies a wide range of construction fibres, and branded geosynthetic products to civil engineering markets worldwide. Its woven and non-woven products are manufactured under a range of brands including Enka solutions, Bontec, Tipptex, Korex and Armatex. These products are used to improve mechanical strength, permeability and erosion resistance in a variety of civil engineering applications, including construction of retaining structures, erosion control, drainage systems, soil reinforcement, material consolidation and separation. By the company in challenging European construction markets where, until recently, demand has been declining due to lack of infrastructure projects caused by economic slowdown and geopolitical tensions. This led to a profits downgrade in 2014 and was the main reason for subsequent share price weakness. The divisions margins are low and under pressure due to price competition. The company has responded by strengthening the management, improving product mix management and focusing on its higher specification products. In so doing, it believes it can both improve sales and drive the margin up towards 10%. In addition to the European problems, the Civil Engineering division has also suffered from slower than anticipated sales at its Saudi joint venture, Bonar Natpet, which began commercial operations in This business was established with the National Petroleum Industrial Chemical Company in order to build a materials manufacturing site on its polypropylene plant in Yanbu, Saudi Arabia. The plant was an attempt to add capacity and diversify the company 3 Capital Access Group

4 markets. However, it has experienced slower than expected sales growth due to the economic and political tensions in the region brought about by the slump in the oil price. The company has taken the decision to write down its holding in the group to zero and not to inject any more cash while it attempts to find a resolution with its joint venture partner. Interiors and Transportation: 22.7% of revenue, 34.1% of EBITA. Margin 14.7% Interiors and Transportation In 2006, Low & Bonar acquired Colbond, a Dutch producer and supplier of synthetic nonwoven fabric products and three-dimensional mats to make it the dominant operator in this market. It was based in Arnhem in the Netherlands with production facilities throughout Europe and in Ashville, North America. Its main product was and still is marketed under the Colback brand name and is used extensively as a backing for carpets and floor tiles, in automotive manufacture as interior moulded carpets. It also has potential applications in interior cabin components for the automobile industry. Colbond also produced products for a range of more commoditised building and construction applications, such as reinforcement for waterproof bituminous roofing membranes, which were marketed under the Enkamat brand name. These now operate within Building and Industrial division. Scope for expansion of market reach Building and Industrial: 15.6% of revenue 21.7% of EBITA. Margin 13.6% Coated Technical Textiles: 30.4% of revenue, 33.1% of EBITA. Margin 10.6% Further growth and margin improvement is possible This division generates strong margins from its unique technologies and is well-placed for expansion. While it has a global footprint, there is considerable scope for expansion of its market reach. It is, in effect, the template for the rest of the group. The company has just commenced commercial production at a new 26m Colbond manufacturing facility in China. This will allow Low & Bonar to exploit local market opportunities while relieving capacity pressures elsewhere. Further margin enhancing growth is expected in in the region. Building and Industrial Low and Bonar produces a wide range of products for building and industrial applications, including building envelope and roofing products, agriculture and horticulture applications (screens and groundcovers), and a wide range of industrial uses, including filtration and fibre reinforced plastics. This division has been described by the company as its its potential opportunities. There are initiatives in place build on the division traditional US strength and to expand into new markets in Asia and Europe. A greater focus on the product portfolio and target market segments should lead to significant margin upside. Coated Technical Textiles (CTT) Through its German subsidiary, Mehler Texnolgies, Low & Bonar produces a range of coated textiles that are used in a several applications including: tarpaulin materials for various transport and protection applications; technical materials for textile architecture; membranes for tents and temporary structures; composite materials for industrial applications with intensive long-term exposure. The products are made from technical textiles that are manufactured in companyowned weaving mills and which are subsequently treated with a wide range of coatings depending on the application. They are marketed under the VALTEX, POLYMAR and AIRTEX brands. Although it has enjoyed good revenue growth and improving margins, the CTT business is still over reliant on its European core markets. In addition, it has not fully developed its potential in some of the higher value end markets like architecture and 4 Capital Access Group

5 niche industrial manufacturing. Low & Bonar plans to invest in new capacity and explore M&A opportunities to expand the business and leverage its specialist abilities. Growth in the Americas is likely and we expect further margin progression. Sports and Leisure: 9.7% of revenue, 3.3% of EBITA. Margin 3.1% Sports and Leisure The Sports & Leisure division supplies yarns to the world woven carpet industry. The primary markets and applications are leisure and flooring. The global market for synthetic turf is growing rapidly during the past 10 years but the market leader, The Dutch-based Royal Ten Cate is the market leader but it has shown little ambition in using its position to exert pricing power, thus ceding market control to the finished product manufacturers and suppliers. Against this backdrop, Low & Bonar has made positive relative progress but has failed overall to meet its margin objectives in this business. It has moved its manufacturing base to Abu Dhabi in order to reduce costs and is looking to establish a presence in the USA. However, the company may also consider divestment of this business as an alternative to further investment. Revenue and EBITA Breakdown by Business Unit (2015) Revenue 10% 21% EBITA 4% 7% 30% 36% 30% 23% 16% 23% Civil Engineering (Civil) Building & Industrial (B&I) Sports & Leisure (S&L) Interiors & Transportation (I&T) Coated Technical Textiles (CTT) Civil Engineering (Civil) Building & Industrial (B&I) Sports & Leisure (S&L) Interiors & Transportation (I&T) Coated Technical Textiles (CTT) Source: Low & Bonar Traditional over reliance on European markets is being addressed The company describes itself as an international business with global reach in some segments. It enjoys market leading positions in some niche industrial markets and locations. Its geographic sales profile is largely biased towards Europe, which accounts for 62% of revenue and towards North America, which represents 23%. This sales distribution reflects the location of most of the group manufacturing plants. However, with the new plant in China now on stream and supplying demand for the local manufacturing industries, it is expected that Asian revenues will continue to grow more rapidly than the group rate. The end of 2015 marked the end of the transition phase of the group restructuring and the company is now seeking to execute the new strategy. The company believes it can improve group operating margin from the current level of around 8% to over 10% and that return on capital employed will improve to over 12% 5 Capital Access Group

6 Revenue Breakdown by Geographical Region (2015) 7% 8% 23% 62% Europe America Asia RoW Source: Low & Bonar, Capital Access Group Steady revenue growth but group margin has been erratic While revenue growth has been steady during the past 5 years, at a compound average rate of 3.1% per annum, despite currency movements, margins have fluctuated. This has been largely due to the problems described above in what is now the Civil Engineering division. The company has continued to invest in strategic initiatives to increase its focus on higher margin niche products and is thereby targeting margin improvement to over 10% at group level. Operating Margin Progression 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% E Unit Contribution Group (incl. JV) Source: Low & Bonar, Capital Access Group Recent Share Performance Shares were adversely affected by the economic slowdown in Europe In early September 2014, the company reported that it had has experienced a drop in demand across its European civil engineering markets reflecting a slowdown in construction activity and the continuing difficult economic and geopolitical climate in Europe. This followed the announcement in July of that year that the joint venture in Saudi Arabia had continued to suffer a slower than expected order intake as a result 6 Capital Access Group

7 of a delay in obtaining a key product certification. This resulted in a group loss of 1.1m in As a result, and despite the group to perform well, Low & Bonar shares have underperformed the London market by 21.5% in the past two years. Recent performance has been more encouraging, and the shares have outperformed the falling market by 32% in the past 12 months but, at its current level, the share price is still a long way short of the recent high of 94.5p seen in February Five Year Share Price Source: Bloomberg 7 Capital Access Group

8 Industry Background Research and Development play an important role Low &Bonar measure of protection from global economic volatility. Its end markets include infrastructure construction, commercial construction, automobile manufacture, building repair and maintenance and leisure activities. Some of Low & Bonar markets are likely to grow at levels significantly above the prevailing level of GDP. As with all advanced materials businesses, it can benefit from advances in materials technology, like the current activity that is taking place around graphene. However, many of its businesses are relatively mature, as one would expect from a company that can trace its origin back to the early 1900 will, at best, grow at prevailing GDP rates. To offset this, the company is heavily engaged in product development and process innovation through its Research, Development and Innovation Centres. This allows it to retain its position in fast growing markets while reducing costs and retaining price competitiveness in commoditised products. Geosynthetics Markets Global Market Size Freedonia estimates that volume will grow by 6.1% pa to 2019 China, India and the Middle East will be key growth markets Forecast growth in Europe and N. America is expected to be around 3.8% Our base case is based on organic growth in volume of between 5 and 6% A 2014 report by the market research group Freedonia looked at a range of geosynthetics by type (geotextiles, geomembranes, geogrids, geonets) and by market (construction, transportation infrastructure, landfills, liquid containment). The report estimated that the annual global demand for geosynthetics will rise from its current level of 4.8bn sq.m. to reach 6.5bn sq.m in 2019, representing compound annual growth 6.1%. Growth will be driven by demand from China due to its ongoing largescale infrastructure projects and increasing need for erosion control. Growing concerns about environmental protection will also stimulate growth. However, there is little consensus either on the current market size or projected growth. Another study by Grand View Research Inc., published in August 2015 estimated that the market was 6.12bn sq.m in 2014, significantly larger than the Freedonia survey. It estimated that this would expand by 5.1% a year to reach 9.0bn sq.m. by It too pointed to growth coming from infrastructure development in China, India and Middle East stimulated by increased government expenditure and regulatory factors. The market is currently dominated by North America which accounts for around 33% of the total global usage. Europe is slightly smaller and both are expected to grow at around 3.5% to 4% a year. However, the Asia Pacific region is expected to grow more rapidly in the medium term and will overtake North America imminently. In financial terms, a 2013 study by Markets and Markets placed the total value of the global market in 2014 at US$9.2bn and forecast it to rise by a compound rate of 11% per annum to US$15.4bn by The Grand View Research Inc. estimate is that the market will be worth US$22.1bn by In its December 2015 report entitled nthetics Market - Global Industry Analysis, Size, Share, Growth, Trends and Forecast assessed the size of the market in 2014 at US$9.57bn and is anticipated it to reach US$20.8bn by 2023, growing at a CAGR of 9.1% between 2015 and Clearly, there is a lot of variation and the forecast range is wide, but our estimate is for steady organic growth in these advanced technology markets of between 5% to 6% in both volume and financial terms for the next five years. 8 Capital Access Group

9 Demand by Types of Geosynthetic Products Geotextiles are the dominant product Within the total geosynthetics market, geotextiles are the dominant product. A chart of the product breakdown in Europe demonstrates that they account for around 70% of the total market in The figure is similar for other regions.rising adoption of geotextiles in soil reinforcement and erosion control is likely to have a positive impact on future demand. In Europe, these products are expected to witness the fastest growth, at 5.2% CAGR from 2015 to 2022 owing to its emergence as an alternative to other granular materials and reduced installation cost. After geotextiles, the next largest geosynthetics product category is geomembranes for which global demand was over 750.0m.sq.m. in Future demand growth is likely to be driven by increasing deployment of these membranes in containment and waste water treatment due their good permeability characteristics. Geogrids have high load bearing capacity and are consequently increasingly used in road construction for reinforcing the base of structures over soft soils. Rising importance of geonets for providing surface impoundment and controlling soil erosion is expected to increase their application in check dams for irrigation in the future. Demand By Product Type in Europe 2500 million sq.m per year a 2013a 2014a 2015e 2016f 2018f 2019f 2020f 2021f 2022f Geotextiles Geomembranes Geogrids Geonets Other Source:: Grand View Research Inc., 2015 The Global Synthetic Turf Market Strong volume growth but the pricing background has not been strong The Sports and Leisure division of Low & Bonar manufactures and supplies yarns and fibres to the global synthetic turf industry. The following two charts show the volume growth characteristics of this market by region and end use. There appears to be no shortage of growth potential in this product with 10 year CAGR of almost 10%. However, Low & Bonar lacks pricing power due to the dominance of Ten Cate and consequently it is obliged to rely on cost reductions for margin improvement. 9 Capital Access Group

10 Growth of the Global Synthetic Turf Market by Region Units:mn sq. m CAGR (%) Europe % NAFTA % South America % Near East % Far East % Oceania % Total % Source: Ten Cate/ Capital Access Group Growth of the Global Synthetic Turf Market by End Use Units:mn sq. m CAGR (%) Contact sports % Non-contact sports % Leisure/DIY % Landscaping % Total % Source: Ten Cate/ Capital Access Group 10 Capital Access Group

11 Full Year Results The full year results from Low & Bonar were a touch ahead of the market consensus and inline with our own estimates. Investment in new capacity Revenue for the full year ending November 2015 declined by 3.6% to 395.8m compared with our estimate of 402.2m, although in constant currency terms it was up by 2.4%. Operating profit improved by 3.5% (+9.7% in constant currency) to 32.8m with the margin improving by 60bps to 8.3%. Adjusted profit before tax was up by 5.6% to 26.6m compared with our own forecast of 26.2m. Adjusted EPS and DPS were in-line with expectations at 5.61p (+2.7%) and 2.78p (+3.0%) respectively. Return on capital employed improved from 11.4% to 12.0%. Net debt increased from 88.0m to 102.1m reflecting the increase in capital expenditure during the year primarily in China, where the new Colback factory has recently commenced commercial operations. A new non-woven facility is also currently under construction in Hungary. Total capital expenditure increased from 20.2m to 33.7m which included an increase to 23m ( 9.2m) on capacity increases. Revenue and EBITA Breakdown by Business Unit 1H14A 2H14A FY14A 1H15A 2H15A FY15A 1H+/- 2H+/- FY+/- Year to 30 Nov ( m) 1H 2H Full 1H 2H Full % % % CIVIL ENGINEERING - Revenue % -4.6% -9.7% - EBITA % 0.0% -24.4% - Margin 2.9% 5.6% 4.3% 0.8% 5.8% 3.6% -213bps 27bps -70bps INTERIORS & TRANSPORTATION - Revenue % -0.8% 1.2% - EBITA % 27.0% 30.7% - Margin 9.1% 13.4% 11.4% 12.0% 17.1% 14.7% 292bps 375bps 331bps BUILDING & INDUSTRIAL - Revenue % -2.1% -1.6% - EBITA % 1.8% 5.0% - Margin 8.0% 16.9% 12.8% 9.1% 17.5% 13.6% 113bps 66bps 86bps COATED TECHNICAL TEXTILES - Revenue % -4.2% -6.1% - EBITA % -6.2% -6.6% - Margin 11.4% 10.0% 10.7% 11.5% 9.8% 10.6% 14bps -21bps -6bps SPORTS & LEISURE - Revenue % 8.7% 5.8% - EBITA % -36.4% 33.3% - Margin -1.1% 6.0% 2.5% 2.7% 3.5% 3.1% 383bps - 249bps 65bps GROUP REVENUE % -2.1% -3.6% Central Costs (incl. share options) EBITA % 4.5% 5.2% Margin 7.3% 10.5% 9.0% 8.2% 11.2% 9.8% 89bps 70bps 82bps Source: Low&Bonar, Capital Access Group European civil engineering market has stabilised Divisional performance was encouraging with the decline in Civil Engineering related to the weakness of European infrastructure markets appearing to have stabilised. Revenue in the division fell by 5% in the second half compared with a decline of 16% in the first half. Operating margin was 5.8% in 2H15 compared with 0.8% in 1H15. Elsewhere, constant currency EBITA was up in all four divisions, with particularly strong 11 Capital Access Group

12 performances in Interior & Transportation (+30.7% to 13.2m) and Sports & Leisure (+33.3% to 1.2m) Underlying profits up by 12% Large increase in non-recurring costs due to Saudi Arabia Gearing increased due to investment Return on capital employed hit the lower end of the target range at 12% Organic revenue growth for the group was 2.4%, comprising 3.8% volume growth offset by adverse price and mix (-0.6%), raw material costs (-1.1%) pass through and trading foreign exchange (+0.4%). Within the divisions, volumes fell by in Civil Engineering, but were up by 5% in B&I, 8% in CTT, 3% in I&T and 3% in S&L. Underlying group profit improved by 12% assisted by a 28% drop though of volume growth and the positive impact of trading forex and raw material pass-through. The positive profits impact was offset by operational inefficiencies and inflation. Non-recurring costs of 10.1m were reported due mainly to the 8.2m impairment cost of the Bonar Natpet joint venture. The 3.0m carrying value of the asset was written down to zero and the 5.2m loan was written off. Other one-off restructuring costs were incurred in relation to the relocation of the artificial grass yarns business from Dundee to Abu Dhabi, and to start-up costs in China. Cash inflow from operations not including the movement in loans to the joint venture improved by 4.5% to 39.8m. Working capital fell as a proportion of sales from 24% to 23%. However, capital expenditure was up from 19.0m to 33.0m resulting in cash outflow before financing of 11.3m. The group borrowed in China to offset the cost of the new factory, resulting in net debt increasing from 88.0m to 102.1m. As a result net debt/ equity rose to 59.4% Interest was covered 7.5x. Return on capital employed increased from 11.4% to 12.0% which is the lower end of the group target. Operating returns on capital 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% E ROCE Ret on Op Capital Ret on Equity Source: Low & Bonar, Capital Access Group 12 Capital Access Group

13 Financial Forecasts and Valuations Basis for estimates Our estimates for the years ending November 2016 and 2017 are based on organic revenue growth across the portfolio of businesses of 2.8% and 3.1% respectively. This reflects our view that, although civil engineering markets in Europe may have stabilised, they are unlikely to commence rapid growth in the near future. As we have pointed out earlier, many of Low & Bonar e potential for above GDP growth of between 5 and 6% but it is still exposed to legacy markets that drag this figure down. We believe that the company will continue to see steady progress on the operating margin as it moves into higher value niche areas and that it will eliminate the joint venture losses during the period. Capital expenditure is likely to be lower in 2016 and 2017 than the 33m reported in 2015 but will still continue at a relatively high level as the Group continues to invest in its strategic initiatives aimed at increasing global reach and improving product mix with a view to improving margin. We have not assumed any acquisition growth. Our forecasts are outlined in the tables at the end of this report. Valuation Based on our financial estimates and a group of pan European sector peers we believe the current share price is between 10 and 11% too low. Peer Group Comparative Valuation PER EV/ EBITDA A F1 F2 A F1 F2 Peer Group average multiple (x) Low & Bonar EPS (p) EBITDA ( m) Implied price of LWB (p) Average implied price (p) Upside 16.7% 14.8% Source: Low & Bonar, Capital Access Group Risks to Forecasts Implementation of Strategic restructuring Sustained global economic weakness Adverse currency movements Technical innovation We have assumed that the strategic initiative that were identified in 2015 will be put in place with minimal disruption to the ongoing business and that they will begin to produce positive results in the current year. There is however a risk associated with the implementation of the plans and ultimately a possibility that they will not work. Although Low & Bonar has a wide portfolio of businesses operating on a global footprint, it is still at risk from a sustained economic downturn which would affect even its non-cyclical operations. It is particularly at risk in its largest markets which are currently Europe and North America. In the course of its ordinary operations, the company is exposed to a wide array of currencies. In our view the main risk is not transactional but translational and is mainly confined to movements of sterling against the US dollar and the Euro. While it is in itself a leader in technical textiles, it cannot be ignored that many of its global markets are very competitive and subject to continued development and innovation which would impact on demand and prices. 13 Capital Access Group

14 Raw material prices Many raw materials that go into the wide range of products sold by the company are based on petrochemicals. Clearly the current slump in the oil price is a significant factor that has proved to be an advantage in financial terms in However, raw material price volatility represents a significant potential risk which the group seeks to mitigate by purchasing from a wide range of global suppliers 14 Capital Access Group

15 Financial Estimates Valuation Measures FY13A FY14A FY15A FY16E FY17E FY18E Year to 30 Nov Full Full Full Full Full Full PER(fd) EV/EBITDA (x) Yield (%) Dividend cover (x) Net debt/equity (%) Interest cover (x) Source: Low & Bonar, Capital Access Group Income Statement FY13A FY14A FY15A FY16E FY17E FY18E Year to 30 Nov ( m) Full Full Full Full Full Full Revenue by division Civil Engineering Interiors & Transportation Building & Industrial Coated Technical Textiles Sports & Leisure Total Revenue EBITA by division Civil Engineering Interiors & Transportation Building & Industrial Coated Technical Textiles Sports & Leisure Central costs (inc. Share based payments) Group EBITA Exceptional items Goodwill amortisation JV s + associates Net interest Reported PBT Adjusted PBT Tax Average no shares - diluted (m) EPS - Reported, basic (p) EPS - Adjusted, diluted (p) DPS Source: Low & Bonar, Capital Access Group 15 Capital Access Group

16 Balance Sheet FY13A FY14A FY15A FY16E FY17E FY18E Year to 30 Nov ( m) Full Full Full Full Full Full Non-current assets Goodwill Intangible assets P,P & E Other Fixed assets Current assets Inventories Trade receivables Cash and cash equivalents Total current assets Current liabilities Trade payables (84.8) (84.4) (78.6) (79.6) (80.6) (81.6) Deferred tax (ex pension) (23.2) (20.8) (17.2) (17.2) (17.2) (17.2) Tax liabilities (5.4) (4.8) (5.7) (5.7) (5.7) (5.7) Other provisions and liabilities Total current liabilities (110.4) (106.1) (97.3) (99.5) (101.7) (104.2) Net current assets/(liabilities) Total assets less current liabilities Non-current liabilities Gross debt (104.7) (113.8) (136.0) (136.0) (136.0) (136.0) Other (12.7) (11.0) (9.9) (5.9) (1.9) (1.9) Total non-current liabilities (117.4) (124.8) (145.9) (141.9) (137.9) (137.9) Total liabilities (227.8) (230.9) (243.2) (241.4) (239.6) (242.1) Net assets NAV (p) Capital and reserves Called up share capital Retained earnings Other reserves Shareholders funds Source: Low & Bonar, Capital Access Group 16 Capital Access Group

17 Cash Flow FY13A FY14A FY15A FY16E FY17E FY18E Year to 30 Nov ( m) Full Full Full Full Full Full EBITDA Working capital (4.8) (7.0) (5.9) (2.0) (1.0) (5.0) Other (12.7) (3.5) (2.5) 0.0 Operating cash flow Net interest paid (4.8) (4.5) (4.4) (5.2) (5.0) (4.7) Net tax (6.8) (7.7) (7.5) (7.8) (8.6) (8.3) Net capital expenditure (13.4) (20.2) (33.7) (26.7) (23.8) (25.8) Net acquisitions / disposals (15.9) Other 0.9 (1.2) (1.7) Pre financing cash flow (13.2) 4.9 (12.0) Dividends (7.2) (8.8) (9.0) (9.5) (9.7) (10.5) Net equity issued Net movement in debt (8.5) Net change in cash (9.0) (4.9) Net cash / (debt) (86.8) (88.0) (102.1) (107.0) (104.5) (103.3) Source: Low & Bonar, Capital Access Group [Section break do not delete] 17 Capital Access Group

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