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On the face of it, it seems like the falls here are overdone. It's been profitable for a long time, and continues to be so. The dividend is being held. Looks like a temporary blip. There would probably be plenty of people catching the falling knife if the spread wasn't so deterring - it means you need an 8% uplift just to break even.
However, the reasons given for the 2 profit warnings are not entirely credible, and raise suspicions.
In the first profit warning, back in May, they said that sales in the UK and US, the two biggest markets, were up, but South Korean sales were down because of "product development", causing a 10% overall fall in sales. That makes no sense. Product development affects costs, but how does it stop sales? Anyway, South Korea accounted for less than 10% of revenue last year, so how can it be responsible for a 10% fall in overall sales, especially if other regions have increased sales?
The second profit warning, which caused another big fall in the share price, claimed that the sales drop was due to South Korea again, down to oversupply and/or overstocking which was being dealt with by designing new stock.
So they have claimed that product development is both the cause of and the solution to the problem, and that everything is OK apart from the relatively small South Korean division.
It doesn't really all add up, does it?
Seems like sells are only getting close to the bid so I wonder if a further easing in the SP is on the table. I suspect that Churchill China might make a bid for this to take out a competitor and advantage of the straitened SP. CHH is moving strongly by comparison to PMP.
Having had a look at the respective mcaps I can see CHH could not afford PMP. Perhaps some private equity could revive PMP.
Well the spread issue was dealt with, I think, the day after I mentioned it. So, thank you to all our MM readers, I guess!
Are long term holders able to offer any clues about what's really going on with PMP: are the sudden dramatic setbacks this year just temporary aberrations, will normal service be resumed in due course?
I think they will recover, but it shows some risks as they get larger - having to rely on going into more markets + other products.
This both spreads the risks, but they can also lose control with new unknown distributors etc.
It appears in Korea that 'other market' distributors were buying PMP products and then selling them on to Korea through the back door. This is what led to an exaggerated slump in Korea's sales, but also an exaggerated rise in rest of the world sales, so a rebalancing has to take place. Short term this means that PMP were 'fooled' into producing too much product, that with fairly fixed overheads means a delayed hit.
However, having only ever increased or kept the same dividend in over 30 years since listing, they will be loath to lose that record and I for one would keep faith in them, although I think short term they will be outpaced by Churchill who have a better growth path at present. On balance keep for the dividend.
Trading update shows a 12% decrease in the US. That makes more sense. Wonder why they pretended the only problem was in the less important South Korean market. Untrustworthy guidance, imo.
I'm not sure your reading this correctly - they state the US decline was driven by stopping reshipping on to Korea.
i.e. They were making what they thought were extra sales to the US - but these were going to Korea, which they have now stopped.
This meant falsely higher US sales and a big decline in Korean sales - not a pretty result, but not untrustworthy - rather they were duped by untrustworthy agents!
....just to be clear - this is why they are confident of higher Korean sales this next year,
but clearly the previous 'false' US sales mean that they will decline for the year (excl. Nambe).
The important figure is however an overall decline in like for like sales of 5% which is of some concern.
Thanks for the explanation CJ. Margins must be much lower in the US than in SK, to tempt agents into "monetising" the difference. Presumably there was an effective legal remedy, given their apparent confidence that it won't happen again.
Like you say though, the real issue is overall sales decline. If management are right, and this is mainly due to distribution problems, the decline should be reversed very quickly, as false sales are immediately eliminated and supply to the higher margin region returns to normal levels?