Going’s good as textile group chases profits
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LOW & Bonar has come a long way from its roots back in 1903, when John Low and George Bonar set up a jute firm in Dundee.
Today, the company is run by Brett Simpson, who was born in New Zealand, raised in Australia and has spent most of his working life in the US, Asia and continental Europe.
The group still has a presence in Dundee, making yarns for carpet groups, including Axminster & Wilton. But it now has 15 factories worldwide, and operates in 20 countries, with almost 2,500 employees.
The shares are 71p and should rise this year and beyond. Simpson was brought in at the end of 2014 to turn the business round. He has made significant progress, but the best lies ahead and the shares should respond as he meets targets.
Low & Bonar can seem like a complicated business because it makes a wide variety of products, used in industries ranging from mushroom farming to motorway building and from carpeting to water filtration.
But all these applications share certain features. They all involve taking polymers and using technology to convert them to hardwearing, lightweight yarns, fibres and other fabrics. The company has contributed to projects including the O2 Skywalk in London, Aintree racecourse in Liverpool, the Aberdeen Western Peripheral Road, Copenhagen airport and waterway embankments in Holland.
When Simpson joined, the firm was organised on a regional basis, with each regional manager responsible for everything sold in that area. Simpson has restructured the business into four global divisions: building & industrial (products for large buildings, roofs, farming and horticulture); civil engineering (products for infrastructure projects including roads, rail and land reclamation); interior and transportation (mainly carpet backing); and coated technical textiles (tarpaulin and similar materials).
Organising the firm this way makes it much easier to see what is working around the world. Simpson sets the bar relatively high – every division should be able to achieve profit margins of at least 10 per cent.
Businesses that seem incapable of reaching that goal have either been sold or are due for imminent disposal. Those with potential are being invested in and expanded.
The strategy is starting to deliver results. Annual figures, released last week, showed a 6.6 per cent increase in underlying pre-tax profits to £29.2million for the year to November 30, while sales rose 10 per cent to £400million.
The company benefited from sterling’s weakness, but suffered from a major blip at the coated technical textiles division, where core profits tumbled 38 per cent to £8.7million. The business ran into problems on two fronts – changes in EU regulation and manufacturing issues, after a period of rapid expansion. Simpson has taken action to resolve both issues and the division is expected to return to health this year.
The three other divisions experienced strong growth, delivering profit rises of between 15 and 27 per cent. Encouragingly too, the dividend has been raised by 8 per cent to 3p, putting the shares on a yield of just over 4 per cent.
The group is also expanding in parts of the world where it should have an edge. A new factory has been opened in China and there was a small US acquisition.
Low & Bonar derives about 65 per cent of its revenues from Europe, 20 per cent from the US and 15 per cent from the rest of the world. Simpson is keen to increase the firm’s presence in China and the US, both countries with extensive infrastructure programmes from which it should benefit.
Analysts are optimistic about this firm, despite the disappointment over coated technical textiles. The group specialises in high-end materials, which cannot easily be copied and it should benefit from global trends, such as spending on roads and rail, a focus on clean air and water and the move towards lighter, durable and flexible fabrics within construction.
Brokers forecast an 18 per cent rise in profits this year to £34.6million, rising to £38million in 2018. A 3.2p dividend is expected for 2017, increasing to 3.4p next year.
Midas verdict: Low & Bonar has been through some difficult times in recent years, but Simpson is determined to improve profits, reduce debt and deliver generous dividends. Buy now, at 71p, and there should be substantial rewards over the next few years.