While there is nothing untoward about the company investing for growth in future periods, even after the drop, the valuation looks rich against a backdrop of earnings going backwards due to large capital expenditure outlays over FY25 and 26.

It seems like there is room for the multiple (50x statutory and about 40x underlying earnings) to come down.

Reported Results after hrs with revenues and profits coming in softer versus consensus forecasts. 

PWH: have spent some cash on the business expansion this generally dints the Revenue, Profit trend.

PWH is this a Buy?

The investments in headcount, factory space, equipment and systems are necessary to prepare PWR to deliver on our medium- and long-term growth objective, specifically growth in aerospace and defence, and is consistent with our approach to “invest now and collect later”

PWR HOLDINGS LIMITED (ASX:PWH) - Ann: PWR reports record revenue and profit, page-1 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

Opened down this morning

PWR holdings reported their H1 FY24 results after hours last night. From their presentation:

A much better half compared to this time last year. Their increase in investments over the past year are starting to show through now. Seasonally 1H is always the weaker half with lower revenue and lower margins. Although net margins have improved back above 15% for the half. Overall net margins are usually around 20%.

Customer mix is improving with less than 50% of revenue coming from the motorsports segment showing their increasing footprint into aerospace and defence.

Overall I thought this was a very solid result given the increased investment of the past year and look forward to seeing the growth come through in future periods.

Disc: Held IRL and on Strawman.

@Vandelay agree PWH looks expensive at the moment, especially compared to other opportunities in the market right now.

Also agree that looking at expected future returns from here is the lens through which to assess opportunities competing for your capital.

Sticking with the 5 year time horizon and the methodology you outline, I ran some numbers and got the following.

Observations:

$SP = $11.97 @ 13-Jan-22 * SOI = 100.6m (fully diluted) = Mkt Cap of AU$1,203.8m.

Assumptions:

NPAT Margin in 5 years = 20% (95% of last 5 year average, which has been stable between 20-23%).

PE Exit Multiple in 5 years = 28.5% (90% of last 5 year average @ 30-Jun). Trailing PE is currently double this at 57.8x.

10% Required Rate of Return (RRR).

This requires a 5 year Revenue CAGR of 27%.

That is, with the above NPAT Margin and Exit PE Multiple in 5 years, you would need a 27% Revenue CAGR to earn a 10% Compound Return from current prices.

Questions:

So can they do 27% CAGR? I think they definitely can but not sure of the probability. Probably not the best base case.

What if 5yr Revenue CAGR is 18% as @Vandelay expects? All else being equal, that would halve your expected Compound Return (RRR) to 5% from current prices.

Are my assumptions too conservative? I think they're a little on the conservative side, but not so much as to offer a large margin of safety.

Other considerations:

They could also be a takeover target, but Kees has a blocking stake > 20%, although his son is now out of the business, so he may sell if the terms are right? Not enough certainty to put a premium on for this in my view.

At the AGM, mgmt said motorsports revenue growth to be moderate, but that the smaller Auto OEM & Aero/Defence segments to be stronger.

Capex in FY23 projected to be back to FY21 levels (double FY22), so they are looking to keep growing through innovation which they look to be adequately funded to do. With their prospects and track record of execution, this is a business I would like to own (more of) for the long term.

However, given the expected moderate Revenue growth from motorsports being the biggest segment and smaller segments set to grow strongly from here, the high $SP could be under threat if top line growth underwhelms.

Disc: Held

I sold out of PWR Holdings today. This is a super high quality business with founder management (this is no secret to the market). And this sell is counter to the mantra that "the vast majority of losses in the stock market come from picking the wrong business, not the right business at the wrong valuation". But as I tried to justify the current price multiple ways, and apart from hoping for continued increase in sentiment, I couldn't see where my returns were going to come from. Currently trading on 55x earnings, there is a lot baked in at these levels. The company has compounded its earnings by just over 18% CAGR over the last 5 years. If we assume this continues for the next 5 years, the company would be earning 48c per share. From the current share price of $11.97 an average market return of 10% would mean it trades at $19.28 in 2027. For this to happen, I would need the stock to be trading at over 40x earnings of 48c at that point. I dont think thats a bet I want to take. Even if I was hyper bullish and thought the company could compound its earnings at 30% CAGR. Its earnings would be 78c and need to trade at 25x at that point, which is still not cheap. The management itself has also said they expect the revenue growth to be moderate for FY23 and beyond.

I understand demand for their cooling systems will be increasing with electric cars, defense, aerospace, data centers etc. The company is very innovative and always looking for the next opportunities with a long term mindset. But I believe the market has fallen in love with this stock too much and returns from this level will not be sufficient for me. Id like to buy back in, if the price comes back substantially. Hopefully it does.

Not wanting to rain on anyone's parade here but I am not a great fan of PWR. I have spoken to a number of people directly, and heard anecdotal reports from lots more, who have all said that PWR is not a pleasant place at all to work at - they treat their employees very poorly, work them into the ground and then spit them out and hire new ones. At the end of the day it is personally not a firm that I would like to be a part owner of. Again, I don't want to spoil things for people however I also think that these are the kind of things that I would like to know about before investing in a company.

PWR Holdings (ASX:PWH)

PWR produces advanced cooling systems to the motorsports, aerospace/defence sector. Also derives part of its revenue from OEM and automotive aftermarket segments. Basically - super niche, high tech/IP company run by founder/MD Kees Wheel.

Financials

• 77% gross margin, >25% operating margin and 21% net margin
• $19.8m in cash, no debt
• Consistent share count since listing
• ROA >15%, ROIC > 20% and ROE > 20% over last 5 years

Insider Holdings

• Kees Wheel Founder/MD 20.3m shares (20% of company)
• Matthew Bryson CTO 3.3m shares

Summary

• Valuation seems a little stretched at the moment - Sitting on TTM PE of 52x, and P/FCF of 94x
• However - if we take a closer look at the business, wow. Ticks many boxes for me:

1. Founder led with huge amount of skin in the game. So far management have been very transparent and fair to shareholders
2. 20%+ net margins, rock solid balance sheet
3. Optionality - Some mentions in the AGM to branch into the aerospace/space segment.
4. Their clients are largely those with deep pockets, willing to pay a premium to get the best product for their cars etc. Largely unaffected by Covid.

• Been a happy shareholder for the last 18 months, will be very happy if the market gives me a discount to pick up more shares in the future.

Long standing holder of PWR with impressive results from a disciplined organisation whom have good prospects in niche automotive / air space. Growth in US strong and launching online as we speak .

Culture a clear strength reflective in financial results

Shares on issue has remained steady at 100m

Debt has always remained minimal 1.7mill. Cash $19.857mill

Rev 2016 = 46.6mill - 79.2 2021

EBIT 2016 = 13mil - 21mil 2021

Operating Margin 2016 = 30% grown to 36% in 2021

Div 2016 4c - 9c 2021

EPS 2016 9c - 2021 15c

PWR Holdings (ASX Code PWH) released its FY21 Results to the market yesterday.Highlights include an NPAT of $16.8 million. Revenue for FY21 is ahead of FY20 with revenue growth across all key markets and geographies, partially offset by unfavourable currency exchange rate movements. Emerging technologies revenue grew by 112.7% and now represents 11% of the Group revenue. PWR North America revenue grew by 71.4% year on year. The PWR North America segment performed strongly contributing a profit before interest and tax of $4.8m up from $1.2m in the prior period.