Stobart Group Prelims and strategy progress

Transcription

1 Stobart Group Prelims and strategy progress The journey begins Industrials Stobart has already made significant progress in the first year of a four-year plan to create significant shareholder value. With the difficult environment creating ongoing volatility in transport and distribution, management s swift actions to restructure the ambient fleet have not only mitigated a large portion of risk, but also positioned the group to capture a greater share of outsourced logistics contracts from customers. In addition, the on-time and on-budget delivery of the upgrade to London Southend Airport has demonstrated the clear success of the business in taking a complex build programme and creating a growing airport operation, underpinned by easyjet. This should see passenger numbers surge toward one million by the end of the year. Year end Revenue ( m) PBT* ( m) EPS* (p) DPS (p) P/E (x) Yield (%) 02/ / /13e /14e Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items. 21 June 2012 Price 118.3p Market cap 410m Shares in issue 346.6m Free float 81% Code STOB Primary exchange LSE Other exchanges N/A Share price performance Prelims progress despite economic volatility Full-year results were heavily influenced by the equity raise in May 2011 and the subsequent accelerated development of the estate. With the core business continuing to grow on the back of new and extended contracts, revenue increased by 10% to 552m (FY11: 500m), while the volatility that caused underperformance in the T&D fleet during H1, before restructuring, held back PBT to just 2% growth at 35.2m (FY11: 34.5m). Basic EPS remained flat at 9.0p; adjusted EPS was 8.0p after normalising the tax rate. The dividend remained at 6.0p. Focus is firmly on the four-year plan With the focus of management clearly on delivering the four-year plan to create and return substantial value to shareholders, capex increased to 93m, largely to deliver a new railway station, runway extension, airport terminal and car park, aircraft stands, radar enhancement and hotel at London Southend. With substantial progress highlighted by this success, the building blocks are largely in place to deliver against the plan. Each division has a clear strategy and target to achieve by the end of the period, which, if achieved, could see a substantial return of cash to shareholders. Valuation: Value creation to become increasingly apparent We have taken a conservative basis for our sum-of-the parts valuation of Stobart to obtain a fair value of 160p/share, recognising the current economic uncertainty. However, we feel that as delivery of asset realisation from the estates portfolio is achieved, coupled with the achievement of targets in Air and Biomass over the coming years, the embedded value will begin to be recognised. If we re-run our valuation based on FY13 forecasts and peer multiples, we achieve a fair value in excess of 190p/share. % 1m 3m 12m Abs (1.4) (9.6) (16.2) Rel (local) (7.4) (5.1) (14.6) 52-week high/low 145.0p 110.3p Business description Stobart Group incorporates transport and distribution (93% FY12 sales Eddie Stobart/Ports/Rail), Stobart Air (2%), Stobart Biomass (2%), Infrastructure and Civil Engineering (2%) and Stobart Estates (1%). Next events AGM 28 June 2012 Analyst Roger Johnston +44(0) industrials@edisoninvestmentresearch.co.uk Edison profile page Stobart Group is a research client of Edison Investment Research Limited

2 Investment summary: The journey begins Company description: Multimodal logistics and asset development Stobart s core business centres on transportation and distribution, encompassing the logistics operations across road, rail and ports (93% of FY12 sales). Supplementing this are divisions that operate alternative business models such as Stobart Air and Stobart Biomass. In addition, the group s Estates division encompasses facilities used by the operational business and a commercial property portfolio consisting of 18 units across third-party retail, light industrial and office space. All divisions are supported by the group s infrastructure and civil engineering division, which develops the estate and provides network maintenance through its rail business. Valuation: Upside set to increase with delivery of targets We have taken a conservative basis for our sum-of-the-parts valuation to obtain a fair value of 160p/share, recognising the current uncertain economic conditions. However, we feel that as delivery of asset realisation from the estates portfolio is achieved, coupled with the achievement of targets in Air and Biomass over the coming years, the embedded value will begin to be recognised. If we re-run our valuation based on FY13 forecasts and peer multiples, we achieve a fair value in excess of 190p/share. Sensitivities: Economic volatility and development management The key sensitivities relate to the health of the economy and the effects of the strategy to accelerate the development of the group s property and estate portfolio: Economic volatility. We believe Stobart has demonstrated that its logistics business model is flexible, robust and resilient. The ability to maintain growth in revenues at a time of economic hardship is a testament to the partnership approach. Fuel costs and environment. With fuel costs volatile and environmental concerns growing, Stobart is positioned to benefit from changes in behaviour. The group is making progress in ensuring its vehicles are the highest environmental standard, with 99% of the fleet Euro 4/5 compliant. We also feel that Stobart s multimodal model will truly come into play with the ability to strategically move products around the UK and then run the final leg via road, placing Stobart in a strong position. Development activity. With the greater emphasis on developing the group s assets, there are risks associated with timescale and cost, valuations of property portfolios and ability to achieve planning permission. The use of internal resource is mitigating some of this risk. Financials: Demonstrating delivery, investing for growth The prelims were heavily influenced by the development activity, supported by last May s 115m placing, while the core business had to deal with the impact of the uncertain economic environment: Revenues were 10% higher at 551.9m (FY11: 500.4m), underlying PBT increased by 2% to 35.2m (FY11: 34.5m) and basic EPS remained flat at 9.0p (FY11: 9.0p), while adjusted EPS declined by 17% to 8.0p after normalising the tax rate. Cash generated from operations more than doubled to 57.6m (FY10: 27.7m) and capex for the year totalled 93.4m (FY11: 55.4m) showing the step-up in investment enabled by the equity raise with the most substantial development being at London Southend Airport. 87.7m of ringfenced debt was also acquired as a part of the Moneypenny portfolio deal. As a result, net debt stood at 166.0m (FY11: 156.1m), or 137.3m ex HP loans (FY11: 111.1m). We have altered our divisional forecasts as a result of the greater clarity in the new structure. 2

3 Prelims highlight operational and development progress Stobart s prelims highlighted the benefits of the operational restructuring and the significant progress made in asset development. This was nowhere more apparent than in Stobart Air, where initial development at London Southend has completed and flights with easyjet successfully commenced. Prelims a period of development and change The prelims were heavily influenced by the year of heavy development activity, supported by last May s 115m equity placing and open offer. The core business also had to deal with the impact of the uncertain economic environment and the resultant changes in consumer buying patterns: Revenues were 10% higher at 551.9m (FY11: 500.4m), driven primarily by new and renewed contracts in Transport & Distribution (T&D), as well as an initial 8.4m contribution from Stobart Biomass. 11.4m, or 2%, of the revenue increase was attributable to fuel surcharges passed on to customers at zero margin. Underlying PBT increased by 2% to 35.2m (FY11: 34.5m). Drivers for the lower profit growth compared to revenue included the impact of a small loss at Stobart Air due to heavy investment at London Southend Airport and increased costs in T&D due to the volatile customer requirements and reduced volume in the chilled fleet as a result of the weak economic environment witnessed in H1. Offsetting this was an initial profit contribution from Biomass and an improved 12.4m contribution from Estates. With swift action undertaken to invest in and improve the management information system in H1, margins in T&D improved in H2 and continue on a positive trajectory into the full year as the benefits start to fully flow through. Encouragingly, cash generated from operations more than doubled to 57.6m (FY11: 27.7m) as a result of a strong focus on working capital management, which reduced debtor days by five days, and an extension of some supplier payment terms. Capex for the year totalled 93.4m (FY11: 55.4m) showing the step-up in investment enabled by the equity raise, with the most substantial development being at London Southend Airport incorporating the new terminal, runway and aircraft stands, extended to accommodate future growth projections. We feel that the results were positive in a difficult operating environment. Indeed, the flexibility required and delivered by the group to improve margins in T&D while working with customers to meet requirements shows the benefits of Stobart s business model. With customers fully engaged in understanding how to improve their logistics operations for shared benefits, Stobart has opened up the potential for further outsourcing opportunities. First year of four-year plan showing success more to come We believe it is important to recognise that Stobart is at the start of a journey in which it is looking to deliver significant shareholder value from its asset base and return proceeds as appropriate as realisation is completed, while at the same time improving operational efficiency and ensuring the best available facilities for the core T&D group are delivered. There is a clear four-year plan to deliver this strategy and, while there may be ups and downs along the way, we believe it is in this context that investors should frame decisions. Significant progress against the four-year plan 2011/12 has been a key first year in the four-year development plan that has seen an acceleration of the strategy, supported by the additional capital brought in through the May m share placing and open offer. This provided the firepower to accelerate development and ensure rapid progress is made against the plan, as shown in Exhibit 1. 3

4 Exhibit 1: Four-year targets and first-year progress Four-year targets First-year progress Stobart Air Stobart Biomass Stobart Estates Infrastructure & Civil Engineering Transport & Distribution Full redevelopment of London Southend Airport. 2m passengers pa throughput at LSA. Secure long-term contracts with major airlines. Realisation? Potential trade sale / sale and leaseback / other? Secure long-term supply contracts with Biomass facilities, including associated transport contracts. Aim to deliver 4m tonnes of biomass pa. Realisation? Potential trade sale or floatation. Develop the Estate to increase rental income, enable sale of assets and improve the operational base of the core T&D business. Realisation? Run-off property and estate portfolio. Utilise the skills and capability to deliver the enhancements to the asset base. Realisation? Profit largely realised upon sale of assets. Capture further external work streams. Core business: improve operational efficiency and deliver enhanced shareholder returns through a lean, efficient and growing multimodal operation. Realisation? Growth in margins and capturing greater share of outsourced logistics. Train station, runway extension, control tower, terminal and aircraft stands all delivered on time and to budget. Long-term contracts signed with Aer Arran and easyjet. First easyjet flights commenced, yields ahead of forecast. Revised planning application for Carlisle Airport 8 June decision. Full control gained of Biomass acquired remaining 50%. Solid contribution, although operations running a bit slower than forecast, 441k tonnes of low biomass fuel supplied. Successful acquisition of the Moneypenny portfolio (WADI Properties) excess of net assets over consideration of 2.5m. Disposal of warehouse at Magna Park for 22.5m profit: 5.4m Gain in value of asset held for sale (One Plantation Place): 5.7m. Projects delivered across the group: London Southend Airport including re-routing of road, car park and runway; further works at Mersey Multimodal Gateway; Magna Park development. Introduction of new management information system allowed identification of areas of underutilisation / waste. Restructuring of ambient fleet offset volatility to an extent. Restructuring of chilled fleet commenced. The rapid progress made in areas such as Stobart Air have demonstrated the clear benefit of using inhouse civil engineering experience to deliver capital projects on time and to budget. London Southend Airport provides a clear example, with the current net book value (28 February 2012, prior to easyjet operations) of 129m, compared to the 40m booked by Stobart when it was acquired. Divisional analysis: Environment and investment Transport & Distribution (93% of FY12 sales) As indicated at interims, T&D suffered from volatility caused by changing customer buying patterns, causing lower utilisation than usual, impacting ambient margins by c 300bps. Following implementation of a new management information system and restructuring of the fleet, margins trended back towards historic levels, however a similar issue occurred in the chilled fleet in H2 due to lower volumes. Exhibit 2: Transport and distribution sales and profit forecasts Sales ( m) EBITDA ( m) Depreciation & Amortisation (16.2) (14.5) (14.0) (14.0) Interest (2.4) (2.8) (2.5) (2.4) PBT m Outlook: Despite the uncertain environment, Stobart has continued to grow revenues through new contracts and extensions. As a result, we forecast volume growth over the coming three years as a result of the work done to ensure customers understand where waste exists in the logistics chain, increasing the opportunity to capture a greater share of outsourcing. With restructuring of both ambient and chilled fleets due to complete in 2013, we forecast margins to steadily improve. In 4

5 addition, Stobart has also launched a recommended cash offer of 12.4m for Autologic, a company that operates within car transportation. We will update our forecasts once the deal completes. Air (2% of sales) 2012 was a year of substantial progress for Air with development of London Southend Airport largely complete and easyjet services commenced. With the signing of this 10-year contract supplemented by services for Aer Lingus Regional, Stobart is building a robust business that, given anticipated growth to c 1m passengers in 2013, will rapidly contribute to the group and is a key piece of the fouryear plan. While start-up costs weighed on FY12, these will ease as volumes increase. With yields running ahead of forecasts, this has the potential to become a star performer over the coming years. Exhibit 3: Stobart Air sales and profit forecasts London Southend Passengers ('000s) / Passenger Sales Tenant rental Total London Southend Sales Carlisle Tennant Rental Total Air sales ( m) EBITDA ( m) 0.4 (0.2) Depreciation and amortisation (0.2) (0.3) (0.4) (0.5) Interest (0.0) (0.0) PBT m 0.2 (0.4) Outlook: The core operations at London Southend are set to expand rapidly as passenger throughput increases and contract start-up costs subside. We forecast 1m passengers in 2013, followed by further robust growth in 2014 to 1.3m. In addition, with redevelopment plans at Carlisle Airport undergoing a further round of planning, we should obtain visibility on what can be achieved here in the coming weeks. The outcome of the planning review was anticipated on 8 June Biomass (2% of sales) Having taken full control of the Biomass business in 2012 through the acquisition of the remaining 50% it did not own, Stobart has ensured that the division continues to build out its supply and customer network and made a positive contribution in The network is now integrated with ESL and operations are being readied for further expansion as demand picks up. Exhibit 4: Biomass sales and profit forecasts Volume ('000 tonnes) , ,900.0 Average /tonne Total sales EBITDA ( m) Depreciation & Amortisation 0.0 (0.1) (0.2) (0.2) Interest 0.0 (0.1) (0.1) (0.2) PBT m Outlook: With greater clarity now achieved on financial support of Biomass through the ROC (Renewables Obligation Certificate) banding review, we believe the opportunity for UK-based demand 5

6 to increase has risen. Facilities need to be built by 2015 to qualify for 1.5x ROCs, meaning the longawaited pick up in Biomass could be about to take off. In addition, Stobart is itself looking at the prospect of constructing and operating its own Biomass facilities at sites such as Widnes that would enable onsite customers to use the combined heat and power to supply their operations. Infrastructure and civil engineering (2% of sales) The infrastructure division had a significant part to play in the asset development strategy in 2012, undertaking the overall project management of the works at London Southend on time and to budget. This ability to keep tight control of development is a key feature of the plan. Profit on this work is not externally visible until the sale of the assets and hence the benefit goes unseen until realisation occurs. Exhibit 5: Infrastructure and Civil Engineering sales and profit forecasts External Sales Internal Sales Sales m EBITDA ( m) Depreciation & Amortisation (0.9) (1.1) (1.0) (1.0) Interest (0.1) (0.2) (0.2) (0.2) PBT m Outlook: With further extension projects ongoing at London Southend Airport, as well as development of the Magna Park site due in 2013, internal works are set to remain the major part of the division for the next few years. The division is then set to expand its external opportunities building on its expertise in rail and civil engineering works and is seeking to increase this by 50% over the period to Estates (1% of sales) During the period, the estates division financed the acquisition of WADI Properties Ltd (The Moneypenny Portfolio) utilising some of the placing money raised in May 2011 in a related party transaction. In addition further property deals were concluded during the year such as the acquisition of a 275k ft warehouse at Magna Park, Lutterworth for ESL, subsequently sold under a sale and leaseback transaction, realising a profit of 5.4m on disposal and another 1.1m over the term of the lease. The division also benefited from the gain in value of 5.7m on One Plantation Place, a property held for sale that has now been disposed of. Exhibit 6: Estates sales and profit forecasts Sales m Core property EBITDA Separately disclosed Property gains EBITDA m Depreciation and amortisation (0.5) (0.2) (0.2) (0.3) Interest (0.4) (1.0) (4.0) (3.2) PBT m Outlook: The opportunity in Estates remains the development of the wider property portfolio, enhanced by the Moneypenny deal. Progress has already started on this with residential planning consent obtained for a site on Soho Square and asset managers appointed for many other properties to achieve the greatest return for shareholders. The target IRR for Estates is 20% over the plan period. 6

7 Sensitivities Within the four-year strategy, there remains a combination of operational and development risks: Economic volatility. We believe Stobart has demonstrated that its logistics business model is flexible, robust and resilient. The ability to maintain growth in revenues at a time of economic hardship is a testament to the partnership approach. While margins were initially impacted by the volatility caused by changed customer buying behaviour, the implementation of a new management information system has allowed an appreciation of how to reduce costs across a customer s logistics chain, improving margins and identifying opportunities for outsourcing. Fuel costs and environment. With fuel costs volatile and environmental concerns growing, Stobart is positioned to benefit from changes in behaviour. The group is making progress in ensuring its vehicles are the highest environmental standard, with 99% of the fleet Euro 4/5 compliant. We also feel that Stobart s multimodal model will truly come into play, with the ability to strategically move products around the UK and then run the final leg via road placing Stobart in a strong position. Development activity. With the greater emphasis on developing the group s assets, there are risks associated with timescale and costs of development, valuations of property portfolios and ability to achieve planning permission. Stobart has already shown, however, that the use of internal resource is mitigating some of this risk. Valuation We continue to feel the most appropriate manner in which to value Stobart is using a sum-of-the-parts based approach, as highlighted in our October 2011 Outlook note. Exhibit 7: Stobart Group sum of the parts valuation CY12 EBITA Tax Rate CY12 NOPAT P/E Value ( m) Basis Transport & Distribution % International T&D groups Infrastructure & Civil % Amec / Balfour / Serco / Babcock / Carillion Engineering Stobart Air % European Airlines for sentiment Stobart Biomass % High growth potential, early stage Stobart Estates 306 Core Property + Investment Property ( 99.6m) EV 727 Net debt (168) Forecast net debt - ex HP loans (Feb 2013) Equity value 558 Shares outstanding (m) 348 Implied fair value per share (p) 160 Despite our conservative handling of both the Estates division and Air, we obtain a fair value of 160p/share, which recognises the current uncertainty in economic conditions. We feel, however, that as delivery of asset realisation from the estates portfolio is achieved, coupled with achievement of targets in Air and Biomass over the coming years, the embedded value will begin to be recognised. For example, if we re-run our valuation based on CY13 forecasts and peer multiples, we achieve a fair value in excess of 190p/share. Note it is important to recognise that the value of the Air business is currently largely contained within the Estates division while the operational division ramps-up. 7

8 Exhibit 8: Financials m e 2014e Year end 28 February PROFIT & LOSS Revenue Cost of Sales (354.1) (397.6) (445.4) (523.6) (550.0) (600.3) Gross Profit EBITDA Operating Profit (after fleet finance costs) Goodwill amortisation (0.2) (0.2) (0.2) Exceptionals / share based payments (30) (2.7) (5.0) (4.4) (2.9) 0.0 Share based payments (0.5) (0.4) (0.5) (0.5) Operating Profit (2.2) Net Interest (4.4) (5.7) (4.6) (4.4) (7.2) (6.7) Profit Before Tax (norm) Profit Before Tax (FRS 3) (6.6) Tax (2.8) (5.1) (6.2) (1.3) (12.6) (15.4) Profit After Tax (norm) Profit After Tax (FRS 3) (9.4) Average Number of Shares Outstanding (m) EPS - normalised (p) EPS - FRS 3 (p) (4.4) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Associates/Assets for sale Current Assets Stocks Debtors Cash Current Liabilities (95.4) (122.5) (120.8) (117.1) (38.5) (12.5) Creditors (57.6) (74.2) (74.9) (99.3) (20.7) 5.4 Short term borrowings (37.8) (48.3) (45.9) (17.9) (17.9) (17.9) Long Term Liabilities (144.2) (115.7) (168.5) (216.4) (218.2) (240.9) Long term borrowings (37.1) (11.4) (69.1) (150.5) (160.2) (185.9) Other long term liabilities (107.1) (104.3) (99.4) (65.9) (58.0) (55.0) Net Assets CASH FLOW Operating Cash Flow Net Interest (3.7) (5.8) (4.8) (2.4) (7.2) (6.7) Tax (1.1) (2.4) (2.3) (2.2) (7.0) (7.0) Net Capex (16.0) 22.1 (44.9) (48.6) (43.4) (43.4) Acquisitions/disposals (93.3) (5.2) (15.2) (9.6) Financing (9.1) 81.1 (3.0) (3.0) Dividends (14.5) (13.0) (15.9) (17.6) (20.9) (20.9) Net Cash Flow (19.2) 20.8 (64.5) 58.3 (30.8) (25.7) Opening net debt/(cash) HP finance leases initiated Other 0.0 (0.0) 0.0 (84.6) (0.0) 0.0 Closing net debt/(cash) EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. 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