Equities
PWR Holdings Limited (PWH) is an Australian based company involved in the design and the
production of customised cooling solutions for motorsports and the automotive industry. 

The company offers cooling solutions for water (radiators), oil and forced induction air (intercoolers) systems for the motorsports industry, including Formula One, NASCAR and Supercars.

The company also engineers cooling solutions for automotive OEMs (original equipment
manufacturers) and is diversifying into emerging technology applications where cooling solutions are required - electric vehicles, cooling for military applications and even for data centres. 

PWR was established in 1998 with the head office is in Ormeau, Queensland. However, about 85% of the company’s revenue is generated outside of Australia. 

Given the extremely competitive nature of motor sports, especially F1, fractional increments in engine heat can make a significant impact. Most energy generated by internal combustion engines is lost as heat, with only ~30% being transferred to the wheels. Clearly, cooling is very important. 

PWR are held in such high regard in their specialist field, that they currently provide cooling systems for 11 out of 12 teams in Formula 1. 

One size does not fit all in this fast-moving industry, allowing a nimble business like PWR to design cooling systems to suit different cars with a variety of aerodynamic designs. Scale is not the driver of success in motorsports, but rather innovative and evolving designs. Such is PWR dominance in its niche category, it holds a monopoly on 3rd party cooling in the sport.

1HFY19 Result 

* H1 FY18 write downs of $635K. Increase of 16% on LFL basis

Earnings per share growth is forecast at around 25% p.a. for the next three years. Although the company does not provide guidance, except to say it is “on track for growth” in both 2HFY19 and FY20.

Motorsport continues to be the key driver of growth, especially in Europe, which saw sales up 42% at the last report. 

Currency movements accounted for $1m, or 5% revenue. 

Cash on hand at 31 Dec 18 was $6.8m and the company doesn’t have any debt.

Potential for Growth

PWR cooling systems have a large potential addressable market, considering the motorsport as well as high-end amateurs and boat sports.

When considering PWH forecast revenue of c. $60m in the context of huge F1 budgets alone (from $US50m to US$400 for Ferrari), the company appears well placed to capitalise on their stellar reputation.

Demand is also high from supercar manufacturers such as Ferrari, Lamborghini and Aston Martin Lagonda.  

Additionally, the business has set up an Emerging Technology division working on battery cooling for electric vehicles, cooling for military applications and even for data centres.

Risks

Competition: PWH relies on being nimble in an evolving environment, providing smart solutions to customers. As such, patents are not protected and a competitor may enter the market with a superior offering.

Customer: As with any businesses, any reduction in customer purchases will impact earnings.

Product: PWR relied on the strength of its reputation, and any product failures, defects or recalls could adversely affect earnings

Currency: Given that about 85% of revenue is derived offshore, any unhedged currency fluctuations will impact earnings.

Key Person: The founder, Kees Weel retains 29% of the company and key management have longevity and strong track records.

Value

PWH currently trades on a P/E of ~30x, which appears stretched, but becomes more approachable in the context of forecast growth of 25% per annum. However, operating leverage appears limited as the nature of this business is difficult to scale (customised engineering). On the flip-side, margins remain elevated as a function their bespoke products. 

Financials

PWR financial summary:

  • Market Price: $4.33
  • Market Cap: $433m


Comments

Please sign in to comment on this wire.