LONDON (Alliance News) - Fenner PLC downgraded its full-year outlook on Wednesday on the back of mixed trading in its two divisions in the final months of 2014, though shares in the company rose as analysts said the weak update was in line with what had been anticipated for the polymer-based products manufacturer.
Fenner, which was relegated from the FTSE 250 in the last quarterly review, said it has increased its focus on controlling its margins as a result of the weak performance in its Engineered Conveyor Solutions business, with cost-cutting plans either implemented or accelerated across the business and selected capital projects deferred.
Due to the impact of lower oil prices and challenging trading conditions for its ECS arm, the group now expects its earnings for the year to August 31, 2015 to be below its expectations. It will also take an exceptional charge related to the cost savings it is implementing this year.
For its Advanced Engineered Products arm, trading has been in line with expectations since Fenner's last update in November, continuing the trend of an improving performance seen in the second half of 2014. It said it expects demand from oil and gas clients to fall due to the drop in the world crude oil price, but said its non-oil, specialist polymer businesses, which represent two-third of AEP's revenue, are expected to continue to meet expectations.
The group is cutting its AEP cost base in anticipation of an expected reduction in business from the oil and gas sector.
For ECS, however, any recovery for the business continues to be elusive, Fenner said, owing to the backdrop of global mineral oversupply and low commodity prices. Demand levels in its Americas business are stable, albeit at low levels, while anticipated growth in its Europe, Middle East and Africa business has not been achieved. Margins also are under pressure in its Australian arm due to consumer-driven pricing pressures, it said.
Fenner said its cash position is currently strong, but said that while it will complete the project to consolidate its US medical manufacturing facilities, other capital programmes for 2015 will be curtailed to focus only on essential or near-term payback projects.
In addition to this, future major projects have been deferred pending an improvement in market conditions, meaning the group is now forecasting significantly lower 2016 capital expenditure than had previously been expected.
The weak update sees Fenner continue the trend seen across 2014, as its performance deteriorated in line with a decline in the coal industry, particularly in the US.
In November, the group reported a sharp fall in pretax profit for the year to August 31, 2014, down to GBP29.2 million from GBP66.4 million a year earlier. Revenue dropped to GBP729.4 million from GBP820.6 million the year before, hit by a drop in revenue for the ECS arm related to a fall in coal production in the US, along with soft domestic thermal coal prices.
Fenner shares were up 3.0% on Wednesday afternoon to 206.75 pence, one of the best performers in the FTSE All-Share, after analysts, despite slashing their earnings estimates, suggested the update was no worse than had been anticipated.
Investec cut its target price on the stock to 190p, down from the 200p price target it put on the stock earlier this week. It has a Hold recommendation on Fenner.
The broker trimmed its revenue estimates for Fenner by 3% for 2015, and cut its pretax profit and earnings per share forecasts by an operationally-geared 12%, despite the cost savings Fenner outlined in its trading statement. It said the forecast cuts are not unexpected and noted its valuation had already discounted some risk.
Liberum, which has a Hold rating on the stock, said it has put its price target on Fenner under review after the update. The broker also cut its estimate for earnings per share for 2015 by 16% to 19.4 pence and slashed its 2016 earnings guidance by 20% to 20.4 pence. The earnings per share downgrade by Liberum is more pessimistic than its expectations for a 10% downgrade to consensus forecasts.
Numis provides no relief to the gloom on Fenner, though it notes the update was no worse than the market had been expecting. The broker has a Hold recommendation on the stock with a 220p price target. It says that while it does see some potential for a recovery, the continued "lack of clarity" in end markets points towards further uncertainty on Fenner's future earnings.
By Sam Unsted; samunsted@alliancenews.com; @SamUAtAlliance
Copyright 2015 Alliance News Limited. All Rights Reserved.
