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Shares in FTSE 250 industrial firm Senior (LSE:SNR) are up 300% over the last half-decade. But the firm’s about to complete what could be a really interesting transformation for investors.
The company’s agreed to sell its aerostructures unit to private equity. And the remaining fluid conveyance and thermal management (FCTM) division has some attractive properties.
Divestiture
Senior’s aerostructures operation makes parts for aircraft. And the regulated nature of this industry means there’s a lot to like about this business. Despite this, the unit’s achieved relatively weak margins and returns on invested capital. Its flexonics division however, has fared much better in making ducts, hoses, and tubes.
Senior’s agreed a deal with Sullivan Street Partners to sell its aerostructures operation for £200m. Of this, £150m is up front with £50m to follow, depending on future performance. The agreed price represents a slightly higher EBITDA multiple than the FTSE 250 firm currently trades at. And the company has big plans for the money.
Outlook
Senior plans to use the proceeds to strengthen its financial position and reduce its outstanding share count. And the impact of this could be quite significant. The proposed £40m share buyback amounts to 5% of the firm’s current market value. And the remaining cash could make a big dent in the company’s £162m net debt (excluding leases).
The real highlight though, is the remaining FCTM business. On the revenue line, Senior’s looking to increase growth rates from 1% in 2024 to 5% going forward. On top of this, it’s looking for operating margins to triple and returns on invested capital to more than double. Given this, I think investors have to be interested in taking a look.
Valuation
There’s clearly a lot to like about Senior’s proposed restructuring. The remaining business should be in a stronger financial position with much more attractive economic properties.
Senior currently has a market value of £810m, with £162m in debt. Subtracting £150m for the sale of the aerostructures division brings the enterprise value to around £820m. The flexonics unit currently makes around £35m in annual operating income. And with the firm targeting 85% cash conversion, this should amount to just under £30m a year in free cash.
That makes me wary, especially given the cyclical nature of the company’s end markets. A free cash flow multiple of 27 seems high to me, especially with the sectordoing well recently.
Foolish conclusion
I think Senior’s restructuring move makes a lot of sense. If it can achieve the kind of operating metrics it’s anticipating, the remaining business should be a high-quality operation.
Strong demand, supply chain constraints, and significant backlogs suggest to me that the end markets the firm sells into are near cyclical highs. So considering a buy right now looks risky to me.
One thing about the industry is that a crisis – and therefore an opportunity – always seems to show up sooner or later. So I’m going to keep watching this one for a bit.
