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To lose one director is not a tragedy, to lose two in a month…
29 Jul 16
The bulls will no doubt use the closely timed departures of the CEO and the COO to highlight the vulnerability of the company to a takeover. To us, it highlights the fragility of the company to commodity prices and the realisation that oil, coal and iron ore markets are staring down into the abyss. After the EPS collapsed last year, the long-standing CEO perhaps deserved to leave on a face-saving “ahead of market expectations” statement. However, we do not agree with the Board’s decision to replace him with the current FD. What the company needs is a CEO who will change the direction away from Oil & Gas and Minerals by suspending the dividend and rebuilding capabilities in growth sectors such as water and renewables. We suspect the newly appointed CEO will stick with the current strategy which, in our opinion, will deliver years of structural decline. We are not comfortable paying more than 13x EPS for a stock that could breach its covenants should trading deteriorate. Hence, no change to our SELL recommendation and target price of 750p.
14 Jul 16
Throwing more good money at keeping the commodity bubble alive has helped the stock recover some respectability after the oil-related collapse last year. Investors should use this opportunity to divest before everyone recognises that China cannot pile unwanted steel to the moon and that demand for iron ore will collapse once sanity returns to China. The graphs below highlight the problem – US steel prices have recovered thanks to heavy tariffs on Chinese steel while Chinese steel mills are facing bankruptcy as their prices fade after the March/April stimulus ran out of steam. Eventually, Weir’s Mining business will look no different to its Oil & Gas business – with a 50% fall from peak revenues and single-digit margins. We still expect the dividend to be cut by 50% in 2017.
Conviction List Q3 2016
11 Jul 16
Our Conviction List returned -3.2% over the last 12 months; this was set against the DS Small Companies index that returned -15.5% over the same period. Since its inception in 2010, the Conviction List has outperformed the market in 13 of 17 periods and a reinvested Conviction List would have returned 235% since its inception against a reinvested DS Small Companies index that would have returned just 22%.
INDUSTRIAL ENGINEERING FLASH - WEIR
28 Apr 16
Today’s trading update was all about being able to say “ahead of market expectations” and squeezing the bears. However, these are expectations that have been steadily falling throughout this year. Indeed, the company IR rushed out a new consensus only yesterday, which for H1/16 was down 3% from the consensus sent on April 11. The risk with this communication strategy is that at some stage the company will have to deliver against the recovery valuation of 20x 2016 consensus EPS. It is entirely possible that the management has got caught up in the re-emergence of the Chinese commodity bubble, but they will struggle to deliver the heightened expectations they have created today. The 11% YOY decline in the Minerals aftermarket Q1 input is a clear sign that no amount of stimulus will change the structural decline in the mining industry. We are sticking with our view that the Minerals division will see a sales decline of 8% and that operating margins will fall by 1.5%. We expect the shares to be de-rated as consensus EPS are downgraded further through the year.
Panmure Research - Industrial Engineering 20-01-16
20 Jan 16
The consensus is expecting sector revenues and earnings to bounce back in 2017, a position that reminds us of President Bush's “Mission Accomplished” speech. Chinese data may well be opaque, but if it is correct then there are two significant trends: 1. China's gross capital formation is falling sharply and needs to decline another 25% from 2015 levels to fall in line with world average; 2. China is successfully reducing energy/metal intensity of its economy with consumption and tertiary industries (aerospace, medical, optics, renewables, comms) generating bulk of the growth. This shift in China's GDP mix has already caused havoc in commodity, currency and credit markets. As the rebalancing continues, we believe it will remain difficult to forecast EPS for UK engineering stocks still heavily exposed to the energy/commodity complex. Attention will shift to balance sheets. Smiths Group and Morgan Advanced Materials are particularly vulnerable to rising refinancing costs. Weir may have to cut dividend to remain within covenants. Bodycote and Vesuvius, which we move to a BUY, seem most likely to pay an unchanged dividend over the next three years without relying on capital markets. Only GKN and Hill & Smith, which we move to a BUY, can be confidently expected to grow EPS and the dividend over the next three years and maintain a strong balance sheet.
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Fighting the waves
25 Oct 16
Management action in response to a tough trading climate and falling profits should contribute to a sound recovery in profits next year. Following share price weakness, the group is valued at a substantial discount to both the broking market leader Clarkson and to other peers. Meanwhile, if the dividend can be held, the shares offer a well above-average yield, pending an eventual improvement in trading conditions.
21 Oct 16
STM* (STM): Acquisition of London & Colonial (CORP) | Hurricane Energy (HUR): £70m placing and open offer (BUY) | Firestone Diamonds* (FDI): Liqhobong commissioning update (BUY) | Accsys (AXS): Acorn aiming to be a mighty oak – analyst interview (BUY) | Avacta* (AVCT): Act now… – analyst interview (CORP) | Tristel* (TSTL): Full year 2016 results – analyst interview (CORP)
N+1 Singer - Morning Song 21-10-2016
21 Oct 16
Xaar has announced that its FD, Alex Bevis, will be leaving to pursue other opportunities after almost 6 years with the group. A search is underway for his replacement and Alex will remain with Xaar until 24th March 2017. While Alex’s departure is disappointing, Xaar’s strategy remains on track, with new product launches expected to drive near term organic sales growth and a target of £220m sales by 2020. This reflects stronger leverage of Xaar’s innovative technology into a broader spread of end products and markets, with the £220m expected to be composed of broadly equal contributions from ceramics, packaging & product printing, Thin film/P4, and partnerships/M&A. Prospects for the group are exciting, with positive news flow on product launches and end markets anticipated over the year ahead.
FY17 expectations unchanged. Interim dividend maintained
25 Oct 16
Interims reflect tough markets which impacted Technical. Shipbroking delivered a resilient result and Logistics has performed well. The interim dividend has been held at 9.0p. The group anticipate an improvement in H2. The Board’s expectations for the year are unchanged based upon the strength of the order book due in H2, its ongoing market coverage and the benefits of action taken previously. We have retained our FY2017 PBT forecast of £8.7m and a maintained dividend. We reiterate our Buy and adjust our TP to 450p.
N+1 Singer - Morning Song 20-10-2016
20 Oct 16
A highly disappointing update from Senior reports a number of issues adding up to the Group being behind expectations. Following the Flexonics issues over the past 12 months, there are now issues on the Aerospace side which are affecting the outlook. In a period when some stability was required, this is disappointing. We have downgraded FY16 EPS by 6.8% and, whilst we see Senior remaining a US takeover target, we move from Buy to Hold (target price down from 262p to 196p) until more clarity is available on the direction of the Group.