It's a frustrating development because if the recent establishment of Stadium's new regional design centres had taken place earlier, it may have led to a different decision from the customer. Following a period of reduced call-off, the telematics client will be moving product design in house and will manufacture elsewhere, the financial implications of which has been a sharp downgrade to profit estimates for this year and next.
Analyst Jon Lienard at house broker N+1 Singer has cut Stadium's current year revenue estimate from £62m to £52m, down from £53.9m in 2015, and slashed his pre-tax profit forecast from £5.5m to £4.3m, albeit that still represent a 7.5 per cent profit increase on 2015. On this basis, instead of EPS rising from 9p to 10.9p as N+1 Singer previously forecast at the time of the full-year results in mid-March and post a trading update in early May, management's guidance points towards a figure around 8.4p. Mr Leinard has maintained his dividend forecast at 2.9p, up from 2.7p a share. On this basis, the shares are rated on 9.5 times forecast earnings and offer a 3.6 per cent prospective dividend yield.
The loss of this key contract completely overshadowed news that Stadium's order book has increased 20 per cent since I covered the full-year results ('Switch on for bumper gains', 16 March 2016), and at £28m is now around £9m higher than at the end of last year. In other words, there is still strong growth coming through. Like-for-like sales in Stadium's technology products division surged by a third last year, mainly driven by the well-timed acquisition of United Wireless 18 months ago which boosted the company's exposure to the design and manufacture of electronics for the high growth M2M wireless sector that supports wireless connectivity between devices. Analysts at Berg Insight estimate that the global number of cellular M2M subscribers increased by 23 per cent during 2015 to reach 265m at the year-end - corresponding to around 3 per cent of all mobile subscribers - and is anticipated to grow annually at a similar rate in the next five years to reach 744m by 2020.
However, the loss of this one contract will be felt next year too and Mr Lienard cut his 2017 pre-tax profit and EPS forecast by 17 per cent to £5.8m and 11.5p, respectively, based on revenues increasing to £62m rather than £73m as previously forecast. Still, this represents decent growth and is supportive of Stadium's customer-focused design-led business strategy. Moreover, as I noted when I updated my view in mid-March, the company is still winning contracts in the insurance telematics market, and for usage-based insurance (UBI) units in particular. The products are fitted to a vehicle and monitor individual driving styles taking into account factors such as acceleration, braking and speeding; encouraging insurance customers to adopt a safer driving style as it can benefit the level of the insurance premium. This is one of the fastest growing machine-to-machine (M2M) vertical markets, with analysts at consultancy firm Berg Insight projecting compound annual growth rate (CAGR) of 42 per cent in the market between 2015 and 2019. I am still positive on Stadium's business proposition and niche electronic sectors being targeted. I also believe this is a one-off event, otherwise the order book would not be growing so quickly.
The key now will be for Stadium to continue to win orders from new and existing customers, and build its sales pipeline further. Of course, the scale of the profit shortfall explains why the shares have fallen from 110p at yesterday's close to 80p this morning. This means that the price is not only down on my last advised buy price of 122p in mid-March, but is only marginally above the 75p level at which I initiated coverage just under two years ago ('Switch onto the Stadium of light', 30 July 2014). Investors who participated in last summer's placing and open offer at 110p ('Powered up for gains', 29 July 2015), an equity raise that funded an acquisition, are sitting on a paper loss.
So, although it will take time for investors to regain their poise, I remain positive on prospects for the business and would hold onto the lowly rated shares for recovery if you followed my earlier advice. Hold.
