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It's a question of timing for Goodwin

The engineering group has been struggling with end markets and it may be some time before it turns the corner
December 20, 2016

In a typically frank summation, engineering group Goodwin (GDWN) admitted that continued weakness in oil, gas and mining spend means that "it would be unrealistic to expect any recovery" in pre-tax profitability until after 2018. The candour is refreshing, but considering that Goodwin's directors collectively own a majority stake in the group, it's not all that surprising.

IC TIP: Hold at 1707p

Demand for the group’s patented check valves, used to regulate the flow of fluids in pipelines, has been in decline. But things would have been far worse save for the progress of the refractory division. By definition, Goodwin, a low-beta stock, should be less prone to risks than the industrial machinery market as a whole, but that means it tends to underperform when markets are in uptrend - a point borne out by the group’s relative performance to the wider market over the past 12 months.

The group’s half-year returns weren’t markedly different from those of 2015 at the operating level, though an increase in finance costs weighed on earnings for the period. However, the share price pulled back as investors digested news that the group’s order backlog at its mechanical engineering division, excepting Easat Radar Systems, was in decline and would in all likelihood continue to decline through 2017. The company's foundry, Goodwin Steel Casings, struggled through the period, while Goodwin International mitigated the energy slowdown by winning orders in the nuclear engineering sector.

The group’s performance is now more reliant on its supplies of inputs to the jewellery trade and tyre casters with minerals and moulds, in addition to minerals used in fire resistant products, coatings and insulation. The Group's cash flow has deteriorated during the first half of the financial year, although that’s partly down to the timing of dividend payments. The half-year position has been helped by a significant reduction in capital outflows, offset by the currency effects of the EU referendum and timing issues related to foreign exchange hedge trades. Timing issues should lead to an increase in customer currency inflows during the second half of the financial year.

GOODWIN (GDWN)
ORD PRICE:1,707pMARKET VALUE:£123m
TOUCH:1,705p-1,725p12-MONTH HIGH:2,350pLOW: 1,430p
DIVIDEND YIELD:2.5%PE RATIO:16
NET ASSET VALUE:1,091p*NET DEBT:45%

Half-year to 31 OctTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201561.26.068.0nil
201669.96.054.5nil
% change+14--20-

Ex-div:-

Payment:-

*Includes intangible assets of £18.6m, or 258p a share.