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Interim results show a strong rebound in trading performance, with the outlook statement pointing to a better than expected full-year out turn. The group has shown a good increase in performance, with both divisions posting an increase in margins. Net debt has reduced, with stronger operational cash flows and balance sheet concerns are now fading. With upgraded forecasts our new 385p price target underwrites our maintained Buy rating.
Fenner
Fenner (FENR): Forecast upgrades follow strong interims (BUY) | Omega Diagnostics* (ODX): In-line trading update and FY18 estimates (CORP) | Minds + Machines* (MMX): Prelims pressing ahead (CORP) | Imaginatik* (IMTK): Year-end trading update (CORP) | OptiBiotix* (OPTI): FY16 results in line with expectations (CORP) | Europa Oil & Gas*, (EOG): Irish seismic contractor (CORP) | Sound Energy (SOU): Schlumberger investment (HOLD) | CityFibre* (CITY): Strategy proof point (CORP) | Connect (CNCT): Investment being made to drive growth (BUY)
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Fenner’s share price has gained 200% from its 2016 trough level. But it’s worth remembering that the trough-to-peak share price move from 2009-2012 was 1,280%. The company makes polymer conveyor belts for mining and heavy industries as well as specialised polymer components for a range of applications from specialised industrial to oil and gas to medical devices. Some of these markets have been depressed in recent years, particularly the mining and energy resources segments. However, we believe that a recovery is now beginning which, like the company’s conveyor belts, will keep going and going.
The group has announced an encouraging Q1 trading update, with trading in the quarter being satisfactory, but with improving sentiment and order intake now being seen in its two main end markets (mining and oil & gas) added to previous restructuring and efficiency gains leading management to guide to the full-year out turn likely to be comfortably ahead of current expectations. We have upgraded our EPS forecasts by 12% for 2017, and we also increase our price target from 300p to 335p, reinforcing our Buy rating.
Avacta* (AVCT): Read across from Pieris €30m licence (CORP) | Fenner (FENR): FY upgraded on positive trading update (BUY) | Chariot Oil & Gas* (CHAR): Rabat Deep farm out approval (CORP) | Mattioli Woods (MTW): Investing in fertile ground (HOLD)
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Recent FY results were in line with expectations, but with a much reduced cost base and several positive market indicators, management now expects 2017 to be mildly ahead of expectations. The shares have moved through the trough of its earnings and have recently outperformed on hopes of a minerals recovery, and now trade on a 2018 P/E of 18x. We some positive indicators now in evidence, and raise our rating from Hold to Buy, with a price target of 300p.
Fenner (FENR): Forecast upgrade prompts Buy rating (BUY) | Transense Technologies* (TRT): Upbeat AGM statement (CORP) | Avacta* (AVCT): To affinity and beyond… (CORP) | ScS Group (SCS): AGM statement (BUY) | BATM Advanced Communications* (BVC): Animal vaccine maker orders second sterilizer (CORP) | Redcentric* (RCN): CFO appointment and Financial Adviser resignation (CORP)
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We couldn’t help but laugh when the Chairman spent what seemed like ages to explain, in today’s interim presentation, that it was inevitable that coal markets would collapse in 2012. Really? So why were he and the rest of the Board not busy selling the division in 2011, when assets values were high? We leave the readers to come to their own different conclusions. We are eagerly awaiting the next presentation; perhaps management will have a view on how it was inevitable that iron ore volumes would collapse. However, if the management was too late to see that coming, they will need to spend millions more restructuring their Australian operations. At least, the Board has cut the dividend by 75% but there is no money left to invest. Cutting costs and capex to the bone to pay the reduced dividend might be the only strategy left.
Fenner is caught in a vicious circle of continuous restructuring as revenues continue to fall faster than costs. This is not a surprise. In a structural downturn, the focus on maintaining dividend to the detriment of everything else leaves a company with a depleted capital base. More restructuring will be required in coming years as we see the iron ore industry heading in the same direction as coal. The non commodity businesses, which should have been the focus of shareholder funds, will soon join the firefighting as the US industrial recession deepens. Ultimately, a rescue rights issue will be required once the company runs out of water.
The management should be able to blame mild weather for the next profit warning expected no later than April 24th. Peabody yesterday added weather to the list of reasons (cheap gas, regulation, etc) on why coal demand in the US is collapsing. According to the Association of American Railroads, coal shipments were down 38% YOY in the week ending March 26; year-to-date it’s down 32%. We are forecasting Engineered Conveyor Solutions’ sales to fall by 17% in FY2016 with Chinese demand for coal (and iron ore) also expected to fall by 10% this year. This could prove optimistic if Indian demand also comes off the rails; reports suggest growing stockpiles and reduction in output target there. We expect ECS to report a loss of £5m in FY2016 with the group as a whole reporting an operating profit of £16m. This equates to a PBT forecast of £1m, which remains well below consensus of £16m.
The group has announced the restructuring of its ECS business in the US reflecting poor conditions in the US coal market. It has also announced a trading update coinciding with today’s AGM. The two main areas of concern are the on-going weakness in mining (especially in the US) and further reduction in oil & gas, taking trading below previous expectations.
No surprises today. The regular profit warning but with more paragraphs. Slowly and slowly, Fenner is being bled to zero equity value as the Board continues to pretend that it can sustain a dividend on a shrinking capital base. We expect more profit warnings in coming months and we stick with our view that the company will at best break-even this year.
We are now forecasting a pre-tax break-even for FY2016 as further weakness in commodity-related markets spreads to Fenner's US-centric industrial businesses. We expect the ECS business to make a loss before a £10m restructuring charge for the US coal business. While the US coal business faces a permanent loss of sales, prospects in other parts of the mining world are also deteriorating rapidly due to a combination of sharp cuts in maintenance capex and mine closures. AEP cannot escape the severe cuts from the major US industrial OEMs such as Caterpillar and Cummins. The pressure on US$ earnings will add pressure on the balance sheet as two-thirds of the debt is US$ denominated.
Fenner: Post-results forecast reduction (HOLD) | Communisis: Bump in the road (BUY) | Independent Oil & Gas*: Rig contract and operational update (CORP) | SacOil*: OPL281 update (CORP)
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The Fenner Board have kept their jobs by not cutting the dividend and like many mining companies are hoping that cutting investment and people will buy them time. The trouble is that even growth in the non-oil part of the AEP division is now slowing, and in all probability has turned negative. Astonishingly, the management still believes that they operate in markets that in the medium to longer term will grow in excess of GDP. We urge investors to SELL before there is nothing left for equity holders.
Last night, CSX, one the largest US transporters of coal, warned that it now expects coal volumes to decline by more than 10% in 2015 and these significant headwinds are expected to continue in 2016. Low natural gas prices and increased competition from solar means that US coal production is struggling to fall as fast as demand, and inventory levels remain very high. Coal production is also being underpinned by banks' unwillingness to pull the plug on the effectively bankrupt US coal industry. Our forecasts already assume a 15% fall in Fenner's US coal revenues in the current fiscal year ending August 2016, which we believe partly explains the large gap between the consensus forecast of 11.6p compared with our forecast of 4.4p.
Fenner: Downgrade after year-end trading update (HOLD) | MP Evans: Volatile market masking latent value (BUY) | Anglo Eastern: Strong enough to weather the storm (BUY) | REA Holdings: Battening down the hatches (HOLD)
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In two weeks' time, we look forward to hearing how the management is planning to pay a dividend by finding new savings in the stationary cupboards. The problem is that many of their suicidal customers are also run by people who are also hanging on their jobs by maintaining (or even) increasing dividends by, among other things, squeezing their suppliers bone dry. Some customers are already junk rated and it is just a question of time before they are taken out of their misery. Yes, the share price can fall a lot further, unless the Board starts to focus on the balance sheet. The more likely scenario is that the Board will have to go. Remember, the share price fell as low as 34p in 2009. We have cut our target price to 125p (from 143p).
With continuing weakness in its two largest end markets, we have reviewed our forecasts for the remainder of the current year, as well as next year. The two main negative pressures on forecasts continue: weakness in the minerals markets and the decline in oil service demand. We have downgraded our EPS forecast by 11.5% in 2015 and 7.9% in 2016. The shares remain unattractive, with no turnaround in underlying markets during the forecast period. We reduce our price target from 185p to 175p, based on a fair value rating of 12x. While the shares have taken a further step down recently and the yield has some attraction, we consider forecast risk remains on the downside and thus the shares remain a rather lacklustre Hold.
Greece and China have dominated headlines but there is another entity staring down the abyss. Our analysis shows that the US shale industry has to undertake further brutal cuts if it is to survive. Investors should not be fooled by actions of companies like Pioneer, which are now adding to oil rigs to maintain the illusion of a viable business model. With debt and equity markets effectively shut, capex is being funded by asset sales; Pioneer remains unprofitable despite the benefit of hedging. Our research shows that most of the major independent US oil producers have little protection beyond 2015. The industry, which is still burning cash, has just enough cash left to maintain capex for one quarter. For companies like Weir, Fenner and RPS, market expectations of a recovery in 2016 look too optimistic. Investors should prepare for a lot worse.
Commodities - Energy
Fenner: Interim results (HOLD) | K3 Business Technology*: Acquisition (CORP)
Fenner K3 Business Technology Group PLC
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