What happens to a growth company with a high PE when it announces it won't be growing the coming 12 month period, then subsequently announce to market that it's revenue will reverse?

Well the share price will fall, substantially. We are down ~23% at time of writing, and down close to 50% in the space of about 3 months. Why?

Well, PWR Holdings (PWH), has provided this update to the market this morning.

Key points to the above table are as follows:

• Lower revenue in two markets:
• OEM – three niche OEM EV programs are not proceeding in FY25 despite PWR receiving purchase orders in FY24 for the FY25 work program. Whilst several new programs are in various stages of discussion, the volatility of the EV market is creating unpredictability; and
• Aftermarket – revenue globally has been impacted by broader economic pressures.
• Semi-Fixed Production Costs – production costs are higher than pcp as they cannot be immediately reduced to match lower than expected volumes and, accordingly, are expected to disproportionately impact forecast earnings for H1 FY25.

This has come as a bit of a sucker punch after their full year release back on the 15th of August that FY25 will be a "transitional year" for them as they look to position themselves for "future growth" which will impact margins. What the market didn't expect is that revenue will go backwards, so this is a bit of a surprise and hence likely to take some time to digest.

I'm still mulling this one over, as PWH is a long term compounder for me, however this will cause for some reflection. Concerned about management not guiding for this a couple of months ago, and also the added pressure this will place on management which, if they depart or lighten holdings may be a deal/thesis breaker for me.

At this stage I am keen to see how this transitional year progresses but FY26 will definitely want to see them shift back to some growth and see some runs put on the board after the "transition" settles. Always risky to take a bet on how long this takes.

HELD here and IRL.

Seems like a logical Trump trade

Seems like institutions don't agree

BlackRock still has 900K left to sell. Van Eck has completely gone

[held]

F1 commission had a meeting overnight and approved Driver Cooling Kits to be used in extreme heat. The exact technical details haven't been released yet but may be something for PWH to come up with?

It seems that it will only be used in races of extreme heat which at the moment would only be perhaps the middle eastern races and maybe Singapore?

Disc: Held IRL and on Strawman.

A rare special from Bell Potter

Been quite hard to find any broker report

I did top up here but not in real life since I think maybe price is not right yet and appears a few index funds aren't done selling since it is now below the magical $1bn

[held]

Going through the AGM slides, interesting that there is no mention of moving into the industrial and data colling space

I would think PWH has the capability to move into the industrial/tech arena for cooling but they haven't and instead prefer to focus on what they are doing now (A&D, autosports, automotive).

If management can't see that as an opportunity, that could be a thesis breaker.

Maybe the new facility migration is proving to be a distraction?

[held]

Would be truly gobsmacked if someone or a group was selling purely because they knew the CFO was about to retire and there was nervousness about transition process. Selling on the basis of inside information?

If so, then this is pretty unfair that someone has taken pure advantage of this information that the rest of the market was unaware of.

Seems to have done a recovery but will have to see...

I guess next time if I see this happen to something I hold, I know where to look...

Probably fully priced

[held]

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

After hours announcement of FY24 results.

Prepare for some cheap shares since it was after hours.

[held]

In case no one noticed, about a weeks ago this appeared on the news

Now shares are back above $12! And possibly even more expensive than when the report came out

Hard to predict prices these days.

Out of curiosity, anyone got access to that report?

[held]

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.

Inside Ownership       Ordinary Shares            % PWH Issued           Net Value at $9.75

Kees Weel                   18,891,505                              18.8%              $184.192m

Roland Dane               114,944                                   0.11%              $1.12m 

Jeffrey Forbes             20,000                                     0%                   $195K

Kym Osley                   3,000                                       0%                   $29.25K

Amanda Holt               1,533                                       0%                   $14.9K

Total                            19030982                                18.94%            $185.552m

Recent Management Buying/Selling

Sell 30 November 2023          Kees Weel 494,719 Shares on-market at $9.75 ($4,823,510.25)

Buy 27 November 2023          Amanda Holt   1,533 Shares on-market at $9.708 ($14,882.74)

Buy 24 November 2023          Kym Osley       3,000 Shares on-market at $9.778 ($29,334)

Buy 24 November 2023          Roland Dane 41,176 Shares on-market at $9.71 ($399,818.96)

Roland Dane- Independent Chairman, Non-Executive Director

Roland has extensive automotive business experience in the UK, Asia and Australia. Roland was the founder of, and remains the principle shareholder in, the Park Lane (UK) vehicle acquisition business in the UK some 35 years ago. He is also the Managing Director of the successful Triple Eight Race Engineering team, winning 8 out of the last 13 V8 Supercar championships.

Kees Weel - Managing Director and Chief Executive Officer

Kees Weel is the founder of PWR and has been awarded the 2021 Australian Performance Automotive Industry “Australian of the Year”. From the humble beginnings of hand making his first copper and brass radiator in 1982 to a visionary leader of PWR, Kees has led PWR on an extraordinary journey that has cemented PWR’s reputation globally for quality and innovative cooling products and unparalleled customer service.It was Kees inspiration to begin manufacturing radiators that quickly led to a ready-made customer base that required superior quality and capability from radiators. With an ever growing business and in-demand product, in 2006 Kees started building, what is today, PWR’s state of the art manufacturing facility at Ormeau. Kees’s uniquely Australian approach to business is his greatest strength, where no challenge is too big and an ethos that everything can be made with time, money and hard work. Following its listing on the ASX, Kees has continued to oversee the extraordinary growth of PWR while still maintaining its commitment to quality and customer service and that ‘family feel’ amongst employees. Kees continues to develop PWR’s business capabilities and leads his high performance team to be innovative, listen to the customer and always have a can do attitude. Printed in supersized letters on the wall at the Ormeau manufacturing facility is Kees’ motto: Most people see things as they are and say why. We dream of things that never were and say why not? Kees was a team principal of PWR Racing V8 Super Car Team 1998-2007 and was a board member for Tega V8 Supercars in 2007.

Jeff Forbes - Independent, Non-Executive Director

Jeff has over 30 years’ experience in senior finance and management roles with extensive mergers and acquisitions experience. Jeff retired in March 2013 as Chief Financial Officer, Executive Director and Company Secretary of Cardno Limited, an ASX-listed engineering consultancy company. Prior to joining Cardno, Jeff was Chief Financial Officer and Executive Director at Highlands Pacific and has previously held senior finance roles in the resources sector. Jeff holds a Bachelor of Commerce from the University of Newcastle and is a Graduate of the Australian Institute of Company Directors. Jeff is a Non-Executive Director of Cardno Limited, Intega Group Limited, Ventia Services and Chairman of Herron Todd White Australia and Herron Todd White Consolidated. 

Kym Osley AM, CSC -Independent, Non-Executive Director

Kym brings to the Board over 45 years’ experience in the Defence Force and Defence industry. He has undertaken Defence strategic procurement and capability planning for the Defence Force as well as personally leading major Defence capability programs, including the $17B F-35 Joint Strike Program for Australia. Kym was Australia’s senior Air Force representative to the UK, and later was the senior Defence representative in the US engaging with the US military as well as with international major Defence companies. Kym flew operationally as a fast jet aviator in aircraft including the F-111, Phantom and F-18 and commanded at all levels through to two-star rank. He was deployed to the Middle East where he directed air operations for the Coalition with responsibility for over 400 aircraft and 25,000 staff. In his Reserve military capacity he has also led many overseas industry delegations to engage with overseas primes and military organisations to generate export contracts. Kym also worked for six years as a senior member of the Canberra PricewaterhouseCoopers firm where he was a strategic adviser to Defence for the $270B Force Structure Plan 2020 and led a team that planned the establishment of Defence Space Command. In 2019, Kym was awarded a Defence Industry Service Commendation by the Minister for Defence for his contributions to Defence and Defence Industry over many years.

Amanda Holt - Independent, Non-Executive Director

An accomplished and respected senior executive and defence industry leader, Amanda commenced her career in military systems engineering developing interoperable combat, communications and simulation systems for the Royal Australian Navy in roles at Adacel, ADI and Thales.  She further developed her understanding of complex military systems when she joined Australian engineering and systems integration company, SYPAQ Systems in 2007. SYPAQ provided Amanda with the opportunity to work with capabilities such as naval shipbuilding, submarine systems, naval and army aviation, aerospace systems, land surveillance and autonomous Systems. Amanda was appointed SYPAQ’s Chief Executive Officer in 2015 after being General Manager, Defence and Aerospace and Chief Engineer for four years prior.  Amanda was the recipient of the 2019 Female Defence Leader of the Year Award. 

PWH released their FY23 results a few days ago, from their presentation:

I thought the result was pretty solid after a fairly disappointing 1H FY23. This year has been a year of investment in the business with the acquisition of several businesses to increase their footprint into Europe. The increase in net assets and lease liabilities reflects this.

Whilst 1H FY23 saw net margins fall below 15% as a result of this increase in spending and also the increased cost of raw materials. 2H FY23 saw a return to increased profitability with net margins improving to back above 20% again.

Management themselves have mentioned that with the increased investment, they will be able to support further growth with current capacity at their new site in Rugby (UK) only being 50% utilised at present.

Once again there was strong growth in emerging technologies with Aerospace and Defence now making up 9% of total revenue. This table below shows their Revenue by Customer Market.

Still lots of projects in the pipeline and interestingly as an F1 fan, I saw that they had secured the contracts for multiple teams for FY26. This is interesting as this is around the time that several major teams will be entering/re-entering the F1 scene. I believe given the growth of F1 in North America, there will likely be more than 10 teams on the grid, thus providing more teams for PWH to work with.

Will update my valuation shortly. Whilst the business seems to be back on track, shares are still quite expensive, and growth would need to continue into the future to support the current price.

Disc: Held IRL and on Strawman.

PWR Preliminary Final Report and 2023 Annual Report

Your new Chairman, Roland Dane, who has unanimous support of the Board, has substantial Board, leadership, operational and financial experience and has been a Board member since March 2017. Roland will take over as Chairman at the conclusion of the 2023 Annual General Meeting

PWR HOLDINGS LIMITED (ASX:PWH) - Ann: PWR Preliminary Final Report and 2023 Annual Report, page-1 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

Return (inc div)   1yr: 4.38%   3yr: 27.35% pa   5yr: 27.90% pa

PWH: returns are like the leaky radiator at the moment. Engine light is amber!!! not red yet...

PWR Holdings (PWH) released their 1H FY23 results after market yesterday. From their presentation:

Probably not the best result considering before the results release they were trading on a PE of around 60x. Management stated that increase labour costs and raw material costs impacted the bottom line. They also spent money to expand into Europe in the last half.

I think in the long term PWH should benefit from the current investment period. Their business is relatively capital intensive, needing to purchase assets in order to scale up their business, and so it remains to be seen whether this level of investment will pay off in years to come.

Shares are still too expensive (even after today's pullback) for mine. I did sell around half of my shares at above $11 around a month ago as I thought the valuation was looking stretched then. At under $7 I think I will likely top up my holdings but they remain a solid hold at the moment. Still lots of projects in the pipeline.

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.

PWR Holdings (PWH) released their FY22 Results ahead of their conference call tomorrow morning. From their release:

A bumper H2FY22 saw a record result for the company as they ticked over $100m in revenue for the first time. NPAT was also a record. Cash flow was a little lower due to increase in spending due to supply chain constraints although management have said that this will ease as supply chains revert back to normal.

I have updated my chart from the previous straw to reflect the full year results.

If you ignore FY20 which was covid impacted, NPAT has compounded at 15% for the last 5 years and shows the quality of this company to execute their goals.

I will update my valuation accordingly.

Full presentation here

Disc: Held IRL and on Strawman.

PWR Holdings (ASX:PWH) released their results for H1 FY22 after hours yesterday. From their release:

Overall a decent result given current covid headwinds driven mostly by a return in motorsports to a more normalised race program. I have graphed out their revenue growth and NPAT growth for the last few years below.

H2 is seasonally the stronger half so it will be interesting to see if they can maintain the growth. I still see a very long run way for this company as their cooling systems can be used in a multitude of applications and we are only just starting to see this playing out (emerging technologies grew by 36% but is only 14% of overall revenue).

I will maintain my valuation (see my valuation straw) as I still think currently shares are a bit overvalued but am a happy holder at current levels.

Disc: Held IRL and on Strawman

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 had a large "Staff Wanted" sign up at the front of their Ormeau office as I drove by. I thought I'd do a search of Seek as this is a company on my watchlist. The following jobs came up:

TIG Welder

CNC Machinist

Graduate Accountant

CNC Programmer

School Leaver Program

Manufacturing Production Assistant

Chef

The company states the need for new staff is due to "Exponential growth at PWR has opened up an exciting career opportunity for..."

The company offers "Fully catered meals from our onsite diner, morning tea & lunch provided". This was highlighted in a podcast featuring Emma Fisher of Airlie Funds where she mentioned the company having a strong culture and management wanting employees to have access to healthy, nutritious food. It also explains why they're hiring a chef.

Management see a bright future for the company stating they offer a "Long Term career path within a growing global business" and "we are searching for candidates who are looking for a long stable career"

"Fully Funded Apprenticeships" are available as well; however, I'm unsure if this is the norm in Australia?

With over 300 staff, this number of new jobs listing may not be significant but it was interesting to take a look at their hiring process, the benefits they offer and their outlook for the company.

H1 FY21 performance places us in a strong position for full year FY21 • Revenue $37.2m up 25% on pcp. Growth across all primary categories with 51% of revenue growth coming from emerging technologies and OEM categories 

• Cash on hand at 31 Dec 2020 of $16.8m (2019 : $7.9m) with over $22m of finance facilities available and unutilised.
•  Sales movement by currency to pcp - GBP sales up 5%, USD sales up 92% mainly from increased OEM sales and AUD sales up 16%.
•  C&R revenue increase of 82% from organic growth in emerging technology and OEM sales.
•  EBITDA margin of 32.8% improved from pcp (25.6%) as a result of higher volumes, efficiencies of scale and JobKeeper receipts. Rescheduling of Formula 1 and other race categories from the first half of the 2021 calendar year to the second half.
•  NPAT of $6.6m up 90% on pcp

 Increased dividend

• Fully franked interim dividend of 2.80 cents per share – an increase of 47% on pcp.

Cash flows

•  317% increase in operating cashflow compared to pcp. Due to improved cash conversion ratio, lower working capital and prepaid contractual commitments (some due to timing).
•  Working capital invested decreased by 12% with revenue growth of 25%.
•  EBITDA to cash conversion ratio of 122% for the period (pcp : 68%).
•  Loans drawn down at 30 June 2020 (due to COVID 19 uncertainty) fully repaid during current period.
• Cash on hand at 31 Dec 2020 of $16.8m (2019 : $7.9m) with over $22m of finance facilities available and unutilised.

Presentation

https://www.asx.com.au/asxpdf/20210219/pdf/44stkpvhqf4mml.pdf