WYG — Update 19 December 2016

WYG — Update 19 December 2016

WYG

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WYG

Order books driving momentum

H117 results

Industrial support services

19 December 2016

Price

122.5p

Market cap

£85m

€1.12/£

Net debt (£m) at end September

4.9

Shares in issue

68.7m

Free float

86%

Code

WYG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

18.4

4.3

(5.4)

Rel (local)

14.3

0.6

(16.7)

52-week high/low

142.5p

97.0p

Business description

WYG is a multidiscipline, international project management and management service consultancy with over half of revenues generated in the UK and the remainder in a spread of international markets, reported as Europe, Africa and Asia (EAA) and Middle East, North Africa (MENA).

Next events

Capital markets event

Q1 CY17 – tbc

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

WYG is a research client of Edison Investment Research Limited

H117 results showed good progress with unchanged full year guidance. Rising order books and confident management messaging support expectations of a good H2 profit uplift and healthy momentum going into FY18. These prospects are not fully reflected in WYG’s rating in our view.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/15

130.5

5.7

8.6

1.0

14.3

0.8

03/16

133.5

7.0

10.6

1.5

12.5

1.2

03/17e

155.0

9.7

13.2

1.8

9.3

1.5

03/18e

166.0

11.0

13.6

2.0

9.0

1.6

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Good progress in H117

Headline growth metrics were all very respectable in H117, with revenue up 17%, PBT up 18%, adjusted, fully diluted EPS up 8% and DPS up 20%. Different regional influences affected divisional performances, with MENA showing the best year-on-year improvement, while in the UK short-term progress was constrained by P&L investment and EAA remained subdued. Cash absorption into working capital was a notable feature of the move into a £4.9m net debt position at the half year stage, though we expect both aspects to effectively reverse by the year end. For us, a key H1 feature was the continued growth in the contracted group order book to £163.7m, compared to c £123m a year earlier and c £146m at the end of FY16.

Positive tone, guidance unchanged

Order book development provides a good indication of momentum into FY18 and management’s tone on the pipeline of further opportunities – especially as EU funded projects feed in – was positive in our view. In the near term, the UK will remain the largest profit contributor and is likely to show the largest year-on-year uplift for FY17 overall, though we expect to see progress in other regions also. We have amended the regional mix behind our profit estimates – with EAA slightly lower and MENA higher – but at the headline group level, they are effectively unchanged. We note management’s comments regarding a new strategic growth plan and intended new group structure. We believe that this will translate to increased collaboration and focus across the regions and await further detail early in 2017.

Valuation: Business prospects not fully reflected

After performing in line with the FTSE All-Share Index for most of the first half of the year, WYG’s share price moved sharply lower after the Brexit vote, erroneously in our view. The subsequent relative underperformance has begun to narrow following the H117 results, which were well received. The share price is now towards the top of its 100-120p trading range of the last six months (regaining the 120-140p range in the preceding six months). With an expected three-year fully diluted EPS CAGR (FY16 to FY19) of 14%, WYG’s PEG is around 0.9x, with a current year P/E of 9x and EV/EBITDA of 6x. Our DPS CAGR now matches that for EPS and WYG’s dividend yield continues to build. Order book momentum is positive and we believe that business prospects are not fully reflected in the current share price.

H117 results overview

Revenue and profit growth were both achieved in H1 with PBT 18% ahead, adjusted, fully diluted EPS up 8% and DPS increased by 20% y-o-y. We expect the move into a small net debt position to have reversed by the year and the order book development is a positive indicator for trading momentum into H217 and FY18. Management has flagged a new strategic plan and we are likely to be hearing further detail on this before the end of the current financial year.

Exhibit 1: WYG regional and interim splits

Year end March, £m

H116

H216

FY16

H117

% chg y-o-y

Group turnover – external gross revenue

62.6

70.9

133.5

73.5

17.4%

UK

46.2

50.1

96.3

53.6

16.0%

EAA

10.9

13.0

23.9

9.7

-11.1%

MENA

5.5

7.7

13.2

10.2

85.1%

Group EBIT (including JV)

2.2

5.0

7.2

2.8

26.6%

UK

4.5

5.8

10.3

4.6

1.1%

EAA

0.0

0.7

0.7

0.0

n/m

MENA

-0.2

0.4

0.3

0.4

n/m

Central

-2.1

-1.9

-4.0

-2.2

Source: WYG accounts

UK operations – good revenue and order book growth

The UK office network has been the bedrock of WYG’s improving financial performance over the last four years and has more than compensated for a reduced contribution from overseas operations during the transition from one EU funding cycle to the next. H117 revenues were 16% up year-on-year. Business review comments highlighted the breadth of sectors, services and clients addressed in the period, some under longer-term framework agreements. This includes the MoD; associated workflows got off to a slow start in Q1, but have resumed more normal levels subsequently. As an indication of the long-term nature of these relationships, we note that the latest Defence Estate review published in November1 contained rebasing activity out to 2032. Elsewhere, some other sectors also were relatively quiet at the beginning of the year but momentum clearly built as the first half progressed.

Order intake momentum has been sustained with further growth. Bearing in mind that the contracted UK order book – which stood at £80m at the end of September (up c 4% since the end of FY16) – is typically to be delivered in the following 12 months, management confidence is tangible here. WYG has a direct delivery model in the UK and has been upgrading office locations (five out of 17 so far) and, more significantly, making c 70 new hires (c 1,000 total UK technical staff). While the former is not understood to have affected overall location costs, the increase in employee numbers – ahead of contracted workflows translating to revenue – did provide some drag. Hence, the reported H117 margin of 8.5% was 130bp lower than H116, despite the revenue uplift. While higher staff costs will also be present in H2, orders should flow into revenues resulting in a good profit uplift, we believe. In the year to date, quarterly revenues are growing sequentially, with Q3 so far stronger than Q2, which was better than Q1. Management stated that the FY17 outturn is not dependent on significant further order wins in Q4 – though this is of course an objective – but also that the order award/deliver cycle tends to be relatively short in the UK. Consequently, this may still have a positive impact on momentum at the year end and into FY18.

Europe, Africa and Asia – subdued financial performance but growing order book

This region has experienced uneven development, being generally weaker over the preceding two years, albeit with an improved H216 performance. As EU-funded development projects have historically provided the primary workflow, a slower than anticipated transition to the latest EU Multi-annual Financial Framework (MFF 2014-2020) has affected revenue. Headline financial performance in H117 continued to reflect this, with revenue down c 11% and a maintained broadly break-even position.

H117 revenue for individual sub-regions was not split out, but we understand that Central and Eastern Europe (CEE) is the largest of the four and South East Europe (SEE) is the next biggest, followed by Africa (excluding northern countries) and then Asia. Our observations, based on their project funding profiles, are as follows:

SEE – the most robust sub-region, underpinned by IPF4, the current Infrastructure Projects Facility, which is co-funded under the Western Balkans Investment Framework (WBIF). The EU’s Instrument for Pre-accession Assistance (IPA) is relevant for both candidate countries (Serbia, Macedonia, Montenegro) and potential candidates (Albania, Kosovo, Bosnia and Herzegovina).Croatia is an EU member and projects here may have experienced some funding inertia.

CEE – covers three countries that became EU members since 2000, namely Poland (2004), Bulgaria and Romania (both in 2007). Consequently, they are beneficiaries of EU cohesion and less well developed regional funding. Projects being implemented under the previous MFF continue until completion and we believe that newer work has not come on stream quickly, though this is changing (see below).

Africa – the results announcement referenced “challenging market conditions” and implied that some actions to lower the cost base had been taken. This does not suggest a withdrawal from the region and we expect there to be closer ties with other parts of the WYG group to address it. This may include the UK (which undertakes work with the MoD in fragile and conflicted states) and other European offices with deeper experience of development and trade aid funding. The Migration Partners venture may form another part of this strategy.

Slower, lower-level EU project funding is not new news, but the rate at which it regained previous momentum has proved difficult to gauge. Our key observation for this region for H117 is the significant order book uplift reported; it had increased to c £44m at the end of FY15 and remained broadly stable subsequently, but has now stepped up again to £60 at the end of September. (Specific project wins in Poland and under IPF5 were both highlighted by management.) We should point out that the bulk of this (c 75%) is to be delivered beyond the current year but some uptick is discernible for H2 and we expect an improved financial performance for this division to become apparent from H217.

Middle East and North Africa – higher order book led improved financial performance

MENA provides a good example of a rising order book (which stepped up from c £8m at the end of FY15 to c £19m six months later and stood at £23m at the end of H117) translating to improving financial performance. Year-on-year revenue rose by £4.7m to £10.2m and moved from a small prior year loss to a 4% EBIT pre-central cost margin in H117. Turkey is the main hub for this region; despite some significant political unrest in the country, EU funding commitments (covering a range of pre-accession programmes and migration objectives) do not appear to have been affected and nor does project implementation to any discernible degree.

Work is underway to broaden the workflow for this region including both EU and non-EU funded projects in the Middle East and Gulf regions, including further work with UK agencies. The order position as it stands provides good trading visibility for FY17 and management expects to deliver a strong financial performance for the year in this region.

Neutral cash flow expected in FY17, building thereafter

H117 cash performance: At the end of September, WYG had moved into a £4.9m net debt position having been modestly net cash positive at the beginning of the year. The free cash outflow of £4m was split broadly equally between trading cash flow and the sum of interest, tax and capex. Deferred consideration (£0.7m, relating primarily to FMW and the FY16 final dividend cash payment (£0.7m) accounted for the other cash movements.

Looking at trading cash flow, while EBITDA rose to £3.8m (up £0.7m y-o-y), there was also a c £5m net absorption into working capital and c £0.5m arising from restructuring activities at UK, EAA and group levels. The working capital movement included a £6m receivables increase; we understand that this was chiefly driven by seasonal effects and rising revenues including some project extensions. Property/PII legacy cash outflows were c £1m in H117. Otherwise, interest, tax (on overseas earnings) and capex (including group IT investment) all individually edged higher.

Historic context: In FY12, WYG successfully completed a refinancing and ended that year in a £23m net funds position. By the end of FY16, this had reduced to £0.2m net funds. In cash terms, the most significant outflows related to legacy items (c £13m in aggregate, across property and professional indemnity provisions) and M&A (c £11.5m, six acquisitions plus some disposal costs). Together, these items effectively account for the net cash movement from FY12 to FY16. During this period, UK revenue increased – partly aided by acquisitions – but was offset by lower overseas sales. At the same time, EBIT moved from a significant FY12 loss to a £7.2m profit by FY16. Implicitly, this was absorbed by operations; in decreasing size order outflows relating to advance payments in the earlier years, capex and working capital investment plus a return to the dividend list have been the most notable items.

We believe that WYG is now moving into a revenue growth phase with UK operations expanding further while the overseas ones regain traction as EU development programmes gather momentum. On our estimates the H117 move into a net debt position is temporary with an expected H2 inflow to restore a modest net funds position. This is driven by increased profitability and a substantial reversal of the H1 working capital outflow together giving a strong free cash flow performance. While further deferred consideration and cash dividend payments are anticipated in H2, the overall expectation is for a good net inflow for the period with a broadly neutral cash movement for FY17 as a whole. Beyond this, we see free cash flow rising to c £6m in FY18 and above £8m in FY19, which easily funds expected dividend growth and a small remaining amount of deferred consideration. Hence, absent any further acquisitions, WYG’s net cash position is set to build.

Strategy evolving

The H117 results contained reference to a new strategic plan whereby WYG is intending to concentrate its growth aspirations where its market positions, client relationships and market opportunities are perceived to be strongest. No further detail was given at this stage – an update is flagged for spring 2017 – but it seems reasonable to expect some change in operating structure, reporting lines and responsibilities and, possibly, financial reporting. A stated objective to focus on growth areas, served efficiently seems sensible enough and we will make a fuller evaluation when more tangible details are available.

Estimates largely unchanged, dividend expectations raised

Our headline group estimates are effectively unchanged. Reflecting H1 performance and trading momentum, we have made some regional mix adjustments to both revenue (UK up, EAA lower) and EBIT (EAA lower, MENA increased), which broadly offset each other. These changes apply to all forecast years. The only other amendments of note concern a zero tax charge (FY17 only, other years unchanged) and raised dividend expectations across all years of between 8-10%.

Exhibit 2: Financial summary

£m

2013

2014

2015

2016

2017e

2018e

2019e

Year end March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

Revenue

 

 

125.7

126.9

130.5

133.5

155.0

166.0

178.5

EBITDA

 

 

3.3

6.4

7.2

9.0

12.4

13.7

14.5

Operating Profit (before GW and except.)

1.5

4.8

5.4

7.2

10.1

11.3

12.0

Net Interest

 

 

(0.8)

(0.6)

(0.1)

(0.2)

(0.5)

(0.4)

(0.3)

JV / Associates

 

 

0.0

0.0

0.4

0.0

0.1

0.0

0.0

Intangible Amortisation

 

 

(1.0)

(1.2)

(1.3)

(1.5)

(2.0)

(2.0)

(2.0)

Other

 

 

(2.5)

(3.7)

(2.9)

(1.5)

(1.0)

(1.0)

(1.0)

Exceptionals

 

 

(0.6)

2.4

0.0

(1.8)

(1.0)

0.0

0.0

Profit Before Tax (norm)

 

 

0.7

4.3

5.7

7.0

9.7

11.0

11.7

Profit Before Tax (FRS 3)

 

 

(3.3)

1.8

1.4

2.2

5.7

8.0

8.7

Tax

 

 

(0.1)

0.3

0.5

0.6

0.0

(0.9)

(1.0)

Minorities

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit After Tax (norm)

 

 

0.7

4.5

6.2

7.6

9.7

10.1

10.7

Profit After Tax (FRS 3)

 

 

(3.4)

2.1

1.9

2.8

5.7

7.1

7.7

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

64.5

64.6

65.8

70.6

68.4

68.4

68.4

EPS – normalised fully diluted (p)

 

 

0.8

6.4

8.6

10.6

13.2

13.6

14.4

EPS – FRS 3 (p)

 

 

(5.2)

3.2

2.9

4.0

8.4

10.4

11.2

Dividend per share (p)

 

 

0.0

0.5

1.0

1.5

1.8

2.0

2.2

 

 

 

 

 

 

 

 

 

 

EBITDA Margin (%)

 

 

2.6

5.1

5.5

6.8

8.0

8.3

8.1

Operating Margin (before GW and except.) (%)

1.2

3.8

4.1

5.4

6.5

6.8

6.7

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

18.6

19.8

22.0

32.3

34.4

33.4

31.2

Intangible Assets

 

 

16.3

17.6

18.7

27.5

28.7

27.1

25.0

Tangible Assets

 

 

2.4

2.2

2.3

3.2

3.9

4.5

4.4

Investments

 

 

0.0

0.0

0.9

1.6

1.8

1.8

1.8

Current Assets

 

 

66.8

60.0

54.6

62.5

60.7

67.1

77.4

Stocks

 

 

20.2

21.6

21.1

30.4

31.7

31.4

32.9

Debtors

 

 

23.0

18.5

18.5

19.7

20.4

22.8

24.5

Cash

 

 

19.597

15.9

12.3

8.2

5.2

9.5

16.5

Current Liabilities

 

 

(45.7)

(42.9)

(40.8)

(50.7)

(48.9)

(50.7)

(52.6)

Creditors

 

 

(44.8)

(42.3)

(40.8)

(47.6)

(48.9)

(50.7)

(52.6)

Short term borrowings

 

 

(0.953)

(0.7)

0.0

(3.1)

0.0

0.0

0.0

Long Term Liabilities

 

 

(23.3)

(16.9)

(13.2)

(15.8)

(11.9)

(9.7)

(9.5)

Long term borrowings

 

 

0.0

0.0

0.0

(5.0)

(5.0)

(5.0)

(5.0)

Other long term liabilities

 

 

(23.3)

(16.9)

(13.2)

(10.8)

(6.9)

(4.7)

(4.5)

Net Assets

 

 

16.4

20.1

22.5

28.3

34.3

40.1

46.4

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

(2.6)

(0.1)

2.4

(1.0)

8.1

10.1

12.0

Net Interest

 

 

(0.8)

(0.5)

(0.1)

(0.2)

(0.5)

(0.4)

(0.3)

Tax

 

 

(0.2)

(0.0)

(0.3)

(0.3)

(0.9)

(0.9)

(0.9)

Capex

 

 

(1.3)

(1.4)

(1.7)

(2.5)

(2.9)

(2.9)

(2.4)

Acquisitions/disposals

 

 

(0.8)

(1.4)

(1.6)

(7.9)

(3.0)

(0.5)

0.0

Financing

 

 

(0.0)

0.0

(0.2)

0.0

0.0

0.0

0.0

Dividends

 

 

0.0

0.0

(0.5)

(0.8)

(1.1)

(1.3)

(1.4)

Net Cash Flow

 

 

(5.6)

(3.3)

(2.0)

(12.6)

(0.3)

4.2

7.0

Opening net debt/(cash)

 

 

(23.0)

(18.6)

(15.2)

(12.3)

(0.2)

(0.2)

(4.5)

HP finance leases initiated

 

 

(0.0)

0.0

0.0

0.0

0.0

0.0

0.0

Other

 

 

1.3

(0.2)

(0.9)

0.5

0.3

0.0

(0.0)

Closing net debt/(cash)

 

 

(18.6)

(15.2)

(12.3)

(0.2)

(0.2)

(4.5)

(11.5)

Source: WYG accounts, Edison Investment Research

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New Zealand

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: TMT

IQE — Update 16 December 2016

IQE

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