PWR Holdings Revs Up For FY26 Growth

This story features PWR HOLDINGS LIMITED. For more info SHARE ANALYSIS: PWH

Cooling parts manufacturer and small cap investor favourite, PWR Holdings shocked the market with an earnings re-set, as management invest across the board for future growth.

-Labour costs drive PWR Holdings’ FY24 disappointment
-Aerospace and defence in the drivers seat
-Is FY25 simply a transition year?

By Danielle Ecuyer

FY24 results set the stage for growth

PWR Holdings ((PWH)) reported an unexpected disappointing FY24 result. The share price of the investment darling in the automotive cooling market has succumbed to the challenges of investing for growth in the future, where short-termism collides with longer-term growth aspirations.

Stripping down the latest results, group revenue came in broadly in line with expectations with the burgeoning aerospace and defence division growing a sharp 100%. While impressive, revenue of $21m against group revenue of $139m is yet to reach it incremental growth potential.

Analyst homed in on the 21.5% increase in employee costs on the back of a 13% lift in the head count.

Management has been transparent in its desire to opportunistically recruit favourable talent which comes at a financial cost in a competitive marketplace. Securing longer-term tenure also requires more financial incentives which are reflected in the latest update on employee costs.

“Moving ahead of the curve” roles, is how PWR described the boost in employees as the company accelerates the transition to its new Queensland factory at a cost of -$37.6m (-$24.6m for factory upgrades and -$13m in new equipment). that will double manufacturing capacity with a 100% increase in floor space.

Some $21.7m cash on hand at June end will be used to help fund the investment, with management negotiating a new $30m facility to fund the residual and boost working capital capacity.

Early access to the new facility has been granted on August 1 with the transition in place by November 2025.

Accordingly, associated costs, including higher rent of -$3.5m by FY26, plus increased net interest costs alongside higher depreciation/amortisation charges are the culprits for analysts downgrading FY25 earnings estimates.

In FY25, the near-term costs will weigh on margins with a decline of -390 basis points to 13.9%, according to the Bell Potter analyst.

Operationally, a slowdown in OEM growth is on the cards in FY25-FY27 following the completion of the Aston Martin Valkyrie and Mercedes AMG X1 projects.

But emerging technologies in motorsports offer a good opportunity management believes, as increased battery cooling needs for the new Formula One regulations will commence in 2026. 

Transitions take time and investment

Analysts tip a hat to PWR’s track record since listing in 2015, but FY25 is highlighted as the “transition” year for the company (a phrase also used by company management).

Higher costs across the board in the face of potentially softer organic growth in OEMs, have resulted in a more downbeat earnings outlook.

Management has offered FY25 guidance of flat earnings pre-one-off cost on FY24 at $24.8m.

UBS moves to the knub of the issue for investors, as PWR invests for the future over FY25, the market will be seeking out indications of growth into FY26 and beyond.

Moelis assesses the valuation of 35x price-to-earnings as leaving little room for disappointment. Admittedly, this broker highlights the technology is great, but expansion into new markets requires new contract wins which can be “lumpy”.

At some point investors having sent the stock price down for the rebasing of earnings will be looking for the “show me the money” moment for the return on capital invested for growth.

The aerospace and defence division is very much highlighted as the new growth engine.

UBS believes aerospace and defence will be the key diver of incremental revenue growth driver for PWR from FY24 to FY26.

In aerospace and defence the number of programs where the company is a “nominated supplier” or “in discussions” rose to 47 from 45 and is stable at 38 in FY26 from 39 six months ago, respectively. For FY27, there are an estimated 34 program opportunities.

While all eyes are on the touted aerospace and defence, the new facility is aimed at driving growth across all divisions, including improved production efficiencies and increased applications of automation.

Growth doesn’t come without investment and with that comes uncertainty. Management has reset expectations as it puts in place the infrastructure for the company’s next growth phase.

In contrast investors like certainty, which leaves the less patient hanging out in the winds of change.

What are the brokers saying?

Even with an average -$1.54 decline in the FNArena consensus price target to $10.638, daily monitored brokers, on average, expect some 12% upside for the stock.

Morgans is the only broker to rate PWR as a Buy with the highest target at $11.00, compared to Bell Potter, Citi and UBS at Neutral/Hold ratings.

Not daily monitored Goldman Sachs is equally upbeat on the company’s long-term growth potential, maintaining a Buy rating and a reduced target of $11.50.

Moelis is looking for future earnings certainty and more transparency; Hold with a $10.97 target price.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms