Somero Share Blog – Final Results Year Ended 2018

Somero have now released their final results for the year ended 2018.

Revenues increased when compared to last year as a $2.4M reduction in Canadian revenue was more than offset by a $9.2M growth in US revenue and a $1.6M increase in ROW revenue.  Depreciation was down $925K but other cost of sales increased by $4.4M to give a gross profit $4.9M higher.  Selling expenses were up $633K, engineering expenses increased by $135K and admin expenses grew by $354K which meant the operating profit was $3.7M higher.  There was a $519K detrimental swing to a forex loss but other expenses reduced by $163K before a $209K increase in tax charges meant that the profit for the year came in at $21.5M, a growth of $3.1M year on year.

When compared to the end point of last year, total assets increased by $8.7M, driven by a $9.2M growth in cash and a $2.1M increase in inventories partially offset by a $1M decrease in prepaid expenses and other assets, a $795K fall in accounts receivable and a $746K decline in deferred tax assets.  Total liabilities also increased as a $1M fall in accounts payable was more than offset by a $1.3M increase in income tax payable.  The end result was a net tangible asset level of $52.2M, a growth of $8.2M year on year.

Before movements in working capital, cash profits increased by $2.5M to $25.3M.  There was a cash outflow from working capital but this was less than last year and after the tax income increased by $705K the cash from operations came in at $23.8M, a growth of $3.8M year on year.  The group spent a net $756K on capex to give a free cash flow of $23.1M.  Of this, $12.3M was paid out in dividends and the cash flow from the year came in at $10.1M to give a level of $28.2M at the end of the year.

Sales in North America grew 12%.  That was driven by strong H2 trading in which sales grew 16%.  The high level of non-residential construction activity alongside a shortage of skilled labour increased the demand for the group’s products.  They see continued strength in the underlying non-residential construction industry in the US and an extended pipeline of projects that remain in front of their US-based customer base.  Going into next year, market drivers in North America continue to demand for replacement equipment, technology upgrades, fleet additions and new products.

In Europe, 2018 sales grew by $300K driven by a solid performance throughout the year.  The most significant markets were the UK, Germany, France, Spain and Portugal.  European market conditions and activity levels remain positive with well-balanced demand. 

In China sales declined by $200K.  The board believe they are taking the appropriate steps to position themselves for future growth in the region.  This includes a narrowed product line focus supported by marketing and demand generation initiatives, combined with the expected increasing benefit from the in-country sales leadership.  They will continue to pursue market development efforts to drive he acceptance and demand for quality concrete floors by building owners and end users. 

Sales in the Middle East increased by $300K.  Activity levels were solid throughout the year with meaningful contributions from Turkey, UAE and Egypt.  In Latin America sales were down $600K as project activity remained solid but did not translate into equipment sales as expected due in part to the impact of election cycles in the region.  During the year, the most significant contributors came from Mexico and Chile.  They remain encouraged by the activity seen throughout the year, particularly in Mexico and see improvement in 2019.

In the ROW region sales were strong, up $1.7M.  The most significant contributors to growth were Australia and India.  They are particularly encouraged by early signs of increasing demand for concrete floors in India and the investments they have made with in-country leadership and resources are helping to drive these results.

During the year the group completed the design and development of the SkyScreed 25, the world’s first Laser Screed machine for use in structural high rise applications.  This opens up a new market segment.  The board are pleased with early interest in the product but also understand this only represents the first step in a long journey of product development.  They have therefore made the decision to moderately increase investment to enable them to accelerate product development initiatives in this market.  They are confident in their ability to deliver on these initiatives alongside continuing to deliver profitable growth for shareholders. 

The group is also moving forward with plans for a $3.5M expansion of their Michigan facility.  This will add 35,000 square feet to the facility, providing their assembly operations with needed space to accommodate their broadening product line.  In addition the expansion will add needed office space and engineering testing areas.  They will not, however, be proceeding with the planned $1.3M expansion of the Florida facility in light of this.  They now will review options to modestly expand training and office space in Florida at a significantly lower cost. 

After the year-end, in January, the group purchased the business assets of Line Dragon, a US-based provider of concrete placing and hose dragging equipment to the concrete industry.  The acquisition was for $2M in cash with ongoing performance payments.

Going forward, the board believes the group has numerous meaningful growth opportunities next year that is supported by positive non-residential construction market conditions and reinforced by customers reporting project backlogs that extend beyond 2019.  Based on this, they are confident that they will deliver another year of profitable growth.

At the current share price the shares are trading on a PE ratio of 9.8 which increases to 10.9 on next year’s forecast.  After a 23% increase in the dividends, and including a supplemental dividend, the shares are yielding 6.8% but this falls to 5.2% on next year’s forecast.  At the year-end the group had a net cash position of $28.2M compared to $19M at the end of the prior year. 

On the 7th June the group released a trading update covering the first five months of the year.  Trading in the period has fallen below management expectations, primarily due to adverse weather conditions in the US where broad sections experienced the highest levels of rainfall on record.  This has delayed project starts which has slowed the pace of equipment purchases, the impact of which was seen in March and April.  Whilst there was an improvement in trading towards the end of May and they expect trading in the US will improve through the rest of the year, they now do not expect to fully recapture the shortfall in the current year.

As such they now expect to deliver revenues of $87M, EBITDA of around $28M and expect to have year-end net cash of $18M.  The positive US market conditions have not changed and whilst they expect it will take some time for momentum to rebuild, the level of work in front of their customers remains significant. 

In the group’s other main markets, Europe and China, as well as in the ROW territories, trading has been comparable to 2018 and they continue to see opportunities for growth in the second half. Growth in India has been steady.  The Middle East and Latin America are trading below 2018 levels, but they expect to see improvements in the second half notwithstanding the political uncertainty and economic challenges in these regions.

Overall then 2018 has been a good year for the group.  Profits were up, net assets increased and the operating cash flow improved with plenty of free cash generated.  Unfortunately this performance has not transferred into 2019.  The main problem is being blamed on the weather in the US, by far the most important market.  Elsewhere Europe, China and ROW seem solid if not great but the Middle East and Latin America is not doing well.  With an improvement in the weather in the US, sales have improved but not enough to offset the shortfall.  It does appear that global markets in general are more subdued but as long as the US market remains robust, this should be temporary.  With a forward PE of 10.9 and yield of 5.2% this still seems decent value.

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