Production problems at Low & Bonar

Tip Updates 

Production problems at Low & Bonar

HOLD

Tip Update: Hold at 43.3p

Tip style
GROWTH
Risk rating
MEDIUM
Timescale
LONG TERM
Our previous tip
We said BUY at 65.3p on 20 Oct 2016
Tip performance to date
-34%

Low & Bonar (LWB) continued to be affected by a root-and-branch reorganisation, and half-year results for the six months to May 2018 reveal that there is still plenty more to do. Of the four trading divisions, the lossmaking civil engineering business is now going to be sold off entirely, having registered £3m-£5m of expected proceeds from assets already processed for disposal.

Of the three remaining divisions, coated technical textiles generates a third of group sales, although operating profits more than halved to £2.1m, reflecting higher raw material costs. But production problems also trimmed profits, and a move to reduce excess inventories led to some production stoppages. Consequently, of the goodwill allocated to the division, £13.3m has been recognised as an impairment charge.

And while sales grew by 5.3 per cent in the buildings and industrial division, underlying operating profits nearly halved to £3m mainly due to the cost of integrating the Enka business. Trading was also tough, with performance hampered by delays in passing on higher raw material and US freight costs in the face of greater competition.

On a brighter note, interiors and transportation pushed sales ahead by 10 per cent and operating profits by 2.7 per cent to £7.7m. However, extra capacity in the market and rising costs trimmed the level of improvement, putting pressure on margins.

Peel Hunt is forecasting adjusted pre-tax profits for the year to November 2018 of £25m and EPS of 5.3p (from £30.7m and 6.3p in FY2017).

LOW & BONAR (LWB)   
ORD PRICE:43.3pMARKET VALUE:£143m
TOUCH:43.3-44.9p12-MONTH HIGH:89pLOW: 43p
DIVIDEND YIELD:7.0%PE RATIO:NA
NET ASSET VALUE:49p*NET DEBT:86%
Half-year to 31 MayTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201721010.82.141.05
2018206-13.2-4.161.05
% change-2---
Ex-div:16 Aug   
Payment:21 Sep   
*Includes intangible assets of £78m, or 24p a share

IC View

Trading in the second half is expected to be stronger as higher costs are passed on. However, the transformation is taking longer than expected, giving little scope for imminent growth, and we exit our buy tip (65.3p, 20 Oct 2016). Hold.

Last IC View: Buy, 61p 1 Feb 2018

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