A transformed business is starting to deliver results.
When I wrote about this company a year ago, its shares were trading at 58p, putting it on a forward price-to-earnings (P/E) ratio of 10.8 for 2011. Today, the shares are 63p and on a forward P/E ratio of 9.8.
Despite the price rise, then, the shares are on a cheaper P/E rating now than they were 12 months ago. Is the company a 'buy' today?
Low & Bonar (LSE: LWB) is a £180m company, listed on the Main Market. The firm has gone through a transformational period. Its 'performance materials' business, which was no more than a small division of the company five years ago, has become its core operation.
Low & Bonar develops and supplies industrial yarns, fabrics and fibres to a wide range of markets, including civil engineering, transport, building and sports & leisure. Its products are used for such things as erosion control on riverbanks and coastlines, transport protection in air, road, rail and sea freight, as an alternative to steel mesh reinforcement of concrete, and in the manufacture of artificial turf and carpets.
Last year I highlighted a number of medium-term sales, margin and asset efficiency targets Low & Bonar had set itself:
- Organic sales growth: 1.5x – 2.5x GDP.
- Percentage of sales from outside Western Europe and North America > 25%.
- Operating margin > 10%.
- Return on capital employed > 17%.
How far did the company progress towards reaching these targets in 2011?
Sales of £389m were organic and up a healthy 13% on 2010. The percentage of sales from outside Western Europe and North America increased to 21.8% from 21.1%, with particularly strong growth in the Middle East (over 30%), Eastern Europe (18%) and Asia (14%).
Despite very high cost inflation in raw material polymers in the first half of the year, Low & Bonar was able to pass on the higher input costs to its customers, demonstrating a quality I particularly like to see in a company: pricing power. Operating margin grew to 7.9% from 7.5%.
Meanwhile, return on capital employed has progressed very close to target, having risen to 16.8% from 15.2%.
Another area that showed good progress in 2011 was a loss-making sub-division. The company was confident this business could be returned to profitability by the closure of a manufacturing facility in Ostend and the transfer of production to a site in Abu Dhabi.
The directors' confidence was justified. The business is now profitable (another contributor to margin improvement) and further benefits are expected to flow in 2012.
This time last year, Low & Bonar was on a forward P/E of 10.8 for 2011, falling to 9.4 for 2012 as a result of forecast earnings growth of 15%.
I felt the shares were quite attractive when pitched against the forecast earnings growth, but suggested cautious investors might be inclined to hold off for any short-term price weakness to add a margin of safety.
With investors obsessed with the possibility of a eurozone collapse in the second half of last year, and Western Europe being Low & Bonar's primary market, its shares fell as low as 38p at one point. Unfortunately, with the deluge of bargain buys on offer at that time, Low & Bonar was one I overlooked!
The shares have recovered strongly over the past couple of months. At 63p, the forward P/E is 9.8 for 2012, falling to 8.8 for 2013 as a result of forecast earnings growth of 12%. On one hand, then, Low & Bonar's P/E is a bit more appealing this year, but on the other, forecast earnings growth is slightly less.
As a result, my view of the company today is similar to my view a year ago. The shares are quite attractive given prospective earnings growth (and, incidentally, a respectable running dividend yield of 3.3%), but after a strong run since New Year I would be looking for some short-term price weakness to add a margin of safety.
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