macquarie report on gerard lighting group

Gerard Lighting Group

* What is Gerard Lighting Group (GLG)? GLG is Australia's largest manufacturer and distributor of lighting products, with an estimated 30% market share. Around 70% of sales are from GLG's portfolio of own-branded products, which include Pierlite, Sylvania, Crompton, Moonlighting, Inlite and Austube, with the remainder from branded imports. The company operates manufacturing sites in Australia at Padstow (the largest of its type in the southern hemisphere), Seven Hills, Gosford, India and Indonesia with products largely interchangeable between Australian and Indian operations.

* A multi-brand operating model with manufacturing capabilities: GLG operate a multi-brand strategy with products covering higher-end/higher-value categories down to commodity products. The company's manufacturing sites have the flexibility to move production between sites depending on project demands. The company's products are ~60% manufactured or assembled onshore, with the balance sourced mainly from low-cost manufacturing countries. GLG is thus a beneficiary of the strong A$. Commodity-type products are sourced overseas while the higher-value items are manufactured locally. Around 15% of revenue is derived from the supply of lighting components adding an attractive ongoing revenue stream. A point of differentiation for GLG is its in-house capability to commercialise best in breed, globally sourced technologies for Australian conditions with a focus on energy efficiency.

* Muted outlook for end markets: GLG is predominantly exposed to commercial and industrial lighting with around 75% of sales coming from these sectors. We view the outlook in the non-res sector as muted. The Construction Forecasting Council (CFC) forecast for commercial construction through FY11 suggested we should start to see supply worked off and new demand emerge into FY12. Industrial construction activity is described as gradually recovering through FY11. Energy costs and regulatory requirements around the reporting of energy usage are increasing. Recently the Federal and State Governments have agreed to implement energy disclosure requirements for commercial building owners under the National Australian Built Environment Rating System (NABERS) coming into effect in late 2010. Energy costs continue to rise with producer pricing climbing around 9% in the September quarter over the June quarter.

* Financials: FY10 sales revenue of A$362m was down 2% on the pcp. This figure was also slightly below the prospectus target of A$364.1m. FY10 EBIT of A$31.6m was a 20% increase on the pcp (FY09 $26.4m) and exceeded the prospectus target of A$30.9m.

* The FY11 prospectus forecast is for sales of A$399m up 10% and EBIT of A$35.5m up 12.5%.

* Based on the FY11 prospectus forecast, this implies a PER of 8.8x versus the Emerging Leaders Industrials of ~13.5x.

* Balance sheet and cashflow: At the FY10 result, GLG's reported net debt position was A$71.9m. FY10 net debt to EBITDA was 2x. Based on the FY11 prospectus forecast, interest cover is 4.1x.