GYG has delivered strong H1 results that show a dramatic turnaround vs. last year. The market dynamics remain intact, with GYG also demonstrating greater levels of efficiency as it benefits from the investments made in systems and management while also widening strategic relationships with shipyards. We are maintaining our headline forecasts at this juncture, albeit we believe our forecasts are conservative and GYG remains firmly on track to execute a strong recovery backed by a record order book.
- H1 results: H1 revenues increased by 31% driven by a 37% increase in Coatings (New Build and Refit) with Supply revenues also +9% YOY. Gross margins improved from 18.9% to 20.0%, with a firm operational focus to improve and enhance this further, peak gross margin in 2015 was 30%. Adjusted EBITDA showed a dramatic improvement with adjusted EBITDA coming in at €1.5m vs. a loss of €0.1m last year. Cash generation also materially improved, with cash conversion at 187% largely due to changes in working capital of €2.2m as a result of a €1.5m movement in payables. Net debt continued to fall and was €5.9m vs. €10.5m last year and a year-end position of €6.6m. As expected, there was no dividend paid, albeit this continues to be reviewed.
- Key drivers: Within the mix, Coating (New Build and Refit) delivered €27.3m of revenue vs. €19.9m last year generating EBITDA of €0.6m vs. a loss of €0.7m last year. Trading in Supply remained robust, with revenues +8.8% and also generating €0.9m Group EBITDA in H1. There was a €6.4m increase in operating expenses during the year, which was +24% YOY. However, this was below the pace of revenue growth demonstrating the improving operating efficiency in the business coupled with enhanced forward visibility.
- Outlook: The clear momentum and turnaround in H1 is said to have continued in H2. The contract wins to date speaks for themselves, and the order book as at 30 June 2019 was in its strongest ever position providing even more visibility than before. The market dynamics also continue to play out as anticipated with the superyacht fleet growing by 3%, with the fastest growth segment in the 70+ metre range reflecting the trend for larger superyachts. Increased shipyard capacity coupled with GYG deepening its relationship with the Dutch and German shipyards should ensure it is well placed to drive growth.
- Forecasts & valuation: We are maintaining our trading assumptions following two upgrades in May and July but incorporate the impact of IFRS 16, which gives a boost to EBITDA, but is PBT and cash neutral. Based on our forecasts, GYG trades on an EV/EBITDA of 8.9x in 2019E falling to 6.0x in 2021E, and on a P/E basis 19.8x falling to 11.9x in 2021E. Following recent share price weakness, the shares are now trading on 6.7x peak 2017 EPS, which we believe is highly attractive with GYG a geared recovery play executing well.
