Positives emerged, particularly in H2, as the recovery commenced within the kettle controls market. Billi was the architect of the revenue improvement, with LAICA also delivering a double-digit increase in the top line. Margins improved, notwithstanding a change in the mix. Encouragingly, investor concerns on debt were allayed with the careful management of cash, and latterly as bankers raised the net debt/EBITDA covenant to 2.75x. With further emphasis on costs and cash conservation and a likelihood that its markets will begin to deliver more meaningful recovery in H2, none of this good news looks factored into the current valuation.
Focus shifting
The results for FY23 were broadly in line with revised expectations, except for the dividend. There will be no dividend payout during CY24 following the sensible pausing of the final dividend to help accelerate a reduction in indebtedness. The resumption of dividend payments in CY25 is expected to amount to a sustainable 30% of PAT and rise in line with adj. EPS thereafter.
The proximity of the net debt/EBITDA ratio to the Group’s key banking covenant was a cause for concern in H223 as it reduced to 2.25x from September. The ratio ended the year at 2.19x. Through a combination of a recovery in its markets, the contribution of Billi, regional expansion and new product launches, net debt should fall to below £80m by the FY24 (net debt/EBITDA of c.1.9x) and to below £70m by end FY25 (1.7x). The medium-term target is to remain within 1x to 2x.
Interestingly, regulated kettle control markets are c.20% below levels witnessed in FY21. Carrying the highest product margin, any acceleration in the recovery could mean a significant improvement in the margin mix. Billi is looking to introduce several new products outside its home market (Australia) and enter new markets via partnership agreements (Europe, SE Asia, and the Middle East). New contracts in the Consumer Goods division combined with new product launches are also positive (e.g. Aurora coffee machine in North America).
Our conservative view of estimates has meant reducing adj. EPS in FY24 by 5.2%. Green shoots have appeared, but recovery is underway on a selected basis only. Self-help will continue, with further efficiency improvements at Aqua Optima and working capital and costs under closer scrutiny. Nevertheless, as its markets see recovery accelerate, profitability levels may surprise on the upside.
Increase to fair value / share
We have utilised DCF and peer group comparison models to calculate fair value. The focus is shifting from survival to recovery and as such, we increase our fair value / share to 173p (149p).
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