GYG Plc (LON:GYG) has released 2018 results this morning which are in line with our forecasts, following two downgrades in H2 2018. Clearly 2018 has been a challenging year for the group with setbacks in the Coatings division impacting both the refit and new build segments. We leave our 2019E and 2020E forecasts unchanged following these results and introduce our 2021E forecasts which imply a €1.5m uplift in adj. EBITDA YoY from 2020E levels to €5.7m. On a more positive note, we believe the group is starting to see demand normalise in the Refit business and is gaining increased momentum in New Build, based on what we can see in the order book.
2018 results: Revenues were down 28.2% YoY driven by weakness in the Coatings division across both Refit and New Build resulting in a 33.9% decline for the segment, partially offset by a 6.5% increase in revenue in the Supply division. Gross margins fell to 17.9% however the group was able to mitigate some of the revenue decline in reduced underlying operating expenses which were down €1.0m YoY to €8.6m resulting in a loss at the adjusted EBITDA level of €0.9m. Net debt was significantly lower than forecast with working capital benefits offsetting trading losses resulting in net debt at year end of €6.6m. There will be no dividend payment relating to 2018, but the board has stated an intention to begin paying a dividend again as soon as is feasible.
Key drivers: Coatings revenue was €33.5m in 2018 (vs ZC forecast of €34.7m) down 33.9% YoY driven by weakness in both Refit and New Build. The Supply business saw a 6.7% increase in revenue to €9.5m (ZC forecast: €9.3m) as trading in the division improved through H2, partially offsetting the decline in Coatings revenue. The order book as at 31st March 2019 was valued at €38.8m, a €28.5m increase compared to the same time last year, driven both by a recovery in demand in Refit and significant contract wins in New Build which should start coming through the business in 2019 and 2020.
Forecasts: The growth in the order book provides greater visibility through the forecast period out to 2021E and underpins earnings through the forecast period. We leave our 2019E and 2020E forecasts unchanged for now. We introduce our 2021E forecasts for the first time, which have been cautiously set below the 2017A outturn.
Valuation: Based on our forecasts the group trades on an EV/EBITDA of 12.9x in 2019E falling to 8.7x in 2020E. On a P/E basis the shares are trading at 35.0x 2019E earnings falling to 18.6x in 2020E. The shares trade at c12x 2021E estimates that we believe have been conservatively set based on a record order book, remaining below 2017 levels which would imply a 9x P/E at the current price.
