International high-end components and systems manufacturer Senior (SNR) should be a big beneficiary of the stabalisation in commodity markets and a marked step up in US infrastructure spending, while self-help initiatives should also support margins. But the shares' lowly rating still reflects recent troubles rather than the improving outlook, which leaves plenty of recovery potential on offer.
- Cost management initiatives
- Step up in US infrastructure spending
- Stabilisation in crude oil markets
- Strong aerospace build schedules
- Uncertainty on aerospace contracts
- Supply chain issues
The group, established in 1933, operates two divisions: aerospace, which manufactures components and systems for clients in aerospace and defence; and Flexonics, which principally supplies the automotive and energy industries.
Five-year valuation and margin range
Shares in Senior have been in downtrend since the early part of 2015, when they were changing hands at around the 350p mark. The industrial engineer lost around a quarter of its market value during calendar 2015, and matters hardly improved last year. In October, the group revealed that its aerospace business suffered a slower than expected rollout of new programmes in the third quarter, leading to its second profit warning of 2016.
The problems in aerospace exacerbated ongoing difficulties at the Flexonics business that has suffered due to challenging conditions in the US heavy truck and oil and gas markets. Underlying group revenue from organic operations was down 4 per cent on a constant-currency basis in the first nine months of the year as modest growth from aerospace was offset by lower Flexonics revenue (down 18 per cent).
The Flexonics difficulties had been signposted by management, but the third-quarter slippage in aerospace was far greater than early updates suggested. The scope of the warning - highlighting pricing and supply chain problems - hit investor sentiment, especially uncertainty over news that "the division has also been affected by some programme specific price increase discussions not yet concluding".
The problems faced by Senior have dragged margins down and the stock rating based on enterprise-value (EV)-to-sales (a classic metric for identifying recovery plays) has followed suit (see graph). Indeed, Senior's EV-to-sales ratio is now within the bottom (cheapest) 5 per cent of the five-year range and offers 28 per cent upside to the median-average rating over that period.
While there is little doubt the group has problems, we think we're currently in 'slack water' and a turn in the tide should unleash latent recovery potential. Trading difficulties have resulted in self-help measures, efficiency initiatives and beefed-up strictures on the cost front, all of which should help performance. The Flexonics business should also benefit from the transfer of production to new facilities in cost competitive countries, including Mexico and India.
| SENIOR (SNR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 193p | MARKET VALUE: | £810m | |
| TOUCH: | 192-193p | 12-MONTH HIGH: | 245p | LOW: 161p |
| FORWARD DIVIDEND YIELD: | 3.5% | FORWARD PE RATIO: | 13 | |
| NET ASSET VALUE: | 112p* | NET DEBT: | 44% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 776 | 98.1 | 19.0 | 5.1 |
| 2014 | 821 | 103 | 19.6 | 5.6 |
| 2015 | 850 | 99.3 | 19.0 | 6.2 |
| 2016* | 902 | 72.0 | 13.7 | 6.5 |
| 2017* | 996 | 79.0 | 14.7 | 6.8 |
| % change | +10 | +10 | +7 | +5 |
Normal market size: 5,000 Matched bargain trading Beta: 1.04 *Includes intangible assets of £373m, or 89p a share **Numis forecasts, adjusted PTP and EPS figures | ||||
Perhaps most significantly, though, there are reasons to be positive about end markets. The collapse in oil prices in 2014 started eating into energy sales and the heavy trucks market in North America. But following intervention in the market by Opec and a marked fall in US inventories, it appears that crude prices have, at the very least, stabilised. The heavy truck business also stands to benefit if the newly inaugurated US President makes good on his campaign trail pledge to unleash a wave of big-ticket infrastructure projects and corporate tax cuts. Defence spending should also benefit if Mr Trump sticks by his campaign rhetoric.
And there are reasons to hope for resilience in the aerospace market, despite recent ructions. Fitch suggests that industry deliveries for commercial aircraft should grow through this year and could approach a peak in 2018. Shareholders can still take confidence from Senior's involment in the Airbus A350 and Bombardier Inc's C Series, both of which are now ramping up.
