Hayward Tyler (HT) Group PLC has existed for 200 years.
Hayward Tyler (HT) Group PLC has existed for 200 years designing, manufacturing and servicing performance-critical motors and pumps for the global energy industry. Operations span across a broad spectrum of end markets including power, oil and gas, nuclear, marine and renewables. Although headquartered in the UK, 80% of sales are exported, the US being its biggest single market amounting to nearly a quarter of group revenues. Key developments include last year’s strategic acquisition of Peter Brotherhood (PB), adding turbine generators to its service offering; and a substantial investment in the Luton “Centre of Excellence”, with potential to double capacity. A number of new strategic alliances also established suggest HT is well positioned for growth, and offers plenty of upside opportunity, in our view.
The FY16 results were described by management as a period of “Transformation for Growth”, attributable largely to the key developments outlined above. Power generation is the group’s key end market, accounting for 51% of group revenues and 45% of order intake, and investor attention is clearly focused on growth prospects in this space. HT owns the world’s largest base of 2,300 boiler circulating pumps and new equipment demand is promising, with 1,200 new coal fired stations expected globally over the next 20 years. 40 are being planned in Japan alone. Strong aftermarket opportunities exist at PB, with 2,000 steam turbines being supplied. PB is the UK’s only producer of steam turbines with outputs up to 40MW, a firm competitive advantage. Oil and Gas accounts for 11% of group revenues, where industry concerns are perhaps overplayed, given the order intake increase from 2% of the group in FY15 to 21% in FY16, a function of opportunities in renewing and upgrading of equipment and extending the life of existing plants, rather than new capex which remains under pressure. Nuclear accounts for 21% of group revenues, up modestly from 20% in FY15, but After Market (AM) demand is reassuring, as 75% of reactors worldwide are over 25 years old. HT is also well positioned in Original Equipment (OE) with 468 nuclear reactors planned or proposed worldwide.
FINANCIALS
VALUATION
Based on consensus forecasts, Hayward Tyler trades on a PE of c11x FY17e earnings, falling to c10x FY18e earnings. As a result, the shares offer good value, trading at a discount to sector peers, such as Weir Group and IMI that are trading on c12x and c14x earnings, respectively. If HT can achieve the order intake necessary to utilise the significant capacity created by the Luton investment, as well as reestablishing the PB brand and its sales pipeline, there is clear scope to drive shareholder value. The two key strategic alliances formed and the rebound in Oil & Gas should support the story further. A pickup in sales momentum coupled with integration and revival of the PB brand creates opportunity for upgrades. The two analysts offering a 12-month price target imply a medium price of 116.5, representing c38% upside to the current share price of 83.5.
MANAGEMENT TEAM
CEO, Ewan Lloyd-Baker, joined the company 10 years ago and was appointed to the board in 2010 following the reverse listing onto the AIM. He has over 20 years of experience in the manufacturing industry, with a background in corporate recovery and turnaround at public and listed companies across a wide range of sectors. He is a partner in a merger and acquisition boutique, through which he found the original opportunity to buy into HT. He owns 7.6% of the group. CFO, Nick Flanagan, joined the company 8 years ago and was also appointed the board in 2010. Prior to joining the company, he spent 14 years in the engineering and manufacturing sectors holding numerous senior financial roles. He jointly led the reverse listing, subsequent equity placings, and the acquisition of PB.
YEAR END MAR 16
FY16 Group Revenue saw growth of +27% y/y to £61.6m (+13% in FY15), driven by the PB acquisition contributing £12.5m. Excluding PB, HT revenues of £49.1m imply growth of 1% in FY16. Considering HT by segment, AM revenues of £31.1m were up 8% y/y, slowing on 12% growth in FY15. OE revenue of £18m declined 9% y/y, compared with growth of 13% in FY15. Management attribute the HT slowdown to a backdrop of challenging end markets and continuing uncertain economic conditions, likely further exacerbated by the EU referendum, albeit Europe accounts for only 10% of group revenues. Management remain upbeat about FY17 prospects, supported by developments in the US, capacity benefits of the Luton expansion, and building the order pipeline. Order intake growth 47%, compares with a decline of 9% in FY15, although clearly supported by the inclusion of PB. FY16 Group Gross Margin of 33% was down on 35% in FY15, due to the PB acquisition. PB gross margin of 20% is significantly lower than the HT average of 37%. HT margin strength reflects an increase in OE margin (22% vs. 18% in Y15), continuing the trend of the past few years, driven by continued operational improvement and efficiency savings. Despite the margin differential between HT and PB (which management sees as representative of the future), the group retain its gross margin KPI of at or above a margin of 35%. FY16 Group EBIT Margin of 9.4% was down on 11.0% in FY15, due to various factors including the lower gross margin in PB; investment in headcount; and Centre of Excellence costs. Management state that they continue to work on improving margin, and retain their KPI target of an operating margin of 1015%. FY16 Balance Sheet reflects the £10m acquisition of PB last year and a substantial capex investment of £11.6m, largely due to a £9.8m investment in the Luton factory. Offsetting the cash outflow was an £8m share placing, and strong cash conversion of 105% (ex. PB working capital) compared with 69% in FY15. Net Debt to trading EBITDA of 1.2x is consistent with FY15 and comfortably ahead of the KPI of less than 2x. Earnings per share growth is targeted at >10%. FY16 saw growth of 16% (u/l growth ex. exceptional tax benefits) consistent with u/l growth in FY15.
OUTLOOK FY 2017
Management highlight that performance this year will be significantly skewed to the second half. Despite current economic and political uncertainty, they remain confident in future prospects. Given the capacity created by the Luton facility expansion, pipeline and win-order process is crucial in leveraging this potential. Encouragingly, the order intake at year end of 1.3x historical revenue is ahead of 1.0 in FY15 and management’s target of >1.1x. The significant installed base in Power across both HT and PB, coupled with a revival in oil and gas ordering should bode well in H2. Review of operating segments: After Market services account for 56% of revenues Management report operating segments consistent with the group’s services lines, representing the main products and services offered. Original Equipment (OE) includes design and manufacture of motors, pumps and steam generators. After Market (AM) activities include a range of aftermarket services and spares, supporting maintenance of HT’s own product range and other OE suppliers. After Market (AM) accounted for 56% (£34.4m) of group segmental revenues in FY16, down from 60% (£28.9m) in FY15, but up 19% in absolute terms y/y, a function of 8% growth in HT revenues y/y and a £3.3m contribution from PB. In HT, a large existing base of 2,300 BCPs provides substantial AM demand, which is more profitable than OE sales. An AM operating margin of 22% in FY16 was down on 26% in FY15, driven by lower gross margin (37%) in PB, compared with HT (45%). PB also services power markets with a base of 2,000 steam turbines, with similar opportunities for AM sales. Original Equipment (OE) accounted for 44% (£27.3m) of group segmental revenues in FY16, up from 40% (£19.7m) in FY15, representing growth of 39% y/y, a function of the PB acquisition contributing £9.2m in FY16. Ex. PB revenues, HT was down 9% y/y, against backdrop of challenging end markets. An OE operating margin uplift to 3% (vs. -1% in FY15) reflects management’s attention on operational cost savings over the past few years. They anticipate that the gross margin in PB will be lower than in HT, a function of the OE business consisting of a significant proportion of more expensive bought-in parts such as generators.
ACQUISITION
On 30 October 2015, HT completed the acquisition of Peter Brotherhood (PB) for a cash consideration of £10.1m, from Dresser-Rand, itself a subsidiary of the engineering conglomerate Siemens. With PB normalised operating profits of c£1.94m ($3.2m) in 2014, the acquisition implies an EV/ EBIT multiple of c8.2x. PB is a UK based engineering business, tracing its roots back to 1867. It specialises in steam turbines, reciprocating gas compressors and combined heat and power units for the power generation, oil and gas, marine and process markets. The PB brand is to be revitalised with a focus on rebuilding the sales pipeline by utilising a substantial installed base of 2000 units, broadly split evenly between steam turbines for the Marine sector and installed power in Waste to Energy power plants. HT’s network and industry contacts also provides a path for growth in the pipeline. In the 5 months to March-16, PB contributed revenues of £12.5m (c20% of group FY16 revenues) and operating profit of £1.0m (c17% of group) with a first full year contribution from FY17. From a segmental perspective, PB contributed AM revenues of £3.3m with a gross margin of 37% (£1.2m), behind that of HT (47%). OE revenues amounted to £9.2m with a gross margin of 14% (£1.3m), behind that of HT (22%), expected by management given the larger proportion of bought in parts within the PB business.
LUTON CENTRE OF EXCELLENCE
Following a £9.8m capital investment in the Luton Centre of Excellence (£2.5m in FY16), the building is now complete and became fully operational in the second quarter of 2017, with a first full year contribution from FY18. The investment contributes to a 40% expansion in size of the facility, which in turn is expected to double manufacturing capacity. Reduced working capital requirements are also anticipated, given an increase in throughput and complementary reduction in lead times. The facility will also be supportive of the new alliance with FMC Technologies, where a dedicated subsea motor testing facility creates and additional revenue stream for HT. £7m of the capital investment relates directly to building extension and refurbishment with the remainder attributable to plant and machinery.
STRATEGIC ALLIANCES
In May 2015, HT entered into a production alliance with FMC Technologies, a global player in subsea systems. The deal means that HT will manufacture motors for use in FMC’s subsea pump systems, a capability and new revenue stream for HT, supported by expansion in the Luton facility. Opportunities for growth in Japan are underpinned by the partnership signed with Ebara, a leading manufacturer of pumps for the energy and oil and gas sectors. The agreement means HT will supply BCPs in Japan and globally, leveraging Ebara’s network of large engineering and procurement players. Over the next decade, Japan plans to build 40 new coal fired power stations, suggesting that HT is well positioned to benefit from both OE and AM service opportunities.
US ACCOUNTS
Over 80% of group’s sales are outside the UK, with the US being the largest single market, accounting for 22% of group revenues in FY16, down on 24% in the prior year. USA revenues of £13.5m were up 17% y/y, accelerating on 7% growth seen in FY15. Order intake increased from 30% of group in FY15 to 35% in FY16, reflecting strength in HT Colchester (driven by a US domestic order from Bechtel) and subsea orders from FMC. China and the Asia-Pacific (ex. China) account for 13% and 25% of group revenues respectively, highlighting the importance of the Far Eastern markets. Asia Pacific (ex. China) order intake accounted for 29% of group, up from 21% in the prior year, attributable to an increase in orders from South Korea. Energy in growth in China has slowed in the last year but remains as the world’s largest energy market. Energy consumption is forecast to grow 46% by 2035.