AUSTRALIA Price Valuation A$ Event 12-month target A$ month TSR % +6.9 Volatility Index Medium

Transcription

1 AUSTRALIA GUD AU Price (at 06:10, 19 Jun 2015 GMT) Neutral A$9.24 Valuation - EV/EBITA A$ month target A$ month TSR % +6.9 Volatility Index Medium GICS sector Consumer Durables & Apparel Market cap A$m day avg turnover A$m 4.7 Number shares on issue m Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x GUD AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, June 2015 (all figures in AUD unless noted) 22 June 2015 Macquarie Securities (Australia) Limited Turning the lights back on Event We update forecasts, recommendation and price target following the lifting of research restrictions applied with the acquisition of Brown and Watson International (BWI) and associated capital raising. Impact BWI appears a very good acquisition for GUD: The BWI business and its management were well-known to GUD. Strategically, the acquisition is consistent with management s stated goal to build GUD over time into three major divisions of scale. BWI business is highly complementary to the existing Automotive Division, which has been GUD s best and most consistent performer for some time. The business is sizeable and transformative from an earnings perspective. It reduces future overall earnings contribution from the business improvement initiatives underway. The financial metrics are attractive on a stand-alone basis. BWI already generates strong margins and cashflows with no synergy or business improvement benefits factored into management s forecasts for the business of FY16 EBIT of $27.9m. The acquisition price including earn out based on FY16 forecast equates to 7.5x s FY16 EBIT. The deal is highly accretive, we estimate ~ 20%. Post the capital raising and expanded SPP, the balance sheet remains in a strong position. We forecast net debt of ~$170m which equates to FY16e net debt/ebitda of ~1.7x and interest cover of ~ 7x s. Earnings impact: We have made no change to our FY15 forecasts which are within the $55-$60m FY15 EBIT guidance range and consistent with the recent trading update. Our forecasts assume BWI delivers $27.9m FY16 EBIT and ~5% earnings growth into FY17. We have made minimal changes to our existing FY16/17 forecasts for the existing business. Earnings and target price revision FY16E EPS +17%, FY17E +20%. TP increased to $9.40 per share (was $7.30). Our TP equates to ~15.5x s FY16E PER which is in line with our Emerging Leader Industrials market multiple. Price catalyst 12-month price target: A$9.40 based on a PER methodology. Catalyst: Delivery of results through FY16. Action and recommendation BWI appears a very good acquisition for GUD and we believe it is accretive from both an earnings and business quality perspective to the overall group. It reduces the overall contribution to earnings and growth from the cost saving initiatives underway. Our forecasts continue to assume further benefits from these initiatives are realised but remain below the medium term targets outlined on the basis that some of these benefits will be eroded by pressures on the underlying business. The stock has rallied hard post the announcement of these cost savings targets and now acquisition. With it trading back at around the market multiple we resume coverage with Neutral recommendation (was Neutral previously). Please refer to page 8 for important disclosures and analyst certification, or on our website

2 Analysis Fig 1 Earnings revisions FY16 old FY16 new Change FY17 old FY17 new Change Revenue % % EBITDA % % Depreciation % % EBIT % % Net interest expense % % Pre-Tax Profit % % Tax Expense % % Net Profit % % Outside equity interests % % Net Abnormals/Extra. 0.0 Adjusted Earnings % % EPS (adj/diluted) % % EFPOWA % % Source: Macquarie Research, June 2015 We have made no change to our FY15 forecasts which are within management s $55m-$60m FY15 EBIT guidance range. Conference commentary last month suggested that management s profit improvement programs are largely on track. Price increases and hedging have helped to offset the impact of the weaker A$. The Dexion order book had increased to over $70m at end March. Revenues were being managed to a level while factory efficiencies continue to build. Supply chain inefficiencies were called out which are expected to result in Dexion being towards the lower end of management expectations for the year. Commentary suggested the Jarden JV was performing well. Early sell-in of the Oster range was ahead of expectations. As a result, Sunbeam appears set to finish the year towards the top end of management expectations. Commentary on other divisions was all in line with expectations. We have made minimal changes to our previous FY16/17 forecasts for the existing business. Our forecasts continue to assume further benefits from the cost saving and business improvement initiatives are realised but remain below the medium term targets outlined on the basis that some of these benefits will be eroded by pressures on the underlying business. Our forecasts above assume BWI delivers $27.9m FY16 EBIT and ~5% earnings growth into FY17. Post the expanded $26m SPP, we forecast net debt of ~$170m which equates to net debt/ebitda of ~1.7x and interest cover of ~ 7x s based on our FY16 forecasts. As can be seen above, the deal is transformative from an earnings perspective and highly accretive. Fig 2 Sum of Parts Valuation FY16 EBITA Capitalisation EBITA Multiple Valuation FY16 High Low High Low Filters $ $406.3 $357.5 Locks $ $11.0 $9.9 Water products $ $108.8 $98.9 Sunbeam 50% $ $40.0 $28.4 Oates $ $114.6 $104.2 Dexion $8.9 $120.0 $100.0 BWI $ $210.0 $210.0 Unallocated -$ $80.5 -$72.8 Enterprise Value $ $930.2 $836.1 Less Debt $170.4 $170.4 MV of equity $759.8 $665.7 Equity value per share $ 8.90 $ 7.80 Source: Macquarie Research, June June

3 Our sum of parts valuation is detailed above (was $6.60-$7.30). Dexion and Sunbeam valuations now include further upside from profit improvement programs underway. We have included BWI at the $209m acquisition price. Our price target based on PER valuation is $9.40 per share, (was $7.30 per share). It equates to ~15.5x s FY16 PER which is in line with our Emerging Leader Industrials market multiple. The following provides a recap on the BWI business as published on 13/5/15 in essentials article; BWI lights up FY16. Business overview BWI s two key brands are: Narva: Automotive lighting and electrical accessories products; and Projecta: Battery maintenance and battery power products. Narva and Projecta brands generate c75% and c15% of BWI revenues respectively. They are positioned as quality, innovative products and are leading players in their respective industries. Management estimate Narva to have c24% share of the $325m lighting and electrical accessories market and Projecta to have c19% market share of the $85m battery maintenance and power market. BWI also has a number of sub brands such as Big Red, AC Pro and Maxilight which tend to compete in the entry level market. BWI has a broad channel and sales mix. BWI offers a portfolio of over 6000 SKU s. The product portfolio is diversified across a range of categories with largest categories contributing ~13% of sales. The comprehensive catalogue provides a complete product solution for retailers and wholesalers with additional benefits in terms of logistics and merchandise efficiencies. Fig 3 BWI has a diversified product portfolio... Other 21% Forward lights 13% LED lighting 13% Plugs and sockets 6% Beacons and strobes 6% Truck and trailer 6% Terminals, cable ties 9% Source: Macquarie Research, June 2015 Cable 6% Battery chargers 9% Globes 11% BWI has in house R&D capabilities to develop new products and product specific to the Australian market. We understand around a third of SKU s are differentiated in house design and a third modified off the shelf. We understand around 70% of goods are sourced in US$. BWI s end market exposure is spread across trade, auto retail, industrial and auto electric. There is considerable overlap of end market customers with GUD s existing automotive business. The addition of BWI will strengthen GUD s market position with existing customers in the trade, retail and wholesale automotive products channels. There are also likely to be opportunities in the medium term to expand Ryco and Wesfil businesses into BWI end markets such as marine and heavy transport where they currently have no presence. 22 June

4 Fig 4...and broad channel mix Specialty transport and recreational segments Auto trade Transport Other Auto electrical Auto retail Source: Macquarie Research, June 2015 Commentary suggests the BWI business has been well run and will be operated largely as a standalone business through at least FY16. BWI shares the same ERP system as GUD s existing automotive businesses which should assist integration. Automotive Aftermarket Aftermarket sales comprise c85% of BWI s total sales. Underlying demand for BWI s products, like GUD s existing automotive products division, is driven by the steady expansion of the Australian vehicle pool which continues to grow. New vehicle sales have exceeded 1m units six of the last seven years. The current car pool is estimated at 16.6m units and forecast to increase to 18.5m by Average car age is ~10 years. The Australian vehicle pool is fragmented with a high prevalence of Australian made models. The diversity of the automotive fleet, means breadth and knowledge of offer, and ability to design product specific to the Australian market are key advantages. BWI has attractive financial metrics BWI is forecast to generate FY15 EBIT of $26.6m on sales of $109m (24.4% EBIT margin). Prior history was not provided. Introduction of new products, improved sourcing and other initiatives are forecast to drive c5% growth in FY16 EBIT to $27.9m on sales of $117m (23.8% EBIT margin). Commentary suggests the slightly lower FY16 margins reflect some conservatism around potential currency impact and margin performance of new ranges. We understand BWI has not previously undertaken currency hedging. These margins while high compare to GUD s auto division which has delivered EBIT margins above 30% for the past four years. Looking ahead, we expect BWI s growth trajectory to be similar to existing Ryco and Wesfil businesses with moderate top line growth and steady high margins. While there are likely to be some margin improvement potential in time, we do not expect this business to reach the existing auto division s margins given their relative market positions. The business has modest capex requirements. Net working capital investment at ~$40m is higher than we would have expected and relates to shorter payable terms. Acquisition consideration and funding BWI is being acquired for $200m and an earn-out of up to $20m. For each $1m EBIT BWI delivers in excess of $26.6m, GUD will pay $7m. If FY16 EBIT target of $27.9m is achieved then a $9.1m earn-out will be triggered and paid after the FY16 year. The acquisition price, including earn-out, based on FY16 forecast equates to 7.5x s FY16 EBIT. The deal is highly accretive. We calculate ~17% accretion based on our previous FY16 forecasts 22 June

5 The acquisition has been funded by a $74.5m fully underwritten placement and a $26m SPP undertaken at $7.45 per share, and ~$120m draw down of recently refinanced debt facilities. GUD has expanded and extended its debt facilities as part of the transaction. GUD now has $300m of available facilities comprising a $185m revolver and $115m amortising facility. Tenor has been extended to five years with pricing ~30bp below previous facility. Post this transaction, the balance sheet will remain in a strong position to support existing operations as well as future acquisition opportunities. We forecast net debt of ~$170m which equates to net debt/ebitda of ~1.7x and interest cover of ~ 7x s based on our FY16 forecasts. 22 June

6 Limited (GUD:$9.15) 22-Jun-15 Interim results 1H/14A 2H/14A 1H/15A 2H/15E Profit & Loss 2014A 2015E 2016E 2017E Revenue Revenue $m EBITDA $m EBITDA $m Depreciation $m Depreciation $m Amortisation of goodwill $m Amortisation of goodwill $m EBIT $m EBIT $m Net Interest expense $m Net interest expense $m Pre-Tax Profit $m Pre-Tax Profit $m Tax Expense $m Tax Expense $m Net Profit $m Net Profit $m Outside equity interests $m Outside equity interests $m Net Abn/Extra $m Net Abnormals/Extra. $m Reported Earnings $m Reported Earnings $m Adjusted Earnings $m Adjusted Earnings $m Gross Cashflow $m Gross Cashflow $m EPS (Adj/dil) c EPS (adj/diluted) c EPS growth % EPS growth % CFPS c PE (adj) x CFPS Growth % CFPS c EBITDA/Sales % CFPS Growth % EBIT/Sales % PGCFPS x Earnings Split % DPS c Revenue Growth % Yield % EBIT Growth % Franking % Profit and Loss ratios 2014A 2015E 2016E 2017E Cashflow Analysis 2014A 2015E 2016E 2017E Revenue Growth % EBIT Growth % Pre-tax Profit $m EBITDA/Sales % Depreciation & Amortisation $m EBIT/Sales % Tax Paid $m Effective tax rate % Gross cashflow $m Payout ratio % Changes in working capital $m EV/EBITA x Other $m EV/EBITDA x Operating Cashflow $m EV/Sales x Acquisitions $m Balance sheet ratios Capex - Plant & Equip. $m ROE % Asset Sales $m ROA % Other $m ROFE % Investing cashflow $m Net Debt $m Dividend (ordinary) $m Net Debt/Equity % Equity raised $m Interest Cover x Other $m Gross Debt/EBITDA x Financing cashflow $m Price/NTA x NTA per share $ Net Change in cash/debt $m EFPOWA m Historical performance 2011A 2012A 2013A 2014A Balance Sheet 2014A 2015E 2016E 2017E Cash $m Revenue $m Receivables $m EBITDA $m Inventories $m Depreciation/Amortisation $m Investments $m EBIT $m Property, plant & equipment $m Net interest expense $m Intangibles $m Pre-Tax Profit $m Other Assets $m Tax Expense $m Total Assets $m Net Profit $m Payables $m Net Abn/Extra $m Short Term Debt $m Long Term Debt $m EPS (adj/dil) c Other Liabilities $m EPS growth % Total Liabilities $m Ordinary DPS c Shareholders Funds $m EBITDA/Sales % Minority Interests $m EBIT/Sales % Total Shareholders Equity $m ROE % ROFE % Total Funds employed $m EFPOWA m Divisional Information 2014a 2015e 2016e 2017e Automotive Lock Focus Water Sunbeam Oates Dexion BWI Total sales Automotive Lock Focus Water Sunbeam Oates Dexion BWI Unallocated Total EBIT EBIT margin 8.3% 9.4% 12.1% 12.2% Source: Company data, Macquarie Research, June June

7 Macquarie Quant View The quant model currently holds a reasonably positive view on GUD Holdings. The strongest style exposure is Price Momentum, indicating this stock has had strong medium to long term returns which often persist into the future. The weakest style exposure is Valuations, indicating this stock is over-priced in the market relative to its peers. 102/418 Global rank in Consumer Durables & Apparel % of BUY recommendations 33% (3/9) Number of Price Target downgrades 0 Number of Price Target upgrades 1 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Consumer Durables & Apparel) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 0.9 Breville Group 0.2 Breville Group GWA Group -0.2 GWA Group Pacific Brands -1.7 Pacific Brands % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. 0.3 Breville Group GWA Group Breville Group GWA Group Pacific Brands -0.5 Pacific Brands % -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Volatility 250 Day 250d Volatility Working Capital Inc. 3m Earnings Revisions Interest Cover Turnover (USD) 250 Day Turnover(USD) 125 Day Merton Score Negatives Positives -42% -30% -30% -31% 26% 26% 39% 39% -60% -40% -20% 0% 20% 40% 60% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/418) Percentile relative to market(/415) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 22 June

8 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2015 AU/NZ Asia RSA USA CA EUR Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients) Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients) Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients) GUD AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, June month target price methodology GUD AU: A$9.40 based on a PER methodology Company-specific disclosures: GUD AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. MACQUARIE SECURITIES (AUSTRALIA) LIMITED or one of its affiliates is currently managing an on market buyback for Ltd. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates has provided Ltd with investment advisory services in the past 12 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 20-Jan-2015 GUD AU Neutral A$ Oct-2014 GUD AU Neutral A$ Jul-2014 GUD AU Neutral A$ Oct-2013 GUD AU Underperform A$ Jun-2013 GUD AU Neutral A$ Jan-2013 GUD AU Neutral A$ Nov-2012 GUD AU Neutral A$ Jul-2012 GUD AU Neutral A$8.30 Target price risk disclosures: GUD AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 22 June

9 General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 22 June