Accrol Group Holdings (LON:ACRL) results came in as expected at the headline level, with adjusted EBITDA (post IFRS 16) of £3.2m (adj. EBITDA of £1.9m pre-IFRS 16), which compared to a £1.1m loss last year at the adjusted EBITDA level. Encouragingly net debt is now reducing at an accelerated rate ahead of our expectations, with adjusted EBITDA on track. However, interest costs are £0.6m higher than our previous expectations for FY, which triggers a 7.9% EPS downgrade in 2020 and 6.1% and 3.1% in 2021 and 2022 respectively. Our intrinsic value analysis implies a valuation range of £89.8m – £139.1m (vs. a current market cap of £60.5m).
- Interim results: In the six months ended 31 October 2019, revenue was up 13% to £65.1m (H1 19: £57.6m), on a like for like basis (which excludes discontinued AFH activities) revenue was up 20% to £64.5m (H1 19: £53.9m). The gross margin rose by 770bp to 19.7% (H1 19: 12.0%), as operational improvements to efficiency began to flow through. Operational costs also reduced by a further 11% during the period, contributing to the adjusted EBITDA improvement of £4.3m to £3.2m from a loss of £1.1m in H1 19. Net debt at 31 October 2019 was reduced to £24.8m, compared with £27.1m at 30 April 2019 with no seasonal weighting.
- Progress delivered: Management have successfully turned the business around through reorganisation, cost rationalisation, renegotiations with customers and refinancing. Management believe that they have achieved their primary goal in building a robust, agile and market-leading business, capable of delivering growth and reasonable levels of return to shareholders in the toughest of economic conditions.
- Forecasts: We leave underlying revenue and EBITDA forecasts unchanged following this update and will wait until the full year results to incorporate the impact of IFRS 16. Our EPS forecasts do fall by 3.1% – 7.9% through the forecast period due to higher interest costs than we anticipated during the period. We also adjust working capital assumptions, reflecting the return of creditor support and now expect net debt to be lower at £19.9m at the end of 2020E (vs £24.8m previously) going to £15.5m in 2021E (vs. £20.0m previously). This is a 22.3% – 59.1% reduction in net debt, and a major positive to the investment thesis in our view.
- Investment view: While challenges remain, we see potential for the Group to return to its pre-IPO foundation to build a more efficient and stronger business from here. Our intrinsic value analysis, based on a revenue base of £150m – £170m at a 10% EBITDA margin, implies a valuation range of £90.6m – £140.2m (vs. a current market cap of £60.5m) implying upside of between 48.4% – 129.9%.
