Small Caps | Aug 21 2024
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.
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