It's also fair to say that the lack of share price progress reflects a patchy profit record which in turn means that investors are unwilling to attribute a high valuation to the earnings of the company. This cautious stance proved justified when the company announced its half-year results to the end of September 2015 last week. On the positive side, the US businesses in both laser marking and machine tools and engineered products are operating strongly. In fact, revenue in North America was ahead 8.5 per cent in constant currencies in the period for the machine tools division. That was just as well because the European side of the business is falling short of expectations and revenue was down 15 per cent in the six-month period.
Moreover, the European business is weighted towards higher-margin precision components, so the revenue shortfall subdued operating margins and profitability significantly. So, although revenue held steady at £16.8m across the machine tools segment, divisional operating profit declined by 18 per cent to £1.05m. Sensibly, action is being taken under new managing director Don Haselton to boost the sales and marketing effort and introduce the company's successful Clausing product range of saws, drills, mills and grinders into the UK, European and overseas markets. These products are often found alongside 600's Colchester and Harrison lathes in many of the facilities it sells into and account for half of the total machine tools sold by the North American operation. In addition, the mix of product manufactured in the UK is being adjusted to improve efficiency and certain high precision products are being brought back in-house to be manufactured rather than outsourced.
But that wasn't the only issue as the laser marking division, accounting for 28 per cent of 600's sales, also suffered from a weak European market. In fact, sales in Europe fell by 30 per cent year on year. This overshadowed the strength in the North American market and the integration of laser marking unit Electrox with US-based laser marking company TYKMA, a business acquired by 600 in February in a £3m deal. The quadrupling of divisional operating profit to £630,000 on a 52 per cent rise in revenue to £6.57m would have been far more impressive otherwise. The sales and marketing effort is now being focused on restoring the European market to growth in this business, too.
Earnings estimates reined back
The bottom line is that although 600's underlying operating profit rose 35 per cent to £1.17m on revenue up 11 per cent to £23.3m, analysts have reined back estimates for the 12 months to the end of March 2016. David Buxton at broking house finnCap now expects full-year adjusted pre-tax profit to rise by only 15 per cent to £2.3m, rather than the 50 per cent growth previously anticipated. This is based on 12-month revenue of £49m, up from £43.8m in the previous year, but shy of his £53m previous estimate. On that basis, expect EPS to rise by 10 per cent to 2.2p. Mr Buxton is far more bullish on prospects for the next financial year, predicting pre-tax profit of £3.9m on revenue of £53.5m to deliver EPS of 3.6p. However, I would be happy if the company delivers somewhere between this year's likely earnings of 2.3p and those bullish estimates of 3.9p in the next financial year. Equally, with the shares trading two-thirds below their last reported net asset value, and on less than six times prospective earnings, cautious investors would be, too.
I would point out, though, that by restructuring the business to reduce overheads, and by targeting a wider distribution to accelerate revenue growth, profit is now more highly geared to any increase in revenue if the above actions work. Private equity firm Haddeo Partners clearly believes they will because it has just purchased 500,000 shares at 12.125p each to raise its stake to 25.22 per cent. 600's executive chairman, Paul Dupree, is a senior member of Haddeo Partners. Private investor Andrew Perloff is too. He has snapped up 300,000 shares to take his stake to 6.5m shares, or 7.04 per cent of the issued share capital.
So, although the investment has not worked out as planned, priced on six times downgraded earnings estimates, I feel the outlook for 600's European markets is already factored into the low rating. And if the decisive restructuring and management changes implemented by the company do realise top-line growth, then the upside to profit could be substantial. I am giving the board the benefit of the doubt and rate the shares a hold at 13p with a fair value target price of 24p. Hold.
Please note that for a limited period of time, my book Stock Picking for Profit is being offered for sale at a promotional price of £11.99 plus postage, subject to availability, full details enclosed below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ First Property: Run profits at 47.5p ('Investing for bumper gains', 30 Nov 2015)
■ Paragon: Run profits at 384p; Redde: Run profits at 174p; Fairpoint: Run profits at 175p ('Capitalising on investor overreactions', 1 Dec 2015)
■ LMS Capital: Tender your pro-rata allocation ('LMS tender on the money', 1 Dec 2015)
■ Vertu Motors: Buy at 78p, new target range of 85p to 90p ('In the fast lane', 2 Dec 2015)
■ MS International: Run profits at 210p, target bull market high of 240p ('Engineered recovery', 2 Dec 2015)
■ Mountview Estates: Buy at 11,500p ('Mountview's accounts reveal hidden value', 2 Dec 2015)
■ Character: Buy at 485p, new target 600p ('Playtime for a popular Character', 2 Dec 2015)
■ UK housebuilding sector: Buy and hold until end March 2016 ('Time to start building once more', 7 Dec 2015)
■ GLI Finance: Recovery buy at 35p ('Refinancing for GLI Finance', 9 Dec 2015)
■ Ensor: Hold at 90p and await news of disposals; Renewable Energy Generation: Await capital payout of 60p a share in January 2016 ('M&A updates', 9 Dec 2015)
■ Non-Standard Finance: Buy at 89p and take up open offer; Arbuthnot Banking: Buy at 1,530p, break-up value 2,200p ('Speciality finance plays', 9 Dec 2015)
■ Bilby: Buy at 132p, new target range of 150p to 160p ('Bilby set for new highs', 10 Dec 2015)
■ 600 Group: Hold at 13p, medium-term fair value target of 24p ('European markets hit 600', 10 Dec 2015)
■ Vislink: Hold at 28p ('Vislink's sales fall short', 10 Dec 2015)
■ For a limited period and strictly subject to stock availability, Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com at a special promotional price of £11.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
