Interactive Investor

Senior dives as warning lights flash

20th October 2016 12:55

Lee Wild from interactive investor

It's been a grim couple of days for Britain's exporting engineers. A weak pound has proved a super tailwind since the Brexit vote, but yesterday we heard that Laird had run into problems with Apple, and now two of our most successful engineers are on the rack.

Ground engineer Keller warned Thursday that weakness in the Far East would cause a 15% results shortfall this year. Aerospace and auto engineer Senior has copped it, too.

Senior manufactures airducts, tail-fin parts and engine casings for new lightweight, fuel efficient passenger jets like the 787 Dreamliner and Airbus A350. It also makes bits for the Eurofighter and F-35 warplanes and engine parts for American heavy trucks. But it's had a slower third quarter and warns that full-year profit will miss forecasts.

Revenue for the nine months ended 30 September was up 7% to £682 million. However, strip out a £48 million currency boost and £26 million from acquisitions, and organic sales fell 4%.

Production of the A320neo, A350 and CSeries has not ramped up as quickly as expected, causing a revenue shortfall at the aerospace division. Given the industry's track record of delays, this should not really have come as a surprise. We're also told of "supplier issues" in the US and UK, which should be fixed within a couple of months, while price talks with customers are dragging on longer than expected.

The result is a 17% slump in adjusted pre-tax profit in the third quarter to around £16.2 million, and 18% plunge in nine-month profit to £58.5 million. It's got investors running for cover, driving the share price down by as much as 21% Thursday, but, in truth, Senior has been in decline for the past 18 months and the shares have sunk to a five-year low.

Like Laird, Senior is a stock I've known for years. Again, like Laird, they've been a hugely profitable tip in the past. Bosses expect the fourth quarter will be better than the third, but even then, and with the foreign exchange (FX) translation benefit, an earnings miss will get punished in this market.

The big disappointment here is that it's not just the Flexonics trucks business that's struggling; it's the core aerospace division, too. Management has been slashing costs at the former to counter a slump in demand from the power, energy and US truck industries.

Paying up to £56 million for Lymington in April 2015, just as Senior's share price peaked, was also bad timing - about 85% of sales are to oil & gas customers who have reined in spending.

Investors will want evidence of an uptick in customer demand before betting on a rapid recoveryAnalysts at Investec Securities think consensus estimates for pre-tax profit - previously about £86 million - should drop by 10% for this year and next.

Assuming fourth-quarter profit of £16-20 million gives £75-80 million for the full-year.

Jon Lienard at N+1 Singer has cut adjusted earnings per share (EPS) estimates for 2016 by 6.8% to 15.1p, putting Senior shares on a forward price/earnings (PE) ratio of 11.7 times, dropping to 10.8 on next year's numbers. Despite tipping Senior as a possible US takeover target, he drops his rating from 'buy' to 'hold'.

Predictably, industrial peers are all on the backfoot Thursday, and investors would do well to put these Q3 updates in their diaries: GKN (25 October), IMI (10 November), Meggitt (15 November), Spirax-Sarco (22 November) and Rotork (22 November).

There is help at hand for Senior over the next few quarters as comparatives get easier. There'll be further FX benefits, too. Investors will likely want evidence of an uptick in customer demand before betting on a rapid recovery.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.