Update, page-2

Truly an amazing Co. Will be a growth story in 2016. Half yearly comes out 26th Feb and rumour has it it will smash out their initial prospectus numbers. LT holding.

PWH a no-brainer for investment.

World leader in automotive cooling solutions.
PWR Holdings (PWH) is at the forefront of cooling solutions internationally. Through its highly engineered, technically advanced and innovative designs, PWH has been able to compete on a global scale and provide customised cooling solutions to elite motorsports series like Formula One, NASCAR, V8 Supercars, DTM, IndyCar and the WRC, which makes up only a small portion of the US$5.3bn global automotive market. We therefore see significant growth opportunities for PWH to further penetrate this large market. PWH’s strong reputation in motorsports has led to exceptionally strong revenue and EBITDA growth as customers seek out performance, which is often measured in milliseconds.

Elite motorsports is just the beginning.
PWH’s market-leading reputation created through its success in high-end motorsports has given it the opportunity to expand into other areas that require specialist knowledge on customised automotive cooling systems. In our view, PWH should be able to further support its growth by continuing to partner with OEMs to provide its specialised solutions to high performance/low production supercars (eg. Porsche 918 Spyder, BMW i8, Lamborghini Asterion, Ferrari LaFerrari). We also believe the group is well placed to leverage its expert knowledge in automotive cooling solutions to expand into adjacent markets and emerging technologies. These markets similarly require technically demanding and customised cooling solutions for products such as electric batteries and household energy storage.

Consistently solid growth profile with high margins.
PWH's track record of delivering both top-line and EBITDA growth is well demonstrated by its historical two-year CAGR performance (40% revenue and 61% EBITDA), which has predominately been driven organically. PWH's FY16 prospectus forecasts imply 44% revenue and 34% EBITDA growth on FY15, which continues to be supported by increased customer spend from motorsports and strong growth in both Automotive and Emerging Technologies. FY16 should also see the benefit from PWH's recent US acquisition, C&R (12-month contribution), which should provide the beachhead for greater US expansion. In our view, PWH has established strong foundations to support a substantially bigger business. As such, we initiate coverage with an Add rating and A$3.06 blended price target. Key risks include increased competition, product failure, loss of reputation, FX movements, customer concentration and lack of IP protection.

Investment thesis
 Highly experienced management team with culture of innovation: PWH’s in-house IP is the culmination of the senior team’s 100+ years of combined experience in the automotive and cooling technology industries and culture of innovation instilled within the company. In addition, PWH is supported by a team of experienced factory supervisors and world-class engineers with the relationships and technical capabilities necessary to operate across all highend automotive cooling technology markets globally.

 High barriers to entry: PWH’s technical knowledge and IP that has been built over the past 30 years, strong relationships with customers and state-of-the-art wind tunnel facility makes it difficult for any new player in the market to replicate.

 Top name racing teams as customers: PWH’s products and services are used by many of the leading teams across the major global racing competitions, high-end aftermarket customers, and premium performance vehicle manufacturers.

 Racing teams are performance focused: Top racing teams are continually searching for the edge on the competition resulting in a drive for technological improvement. Due to the considerably fine margins in racing (difference between winning and losing is often measured in milliseconds), teams are less price sensitive. PWH’s technical expertise and high-quality service offering therefore allow it to earn strong margins on its products.

 Targeting niche segments of the automotive market minimises competition: PWH’s success to date has been its ability to target high margin, niche markets within the automotive cooling sector. These are typically lowproduction run, high performance vehicles with high technical requirements. Large OEM cooling manufacturers have a different business model and typically target high-production run projects with a lower technical requirement. As a result, PWH sees relatively few competitors in its chosen niche markets and this is further demonstrated by the group’s EBITDA margins (FY15: 37%).

 Strong reputation for high quality cooling solutions: PWH is recognised globally as the pre-eminent cooling technology solutions provider to top-tier racing teams, as well as wholesale, high-end retail and OEM markets. PWH’s association with top Formula One teams (widely regarded as at the forefront of automotive technology) over the past five years highlights to us PWH’s capability and the quality of its products. This validation in premier motorsport creates further opportunities in motorsports and other markets.

 Quick turnaround times that are unmatched in the industry: PWH has a range of raw material stock kept on premises at all times to guarantee sales orders can be filled in the expected timeframe. Given the time pressures of Auto & Parts - Overall│Australia│Equity research│December 16, 2015 5 high-end motorsport racing, PWH prides itself on not only providing the highest quality product but also on the quickest turnaround time and delivery to customers all over the world. While this may result in higher working capital requirements, in our view this highlights the customer-focused nature of the company.

 State-of-the-art wind tunnel facility provides competitive advantage: PWH designed and completed construction of a state-of-the-art wind tunnel facility in 2012, which is integral to its end-to-end offering to customers. The unique wind tunnel gives PWH the ability to offer in-house testing of its cooling technology solutions, rapid prototyping and product development.

 Continual focus on innovation: PWH has a culture of research and development (R&D) that drives technology innovation and is inherent in the daily business. Working with the top racing teams around the world has also allowed PWH to develop invaluable intellectual property (IP) over the years that gives it a competitive advantage over its competitors and is difficult to replicate for new entrants.

 Infrastructure in place to support substantially higher revenues: PWH’s custom built manufacturing facility at Ormeau, QLD is currently operating at one shift per day, which has allowed the group to generate A$33m in revenue in FY15. We believe PWH could potentially double capacity at its Ormeau facility without significant increases to its fixed cost base. Growth opportunities

 Global motorsport industry is worth US$5.3bn: PWH is aware of 86 active motorsport championships around the world, but the global motorsport industry extends far beyond this with professional, semi-professional and amateur racing series across formula, touring car, sports car, production car, one-make, stock-car, rallying, drag, sprint, demolition derby, speedway, road racing, ice racing, off-road, kart, motorcycle, boat racing and historical racing categories. Globally, this market is estimated at US$5.3bn pa, and as such there is potential for PWH to extend its reach into other racing categories where it currently doesn’t have a presence.

 Partnering with Original Equipment Manufacturers (OEMs) on high performance/low production run vehicles: On the back of its ability to provide complex cooling solutions, PWH has been able to apply its technology to a number of limited release (typically less than 5,000 vehicles), high performance “supercars”. For example, Porsche, Lamborghini, Ferrari and Aston Martin have all released special edition vehicles recently. There is an opportunity for PWH to grow in this space and target OEMs due to its proven ability and contacts gained via dealing with high end motorsport teams.

 Capturing a greater share of customer spend on cooling solutions: PWH has been successful in transitioning more customers to a close collaboration model, whereby PWH partners with the customer from the initial design stages through to implementation of bespoke solutions. Over time, higher collaboration with its customers gives it the opportunity to cross-sell additional products and better service the customer’s needs, which should lead to higher spend per customer.

 Motorsport globalisation and standardisation: The ongoing globalisation of motorsports and increased number of races in key championships has resulted in a greater number of racing schedules in a wider range of climates and conditions. This in turn has led to increased cooling complexity and demand for specialist services such as PWH’s.

 V8 supercars - Gen2 Supercars regulation coming into force in 2017: Regulations will open the category to different engines and body shapes, which will change the face of the sport by allowing non-V8 engines (eg. V6 turbocharged) onto the grid. The changes outlined for the 2017 season are likely, in our view, to drive further opportunities for growth (eg. V6 turbocharged engines will require more cooling solutions than a V8 engine and entry by more racing teams means increased potential for new customers).

 Rising demand for hybrid and electric vehicles: Increasing demand for more environmentally friendly vehicles presents new opportunities for PWH. Auto & Parts - Overall│Australia│Equity research│December 16, 2015 6 Electric and hybrid vehicles face many of the same, as well as several additional, cooling challenges faced by its traditional fuel-powered equivalents.

 Stricter environmental regulations leading to more smaller-sized turbocharged engines: Downsized turbocharged engines are a good way for automakers to satisfy more stringent global fuel economy and emission regulations and customer demand for better-performing vehicles. With turbocharged vehicles requiring more cooling products than a conventional vehicle, PWH is in a good position to capture a portion of this growth, in our view.

 Increase penetration in the automotive aftermarket segment: PWH’s acquisition of C&R in the US has given it a platform from which to grow its aftermarket products in a market estimated to be worth around US$300m. PWH/C&R’s current sales in the region are around US$1m pa, and with an increased marketing effort, there is opportunity for PWH to increase its market share, especially in the higher-end aftermarket category where competition is fairly limited. Similarly, PWH believes the Australian aftermarket segment is worth around A$40m pa (of which PWH estimates its market share is around 10%) with an opportunity to increase its presence further.

 Increase presence and entry into adjacent markets: While PWH currently operates primarily in the automotive cooling solutions space, opportunities exist for it to transfer its technology into adjacent markets such as buses, trucks, heavy equipment, mining, civil, agriculture, farming, military and marine where the need for high-quality cooling solutions is just as important.

 Emerging technologies: Advancements in technology (e.g. development of larger, more sophisticated batteries, specifically with respect to renewable energy and energy storage) have opened up a new set of cooling challenges and provides an opportunity for PWH to develop associated battery pack and electronics cooling systems to maintain and control optimum operating temperatures.

DYOR