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Hayward Tyler Group PLC: THE INVESTMENT CASE

Hayward Tyler: Short-term pain, long-term gain

The strong order book and pipeline should result in a stronger out turn for 2018, according to finnCap
The Hayward Tyler Centre of Excellence in Luton
INVESTMENT OVERVIEW: HAYT The Big Picture
The Centre of Excellence in Luton

The investment thesis for pumps and motors specialist Hayward Tyler Group PLC (LON:HAYT) boils down to assessing short-term pain and long-term gain.

Shares in the centuries-old specialist engineer took a buffeting after the company cut revenue and profits guidance for the full year.

The group had previously warned that the current financial year (to end-March) would be weighted to the second half more than usual, and while this has been the case, some of the orders it expected to cross the line in the second half of the year are now expected to be delayed until the new financial year.

Some £30mln of contracts have been delayed, as a result of which the board now expects revenue for the current fiscal year will be in the range of £60-65mln, versus current market expectations of £80mln.

Trading EBITDA (underlying earnings) for the full-year is expected to be break-even, Hayward Tyler said.

House broker finnCap said guidance of break-even at the EBITDA level suggests an adjusted pre-tax loss for the year of £4mln, which is the broker’s new forecast.

It now expects full-year revenues of £63.5mln.

“While the group has a record order book, strong prospects and is expected to return to profit, we anticipate some change to our 2018 forecasts; thus – pending clarification with management and renewal of banking facilities – we place our 2018 forecasts temporarily under review,” finnCap said.

The broker has also put its price target under review, but had words of encouragement for shareholders.

“The shares have fallen heavily over recent months to historically low levels. Today’s announcement is disappointing, but largely anticipated and the shares factor in much of the bad news,” it said.

So, how about those long-term prospects?

The pipeline of new business opportunities running through to the end of March 2019 stands at more than half a billion pounds, while the short-term prospects clock in at £40mln.

The aggregate order intake secured in the four months to 31 January 2017 was £24.3mln, lifting order intake for the first 10 months of the financial year to £49.7mln, bumping up the order book significantly in the process to £52.2mln.

Ewan Lloyd-Baker, chief executive officer (CEO) of Hayward Tyler, reckons the group is well-positioned for further growth following the substantial investment made in the group's facilities, such as the £15mln pumped into building its Centre of Excellence.

The Centre of Excellence adds world-class capabilities to create the world's most advanced facility for specialist motor manufacture, which is also ‘Fit for Nuclear’, the group told investors.

It provides single process flow lines that increase the pace of production and thereby reduces lead times, which provides Hayward Tyler with the opportunity to double capacity from the Luton facility while reducing working capital levels by reducing order fulfilment periods.

There is also the prospect of turning around the Peter Brotherhood business it acquired in 2015.

Hayward Tyler purchased Peter Brotherhood with the aim of rejuvenating a well-respected historic engineering brand and exploiting cross-selling opportunities.

In November 2016, Peter Brotherhood won its first contract since becoming part of Hayward Tyler, for a Tri-generation Combined Heat and Power system, which will not only provide heat or cooling or a combination of both, but also a significant electrical output.

Shortly before Christmas, it bagged another contract win – for a 22.6 megawatt extraction back-pressure steam turbine generator.

This indicates momentum is building, but perhaps not as fast as the market would like.

Another issue clouding the investment case is the group’s banking facility.

On February 13, the group announced the successful completion of its latest loan note issue at £0.6mln. 

The loan notes carry a one-year term and pay interest at 6.75%.

Proceeds of this issue will be used to reduce the company's revolving credit facility with Royal Bank of Scotland (RBS).

Hayward Tyler is due to repay £2.4mln of short-term borrowings to RBC by 28 February – a deadline that has already been extended once.

The group is operating within its current borrowing facilities and continues to have constructive discussions with its bank about ensuring a suitable long term financing structure is in place to support the longer term prospects of the business.

Cantor Fitzgerald said it harbours concerns over the strength of the balance sheet at this juncture.

"All else being equal, we calculate Hayward Tyler could have between £20m and £25m net debt at 31 March and investors will understandably require greater clarity over the management of this before looking further forward," it said.

For those prepared to take a longer view, the last words go to house broker, finnCap.

“The strong order book and pipeline should result in a stronger out turn for 2018 and we look forward to greater clarity on its longer-term capital structure,” it said.

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The Hayward Tyler Centre of Excellence in Luton
February 20 2017
The strong order book and pipeline should result in a stronger out turn for 2018, according to finnCap

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