Investment Column: Profit warning makes Charter too risky
Tuesday 21 June 2011
Our view: sell
Share price: 538.5p (-179.5p)
Charter International not only issued a horrible profit warning yesterday, it managed to exacerbate the situation by explaining it with a display of prize corporate gobbledegook.
It began thus: "Divergent trends have emerged in trading and economic conditions over the past months, resulting in variable performances in different market sectors."
In English, that means the tool and equipment maker has been caught in the middle of a perfect storm. The costs of raw materials at its ESAB division, which is focused on welding, cutting and automation, have been rising at a time of increasing competition.
At the same time, Charter's previously pristine balance sheet has been loaded with £150m of acquisition-related debt.
Its other business, Howden, makes and maintains air and gas handling equipment for use in the power, oil and gas, petrochemical and other industries. You might think a company operating in that arena ought to be doing well, given the high price of energy. But Howden is not doing well enough to cushion the ESAB blow.
Howden will produce results "somewhat" in excess of expectations, whatever that means, and is, anyway, much the smaller of the two divisions, with ESAB providing more than 60 per cent of revenues.
In an attempt to ease the pain, the company has promised cost savings of up to £30m, but they won't be fully realised for 12 to 18 months, and they will also require a one-off charge of £25m to be booked.
To be fair, Charter was hardly expensive at less than 10 times 2011 earnings before yesterday's share price crash and lower expectations were factored in, putting it at a discount to the sector. After the forecasts are updated, it could look very cheap.
But yesterday's statement just isn't good enough. Behind the mangled language, it looks like a company in a bit of a state. Those who haven't bailed out should do so until things have settled, notwithstanding the possibility of a predator putting it out of its misery.
Our view: buy
Share price: 177.5p (-1.75p)
Avocet Mining announced what was yet another set of positive drill results from its flagship Inata project in Burkina Faso. And yet the gold miner's shares continue to trade at more than affordable levels.
At around 177p apiece, Avocet is trading well below City targets. Collins Stewart, for instance, has a target of 270p. Ambrian is eying 271p. Evolution is more conservative – but even then, its target of 252p still leaves ample room for upside gains. Even if the City targets are off the mark by 50p, say, they point to an excellent buying opportunity, particularly in light of the continued progress at Inata.
Of course, weakness such as this often prompts questions about the likely cause. And in this case, the lack of steam is likely to be down to the hedge Avocet assumed in connection with an acquisition some years ago. That agreement binds it into selling part of its production at fixed prices that are currently below the gold price. Though we would rather that there were no hedge, we'd make two points.
First, gold prices face a headwind as the US quantitative easing programme ends in coming weeks. That could cause volatility and push prices lower. But second, even if gold does not slump, we would highlight that success at Inata will pave the way for higher production, thus diluting the hedge over time. Either way, we'd buy.
Euromoney Institutional Investor
Our view: buy
Share price: 642p (+7p)
With publications such as Institutional Investor and HedgeFund Intelligence, Euromoney is hardly at the glam end of the publishing spectrum. It is, however, at the more profitable end.
The group has found its niche in financial-market customers who are willing to pay, and keep paying, for the content it provides. Yesterday, it boosted that content with the acquisition of Ned Davis Research Group in the US.
Euromoney is to borrow the funds for the £69m deal for an 87 per cent stake in the research company, buying the rest under earn-out agreements. The maximum it can pay is £107m.
The announcement was somewhat light on detail, but analysts at Altium Securities said it "looks like a sensible and complementary deal in an area the group knows well". We agree. And even if you don't follow Euromoney on the news-stand, it may be worth following it on the market.
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