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Entu (UK) plc

entu (UK) plc Ongoing operational challenges in H216; FY16 and FY17 forecasts revised by Zeus Capital

Ahead of the year end (31 Oct) entu (UK) plc (LON:ENTU) has released a pre close trading statement. EBITDA for FY16 will be in the range of £3.6m to £4.0m, this is below the estimated £4.2m. As a result, forecasts in FY16 are cut to the mid-point of the range £3.8m, a 9.5% decline. This leads to a decline of c.11% in profit after tax on revenue falling from £108m to c.£103m. The impact in FY17 is greater at c.34% with adj operating profit cut to £4.6m (prev. £7.0m) on revenue now expected to be broadly flat at c.£103.0m (prev. £113.6m). The impact of the downgrade in H216 into FY17 is exacerbated by planned cost savings now expected to be reinvested into the business to strengthen management, controls and the balance sheet. The net debt estimate for the year end increases to c. £5.0m on larger exceptional costs than had previously been forecast. Despite this, management expect to honour the commitment to a 1.0p final dividend making 1.5p for the FY and, despite the cut to numbers, maintains its intention to pay 2.4p in FY17 equating to a c. 10% yield at the current 24.5p share price.
Energy division strong but core division experiences weaker trading in H2: The good performance in the Energy Generation and Savings Division, driven by the LED installations business and Astley Facades once again, has been off-set by the larger Home Improvements division. Contributing c.75% of revenue and gross profit Home Improvement’s remains core to group profitability. H1 revenue was down YoY but was expected to catch up as installation capacity was increased to meet increased order intake in Q2. However, ongoing operational challenges in H2 has meant we now expect revenues to be lower YoY. With the market broadly flat, this is disappointing but remedial action has been taken with management changes implemented and tighter controls, our understanding is that trading has improved in recent weeks.

 

Impact on forecasts: The ongoing operational challenges lead to a decline of 4.3% in revenue to £103.4m and, despite further cost savings, this feeds through to a 10.7% decline in Profit Before Tax. The impact in FY17 is more pronounced as the c. 10% decline in revenue feeds through to c.35% decline in profit due to operational gearing.

 

Net debt increases but dividend intact: The statement indicates that net debt at the end of FY16 will be higher than anticipated at c. £5.0m due to the cash impact of restructuring costs being higher than previously assumed. Despite this, entu (UK) plc management has indicated that it expects to honour its commitment of paying a 1.0p final dividend taking the full year pay-out to 1.5p in line with forecasts. Importantly the 2.4p FY17 dividend is unchanged with the shares yielding c.10% at this level.

 

Valuation: Post today’s cut to earnings, the shares are trading on a PER of 6.0x, reflective of the decline in earnings during the year. Should the operating cost base be managed and revenue increase, earnings would respond strongly, resulting in multiple expansion. However, visibility currently remains very low on when this could be achieved but new rebased forecasts appear achievable.