7:59 cut – SOM, PEG, QUIZ


After a quiet patch, it is quite busy today and I also expect to be commenting on Beeks tomorrow and UPGS on Monday.

Somero (SOM) – H1 Results

Somero issued a profits warning on 7th June citing unusually poor weather, followed by an in-line trading update on 11th July. However reports from US Concrete and others report ongoing poor weather in certain locations and so guidance for the remainder of the year in today’s update will be followed closely, as will anything about longer-term trends.

I do not yet have a full model in place for Somero, however I soon calculated that today’s H1 revenue of $39.0m is only 44.8% of June’s FY forecast $87.0m, whereas FY 2018 H1’s revenue of $45.0m was 47.8% of the actual $94.0m full-year figure [I note all these figures end with”.o”]. Working on the same split for FY 2019 would give $81.5m full-year revenue.

Indeed this is reflected the statement that revenue is only tracking “broadly” in line and a move from a £87m central forecast to an £83.0m – £87.0m range (central point $82.0m).

Despite now being 2 months into H2, they can only say “we are pleased to note that as the weather improves, we expect to see improvement in H2”.

It is a well known phenomena in the clothing retail that poor weather can obscure the underlying picture and many a company have initially blamed poor weather for a downturn that turned out to be more about their market positioning. There are reasons to believe this is less likely to apply to Somero, but nonetheless shareholders will be nervous about the current situation.

On the positive side, their success in not only maintaining but raising gross margin [edit: this is wrong: gross margin fell as normally happens on reduced turnover and also in this case due to increases in input costs], as well as significantly cut operating costs (despite increases in expensed product development) bodes very well for the future of the company when the downturn inevitably comes.

To be clear, this is a further mild revenue warning and despite guiding profit in-line, the shares may well fall this morning. This is a top 5 shareholding for me. I will be holding tight unless the fall is more than 10%. [edit: I added this morning at 234p]

Petards (PEG) – Contract win

Petards have been notable for their lack of contract wins and poor order coverage for 2020/21 due mainly to delays in rail re-franchising [edit: new franchises generally include commitments to new / upgraded trains]. Although an agreement for the West Coast Main Line (WCML) was announced recently, publication the wider franchising review seems to be held up in the current government chaos over Brexit. I also have concerns that the pension liabilities issue may still come back to bite the WCML and other franchises.

FY 2020 forecasts have not been updated since April when they stated order coverage of just £5m of £19.4m. At the May AGM they said:

…management’s focus continues on building on the current order book for 2020/21 where it is in discussions with its customers over new business across the Group, in particular for Rail Technology where a number of significant new contracts are in the offing.

With no rail contracts announced clearly things are not going well and it is difficult to judge whether this has been fully reflected by recent share price falls. And although this is mostly business deferred rather than business lost, Petards will need to continually invest to keep up with the latest technology.

It is fortunate that Petards have their defence and other non-rail business to fall back on. Today’s defence contract is welcome, but does little to improve order coverage “£1.1m most…expected…delivered…second half of 2020”.

I have been reducing and may sell further into any strength on the back of today’s statement. Note: 2019 H1 results due out in 2-3 weeks time should be in line.

Quiz (QUIZ) – AGM Trading Update

Another small profits warning with revenues only “broadly” in line. They are clearly positioning themselves to a move online but have not provided any meaningful indication of progress.

[edit: At the last results they held considerable amounts of cash which should help with the transition. However we saw with Bonmarche how quickly these can evaporate and so I would have liked to have seen an update on cash levels today]

I used to hold and am monitoring.

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