Having cut its full-year pre-tax profit estimate from £3m to £2.3m at the time of the interim results in December, when 600 Group warned that market conditions were difficult and customer confidence to commit to purchases was a concern, analyst David Buxton at finnCap now expects pre-tax profits of £1.4m on revenues of £47m in the 12 months to end March 2016. That predicted outcome represents half his profit forecast less than 11 weeks ago, and 30 per cent less than the profits 600 Group reported in the 2015 financial year. The latest 39 per cent profit downgrade is based on a £2m shortfall of revenues. Mr Buxton also cut his 2017 pre-tax profit estimates from £3.9m to £3m based on a downgrade in revenues from £53.5m to £49.5m.
Given the scale of these downgrades, it’s hardly surprising that the shares have tanked, down 23 per cent from 13p to 10.5p this morning. It also clearly makes my decision to rate the shares a hold at 13p in mid-December the wrong advice (‘European markets hit 600’, 10 December 2015). At the time I concluded that priced on six times downgraded earnings estimates, the outlook for 600's European markets was already factored into the low rating. That’s clearly not the case now that the weakness the company experienced in its European markets is also being encountered in the US market, principally in its machine tools division. The situation could deteriorate further.
That’s because the latest Oxford Economics Global Machine Tool Outlook Survey's figures for machine tool consumption for the year to December 2015 showed a contraction of almost 19 per cent in Europe and a flat performance from the US market. While the forecast for both markets is for modest single-digit growth for the coming year, other trade bodies and commentators are reporting more negative figures and 600 Group has seen continued weakness within Europe and the UK and a marked fall in confidence in the US. Figures recently released for machine tool orders from the Association for Manufacturing Technology in the US recorded a double-digit decline for the year to end December 2015. Furthermore, with general economic and manufacturing forecasts weak, customers are now leaving purchasing decisions until the last minute and consequently the company’s order book is little over one month forward. In turn, this makes future trading difficult to predict and subject to greater volatility month to month.
In the circumstances, both 600 Group’s laser marking and machine tools divisions have taken steps to reduce overheads and improve factory efficiencies which should generate annual savings of £1m. The board also point out that the integration of the TYKMA and Electrox laser businesses are now producing improved margins. However, these improvements and the restructuring benefits are not large enough to offset the effects of the volume decline from the market weakness in the machine tool industry, hence the massive profit downgrades.
Frankly, I can now see the trading environment not only remaining subdued, but possibly deteriorating further in the months ahead and feel that even though the shares are rated on a modest 7 times downgraded earnings estimates for the year to March 2016, I have little confidence in the rebound finnCap predict in the 2017 financial year. Given the industry backdrop, the risk to earnings looks firmly to the downside in the next financial year. I am therefore exiting the holding and would recommend you sell the shares. Sell.
Please note that I have written articles on three companies today, all of which are available on my IC home page and are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on the following 72 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p (‘Investment company watch’, 16 February 2016)
■ GLI Finance: Buy at 31p (‘GLI Finance review offers potential for gains’, 17 February 2016)
■ Trifast: Buy at 112p, target 140p (‘Engineered for a higher rating’, 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
