When a company with high-yielding shares 'rebases' its dividend downwards in order to invest in growth plans, it is nice to see growth come through. However, in the case of household products manufacturer McBride (MCB), shareholders have had to stomach a profit warning just six months on from news of the dividend cut. While the share price suggests the market is keeping faith for now, we feel it is time to jump ship given the heightened uncertainty brought about by the warning.
- Rolling out 60 new products by the year-end
- Cutting costs
- Competition from branded goods
- High debt position
- Weak consumer demand
- Dividend cut
True, there is some sound logic behind McBride's plans to boost production of supermarket own-brand goods. With consumers feeling the bite of the recession, many supermarkets have been reporting that their own-label products are flying off the shelves as shoppers trade down to what they perceive to be better value-for-money groceries. So McBride has been winding down its contract manufacturing arm to focus specifically on private-label goods in household and personal care, where it sees particularly good growth prospects. But a recent profit warning suggests sales may prove harder to win than previously expected.
In March, not long after releasing a set of average, but promising, half-year results, McBride issued the warning. It cautioned that full-year sales would be 3 per cent lower than expected and profits would also fall below forecasts because of an "unusually strong and prolonged period of branded promotional activity" and a "continuation of weaker consumer demand" in western Europe.
Weak consumer demand has been a characteristic of the European market since the financial crisis hit and it should come as no surprise to McBride that spending will remain subdued, not least because of the deteriorating situation in the eurozone. Meanwhile, the success of branded goods companies at using promotions to keep shoppers loyal suggests competition could prove fiercer than expected. This is worrying given McBride's recent decision to expand production. Indeed, as recently as January, McBride stated that "private label has continued to win market share from the branded competition".
| MCBRIDE (MCB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 114p | MARKET VALUE: | £208m | |
| TOUCH: | 114-115p | 12-MONTH HIGH: | 148p | LOW: 103p |
| DIVIDEND YIELD: | 4.8% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 59p | NET DEBT: | 71% | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 812 | 29.6 | 12.3 | 6.80 |
| 2011 | 812 | 7.10 | 2.90 | 6.80 |
| 2012 | 814 | 12.1 | 5.10 | 5.00 |
| 2013* | 752 | 14.5 | 5.80 | 5.10 |
| 2014* | 806 | 25.5 | 10.3 | 5.5 |
| % change | +7 | +91 | +88 | +8 |
Normal market size: 2,000 Matched bargain trading Beta: 0.55 *Investec Securities forecasts | ||||
That said, McBride has been successful in cutting costs. In the half-year, it slashed administrative overheads by £3.3m, helping to boost profits despite a fall in revenue. But if cost-cutting has been successful, growth has so far been slow to materialise. Sales in the so-called 'core and future growth' categories, in which McBride has been investing, rose just 2 per cent. Net debt of £77.8m is also a significant stumbling block and operating margins are pretty tight, too. Broker Investec expects the full-year margin to fall from 3.6 per cent to 3.2 per cent in 2013, reflecting the sensitivity of profits to falling sales.
Still, there could be some catalysts ahead. It could be that by specialising in the core growth areas it knows best, McBride can become a leaner, more efficient operation in the long term. The 60 products it plans to launch before the end of the financial year could boost sales. Eastern Europe and Asia also offer growth opportunities but, to put this in context, they represented just 4 per cent of first-half profit and 8 per cent of group sales.
