News of 400 further job cuts clearly played a role in this positive reaction, as it helped reassure markets that there should be enough funds to keep the balance sheet in order and cover the current 3.7 per cent dividend yield. Other bull points include unchanged profit guidance and a lower than expected decline in the group’s mining segment.
Despite a recent slew of investment and production cuts by big mining groups, order intake in Weir’s minerals division was encouragingly down just 1 per cent. That resilient performance underpins the logic behind supplying apparatus used in processing rather than excavation, an area far more vulnerable to the cancellation of new mines. Unfortunately, the more lucrative maintenance, repair and replacement old parts business wasn’t so lucky – aftermarket orders tumbled one-tenth, albeit against very tough comparatives.
Given that management have already factored in renewed weakness in oil and gas, Weir’s ability to meet expectations will be heavily dependent on mining conditions not worsening. That’s not an easy target to make, especially as chief executive Keith Cochrane warned that mining customers took extra measures to preserve cash by delaying investments during September and October.
And let’s not forget about the impact a further slide in the value of brent crude could have. Weir’s oil and gas unit’s operating profit, which accounts for roughly half of the group’s total, shrank by two-thirds in the third-quarter. Recent trends, such as lacklustre data on Chinese factory activity and a jump in Russian oil production, suggest that difficult backdrop isn’t likely to ease anytime soon. True, the occasional supply disruptions are chipping in every now and then to lift the price, but the overall short-term outlook remains bleak.
As the chart below shows, that doesn’t bode well for Weir’s shares.
Source: Thomson Reuters Datastream / AJ Bell Research
