True, if you followed that recommendation you will have banked five dividends totalling 13.75p a share which has lessened the pain. And I understand that the company's board will hold the dividend at 5.5p for the current financial year too.
However, I am disconcerted by the scale of the deterioration in business for the company's tobacco machinery division as customers delay equipment orders. This reflects a cautious approach to investment in light of the ongoing geopolitical situation in the Middle East and Eastern Europe, coupled with consolidation of supply chains amongst tobacco groups. As a consequence, two large machinery orders which had been deferred in the first half of this year are now not likely to be completed due to "customer specific issues".
To compound matters, the economic uncertainty is undermining prospects for Molins' scientific services division too. So although orders and sales in the company's packaging machinery business are ahead of 2013 levels, this will not make up for the shortfall elsewhere and has led to some pretty hefty profit downgrades. In fact, analysts Paul Hill and Gilbert Ellacombe at research firm Equity Development have slashed their 2014 pre-tax profit estimate from £5.27m to £3.27m based on revenues of £91m, down from £5.4m and £105m, respectively, in 2013. They have also downgraded their 2015 pre-tax profit estimate from £5.8m to £3.5m based on turnover of £92.1m. On this basis, expect a near halving of EPS to 12p this year, recovering to 13.6p in 2015.
The problem I have is that this is in effect the second warning from Molins as analysts had already downgraded earnings estimates by 10 per cent post the results in August. At the time I gave the company the benefit of the doubt and thought there was a decent chance of a recovery in the second half to make up for the revenue shortfall in the first six months of this year. That is clearly not going to happen as revenues are now expected to fall from £60m in the second half of 2013 to around £51m in the same period this year. Moreover, given the operational gearing of the business, this will mean that instead of delivering a 20 per cent rise in second half pre-tax profits to £4.7m as had been predicted by analysts, they are now forecasting a near 33 per cent decline in second-half profits to around £2.67m!
True, I did raise the issue of execution risk when I updated my view last month. At the time I noted that there was heavy second-half weighting to profit estimates and potential for additional orders to be deferred if the geopolitical environment didn't improve. Unfortunately, that is now having a significant impact on Molins and with the business encountering some stiff headwinds, I feel there is a real chance that Molins may warn again on profits in the coming six months.
So although the shares are only priced on 8.5 times downgraded earnings estimates, and offer a 5 per cent plus dividend yield, I feel that it's best to exit your holdings now. Sell.
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
