Entu (UK) plc Restructuring for future growth – Zeus Capital

Entu (UK) plc

Entu (UK) plc (LON:ENTU) final results in line with expectations following a challenging year that has included significant divisional restructuring, and a detailed balance sheet and accounting policy review. EBITDA for FY16 of £2.7m is in line with management’s revised guidance of £2.6m to £2.7m and ZC forecast of £2.7m. As previously announced no final dividend has been declared, resulting in a total dividend for the year of 0.5p. Management have affirmed intentions to reinstate a dividend as soon as possible; our forecasts of 1.0p in FY17 and 1.5p in FY18 are unchanged and reflect the improved profitability of the business going forward as cost savings are realised. Encouragingly, revenues for the first quarter of FY17 are ahead of plan with £4.0m of annual savings targeted for the year. Entu is on track to meet FY17 expectations whilst implementing the necessary changes to establish a foundation for future growth. Trading on just 5.6x FY17 earnings the valuation is undemanding if restructuring plans continue to be well executed.

Results in line: Group sales for the year of £87.7m were c.2% lower YoY, largely the result of lower interest rates on consumer finance products impacting finance commissions. Reported EBITDA of £2.7m was notably down, however on an underlying basis, adjusted for prior year costs disclosed as discontinued but which were retained in the business, EBITDA was unchanged at £2.4m. Underlying operating profit, adjusted on the same basis, improved to £2.2m (FY15: £2.0m). Exceptional items of £4.6m include £1.9m of restructuring costs, £2.1m of balance sheet write downs and £0.6m in exceptional legal and professional fees.

A clear strategy with defined priorities: Management have outlined three strategic goals in becoming the UKs leading installer of energy efficient products; 1) focusing on its core strengths to improve returns and cash generation; 2) leveraging its core home improvement business through consolidation of strong national brands; 3) building its energy efficiency offering with an extended product portfolio and expansion into commercial markets. Alongside these goals are short term operational priorities to reduce costs and drive supply chain efficiencies. Management are targeting £4.0m of annualised savings in FY17, building on the £2.1m realised in FY16. These objectives are supported by a strengthened executive team.

We make no material change to our forecasts: A good start to the year for Entu (UK) plc with Q1 revenues ahead of plan underpins our forecasts for FY17. Identified cost savings of £4.0m should contribute to a bounce in profitability if executed to plan, with PBT forecast to rise c.60% to £3.6m. We reduced our dividend forecasts at February’s trading update with 1.0p expected to be announced at year end and 1.5p in FY18 translating to a yield of 3.8% and 5.7% respectively.

Valuation: On FY17 earnings, the shares are trading on a PER of 5.6x falling to 4.4x in FY18. Whilst this rating reflects the challenges of the last year, the actions being taken to reorganise and restructure should leave the business in a cleaner and more stable position from which to grow.

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