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This is a company that popped up on one of my European screens. I don't have a position in this company, but thought my readership may find it interesting. Each of my shorts are usually the result of a screen of about 250 to 600 companies in a particular sector, industry or segment.

Tomkins Plc (TKS US)

 

Comparative Price Chart of S&P 500 Index Returns and Tomkins Stock price Returns:

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Tomkins Plc, along with its subsidiaries, is a global engineering and manufacturing company. It has two business groups: Industrial & Automotive and Building Products. Under the Industrial & Automotive business group, the company manufactures a range of systems and components for cars, trucks and other industrial equipment. The Industrial & Automotive segment operates through four business divisions: Power Transmission, Fluid Power, Fluid Systems and Other Industrial & Automotives. Building Products consist of two business divisions: Air Systems Components and Other Building Products. Air Systems Components supplies the industrial and residential heating, ventilation and air conditioning market. Other Building Products manufactures a variety of products for the building and construction industries.

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{njaccess 24,25,32,33}In March 2008, the Company acquired A.E. Hydraulics (Pte) Ltd. In June 2008, Tomkins plc announced that it has sold Stant Corporation to H.I.G. Capital, LLC.

 


1H 08 Results:

 

Decline in Building product segments results in decline 1H 08 revenues

For the six months ended June 30, 2008, Tomkins Plc's revenues declined a marginal 1.4% to US$2.927 billion. Lower revenues from Building Products segment (which fell by 13% y-o-y) was offset by rise in Industrial & Automotive segment which recorded a 2.8% y-o-y rise in revenues in 1H 08. Although the revenue decline was marginal in 1H 08, we believe the worsening housing markets in the US and bleak outlook for global automotive sector in the rising oil price scenario would hamper revenue growth in the future.  

 

Revenues in Building products segment decreased as both the divisions in this segment were impacted by slow down in the US residential and manufactured housing markets and rising raw material costs. The segment’s Air systems components’ non-residential division reported good performance with an increase in market share in bad market conditions. Though new acquisitions in the form of Trion and Rolaster paved their entry into the emerging markets, the management expects non-residential market to contract in 2009.

 

In the Industrial and Automotive segment, Power Transmission division recorded 8.1% y-o-y growth due to increased demand from the agricultural markets. The Fluid Power division grew 13.9% y-o-y owing to increase in capacity. Fluid Systems division reported 11.4% y-o-y increase mainly due to high growth in Remote Tyre Pressure Monitoring Systems (RTPMS).

 

In addition, new product developments, acquisition of Swindon Silicon Systems and newly won contracts from Mercedes-Benz, Mahindra and Mahindra, Chrysler and Ford supported revenue growth. Other Industrial & Automotive division’s revenues declined 23% y-o-y due to weak manufactured housing demand and decline in recreational vehicle markets as the manufacturers (US customers) cut production.

 

However, going forward, the pressure on the Auto aftermarkets (replacement sales) given higher fuel costs, are discouraging driving and, in turn, reducing maintenance needs. The miles driven in the US have been falling in the US for the first time in decades, as retail gasoline prices crossed $4 (then $5) per gallon mark. Furthermore, the automotive production is anticipated to decline in the near to medium term negatively impacting the company’s revenue growth.

 

Slowdown in the end markets to impact overall sales

The declining sales in the US (down 11% y-o-y), which is a key-end market of Tomkins (contributing 53%), resulted in the overall decline in the company’s revenues. The US construction sector accounted for 25% of 2007 revenues, the North American Original Equipment markets contributed 11%, and the US non-residential construction contributed 14% to 2007 revenues. As all these sectors are anticipated to remain weak in the US in the near to medium term, Tomkins’ financial performance is anticipated to take severe hit in the coming quarters.

 

Europe, which accounts for 23% of the total revenues, is also headed down with signs of economic slowdown and lower consumer confidence. The management indicated a slowdown in European industrial demand with JCB (Tomkins’ largest customer in Europe) announcing 20% production cuts. Considering, the company’s end market sectors, Construction, Industrial and Automotives, going through a rough patch in its major end markets, Tomkins’ prospects appear bleak.

 

 

 

Geographic exposure

End market exposure

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Source: Company data

 

 

Going forward, the North American market, which contributes more than 50% of total revenues, is expected to further weaken due to continuing slowdown in housing sector spreading into other sectors such as automobiles exerting pressure on the company. This slowdown in US residential markets is expected to continue till the end of 2009. Even in Europe, Industrial and automotive markets are expected to soften due to deteriorating economic conditions as well as declining consumer spending, which could lead to further decline in revenues.

 

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Continued weakness in operating profits due to higher input costs

Tomkins’ adjusted operating profit declined 9.3% y-o-y to US$243 million. Operating margins declined to 8.3% y-o-y in 1H 08 as compared to 9.0% in 1H 07 mainly due to increased raw material costs as well as higher distribution costs. In the Industrial & Automotive divisions’ Power Transmission segment, operating margins were slightly below previous year’s margins (13.3%) at 12.1% in 1H 08 due to increase in oil and other commodity prices. In the Fluid power segment, margins fell from 9.9% in 1H07 to 8.4% in 1H08 due to rising costs of oil-related materials and steel. Operating margins fell in both the segments in Building products’ category due to continuing weakness in the US residential housing, manufactured housing and recreational vehicle markets. The operating margins in the Air Systems Components division declined to 8.3% in 1H 08, while it turned negative in other building products segment to (9.1%) in 1H 08 as compared to 2.1% in 1H 07. 

 

Going forward, the operating margins are likely to remain under pressure in light of rising steel prices. Over the last six months, steel prices have increased 85% and the crude oil prices have increased 99%. At the same time, prices of other commodities such as Aluminum and Copper have risen by 14% and 15%, respectively over the same period. The unabated rise in oil prices coupled with the surge in commodity prices will continue to hamper the company’s margins.  

 

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One time charges reduce net profit margins.

Net income from continuing operations declined 93% to US$14.7 million. The decline in net income is attributable to decline in operating profit, increase in restructuring expenses, as well as impairment expenses worth US$168.1 million relating to Stackpole (automobile business). Consequently, the net profit margins declined to 0.5% in 1H 08 as compared to 6.7% in 1H 07. Even though the interest expense declined 5% y-o-y, interest coverage ratio reduced to 1.3 times in 1H 08 as compared to 4.5 times in 1H 07 due to lower operating profit and the impairment charges.

 

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Higher debt levels to negatively impact the company’s profitability in the coming quarters

The company’s net debt increased to US$702.8 million (as on June 28, 2008) as compared to US$591.5 million in FY 2007. The company’s long term debt has increased to US$852.9 million in 1H 08 as compared to US$828.3 million in FY 2007, while the short term debt has increased to US$100.9 in 1H 08 from US57.3 in FY 2007.  

 

Tomkins’ 10-year £150 million bond will mature in December 2011 which has been taken at a fixed interest rate of 8% and a £250 million bond is set to mature in September 2015 which is at a fixed interest rate of 6.25%.

 

Due to the capital-intensive nature of the industry, companies in the manufacturing sector are required to raise large amounts of debt for capacity expansion as well as geographical expansion. Considering higher interest rate scenario, raising further debt will be difficult for the company. Moreover, with the bleak revenue outlook and margins under pressure, the company’s’ debt paying ability might be significantly impaired in the near future.

 

Leverage Ratios

1H07

FY07

1H08

Long Term Debt

874.6

828.3

852.9

Short Term Debt

150.2

57.3

100.9

Total Debt

1024.8

885.6

953.8

Shareholder's Equity

1929.9

2137.8

2038.6

Debt to Equity

53.10%

41.43%

46.79%

Debt to Total Assets

22.66%

19.80%

21.43%

 

 

Other Ratio Charts

 

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Historical Data:

 

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Financial Statements

 

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Valuation Metrics     

 

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Current Market Multiples

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Ratio Analysis

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Ratio Comparison:

 

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Ratio Comparison (Contd.)

 

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