LPA Group looks set for a bumper year

LPA Group exhibits a strong order book, a strong balance sheet and a clear forward strategy – and on just 8.7 times earnings. 

About a month ago the Saffron Walden-based LPA Group (LON:LPA) announced its interim results for the six months to the end of March this year. 

They were nothing to get excited about. 

However, upon looking at the group’s record order books going forward, I reckon that the coming year will see the company make significant advances in both sales and, more importantly, profitability.

What is LPA’s business?

The LPA Group is a market leading manufacturer of high reliability LED lighting and electro-mechanical systems. It is also a distributor of engineered components. Its focus and expertise is in the rail, aviation, industrial, infrastructure and defence markets.

It has three main operating companies – LPA Channel Electric, which is a distributor of engineered components; LPA Connection Systems, which is a designer and manufacturer of electro-mechanical systems and also offers fabricated metal engineering services; and finally, LPA Lighting Systems, which designs and manufactures LED lighting and electronic systems.

The group has a reputation for innovating cost-effective engineering solutions to improve product reliability, reduce maintenance and minimise life cycle costs, especially for use in benign and hostile environments. 

Global markets and clients

The company, which is a world leader in the design, build and supply of LED lighting, electrical connectors/connector systems, and high-performance electrical components, has developed a successful export capability to over 50 countries, most notably in Europe, Asia and Australia. 

The group supplies a range of original equipment manufacturers, including Airbus, Alstom Transportation, BAA, BAE Systems, Bombardier Transportation, CAF, Compin, CRRC, Downer EDI, Hitachi, ITW, Kinki Sharyo, Knorr Bremse, Leonardo, London Underground, Siemens, SNCF, Stadler, Stagecoach, TRSC, Unipart Rail and Wabtec.

In mid-June the company confirmed the contract award to supply 165 new build carriages with LED lighting systems, for the UK’s East Midlands Railway Aurora InterCity Fleet. Manufacture of the trainsets will be from Hitachi’s UK Newton Aycliffe site. 

At the time Paul Curtis, CEO commented, “Our business development activities remain strong with this award adding to our already record order book. Manufacture for this contract will commence this financial year.”

Recent results

Covid-19-impacted half-year results to end-March showed a 13.8% decline in revenues to £9.3m, and pre-tax profits were £100,000 against £190,000 previously. 

Some cost-cutting measures have helped to improve gross margins, to reduce its net debt to £1.77m (£3.17m) and almost halve its gearing to 13.5% (25.6%). The focus on costs and cash retention is a continuing feature.

So, it is now estimated that the full year, to the end of September, could show £19m of sales and a £200,000 profit.

But, on looking at the interim statement I noted that its order books going into the next year were standing at record levels of £26.2m (£24.7m). Some £5m of that book comes from new product developments and a number of new customers. 

Broker estimates

Research director David Buxton, at the group’s brokers finnCap, sees sales in the year to end-September 2022 rising to £23.9m, with a near six-fold increase in adjusted pre-tax profits of £1.2m, worth some 8.1p per share in earnings and able to cover a 1p dividend.

Buxton’s share price objective is 110p compared to the current 71p.

The equity

There are some 13.5m shares in issue, of which the LPA Group Employees Benefit Trust holds 300,000 shares.

Significant shareholders include Peter Pollock, Chairman (7.44%), Michael Rusch, President (7.14%), Peter Gyllenhammer (6.19%), Rights and Issues Investment Trust (4.83%), Susan Thynne (4.30%), Marilyn Porter (3.98%) and Stephen Brett (3.60%).

My view

Capitalised at less than £10m, with a £26m+ record order book, a range of premium products and services, low gearing and making £1.2m profits in the next year – and just trading on 8.7 times earnings – the shares of the LPA Group at just 71p look to be excellent value at these lower levels.

I now set a target price of 88p.