Worst over for high-yielding Low & Bonar?

It was tough for industrial fabrics firm Low & Bonar in 2014. A lack of growth in its core European market forced a profits warning at the end of the summer, and few expect much progress this year either. But new boss Brett Simpson has got under the bonnet and likes what he sees. He'll be spelling out his plans in the months ahead, and, if QE does kickstart a lifeless European economy, the company stands to benefit.

Low & Bonar made an underlying pre-tax profit of £25.2 million in the year to November 2014, up 7% at constant currency (CC), although flat at actual exchange rates. Revenue grew by 7% and 2% respectively. Strip out maiden results from its loss-making Saudi joint venture and CC profit jumped over 12%. Orders are, however, picking up there.

L&B's Technical Coated Fabrics division stood out. The business, which makes side curtains for lorry trailers and advertising banners, increased CC revenue by 9%, but higher volumes and operational efficiencies improved margins, driving underlying operating profit up by 28% to £14.2 million. The firm's smaller yarns unit which supplies artificial grass for sports pitches grew profit by 58% to £0.8 million.

Clearly, the core Bonar division, also responsible for last September's damaging profits warning, held things back. Then, the company admitted that a slowdown in construction activity had hit demand in European civil engineering markets, which chip in about a quarter of group sales. Annual profit fell 3.9% at constant currency to £21 million.

Civil engineering like-for-like sales fell 7.9% in the third quarter and 2.8% in the final three months, ending the second half 5.1% lower. "Activity levels have stabilised but remain subdued due to difficult economic conditions in our main European markets," says L&B, which supplies construction fibres, flooring and transport services. Weak sales in Poland also hurt Texiplast, bought for £15.9 million in 2013.

Former Dow Chemical engineer Brett Simpson took over from Steve Good in September, just three days after the profits warning, and likes what he sees.

"I have been getting under the skin of the business and our operations globally, and what I have found is greatly encouraging," says Simpson. "I believe there are further improvements which can be made which will enhance and accelerate our growth prospects, and I look forward to setting these out in detail later in the year."

Don't expect much growth this year - Peel Hunt forecasts pre-tax profit of £26 million and earnings per share (EPS) of 5.7p in 2015. But things are tipped to pick up in 2016 when the broker pencils in £28.5 million and 6.2p. That puts the shares, currently up 10% at 55p, on just 9.6 times forward earnings, dropping to 8.9 next year.

Crucially for income seekers, the final dividend is maintained at 1.75p, giving a full-year payout of 2.7p twice covered by underlying earnings. The prospective dividend yield is 5%, and Peel Hunt reckons the shares are worth 70p. However, with 2015 likely to be a low-growth year, investors will likely demand evidence of significant improvement in Europe before paying significantly higher multiples.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.