What's new?
■ On track for year
■ US coal orders slow
■ Coal inventories normalising
Americans are enjoying rock-bottom gas prices thanks to unconventional shale drilling on a mammoth scale. That's good news for them, but not for Fenner which makes conveyor belts to transport more expensive coal. However, the long-term outlook remains intact and a heat wave in the US means investors should warm to the shares.
Indeed, both revenue and earnings have matched expectations since March and, with seven weeks to go until the year-end, management is confident it will hit targets. That's good to hear given a mild winter and uneconomic shale gas pricing has softened demand for coal, threatening Fenner's core Engineered Conveyor Solutions (ECS) division. Admittedly, orders from the US coal market have slowed, but there are "early signs" that a recovery in US gas prices and growing exports are nudging coal stockpiles back to normal levels.
A record-breaking heat wave will have helped - air conditioning systems running at maximum are pushing electricity consumption through the roof. And seasonally higher operating margins are benefiting the Advanced Engineered Products unit, which supplies seals for pumps essential to shale drillers. Fenner has also reaffirmed its commitment to acquisitions following a refinancing back in May.
Investec Securities says...
Hold. This update is reassuring and the long-term growth drivers are still intact. But we are taking a more cautious stance on earnings for virtually all of the industrial stocks and cutting our earnings growth estimates from 9 per cent to 4 per cent for both the financial years ending August 2013 and 2014, with profits in both divisions reduced. We now expect adjusted pre-tax profit of £109m and £115m, respectively, giving adjusted EPS of 38.1p and 39.6p. And, given the de-rating of the peer group, our target price comes down from 500p to 380p and our recommendation moves from buy to hold.
Panmure Gordon says...
Buy. Fenner's statement is broadly in line and backs the case for 36.2p in consensus EPS in the year to August 2012, so our higher estimate of 36.8p needs to be tweaked - the main difference appears to concern revenues in Conveyor Belting. And full-year cash profits may trend towards £116m-£117m rather than our £118.7m. Still, Fenner remains one of the most innovative companies in the sector and EPS growth should resume its normal course once the US coal scene rights itself. We believe that the blip in the latter market is creating an attractive buying opportunity in the shares.
