Somero has now released their final results for the year ended 2016.
Revenues increased when compared to last year as a $756K decline in Canadian revenue was more than offset by an $8.2M growth in US revenue and a $1.7M increase in ROW revenue. Depreciation was up $402K and other cost of sales increased by $2.8M to give a gross profit $5.9M above that of last time. Selling expenses grew by $618K, share based payments increased by $528K and other admin costs were up $1.1M so the operating profit increased by $3.6M. We then see a $247K growth in interest income offset by a $1.2M increase in tax charges to give a profit for the year of $14.3M, an increase of $2.7M year on year.
When compared to the end point of last year, total assets increased by $9.3M driven by a $7.5M growth in cash and a $3.3M increase in property, plant and equipment, partially offset by a $1.5M decline in the value of patents. Total liabilities fell somewhat during the year as a $1M growth in accrued expenses was offset by an $897K increase in income taxes payable and an $874K growth in accounts payable. The end result was a net tangible asset level of $44.4M, a growth of $11.5M year on year.
Before movements in working capital, cash profits increased by $3.5M to $18M. There was a cash outflow from working capital to give an operating cash flow of $16.9M, a growth of $2.2M year on year. The group spent $4.4M on capex which meant they had a free cash flow of $12.6M. Of this, $345K was used to pay the RSUS, $145K went on stock options settled for cash and $4.2M was paid out in dividends to leave a cash flow of $7.8M for the year and a cash level of $21.2M at the year-end. This is strong stuff.
The performance in the North American market continued to be strong with sales up 15%, reflecting a healthy commercial construction environment supported by the new political establishment. It was also driven by an abundance of commercial construction combined with a growing shortage of skilled labour in the concrete contractor industry that increased demand for Somero equipment. New products have also been a contributor to growth in the region as the new S-10A and S-940 laser screed machines have gained considerable traction in the market.
The group’s European market accelerated its recovery in the year with sales growing 40%. This growth was well balanced across the product line and on a geographic basis with particularly solid trading in Italy, Poland, UK, Spain and the Czech Rep.
The Chinese market stabilised in 2016 with a 5% increase in sales. The group recruited an experienced sales manager based in Shanghai to lead the sales team there and in late 2016 introduced their newly designed entry level S-158 laser screed machine and the S-940 laser screed machine to the country, two products that the board believe will attract new productivity oriented customers. Finally the long term financing programme continued to be a success which has earned the group $200K in interest income this year.
Sales in Australia improved substantially in the year, more than doubling to reach $2.3M. This was driven in part by improved economic conditions combined with the strengthening of the Australian dollar. Sales in the Middle East grew 7% to reach $2.9M with strong contributions from Turkey, the UAE and Saudi Arabia. In Latin America, sales declined 15% but the second half of the year was considerably improved from the start of the year reflecting noticeably improved activity levels across the region, including modest improvements in Brazil.
In South East Asia, sales more than halved to just $400K although the group continue to view the region as a growth opportunity. Sales in India also collapsed, down to just $100K although the group exited the year with a solid pipeline of opportunities, some of which were delayed as a result of the Indian banking system reforms that slowed bank financing approvals. As expected, sales in Russia improved only modestly to $200K given the continued unstable economic climate in the country.
During the year the group completed development of three new products. Their entry level S-158 laser screed machine targeted for the Chinese market, their new SP-16 concrete hose line-pulling and placing system and their next generation 3D profiler system. All three have been well received by the market with the S-158 launching at the end of 2016 in China and the SP-16 and 3D profiler system launching in January 2017 at the World of Concrete trade show. Additionally in the year they gained significant sales traction with products that were developed in the previous year, the S-10A and the S-940 laser screed machines with growth in sales of $4.6M.
It should be noted that the group is still rather reliant on a small number of customers. One represented 20% of total accounts receivable for example.
During the year the group completed their new global HQ and training facility in Fort Myers to provide a venue for customer training and product demonstration. In the coming year they plan to construct a training facility for $700K, located on the Fort Myers campus which is expected to enable them to launch the Somero Concrete Institute in Q2 2017.
Going forward the solid momentum in North America at the end of 2016 has carried over into 2017 driven by demand for replacement equipment, technology upgrades and interest in new products. The board remain encouraged by the solid level of non-residential construction activity in the US, a view that is supported by reports from customers of lengthy project backlogs that extend well into 2017. Proposals for US corporate tax reform and fiscal policy programmes to invest in US infrastructure are additional factors reinforcing their confidence in growth prospects in the region.
In Europe, the 2016 acceleration of recovery from the recession is expected to carry forward into 2017, driven by demand for replacement equipment, technology upgrades and interest in new products, much like in the US. In China the interest level in the group’s products remains healthy with a particularly solid interest in the S-158 entry level product which opens up the productivity oriented market segment that they expect will help them grow their customer base and offer future upsell opportunities. They also see traction with their market development activities to promote certain flatness standards. This points to solid growth prospects in China for the year ahead.
In Latin America, the group are expecting a stable performance from Mexico and Chile and they have begun to see modestly increased activity in Brazil, and are optimistic for a satisfactory contribution to growth from the other countries in the region. Overall the board are confident that the group is poised to deliver another year of profitable growth.
At the current share price the shares trade on a PE ratio of 17 which falls to 14.5 on next year’s consensus forecast. After a 61% increase in the dividends the shares are yielding 2.7% which increases to 2.8% on next year’s forecast. The board have approved an increase to the dividend payout ratio to 40% of net income. At the year-end the group had a net cash position of $20.2M Compared to $12.6M at the end of the prior year. After the year-end they paid off their outstanding mortgage totalling $1M which leaves them debt free.
Overall then this has been a very strong year for the group. Profits were up, net assets increased and the operating cash flow improved with plenty of free cash being generated. The good performance is being supported by a strong commercial construction market in the US where the group gets most of its revenue from. Australia and Europe also showed strength with Asia looking a bit more subdued as there seems to be some resistance to take on the group’s products in the less sophisticated emerging markets.
Going forward, as long as the US construction industry stays healthy, things should go well for Somero. For once, though, the valuation looks a bit more sensible as the forward PE of 14.5 and yield of 2.8% looks about right. It is worth noting the big piles of cash the group has, however, and I am happy to continue holding.
On the 5th June the group released a trading update for the first half of the year with strong trading in Europe, and solid contributions from the Middle East, Latin America and ROW markets. In North America, trading has been flat due in part to poor weather across the country that has delayed numerous project starts and ongoing political uncertainty. In China, trading at the start of the year has been slow but there have been some signs of improvement and early traction with the new entry-level products. Overall the trading to date is in line with expectations.
The added headcount has created a need for additional office space in the Florida HQ so the board has approved plans to build a $1.3M expansion to accommodate the planned growth. The project will be completed in the first half of 2018 with the majority of costs expected in that year. The board has also announced that they will be distributing $7.5M in the form of a special dividend representing a dividend per share of 13.3c.
I have to say the slow-down in the US is disappointing and a concern as it is the largest market by far. It sounds as though it may be temporary, however, so I remain a holder although I will be keeping a closer eye on developments.
On the 18th July the group released a trading update covering the first half of the year. Trading in June was stronger than both May and the period year comparison. This performance, together with the continuation of the positive global trading environment, margin improvement and solid operating cash flow generation has underpinned a positive outlook for the second half of the year and the group’s expectation that trading for the full year will be in line with market expectations.
On a regional basis, June trading activity in North America was at the highest levels of the year as weather conditions improved and projects started but H1 trading will show a slight reduction from prior year levels. Looking ahead the group remains encouraged by the healthy US commercial construction market, extensive project backlogs being experienced by customers and the high level of activity that is carrying into the second half.
First half trading in Europe was very strong, significantly increasing over the prior year, driven by broad-based geographic contributions. Latin America and ROW territories were also significant contributors to growth in the period with trading significantly higher when compared to the prior year. Trading in the Middle East ended the period slightly down from the prior year as a result of a number of opportunities in this territory having been carried over to the second half. In China, June trading was also at the highest level of the year (this isn’t saying much in the Northern hemisphere) and despite first half trading falling below last year, the group expects improvements in the second half.
Overall then, this seems to be a cautiously optimistic update and I continue to hold.