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Entu (UK) plc

Entu (UK) plc Strategic Disposal of Astley Zeus Capital Comment

Entu (UK) Plc (LON:ENTU) has announced it has agreed the disposal of Astley Facades and its wholly owned subsidiaries to Duality Group for a nominal sum. The disposal is in line with Entu’s strategic focus on improving the performance of, and driving growth in its core Home Improvements business. In addition, it de-risks the business from a potentially significant increase in working capital commitment. Astley’s contribution to FY16 adj EBITDA is £1.1m, this will now be classified as discontinued. Adj EBITDA from continuing operations is expected to be between £2.5m and £2.9m, in line with guidance provided in the pre close statement (11th October), excluding Astley’s contribution. The impact in FY17 and FY18 EBITDA is less muted at just c. £400k in each year respectively. Dividend assumptions remain unchanged offering a prospective FY17 yield of 11.9% and on new FY17 earnings the shares trade on a PER of just 4.3x.

 

Astley is non-core and the disposal significantly de-risks the rest of the business. Astley specialises in exterior wall insulation, render and specialist cladding for new-build construction and the refurbishment of existing stock. Since being acquired in March 2015, Astley has grown its order book significantly as a result of winning larger longer term construction contracts. This was a move away from the historic operations of the business which had been focused on smaller residential works. The larger construction jobs carry inherently more risk, particularly in terms of working capital commitment, and as a result management has taken the decision that the business is no longer in-line with Entu’s core specialism and business model focused on the Home Improvement market. The headline sale price is £0.2m, off-set by £0.2m of working capital included in the sale.

 

Change to forecasts. Astley will be included as a discontinued operation in the Group’s results for the full year FY16 ending 31 October. As a result of the disposal, we now expect EBITDA on the Group’s continuing activities before exceptional items for FY16 to be £2.7m, in line with new management guidance. In FY17 and FY18 we cut EBITDA by 10.9% and 7.3% to £4.1m and £5.1m respectively. This assumes a reduction of just c.£0.4m in EBITDA in both years. Forecasts had assumed the business would refocus on smaller contracts as per its historical model. Despite the change to forecasts net debt assumptions remain broadly unchanged over the forecast period as does the forecast dividend of 2.4p in FY17.

 

Valuation: Post today’s changes to Entu (UK) plc FY17 earnings, the shares are trading on a PER of 4.3x. The rating is reflective of the difficulties the business has faced during the year and the resulting impact to earnings. Whilst today’s announcement effects earnings in the forecast period it does also have the beneficial impact of de-risking the business operationally. An indication of an improvement in the operational performance, and therefore profitability, would lead to multiple expansion. However, visibility remains low on when this could be achieved. This is reflected the shares prospective yield of 11.9%.

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