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Latchways heading for a fall

Lost sales in the US and big exposure to the eurozone mean safety equipment group Latchways may be heading for a fall
August 2, 2012

Working at heights is a dangerous occupation and support services company Latchways has created a niche industry out of making sure that, for workers who do slip, the worst doesn't happen. Management hopes that new technology in fall-protection systems will defy the downturn, but shares in the company could be facing a drop of their own as sales slow in the US and the weakness of the euro is set to hit the European business. With inventory on the rise and management pointing towards a slow start to the year, we think it's time to sell the shares.

IC TIP: Sell at 970p
Tip style
Sell
Risk rating
High
Timescale
Long Term
Bull points
  • Innovative new products
  • Strong balance sheet
Bear points
  • Slowing US sales
  • Construction sector weak
  • Big exposure to eurozone
  • Margins slipping in Safety Services division

After showing resilience, the US economy is showing signs of faltering; for the three months to June, growth was 1.5 per cent, down from 2.4 per cent in the first quarter. This is bad news for Latchways' US business, which in the year to March was already feeling the pinch - sales were down 30 per cent to £4m. The specific reason for the slump was that the US military decided not to repeat a contract for the new Wingrip product; but US defence spending is likely to stay under pressure.

Yet the US only accounts for 10 per cent of group sales. More concerning is the weakness of the euro because a third of Latchways' sales - £13.9m in 2011-12 - are made in Europe. Management says that, despite efforts to mitigate the impact: "The current crisis in the eurozone will have some adverse impact on margins." The situation is compounded by dismal confidence readings from the eurozone; ominously, the Markit Purchase Managers Index for Germany recently showed the fastest falls in confidence for three years.

LATCHWAYS (LTC)

ORD PRICE:970pMARKET VALUE:£109m
TOUCH:970-1,010p12-MONTH HIGH:1,238p LOW: 990p
DIVIDEND YIELD:3.7%PE RATIO:14
NET ASSET VALUE:258pNET CASH:£8.4m

Year to 31 Mar Turnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
200937.08.3151.623.4
201033.97.6249.325.8
201139.69.3361.329.6
201241.49.9366.032.7
2013*45.110.9070.136.0
% change+9+9+11+10

Normal market size: 200

Market makers: ?

Beta: 0.5

*N+1 Brewin forecasts (earnings are not comparable with historic figures)

Latchways' main source of income is its Safety Products division, where sales were up 5 per cent and operating profits rose 12 per cent to £9.1m in 2011-12, contributing over 90 per cent of the group profits. The other division, Safety Services, which installs Latchways products, was less inspiring - revenues were 8 per cent up in 2011-12, but operating profits fell by 25 per cent to £0.9m.

Inventories have been backing up as well, with an increase of £1.6m, some 43 per cent during 2011-12, to finish at £5.4m. Latchways isn't concerned, though. Its balance sheet is strong with £8m of net cash and its bosses say the stock allows them to respond quickly to customer requests; besides, they remain confident that new technology such as the Personal Rescue Device can pull them through, adding that the product is attracting strong interest. Chairman Paul Hearson is confident of a strong year in 2012-13, saying that the levels of prospects and opportunities are at an all-time high.