Somero : AGM trading update - in line (but US only flat)
Somero announced its AGM trading update today : the key point is that the "Company's trading to date is in-line with market expectations for the full year ending 31 December 2017."
Regional trading
NOrth America,which accounts for 70% of sales, is only flat. I mentioned this as risk in a post yesterday as the data has been less conducive recently. Partially this slowdown is due to weather and partially due to the uncertainty of the new Government. This isn't a disaster but I would wager the shares will fall a bit today given this slowdown. It leaves H2 as particularly important in terms of trading.
Europe (10% sales) remains strong but the growth insnt quantified (why not?)
China (8% sales) had had a slow start but picking up
The rest of the regions seem ok
So overall the business is growing less fast than a year ago, which we knew from the FY outlook statement, and I would think the shares will pause for breath for a bit.
Balance Sheet
The balance sheet is in good order with $20m of cash, and management will be paying a $7.5m or USC 13c / share special dividend (c11p / share). This should absorb some of the trading disappointment. I would expect further special dividends as cash builds up because management have said in the past that there is nothing to buy. Also I know how scarred they are from the 2008-10 Global Financial Crisis. So expect excess cash to be paid out but a healthy cash buffer to be retained on the balance sheet.
New facility
The group is investing a further $2m in expanding its Fort Myers facility which is good.
Valuation
Under 15x 2017 PE looks fine and with a normal dividend of 2.9% plus a 3% special kicks the yield up to 6%. This is ok, but not the standout buy it was. I am holding on but not adding unless the shares get really oversold.
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18 comments
Richard, I think Somero Enterprises Inc (LON:SOM) would/will benefit from Trump lowering corporate taxation rates as they are a US company. This is more how the "Trump effect" could help Somero Enterprises Inc (LON:SOM) rather than infrastructure spending.
My take is that if the US construction industry prospers, then their capital equipment spending increases and older "Make Do" equipment is upgraded/replaced before the inevitable cyclical downturn. Trump infrastructure sentiment cant do Somero Enterprises Inc (LON:SOM) and harm and perhaps will do it good! A moat producing a ROE of 33% @ <14 PER looks cheap to me. Ian
Am I missing something? I never quite understand the relationship in the market's mind between Trump infrastructure spending plans (presumably roads, bridges etc) and Somero. As far as I understand Somero engages essentially in making sure that distribution warehouses have flat floors. I presume this latter market to be private sector money driven by structural factors such as growth in the sophistication of corporate logistics. Therefore although both loosely connected to 'construction' there is in practice no relationship between the two.
Can anyone tell me what I am missing?
My understanding is that whilst warehouse floors are the majority of Somero Enterprises Inc (LON:SOM) concrete leveling equipment applications that industrial sites, shopping malls and office blocks also require flat bases, especially those that are to be covered by tiles or wooden flooring.
Somero Enterprises Inc (LON:SOM) has a massive market share in this sector and the return numbers indicate a strong moat. So whilst the price may have gone up to reflect Trump infrastructure sentiment and be weakening currently it is still IMO an excellent company currently, deserving a premium PE multiple. Ian
Thx Iwright7, but apart from a possible general uplift in US economic growth I still don't see how these sectors can be a transmission mechanism for public spending to ultimately end up with Somero Enterprises Inc (LON:SOM) ?
I'm not dissing the company though and think that they are doing great. There is a good structural growth story. It is just that I don't understand the Trump angle on their business cycle
I sold 100% of my holding in Somero in Mid May at 294p. I was happy with the profit at the time and felt that the Trump rhetoric was running out of steam. However I do agree with some subscribers that valuation metrics are compelling with strong cashflows so might be tempted to go back in if the price falls further.
If anyone is minded to go to the AGM tomorrow, I would be very interested in some feedback from Jack and Howard. It's at FinnCap. I would go but I am abroad on business.
I sold half my holding on advice a month ago, having enjoyed the journey from 140p. The company is still solid and well run, with a firm market share and its products are well placed to take advantage from any US growth. I am very happy to hold as I truly believe in the management and their position in their market, I have even considered re-purchasing my recently sold stock today on what is perhaps a typical AIM over reaction to average news (not a profit warning). This for me remains a solid long term holding.
They are continuing with plans to expand their Fort Myers HQ. To me this shows confidence for the future and runs counter to the idea that this statement is sowing the seeds of a profit warning.
I've sold half of mine on the open. If this trading update is not a profit warning, then it sows the seeds of a future possible warning as far as I'm concerned. It's all about the US so flat sales there and particularly the comment about "political uncertainty" are key. Don't forget that Somero Enterprises Inc (LON:SOM) got a big Trump boost so if his plans for tax cuts and/or infrastructure spending don't happen then that could negatively impact the company.
Further, I feel that the comments are quite a turnaround compared to the FY results released in March which was much positive about 2017 trading. So maybe things have hit the brakes in the last couple of months, which would indicate a slowing trend going forward?
I feel the special dividend is less than I hoped it would be and quite conservative. They had cash of c. $20m and will probably generate about $10m of FCF this year so to give only $7.5m back in a special dividend seems quite cautious, a view strengthened by the narrative that describes it.
Set against this is the fact that Somero Enterprises Inc (LON:SOM) does still look like a good takeover target. Additionally from a UK investor point of view it is a good GBP/USD hedge - particularly if there is instability or GBP weakness coming out of this week's election.
I think today's price reaction feels about right and I'm happy to halve my holding having had a good run up from about 140p in the last year.
Great minds think alike. I also top sliced my holding in Somero Enterprises Inc (LON:SOM) for a decent profit to protect profits. I share your concerns about the RNS issued this am compared to the outlook statement in the 2017 finals. I also compared the RNS with the TU issued last June and compared the language used and the length of the statement. I think the SP is priced about right for now, although I believe Finncapp have raised the price target to £3.50. Not sure how they've arrived at that figure and nudged the price target up.
Great minds think alike. I also top sliced my holding in Somero Enterprises Inc (LON:SOM) for a decent profit to protect profits.
All I can say is that I've often been tempted to top slice this share and have not to date. Nothing in this update has changed that and I'll happily take the special dividend and any future special dividends, which must be on the cards. Every time I consider selling some I look at the StockReport and salivate over the ROCE and Operating margins. You guys must have a seriously good home for your sales proceeds :)
I guess it depends on your situation but with 40% of my SIPP in cash I feel no need to sell my best quality ideas even if the price takes a short term dip.
All the best, Si
Hi Si - for me Somero Enterprises Inc (LON:SOM) was my largest holding (around 15% of portfolio value), and I've held for some time.
I agree Somero Enterprises Inc (LON:SOM) is still a very good company and that's why I still hold, but I wanted to reduce my exposure. I didn't like the fact that US earnings were flat compared to last year as the investment thesis for me at least is predicated on strong US earnings and the potential earnings in China and the RoW. Given the decent profits I'd made from Somero Enterprises Inc (LON:SOM) I decided to lock in some profits.
I've learnt in my short investing experiences to date to never fall in love with a company, and to evaluate each TU/results statement on its own merits. Too often in the past I've held on and not top sliced and lived to regret it with the price falling back.
In terms of deploying the cash, personally I'm not seeing much value, so am inclined to sit on cash and am happy for this to build-up, with a view to buying stocks on a general fallback in the markets.
Regards,
Imran.
I've learnt in my short investing experiences to date to never fall in love with a company, and to evaluate each TU/results statement on its own merits.
I also think you can read too much into RNSes if you are not careful, particularly if you are already of the disposition to sell some. I know it is a weakness I have myself. I am certainly not in love with any company but it's hard to sell a company for which the valuation is still compelling. It's sometimes very easy to sell a share just because it's gone up a lot, and tbh although I have trouble buying into very high QM shares I now at least hold for longer than I may otherwise have done.
Too often in the past I've held on and not top sliced and lived to regret it with the price falling back.
I actually put together a spreadsheet of my sells over the past 18 months recently, and far too many times I top-sliced or sold out way too early. So my own experience in recent times is quite different to yours.
IMHO it is possible Somero Enterprises Inc (LON:SOM) will be bought out by a trade buyer at some point in its continued growth - it would make a great bolt-on for companies like Liebherr or Sany. In the meantime, it does not look expensive on any valuation metric and the margins and cashflow are phenomenal, so I'll happily sit on my hands and take the dividends, and may even buy more.
All the best, Si
I think I will probably continue to hold but unlikely to add for the moment (largely due to not having any available cash more than anything).
I have been following Somero Enterprises Inc (LON:SOM) for some time, as a decent yielding share with good growth prospects, waiting for an entry point. Jumped in this morning as well following the dip. Hope I won't be disappointed!
Shares -12% which seems an over reaction but this is a well folllowed share due in part to Stockopedia readers. I have just bought some at 275p (having said I wouldn't) and I do believe
1) the weather will improve
2) Trump wil spend on infrastructure
PE now closer to 13x, yielding 3.3% on normal divs plus c3.5% special =c 6.5%
Net cash on the balance sheet
I am now on a flight for 6 hrs, I wonder how the SP will look once I land ?!?