Small Caps | Aug 23 2021
This story features PWR HOLDINGS LIMITED. For more info SHARE ANALYSIS: PWH
Emerging technologies in the automotive industry are expected to propel PWR Holdings towards substantial earnings growth in FY22
-New car designs for F1 in 2022 likely to increase business
-Potential upside from the large contracts on offer
-Including cooling systems for defence and aerospace industries
By Eva Brocklehurst
Customised cooling solutions are being provided by PWR Holdings ((PWH)) at an ever increasing rate to the automotive industry. Moreover, the company has emerging technologies in its sights while expanding its exposure to areas outside of motorsports.
Original equipment manufacturers (OEMs) are now the third largest area of revenue after motorsports and the automotive aftermarket. Revenue in FY21 was up 20.5%, supported by OEMs and emerging technology.
No formal guidance was provided for FY22 but the company maintains a strong balance sheet, with $19.9m in cash and debt reduced to $8.5m. The operating earnings (EBITDA) margin in FY21 was 36.6%. A scaling up of staff is occurring with more than 87 extra expected by December 2022 and there is also significant capital investment being committed to plant and machinery.
Moelis expects net profit growth of 18-26% for FY22-24, supported by 2022 Formula One rules that are regulating a new car design, in which unrestricted components should attract increased R&D expenditure by the teams.
There are also new OEM projects going into production that will contribute to PWR Holdings' growing order book. The company's aftermarket business is robust and the online store has been rolled out, providing further increases to US market penetration.
Morgans is enthused by the opportunities and dismisses the probability that revenue may have disappointed in FY21, attributing this to the motorsports division where F1 used the same cars in 2021 as for 2020, which meant there was less development work.
Other racing categories have also been slow to ramp back up because of the pandemic. Additionally, OEM revenue was affected by delays to vehicle production because of the global semiconductor chip shortage.
Valuation appears relatively high, Morgans acknowledges, but a premium is considered justifiable because of the strong growth outlook and the potential upside from large contracts as well as a healthy balance sheet. The broker has an Add rating and $8.50 target.
Despite downgrading estimates for FY22 and FY23, Bell Potter continues to expect strong double-digit growth for both revenue and earnings, noting the pay-out policy remains between 40-60% of net profit. The broker's target of $7.25 reflects a modest discount to the share price and as a result a Hold rating is retained.
Moelis asserts emerging technologies have double-digit earnings growth potential, underscored by the company's leading product offering and a strong balance sheet. Still, these factors are captured in the share price and the broker retains a Hold rating with a $7.70 target.
PWR Holdings is moving into applications where cooling solutions are required in the wider automotive industry and brokers anticipate emerging technology will be the driver of the next leg of growth. This division includes cooling systems for the defence and aerospace industries, electronics, battery and communication systems.
Morgans is impressed with emerging technologies, where revenue grew 113% in FY21 and now accounts for 11% of total revenue, asserting there is potential for this segment to contribute a much larger portion of revenue over the long-term.
The company recently achieved the AS9100 certification, a global aerospace and defence standard which should enable the amount of work being undertaken to expand substantially.
PWR Holdings has provided further detail regarding the 16 programs in emerging technology that are in production in FY22, ranging from $100,000 to $50m. There is also the prospect of quoting on many more, extending to at least FY24. Moelis assesses emerging technology, in its base case, will be the size of the motorsport segment by FY25.
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