EU slowdown bites into UK machine sector, though IMI rebounds
Ken Odeluga November 14, 2014 11:19 PM
<p>A raft of trading updates from British industrial machinery businesses today confirmed mixed sector conditions at best. Three major UK makers or suppliers of machines […]</p>
A raft of trading updates from British industrial machinery businesses today confirmed mixed sector conditions at best.
Three major UK makers or suppliers of machines reported interim updates, Aggreko, Rotork and IMI, as did a prominent supplier, Premier Farnell.
Investors reacted best to Aggreko Plc.’s Interim Management Statement (IMS) in which it reaffirmed underlying full-year profit guidance.
Shares of Premier Farnell, a key partner of many heavy industrial firms for electronic design and engineering applications, were hit the hardest.
The stock was the biggest faller on the London Stock Exchange after the firm essentially gave a profit warning by stating its full-year operating margin would be lower than the year before.
IMI Plc., the second-largest of the group in market capitalisation terms (after Aggreko) took a moderate early hit, after reporting slipping revenues and saying it would buy a German valve maker for €152.6m (about £120.5m).
Europe slowdown bites
As with many British firms in a variety of sectors, the chronic economic weakness in much of the European Union is proving a significant drag on earnings.
Gross Domestic Product readings from core regions of Germany and France today showed little more than continued anaemic growth.
Just over 20 years of monthly readings from the European Union Industrial Production Index (excluding construction) are charted below, against the FTSE 250 Industrial Engineering Index.
Whilst international expansion of firms in the UK’s machinery sector enabled it to continue rising, even after the Eurozone crisis, the drag from the bloc is beginning to show, possibly as China’s cool-down accelerates.
Further re-calibration of the UK machines sector to European conditions looks likely.
Premier Farnell bears brunt after margin warning
Shares of FTSE 250-listed Premier Farnell plunged as much as 11% after it said its gross margin fell 50 basis points, hurt by softer market conditions in Asia and Europe as well as its business mix.
It also warned full-year operating margins would be “slightly” below prior year levels for the same reason.
Premier posted operating profit of £92m in its 2014 full year with a margin of 9.5%, implying £8.74m remaining to pay for fixed costs, like debt.
Assuming the same operating profit for the current full year (although the market is more pessimistic) and taking “slightly” to mean 10 basis points, we’d need to shave off less than £100,000 from the fixed costs allocation.
At 30bp, the hit would be about £276,000, and with £90m–as per consensus forecast on operating profit for this year–the margin would fall £460,000 from the year before.
Clearly the market is concerned about much more central values though.
We note pre-tax profit forecasts have been slashed from as high as £79m in September, to as low as £73.78m today, according to a consensus compiled by Thomson Reuters, a downgrade of about 15%.
Rival Electrocomponents Plc. said on Thursday, it also took a gross margin hit, in its case of 0.7 percentage points, mainly from increased discounting in the UK and Asia Pacific.
IMI turnaround taking effect?
IMI Plc., which specialises in engineering solutions for conveying fluids and gases, said it would buy German valve maker Bopp & Reuther for an enterprise value of €152.6m, aiming to expand in emerging markets, particularly China and India.
The deal will give IMI access to a new high-margin opportunity in the aftermarket business, IMI’s CEO Mark Selway said in a conference call with analysts on Friday.
“We are expecting that they’ll (Bopp & Reuther) see improving margins in 2014 versus 2013”, Selway noted.
The market appeared to have lost faith in the firm, judging by the year-to-date fall of 28% (compared with peer Ashtead Group’s +39.5% over the same period).
However the stock has risen 13% off a mid-October low of 1108p to Friday’s 1251p, suggesting IMI’s five-year plan to double full-year operating profit by 2019 by means of acquisitions is gaining credence.
The stock is seeing a good bounce from lows around 1108p in mid-October, as daily momentum indicators rise into positive territory.
Aggreko may have benefited from short squeeze
Aggreko was the top riser on the UK’s benchmark FTSE 100 index, peaking at a 4.3% gain, its biggest one-day rise since April, in considerable volumes.
With shares having lost about 20% between mid-August to mid-October, the stock has, like that of its slightly smaller peer IMI, risen off lows.
But 4.4% of the stock is on loan, according to data provided by markets regulator the Financial Conduct Authority—an amount the FCA would judge as significant.
This suggests a ‘short-squeeze’ may help explain some of the day’s rise.
The company said in its interim update, trading since August had been in line with forecasts and that it continued to expect underlying full year trading profit to be similar to 2013.
On a day of marginal profit warnings, that clearly played well with investors who are taking the stock to its first test of moving averages since the shares slipped from autumn highs in September.
Rotork gets the thumbs-down
Rotork a direct competitor of IMI, reported revenue down 1% in the third quarter, although order intake was up 4.3%.
Its board said the firm continues to expect to make further progress in the full year, with margins anticipated to be similar to those seen in the prior complete year.
This obviously was somewhat guarded, and Rotork stock closed almost 4% lower.
Amongst its machinery peers, its stock looks to be responding the most poorly to the uptick in sentiment for some shares in the sector since mid-October, getting as far as 2582p before reversing late last week.
Moving average momentum (MACD) and percentage change oscillation seem to concur with the failure of sentiment.
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