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Entu (UK) plc

Entu (UK) plc Trading in line but dividend cut in FY17

Entu (UK) plc (LON:ENTU) has announced that EBITDA from continuing operations will be within the range of its previous guidance of £2.5m to £2.9m at £2.6m to £2.7m. This is in line with ZC forecast of £2.7m in FY16. The FY16 outcome, combined with the fact that revenue for the first three months of FY17 are also in line, is reassuring considering the issues the business has faced during the year. FY17 forecasts assume a c. 60% increase in EBITDA as profitability bounces back. However, as a result of a balance sheet review and the introduction of more prudent accounting policies, the company will not pay a final dividend for FY16. This means total dividend for the year will be 0.5p, not the 1.5p forecast. We leave income forecasts unchanged in FY17 and FY18 but reduce dividend expectations. Although the company does state that it intends to reinstate the dividend as soon as possible the cut to the dividend is disappointing. The valuation on FY17 earnings of 5.4x reflects the difficulties the business has faced over the last twelve to eighteen months.

Getting to grips with legacy issues: We welcome the balance sheet and accounting policy reviews, despite the historical issues that it raises. The change in accounting policy in the Repairs and Renewals Service Agreements and Finance Commissions will impact prior year results by c. £2.0m but will not have a material impact on the FY16 outcome. We await FY16 results for greater detail on the adjustments needed before adjusting historic numbers. Management’s commitment to reorganise and add the necessary infrastructure will leave the business in a better position and with a cleaner balance sheet post all discontinued operations being fully written down. We previously treated £5.0m of advanced payments as debt, on the same basis, the net debt forecast for FY16 improves to £4.2m from £5.0m.

No impact to profit forecasts but dividend expectations cut: That today’s statement indicates that FY16 results will be in line with expectations is reassuring when considering the difficult year the business has experienced. Further to this, the comment that the first three months of the current year is in line provides confidence that FY16 will prove to be the trough in earnings. FY17 forecasts assume a significant bounce in profitability as adjusted PBT increases c. 75% to £3.9m. The only material change to forecasts on the back of today’s statement is that we reduce dividend expectations in FY16 to 0.5p from 1.5p. The 0.5p relates to the interim dividend previously announced. We assume the company pays a dividend of 1.0p in FY17 and 1.5p in FY18. This improves the net debt position to £0.9m from £1.2m in FY17.

Valuation: On FY17 earnings, Entu (UK) plc shares are trading on a PER of 5.4x. The rating is reflective of the difficulties the business has faced and the uncertainty with regards forecasts in FY17 and FY18. On FY18 earnings the multiple falls to 4.2x.

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