Small Cap Value Report (Fri 7 June 2019) - SOM, SUN, GAW | Paul Scott

7th Jun '19 by Paul Scott

53 comments 13605 reads

Good morning, it's Paul here!

EDIT at 15:19: thanks for all the interesting reader comments today on Somero Enterprises Inc (LON:SOM) - some outstanding contributions, bravo! End of edit.

Somero Enterprises Inc (LON:SOM)

Share price: 280p (down c.20% today, at 09:08)
No. shares: 56.3m
Market cap: £157.6m

Trading update (profit warning)

This company is based in the USA (its largest market), and sells laser-guided concrete screeding machines, to lay perfectly flat concrete floors for warehouses, etc.

I'll spend some time, properly looking into this, because I've always liked this company and am thinking in terms of buying the dip, possibly.

What's gone wrong?

Trading during the five month period to the end of May 2019 has fallen below management's expectations, primarily due to adverse weather conditions in the US, the Company's largest market. Broad sections of the US experienced the highest levels of rainfall on record.*

[Paul Scott: The asterisk relates to some rainfall data, given at the end of the announcement.]

The record rainfall seen in the US has delayed project starts which in turn has slowed the pace of equipment purchased by our customers, the impact of which was seen through historically strong trading months of March and April.

If this is true, then it fits my definition of a good profit warning - i.e. something that's a one-off negative, and should be easy to recover from. Therefore I'm starting to get interested - re a possible purchase on the dip.

The downside risk is that the adverse weather explanation might be masking a more negative cyclical trend, or a deterioration in Somero's competitive position, possibly?

Things have started to improve - which is positive, and adds weight to the adverse weather argument being true;

Whilst there was an improvement in trading to end the month of May, and although the Company expects weather conditions and therefore trading in the US will improve throughout the rest of 2019, the Board now does not expect the Company to fully recapture the shortfall caused by this extended period of poor weather in the current financial year...

Revised guidance is provided - extremely useful - all companies should do this when putting out a profit warning. If they're not…

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MrContrarian

7th Jun '19

My morning smallcap tweet: SUN dims.

Surgical Innovations (LON:SUN), Somero Enterprises Inc (LON:SOM), PHSC (LON:PHSC), £R4E

Surgical Innovations (SUN) weak Q2, blames Brexit. Guides rev still up but adj pretax down YoY.
Somero Enterprises (SOM) record rainfall in US hits construction starts. Guides rev $87m, EBITDA $28m. F/C rev 98.3m. "The positive US market conditions described in the Company's 14 March 2019 trading update have not changed and whilst we anticipate it will take some time for momentum to rebuild."
PHSC (PHSC) FY trading: rev £5.2m (£7m). EBITDA £320k (£92k). "The reduction in revenue is largely attributed to a significant decline in the sale of security solutions to retail clients as highlighted in our interim results." Accounts may have impairmanets and stock write-down.
Reach4Entertainment (R4E) closing loss making Dewynters Germany, will service Germany from UK. "Dewynters Germany was launched under r4e's previous management team."

rmillaree

Somero Enterprises Inc (LON:SOM)

Somero down on trading update that is poor due to excess rain.
they now expect $87 sales and $28 mill ebit
they did $30.8 mill adjusted ebit last year - and profits were expected to be up £1 mill this year.
so it looks worst case they may be roughly 10% down on last year

Other than that outlook seems reasonably stable although i do wander if future growth is going to be harder to come by than what they have previously achieved - even before todays update 2020 was expected to be pretty much flat compared to 2019 eps wise.

I would have bought in at 320p before todays update - will i buy in now ? - i don't know i think i will wait and see if the price drifts closer to the 300p level - i can't see any trigger that would make me expect this share would bounceback to higher levels in any hurry as the market always seems to give this share a modest rating - hopefully Noah and his Ark will never be called upon (mind those arks have been known to suffer flood damage so they dont build em like noah used to)

Michael Tee

Somero
Sorry for those who are down today.
I have considered investing in Somero for quite some time now.
Today my overriding thought is 'why invest in a company which can be affected so heavily by the weather when there are many other options?'
This is not the first time the weather has had an impact on the business.

Laughton

Games Workshop (LON:GAW) - nice Trading Statement from Games Workshop today with more of the same (actually, I think a little bit extra on top). Seemingly no "high street" or "Brexit" effect here. I particularly like their staff profit share bonus scheme - great to see them rewarding those who obviously help make the difference.

sbotting

I can understand your point, but I think the cyclical nature of the business should be more of a concern for you as a construction downturn happens more frequently than a record amount of rainfall:

" Broad sections of the US experienced the highest levels of rainfall on record.*

An average of 36.2 inches of precipitation has fallen over the Lower 48 from May 2018 to April 2019 representing the highest level recorded in over 120 years and six inches over average. "

I hold.

jwebster

Somero Enterprises Inc (LON:SOM)

I too was looking at Somero

They are in concrete leveling products so are driven by the construction industry, which is itself very cyclical and it seems prone to weather in terms of pouring concrete outdoors.

The USA is their main market 69% of revenue. Europe 14%. Bits and pieces elsewhere. They have a small operation in China but revenues didn't grow there. Shame they don't have growth in Asia as it's booming in terms of construction. Can imagine it's a really tough market area to break into against the locals.

I was attracted to them given their steady earnings growth over time, no debt and good dividend yield.

However, they are beholden to the USA economy and construction industry. So it's cyclical.

I think this is a good company but for me we are too long into the business cycle to buy construction. Probably a bargin in the next downturn.

fwyburd

Re Malvern International (LON:MLVN)
For those following this who read my post on Wednesday 5th June, you will know that the results were expected this week. Today I emailed their PR firm and just received this very prompt reply

No reason to be concerned. The delay is purely the auditors working through the new International Financial Reporting Standards, which have been a pain to put it mildly. The results should be next week.

Thanks to WimbledonsPrinter who replied to my post saying they had mentioned this in their presentation at Mello in May but reckoned this was a rather vague excuse.

What bothers me is that they have twice made promises which they have not kept. Can they be trusted?

cheers

Francis

simoan

RE: Somero Enterprises Inc (LON:SOM) it's a funny old thing the stock market, isn't it? It looks like the FY19 results are heading for a replay of something like FY17 as reported in March 2018 from the numbers quoted today. At the time the share price was the same as last nights close but it went up to 400p after the announcement. Sentiment and the anticipation of earnings growth is everything...

Anyway, a kick in the nuts for my portfolio this morning but I'm not going to beat myself up about it, and it's just the kind of thing I need to stop complacency from setting in. This must have read across to companies like Keller (LON:KLR) but that has barely shifted this morning. If I still held, I'd be considering my options with that one.

Perhaps I'll watch the Weather Channel a bit more in future...

All the best, Si

Vader

Somero Enterprises Inc (LON:SOM) update does not leave me convinced that there is going to be a recovery soon.
US market is still strong but affected by the weather which is temporary however it plants the seed of a larger downturn starting in the US. New tariffs and confidence falling will SOM pay the price of investors wanting to exit the construction market for now?
Trading in Europe and China at the same levels as 2018, Middle East and Latin America is going backwards.

Great company but I might exit for a while.

JohnEustace

It looks as if the Woodford fallout has spread somewhat unfairly to his old colleague Mark Barnett at Invesco. He's given an interview to the FT saying his approach is much more balanced etc.
Invesco have sold a £144m chunk of AJ Bell within the six month lock up by agreement with Numis who conducted the sale. I'm putting two and two together to guess this timing is precautionary to top up Invesco's cash to meet any panic redemptions.
Invesco retain 16.1% of AJ Bell.

jonesj

If weather were the only variable, any company whose share price could be greatly affected by the weather would be an ideal investment.
That's because we could sit back and wait for the poor weather, then buy, on the assumption that poor weather is just a deferral of expenditure and mean reversion is likely.

In practice, as we all know, investing is not easy and weather is not the only variable. Even the influence of that may or may not be exaggerated.

For this stock, top of my list of other variables would be the construction cycle & I expect a discount in the stock price for that.

That discount is possibly in the share price, considering a trailing PE of 11.9 for a growth company.

davidjhill

Somero Enterprises Inc (LON:SOM)

1) you've already got a big discount in the price for cyclicality

2) The reason profit growth was expected to be low - circa £1m was because they were investing in new products they expect to have a future strong IRR

3) The weather factor, even when extreme and in their main market and in 2 historically strong trading months, was marginal - sub 10% impact. This is less impactful than the weather on drinks, restaurants, clothing and many other products

4) The order book was confirmed as particularly strong for next year - market generally works on 6 month forward outlooks

One should never be complacent but neither should one spend too much time looking for problems that aren't there.

Howard Adams

Hi

For those following the online fashion retailers such as Boohoo (LON:BOO) Sosandar (LON:SOS) ASOS (LON:ASC) you might want to read this about £AMZN moving into online fashion.

https://www.hl.co.uk/news/2019/6/7/amazon-just-made-another-move-to-win-over-clothing-shoppers?cid=halDM74269&bid=320273906&e_cti=2135170&e_ct=T&utm_source=AdobeCampaign&utm_medium=email&utm_campaign=EONRM_Daily_newsroom_07.06.19&theSource=EONRM&Override=1

Regards
Howard

Small Cap Value Report (Fri 7 June 2019) - SOM, SUN, GAW

Somero Enterprises Inc (LON:SOM)

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Paul Scott

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