PWR Holdings Limited: Opportunities galore

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Alex Lu
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By Alex Lu
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Date posted:
21 August 2021, 9:00 AM
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  • While PWH’s FY21 revenue was below our forecast, stronger-than-expected margin expansion resulted in earnings growth slightly ahead of our expectations. 
  • The result overall however was slightly below Bloomberg consensus estimates. Key positives: Strong margin expansion with EBITDA margin up 100bp to 36.6% and NPAT margin rising 130bp to 21.2%; Balance sheet remains very strong with net cash (incl. leases) of A$11.4m (FY20: A$2.8m); ROE increased to 26% (FY20:24%); Cash conversion was strong at 115% (FY20: 94%). 
  • Key negatives: Motorsports (-6% vs MorgansF), OEM (-9% vs MorgansF) and Industrial & Other (-50% vs MorgansF) revenue was below our expectations; FY21 DPS was lower than expected; FX impact was negative. 
  • FY22F/FY23F/FY24F EBITDA changes by +1%/+5%/+10%. 
  • Our target price rises to (login to view) and we retain our Add rating. In our view, PWH is a high-quality business with a strong track record of growth. With a healthy pipeline of opportunities across all key segments, we expect this growth trend to continue over the medium term. 

Taking a closer look at revenue

The main thing that stood out for us was revenue (particularly Motorsports and OEM). While growth was strong at 21%, FY21 revenue was 6% below both ours and Bloomberg consensus expectations.

Digging into this further, we believe the weaker-than-expected revenue growth in Motorsports was due to Formula One using the same cars in the 2021 season as 2020 (hence less development work than previous years) and other racing categories still slow to ramp back up due to COVID. In addition, OEM revenue was  impacted by OEM vehicle production delays due to the global semiconductor chip shortage. We view these impacts as transitory which will revert in FY22. 

FY21 EBITDA rose 24% to A$29.0m (+3% vs MorgansF and -1% vs Bloomberg consensus) and underlying NPAT jumped 29% to A$16.8m (+4% vs MorgansF and -1% vs Bloomberg consensus).

Emerging Technologies was very strong

Emerging Technologies revenue growth of 113% was impressive with the segment now representing 11% of group revenue (vs 6% in FY20). The division includes cooling solutions to the Defence & Aerospace  industries, electronics, battery systems, communications systems as well as high-end motorsports.

Management indicated the Emerging Technologies pipeline continues to build with recent AS9100 certification expected to open more opportunities. PWH will have ~16 programs in production in FY22 with quotes and discussions on dozens more extending to at least FY24. Programs are diverse, ranging from weeks to 10+ years with contract size worth up to A$50m.

The opportunities are therefore enormous, and history suggests that PWH has been successful in entering new markets. Should this be with case with Emerging Technologies, we see potential for the segment to be a much larger portion of group revenue over the long-term.

Management showing confidence in the long-term outlook

Management did not provide outlook guidance as expected, although a key leading indicator such as employee headcount is anticipated to rise to 450+ by December 2022 (from ~363 currently).

FY22 capex is expected to be similar to FY21 (ie, A$10.4m, a record year for investment) to ensure sufficient capacity for growth. The planned investments in employees and equipment suggests to us that management remains confident in the long-term outlook.

Changes to earnings forecasts and investment view

We increase FY22-24F EBITDA by between +1 and +10%. However due to higher D&A, FY22-24F underlying NPAT changes by between -4% and +6%. 

PWH is currently trading on 40x FY22F PE and 1.5% yield. While the valuation is relatively high (Industrials (ex-Fin) multiple currently trading on 32x), we believe the premium is justified due to PWH’s strong earnings growth outlook (3-year forecast EPS CAGR of 16%) with potential upside from large contract wins, very healthy balance sheet and strong track record of execution.

We therefore maintain our Add rating with our equally blended (DCF, EV/EBITDA, PE) target price increasing to (login to view).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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