Discl: Held IRL and in SM

Finally had a chance to have a closer look at AHL’s results. Also used the AHL results to work through a PE-based valuation, which I will post separately.

OVERALL

• Operations are chugging along and revenue growth from operations is 8.9%
• HTS continues to spearhead growth - consistent comment on backup generation for Data Centres driving HTS growth and this looks like it will continue
• The issue is cost - cost increases have dented profitability, but the increases are not really thesis breaking:
• Inventory increased 2.6% to support the Data Centre projects - this, plus evidence of higher Contract Assets in the Balance Sheet, up 114.7% from $2.8m to $5.9m YoY, provides good comfort that HTS is indeed firing
• A good ~$1.6m is due to a on-off Impairment of $1.0m and $0.6m of Forex losses, both these alone accounted for 1.2% of the 10.0% YoY cost increase and 1.1% of Margin
• Forex movement has been more favourable in 2H, and looks to have continued into FY26
• Cash position remains healthy - up $2.3m, 14.8%, $18m cash balance, $0.6m borrowing's - balance sheet is in decent shape
• Dividend 3.48cps, up 18% from, 2.94cps, 50% of FY25 Statutory NPAT
• An ongoing concern is the churn in CEO’s 

AHL was intended to be a steady-grower-with-dividends ballast to my growth-centric portfolio and remains so. While the rising costs remain a concern, my thesis, which is predicated on (1) revenue growth, underpinned by AHL’s monopoly-like position in the Industrial Heat Cooling space (2) increasing demand for Data Centre cooling is still intact.

Have valued AHL at $0.86, based on the current undemanding PE of 8.82x, which is mostly held back by the ongoing cost concerns, so this appears more less “fairly valued” now.

The share price has stayed “recovered” despite the cost concerns, crossing and staying very much above the 200SMA. It does seem that the market is being patient and settling for the long haul ...

Am already at ~3.0% allocation, so will take no action.

OPERATIONS

Chugging along

HTS

• Nothing to not like in HTS
• Ingredients are in place for Asian expansion - Sales capability, prototypes, manufacturing facilities
• AluFin is progressing
• Strong demand in data centre cooling

Distribution

Nothing negative, but this is probably unexciting, in relative terms.

FINANCIALS

Total Revenue rose 8.9% YoY - Both segments have contributed to the increase in revenue but Heat Transfer Solutions revenue has risen more than Distribution revenue

Costs have increased 10% YoY:

• The pace of Raw Materials & Consumable Expenses growth is greater than both Employee Expenses and Other Expenses
• Despite improving 6.8% HoH, Raw Materials & Consumables Expenses have increased 12.5% YoY

Revenue has been steadily increasing, but increasing costs have steadily eroded profitability and profitability margins. This is really not a pretty picture and one that troubled me. But it is clear that the issue is not revenue, it is cost-driven.

3 things stuck out when having a closer look at the P&L detail

AHL Took a R&D Impairment of $1.0m in FY25 - this related to the building of new equipment where it was found that the materials used in the prototype were not suitable for subsequent product manufacturing in commercial quantities - asset will be retained, to be revisited later.

There was a loss of $0.5m of Other Income comprising (1) ($0.2m) of Grant Income (2) ($0.1m) of Net Franchisee Fees (3) ($0.1m) of IT rebates (4) ($0.1m) Other Income - despite this, Total Revenue still rose 8.3%, driven by the 8.9% increase in Sales to External Customers - this normalising of Other Income from FY24 continues the downward trajectory of Other Income from FY22 (FY22: $1.3m, FY23:$1.7m; FY24: 0.9m; FY25: $0.2m)

Other Expenses rose $2.2m YoY driven by (1) $0.9m increase in Impairment Loss (2) $0.4m of Forex Loss (3) $0.16m IT Cost (4) $0.4m Other Expense - as the AUD strengthens, and there is no further impairment, expenses could decrease between $0.9m to $1.3m in FY26, all things being equal.

The picture looks much better when the $1.6m Impairment and Forex Loss is added back to to Operating Expenses

• The YoY expense increase drops 1.2% from 10.0% to 8.8%
• Margins come in at 7.2% instead of 6.1%
• Once these 2 mostly uncontrollable costs are stripped out, the cost increases feel a lot more palatable

• 5.1% fall in Cash flow from operating activities but more than offset by a 21.8% fall in Cash Flow from Investing activities
• $2.3m increase in cash, up 14.8%
• Dividend 3.48cps, up 18% from, 2.94cps, 50% of FY25 Statutory NPAT

• Contract Assets is up 114.7% to $5.9m - data centre and project orders pending customer delivery
• Inventory increased 2.6% to support the Data Centre projects

Good to look at micro, company-specific matters, to take a break from the chaos of the maro world!

Discl: Held IRL and in SM

SUMMARY

1HFY25 results were disappointing.

A steady 6% increase in revenue was more than offset by higher raw material and employee expenses, resulting in lower EBITDA (16.9%) YoY, lower NPAT (9.7%) and a drop in Operating Margin from 7.6% 1HFY24 and 6.6% in 2HFY24 to 5.9% in 1HFY25.

However, my revenue-focused thesis is playing out. HOLD.

POSITIVES

Revenue continues to grow nicely across both segments

HTS - up 7.1% vs pcp

• Traction in Asian Rail project, which is the outcome of an increased focus in Asia from AHL’s Thailand operational base - 1st Asian rail project won and will commence in 2HFY25
• 1st Orders for AluFin - prototype for above ground mining vehicles - good traction in AluFin, primary target market $15m-$30m revenue
• Rail Service - $9m orderbook expansion to replace cooling units in Victorian trains

Distribution - up 4.6%

• Branch improvement projects
• Selling price driven customer growth campaign

Continued good cash generation - $10.1m of cash from operations, $3.3m net increase in cash after (2.9m) capex spend, ($0.7m) debt repayment and ($1.3m) FY24 dividends paid

Balance sheet remained in good shape and strong - $19.1m cash, $0.7m borrowing's (down from $1.4m 1HFY24), Inventory flat $0.4m increase to $47.7m as Distribution stock reduced from increased turns offset by higher HTS raw materials in preparation for uplift in 2HFY25 manufacturing activity

Thai manufacturing facility is now complete - lower manufacturing economics should start to flow through more clearly - will facilitate insourcing

DISAPPOINTMENTS

After good cost improvement in 2HFY24, Operating Expenses have increased back to the overall cost increase trendline:

Raw Materials & Consumables are now in a noticeable upward trend:

• Deteriorating AUD purchasing power
• Increased direct input costs

Employee Expenses are also in an upward trend, although not as steep as Raw Materials & Consumables:

• Wage & Super uplift from 1 Jul 2024
• Sales team boost has kicked in 

Additional Insurance costs, doubtful debt provisions, FX costs have also added to costs.

Customer Growth campaigns in FY24 to reduce pricing to grow customers, now returned to pre-campaign normal pricing - seeing revenue increase from increased volume from increased customers

Management understands the reason for cost increases and have taken action - need to see this filter through in 2HFY25.

Distribution EBITDA is on a clear upward trajectory, HTS EBITDA continues to trend downwards as the cost increases impact HTS directly.

THESIS REVIEW

Thesis was predicated on: 

• Revenue growth from HTS given dominant market position on Industrial Cooling, domestically and in Asia - tick
• Growth from AluFin taking off - good positive greenshoots, tick
• Thai manufacturing facility would give AHL an Asian base, from which to deepen penetration to Asia - tick
• Thai facility will also lower cost - cautious tick on this, the issue this half was more raw materials/AUD driven - without the Thai facility, the cost increase could well have been worse

Cost advantages was not an explicit part of the thesis, although arguably, there was an implicit assumption that costs would stay under control and contained - the cost increases this half has knocked this assumption around a bit

• Management is aware of the challenges and have and will continue to focus on cost management
• Pricing increases will have kicked in in 2HFY25, expecting ~$2.5m to kick in - $1m from Distribution and $1.5m from HTS

In summary, while the cost increases have impacted EBIT and NPAT, and the downward trend of both is not great, the revenue-related thesis is actually playing out. 

Still too early to call this result a thesis breaker, but will need to see improvement in cost increases to arrest the increasing trajectory.

2HFY2025 OUTLOOK

Need to see:

• Continued revenue growth from both HTS, from Data Centre demand, and Distribution
• Continued manufacturing leverage from the Thailand facility move
• Cost containment measures kicking in to rein costs back in

Portfolio Action

HOLD. Current allocation of 2.98% is about right

In a quick review of AHL's AGM material and speech, picked up 3 subtle points to note to manage expectations:

• Strong order book for data centre power generation - significantly higher than FY24
• FY24 deferred projects commenced - this was as guided previously, but good to confirm
• Full year FY25 revenue and earnings weighted to 2HFY2025, presumably from the revenue of deferred projects and data centre projects hitting later in the year given the longish gestation period for these sorts of projects. Implies 1HFY2025 growth could be flattish

Have been trying to top up around $0.75 these past few months but there has been very little decent volume of above 5,000 units available to make a purchase worthwhile. Patience is absolutely needed!

Discl: Held IRL and in SM

My notes on AHL's FY24 results. As I was reviewing the Annual Report, the following 2 longer term growth areas for HTS crystallised, particularly the commentary around Caterpillar recognition, both of which now forms the core of my refined AHL thesis. Am trying to get more information on AHL's relationship with Caterpillar to work out how far it could potentially go with AluFin.

Discl: Held IRL and in SM

KEY LONGER-TERM GROWTH AREAS FOR AHL

Cooling systems for Data Centres - demand for AHL’s cooling solutions will grow as demand for Data Centres grow globally driven by the AI boom. Thailand manufacturing facility is well place to support growth in this area in the Asian region

Battery powered above ground mining equipment is set up for significant growth once the cooling technology matures.

• Supplier recognition by Caterpillar is a really good positive sign
• Cat appears to be targeting 2028 for the production rollout of Cat battery-operated trucks - the mining industry is under increasing pressure to transition to green technology and there is a whole existing fleet of mining equipment which will require upgrading to battery-operated operations once the battery-powered technology matures
• An efficient and cost effective cooling system is an integral part of the green equipment which is where AluFin is targeted at

FINANCIALS

Weaker 2HFY24 and weaker FY24 overall, but no surprises as guidance was provided in May 2024

FY24 earnings issues in HTS appear to be transitory, not permanent due to customer project slippage which is anticipated to be restarted in FY25 - expect to see some recovery in HTS in FY25

Revenue of $142.8m came above the midpoint of revenue guidance of $140m to $144m

EBITDA Proforma came in at $18.1m, at the lower end of the $18m-$19m guidance - HTS One off $1.5m costs were incurred, impacting EBITDA, also previously flagged

BALANCE SHEET

Strong cash generation from operations continues

Inventory reduced by $7m - focus in this area bearing fruit

Capex investment makes sense in terms of Thai plant expansion

OPERATIONAL UPDATES

Senior Leadership Team is now fully in place with the onboarding of the new CEO Kevin Boyle in Apr 2024

Internal re-organisation completed with key segments being (1) Heat Transfer Solutions (2) Distribution and (3) Group Support

This is the ongoing maturing of the AHL organisation that Daryl Abotomey discussed during the SM meeting.

HEAT TRANSFER SOLUTIONS

Positive Developments:

• Expanded the scope of our after sales service offering by providing more services for our customers’ equipment along its path from manufacturing and commissioning and throughout its serviceable life
• Off-highway segment continued its positive trajectory
• Continue to pursue operational efficiencies as we finalised construction of the factory extension and new offices, factory floor re-lay and new equipment commissioning at our Thailand plant.
• Continued progress on AluFin product development with a number of global mining players on multiple fronts- field testing in underground mining equipment, developing a prototype for above ground mining dump trucks, field testing units in on road transport and service testing of an auxiliary cooler module for battery electric powered above ground mining equipment - 
• Awarded the Supplier Excellence Recognition award by Caterpillar; an award which recognises top-performing suppliers who have met or exceeded rigorous requirements and achieved world-class certification levels under Caterpillar’s Supplier Excellence Recognition program

Negatives offsetting the positives:

• Continued negative volume pressure in our OEM mining vehicle market in Asia. 
• Conditions in the Australian domestic mining and energy sector saw a number of projects with their associated demand for cooling applications deferred. 
• We expect most projects to progress in FY25 and we retain a positive outlook for this sector

DISTRIBUTION

Inventory reduction was a big management focus in FY24

Another year of top line revenue growth from a greater volume of sales across the range of categories we supply to the industrial and automotive aftermarkets. 

Continued to emphasise our primary focus on cooling applications in industrial and vehicular sectors but also added to our product range with the introduction of fuel pumps and harmonic balancers amongst others. 

More actively engaged in dynamic pricing to be more competitive across our product ranges and drive continued market share growth.

GROWTH OPPORTUNITIES

THESIS REVIEW

No change in thesis - business is steadily improving and growing, albeit with FY24 headwinds in HTS - these appear to be transitory

Positioning early for the longer term growth in HTS from Data Centre growth and AluFin opportunities in mining, especially when the global mining equipment players complete the current development phase of green technology equipment and massive fleet replacements from combustion to green technology occurs

Happy with 2.8% position size. Will top up position to 3.5% on any weakness below 75c, which is an attractive entry point given AHL’s all-time low price of ~64.5c

This is a note to myself, sharing in case it resonates with anyone else.

I was reading the story of the AirTrunk $2.4b deal which has been all over the news, particularly the explosive demand on Data Centres from "AI, and how AirTrunk was setting up Data Centres all over Asia and Australia.

It help crystallise for me, the AHL longer-term thesis around "AI". AHL's industrial cooling systems business has seen good demand growth from data centres as AHL's systems are a key requirement for good data centre design. That AHL has moved a chunk of its manufacturing facilities to Thailand positions it well for Asia-based data centre opportunities.

Cheap sale might be on from Monday onwards, will be a good time to add ...

Discl: Held IRL and in SM

From the AFR:

Street Talk understands veteran Bapcor chief executive Darryl Abotomey was canvassed by the Mike Murphy-led Bain Capital about being involved in the buy-out. Bapcor disclosed it had received a $1.83 billion non-binding, indicative offer from Bain via scheme of arrangement on Tuesday, following a report by Street Talk. Abotomey did not respond to requests for comment.

Sources said Bain Capital was among a number of private equity firms that had tested the appetite of the former Bapcor boss. Of some note, it is understood shareholder John Wylie, who is leveraging a 6.45 per cent ownership to call for a board shake-up, had also reached out to Abotomey about his interest in taking the chairman’s role under a new owner.

The proposed Bain takeover offer of BAP could impact AHL a bit. This plan to involve Daryl in BAP 2.0 sounds like it has been brewing for a while and makes perfect sense. The timing is very interesting vis-a-vis AHL (1) the BAP downgrade (2) Kevin coming onboard AHL (3) Daryl handing over and being totally non-commital on his involvement in AHL post Kevin when SM interviewed him a few months back.

I can't see Daryl just stumping out capital to partake in the buyout and do nothing else ...

Given that BAP would be a competitor of sorts to AHL's parts distribution, not sure how Daryl can still be involved in AHL as a non-Exec director, if he is actually going to be involved in BAP 2.0.

Doesn't change my thesis for AHL, but I would probably temper my enthusiasm a bit, unless Kevin turns out to be a dud ...

Discl: Hold AHL IRL and in SM, Do Not Own BAP

AHL has weakend in the past 2 weeks on no news. The thin volume makes it very hard to buy a meaningful number of units to make the brokerage worthwhile. Took the only super-short window available today to top up at 0.93 as there was some decent volume on offer as well as the price being smack bang at the 38.2% rectracement level - both rare occurences!

If it weakens further, the next entry point that I am looking at is ~0.885, which is the 50% retracement and 200 Daily Moving Average.

Discl: Held IRL and in SM.

Just finished watching the AHL meeting video. Will need to do a deeper dive to full understand the company but rather than get stuck with analysis paralysis as I normally do, have opened a small position both IRL and in SM today.

Thesis

Main thesis points for me from the call as well as @Strawman and @Tom73 's points:

1. The focus of the business is way, way beyond radiators - as Daryl put it "anything to cool anything down". So cooling systems for trucks, data centre gensets, power generation stations, VLine diesel trains etc. and the strategic direction is to remain very focused in this space (vs veering into more general aftermarket parts, which they are trying to reign back)
2. Very well positioned for the cooling system-end of hydrogenisation and electrification of machines, trucks, cars - cooling is a huge issue and requirement in the greening of industrial machines, vehicles etc
3. AHL has no direct peer in the manufacturing of "big stuff" cooling within Aust for Aust conditions for the range of products that AHL supports
4. Are deep into AluFin technology, using aluminium instead of copper as the basis of the cooling systems
5. Sticky customers for the main Original Equipment manufufacturing business
6. Laser focused on improving Working Capital (lots of passion on improving inventory turns), Retun on Invested Capital and EBITDA instead of pure revenue-driven "prosperity without profit".
7. Tailwind from moving of manufacturing facility to Thailand which is not only more cost effective, but also opens up access to Asian markets down the road.
8. Stacks of cash, dividend paying, providing some stability to my current heavily-skewed-to-growth-centric portfolio - very nice to hear that they do not need an equity issue as they have "so much cash".
9. Share Price has come well off the highs of $1.625, with the low thus far of $0.67, $0.90 seems like a decent entry point

Some Immediate Risks

• Not all its products are IP-protected - not cost effective. A concern initially, but they have a 40-50 year track record of existence, and Daryl took great pains to say that it takes a heck of a long time for AHL to get a OE product from design to operations, which in itself, is a moat.
• Low free float - they are recognising this as a "problem" and have some focus on striking a better balance on this.

I didn't realise how much I missed Daryl from BAP, until you hear/see him back in action again, motivated to get AHL on the rght track as a public company and setting them up nicely to grow.

Discl: Held IRL and opened trade in SM