LON:CRL | Creightons - Profit Warning

9th Feb '18 by jonno

26 comments 7671 reads

Trading update from Creightons Creightons (LON:CRL) released at just after 4pm states that significant and unexpectedly higher order intake has resulted in demand outpacing manufacturing capacity. As a consequence the Company has decided to outsource the supply of some branded product lines rather than disappoint customers, which has adversely impacted profit margins. The net result is that full year profit before tax is likely to be marginally lower than last year, so around £1.5m. However the profit after tax will also be impacted by the first full year of full corporation taxes, which as far as I can tell is 19%. I am not sure how this impacts earnings. For the year to March 2017 diluted EPS was1.88p

I have a small holding in Creightons and would ordinarily sell a stock on a profit warning but given the nature of the warning and that Creightons is in the process of addressing the capacity issue, I am inclined to hold and depending on the price reaction may add. The share price fell about 14% on the announcement which is comparatively muted, perhaps reflecting the nature of the profit warning.

Thoughts and views welcome.

Jonno

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daveinthelakes

9th Feb '18

Good questions.

1 They are only sacrificing margin because of the outsourcing. Margins improved last year and they are getting higher margins on increased own product sales.
2 They are in the fast moving consummer goods (FMCG) sector and so by the very nature there is limited visibility on forward orders. This goes with the territory but Creightons (LON:CRL) has such a growing reputation and demand for their capabilities it is unlikely they will be screwed as badly as most suppliers. They formulate many of their clients products and are not merely a supplier bidding on contract price.

InvestedGeordie

Hi Everyone,

As a long time Creightons (LON:CRL) holder, I was infuriated with this release, for a few reasons, and dumped my entire holding last night. I have tried to speak with a director this morning, but couldn't get through. I'll try again this afternoon. Unhelpfully, their email isn't working either!

"The sales growth is being addressed through accelerated capital expenditure and upskilling in key operational functions to enable the group to meet the increasing demand for our products and enabling us to return to the higher returns previously achieved."

This is a lot of waffle. They are throwing money at something, we're not told what, to help ensure increased volume can be handled. Are their processes working? When will manufacturing capacity be increased? "Upskilling in key operational functions" is literally meaningless tosh. How can you upskill a function? Does that mean 'We're not happy with the way we're currently producing, so we're significantly changing and/or creating process to simplify this?' Are operational management failing? Does headcount need to be increased to handle increasing volume? Is machinery at fault? If so, will new equipment solve this issue? Will new machinery be automated to stop issues like this from happening again?

PBT concerns - They have dramatically increased volumes, but PBT is lower than last year. Margins hit because they are part outsourcing some production, but what else is going on here?

Poor planning & forecasting - They have underestimated demand, have no slack to increase volumes, and Mgmt forecasting is poor. Where's the planning? Where's the forecasting? This is rudimentary.

Question over quality - They have outsourced. Will this effect quality? It's certainly a risk.

RNS into open market - Absolutely no excuse for this to happen whatsoever in this case. Why on earth couldn't they release this pre-market, this morning? Ludicrous disregardful for holders.

Thanks,

Velo

Good post IG. I admire your iron will discipline in selling promptly once you'd mulled things over. Taken me years and years to achieve prompt decisive action when things go t$ts up. Only managed it last month with Connect (LON:CNCT) . Took a small loss and it continued falling. But felt great. Ceased being a "victim".

That aside, I refer other readers to my earlier post about the couple of months established downtrend in this stock as it appears the market is siding with IG's point of view - for the moment.

FREng

Perhaps Creightons (LON:CRL) planned a 7am RNS on Friday but the news leaked so they felt they had to tell the market.

Perfectly acceptable if that is the case, but we've no evidence to suggest it is.

rhomboid1

Hi IG
Agree re timing. Knowing CRL they’d have taken advice from their NOMAD and done what they told them, if so unfair to kick CRL for that.

Re the rest of the RNS I’m reasonably happy with the explanation, right call to keep customers onside by outsourcing albeit at lower margins, but they must be actually losing money on some outsourced lines to not have an increased profit overall. Managing outsourcing is a different skill set that they won’t have so upskilling the operational functions makes sense to me.

Overall I’m cutting them some slack and retaining my holding as they’re modestly rated and still growing fast ..growing pains are the only acceptable form of PW to me as they indicate that once bottlenecks are resolved higher profits can be earned.

At these levels it looks good value

JohnEustace

I agree that if there can be such a thing as a good profit warning this is it. They strike me as people who will take the appropriate actions, having discovered that manufacturing isn’t as simple as they thought it was.

Wimbledonsprinter

Qigomi Sing

Agree cash is important. Net debt at end Sept 2017 was £230,000 up from £40,000 the year earlier despite the strong profit as cash was used in building up working capital. In addition, £800,000 will be allocated to double manufacturing capacity upto 2020.

In addition to the good points made by other readers, maybe worth also pointing out:

1) the challenge of manufacturing capacity keeping pace with demand was highlighted by Bernard Johnson in the H1 results presentation (first page). So this has not come out of the blue.

2). Given Creightons seems so keen on further acquisitions this must make further equity issuance (dilution) a more likely route to finance them than debt.

3). Creightons seems very much a sales driven group and it raises the question of whom among senior management haa a strong enough personality to stand up to Bernard Johnson and Pippa Clark that a client order might contribute negatively. (Given 45% of business is contract manufacturing - it is a bit inexcusable to run out of manufacturing capacity and to have to outsource.)

I agree with much of what you say but as a small supplier to big companies they’ve encountered the best kind of problem...unexpectedly large orders

I agree about the management team needing more strength and depth. I think it's best to wait and see what new appointments they announce - I'm assuming the management waffle in the RNS was papering over the fact they don't have the right person or people lined up yet.

Andrew niven

11th Feb '18

Letting customers down in any supply business is a cardinal sin and easiest way of losing business.
I think it is very harsh that the market has reacted in 2hat was in my opinion a sensible business decision.
Think i will put this share on my radar

TheGlade

8th Mar '18

In respect of the RNS : search "Beaumont Cornish scandal" in Google : these are the Nomads to Creightons : nuff said

I think Creightons are listed on the main market, not AIM, so they won't have Nomads. But I do see they have Beaumont Cornish as financial advisors.

aflash

NSX

The FTSE Fledgling Index comprises companies listed on the main market of the London Stock Exchange (LSE) which qualify as eligible for inclusion in the FTSE UK series but are too small to be included in the FTSE All-Share Index.

jonno

5th Apr '18

Creightons (LON:CRL) share price is up close to 25% from a low of about 18.5p over the last 2 days on a large volume. More likely than not it is a bounce from an oversold position, but there may be a predator ion the wings?

1st May '18

Creightons (LON:CRL) share price continues to rise; up about 10% today on large volume and close to 50% since the low of around 18.5p at the beginning of April. I would venture that someone knows something of which I and private investors in general are unaware?

Thoughts and views welcome.

ezlifeme

Creightons (LON:CRL) - Pattern buying? Related to news of 23rd March https://www.stockopedia.com/sh...

Or just a coincidence?

Whatever it's broken out

I very much doubt it is a “predator” is buying the shares. With a limited free float, any predator needs to get the approval of the main shareholders (particularly McIlroy and Johnson). If rhe predator were trying to get their approval to an offer - the last thing they want is the share price going up.

The most likely explanation is just there is a sizeable buyer in the market and given the illiquidity of the shares, it is driving the price up.

MiserableJacktPotato

Their new machinery maybe installed and commissioned by now, that was supposed to be completed Q1 if I remember correctly.

2nd May '18

Perhaps there is an expectation they will benefit from the Asda / Sainsbury merger? I thought it odd that their share price was going up as most other supermarket suppliers were being hit.

Creightons - Profit Warning

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Jonno

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