Shares in GYG (GYG:81p), the market leader in new-build and refit superyacht painting, sunk from 131p to 81p this morning after the directors guided shareholders to expect a 50 per cent shortfall on the cash profit guidance they had given only 10 weeks ago.
When I interviewed chief executive Remy Millott and finance director Gloria Fernandez at the time of the 2017 full-year results in late April their guidance was in line with house broker Zeus Capital’s estimates which pointed to 2018 revenues rising from €62.6m to €74m (£65.5m) to lift cash profits from €7.2m to €9.9m and deliver adjusted pre-tax profits of €8.6m, up from €5.5m in 2017. On this basis, investors were expecting full-year EPS of 12.9¢, a rise of almost half on 2017, to support an annual dividend of 6.6p a share. The board declared a final payout of 3.2p in line with 2018 dividend guidance. The forecasts looked justified as a record forward order book of €20.4m at the turn of the year had “grown sharply since then.”
However, this morning the directors revealed that the business only achieved a cash profit break even in the first half on revenues of €25m and have reined back second half revenue expectations to just €37m, of which a third is the confirmed order book and €25m represents “high probability prospects.” If second half revenues of €37m are achieved then GYG expects to make cash profits of €5m in the six month trading period, but this still means that it will miss the previous annual cash profit estimate of €9.9m by a wide berth. The 50 per cent profit shortfall explains the savage share price reaction and one that has been exacerbated by the fact that 84 per cent of the shares in issue are held by the top 11 shareholders including three directors who hold 15 per cent of the share capital between them. So what has caused this to happen?
I initiated coverage when GYG listed its shares, at 100p, on Aim last summer (‘Floating a profitable passage’, 4 Jul 2017), as I was attracted by the strong underlying growth in the market for 40-metre-plus yachts which have doubled to 2,000 in the past decade, and is predicted to grow by a further 14 per cent by 2020, buoyed by the steady growth in the number of billionaires. The boats are getting bigger with the average GYG client owning a yacht 78m in length, and with an average painted surface of 3,500 sq metres.
That’s good news for the specialist companies catering for the maintenance of these huge ocean going vessels which require a major survey every five years to comply with certain class, maritime laws and insurance requirements. GYG’s refit and new build revenues increased by 16 per cent to €53.7m (£47.1m) in 2017, and there was a useful contribution from its supply business which sold €8.9m worth of marine products and maintenance equipment through its retail and yacht supply divisions.
The problem is that although GYG has already secured €13.4m worth of new build orders for 2019, in the first half of this year it failed to secure a number of material projects for 2018. Given the size of the contracts, and the margin it makes on this type of work, it not only led to a sales shortfall, but has dented profits even more. To compound the situation, the refit side of the business – work here is seasonal and is weighted to outside the peak cruising season – has seen delays in contracts that were originally scheduled for the first half of 2018.
The bottom line is that Zeus Capital has slashed its 2018 pre-tax profit and EPS forecasts by two-thirds to €3m and 4.4¢, respectively, and is taking a more conservative view of the 2019 outcome too, having pulled back forecasts by more than 40 per cent to €5.7m and 8.4¢. This means that the 2018 forecast dividend of 6.6p is uncovered by net profits.
Also, based on 46.6m shares in issue the cash cost of the payout is £3m which exceeds analysts’ new free cash flow projections of €0.8m. The profit shortfall means that instead of paying down year-end net debt from €6.7m to €2.7m, Zeus now expects a closing figure nearer to €8.2m, albeit finance director Gloria Fernandez says that the company is compliant with its lending covenants on all its borrowings, and has ample facilities in place. The board are also committed to the full-year dividend.
The worry for me is if the win rate of high margin new build work fails to meet with management’s expectations, or if there are any more contract delays. True, refit deferrals were caused in part by the French tax authorities trying to put social security taxes on yacht crews while the boats were being refitted in French yards. This industry wide issue has been resolved and crews are now exempt.
I am also less comfortable with the debt situation given that GYG has to make debt repayments of €918,000 every six months on a syndicated loan facility which matures in March 2021, and also has finance leases of €890,000 due this year. These debt repayments are material in relation to the weaker cash generation, although the upfront payments on new work due to start in the third and fourth quarters means that cash flow could be better than Zeus’ forecasts.
So, having taking into account the issues that caused the profit warning, and having last advised buying GYG’s shares at 123p (‘From yachts to clean energy’, 23 Apr 2018), after which they hit an all-time high of 146.5p at the end of April, I can see the share price continuing to drift lower until there is greater certainty on the company achieving revenue projections. In the circumstances, I have decided to crystallise the loss. Sell.
