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I initially recommended shares in Elektron Technology (LSE:EKT), a designer and manufacturer of precision engineered components for connectivity, instrumentation, monitoring and control, in April 2011 at 37.25p as the company looked be recovering well from the impacts of recession and customer de-stocking. The shares initially performed well – hitting a high of 45p in the month following the recommendation. However, as macro economic progress has once again stalled so too has Elektron’s profit recovery – as most recently witnessed by results released in September for the six months to 31st July 2012. The shares are now 18.5p valuing Elektron at £22 million. I apologise for having made a bad call in my initial recommendation. What to do now?
The results saw Elektron report an underlying pre-tax profit of £1.5 million, down from £3.4 million in the first half of 2011, on revenue 13% lower at £29.9 million. This saw earnings per share of 1.02p, down from 2.38p. At the period end net debt totalled £4.6 million, with net tangible assets declining by £1.3 million during the period to end at £9.8 million. But this included £9 million of inventories and £5.1 million of property, plant & equipment. My guess on the real value of those inventories should markets head even further South is that it is well under £9 million. As such I do not regard this company as having that substantive an asset backing for its £22 million market cap.
The company noted that “the challenging backdrop of economic uncertainty and deferred spending has continued from the second half of last year”, with “the on-going downturn in European economies and reduced UK Government spending making for difficult trading conditions”. In all but currently the smallest (Americas) of its four (UK, EMEA, Asia-Pacific & Americas) geographic regions revenue was lower than in the first half of 2011 and in the UK and Americas it was lower than in the second half of 2011. The company is seeking to mitigate the economic backdrop by further investing in new product development and “streamlining” the business – this contributing to it not declaring an interim dividend, with a decision on a full-year dividend to be based on “trading in 2013 H2, the outlook for 2013-14 and plans for investment in new product development”.
On the near-term outlook the conclusion was “as always we have limited visibility of a few weeks of sales. Beyond that, we anticipate that weak levels of demand may continue into the rest of the financial year”. Although the balance sheet looks to remain in reasonable shape, the demand outlook, lack of visibility and, externally, lack of signs that the macro economic uncertainty is abating concern me in terms of the prospects for a share price recovery in a reasonable time-frame here. I am not even going to hazard a full year forecast as it is impossible but I bet you 10 Albanian Lekke that earnings are well under 2p.
As such, I apologise for having made a bad initial call on this one – and though it looks to have some decent long-term, innovation-based potential (I note Chairman Keith Daley has acquired £87,500 of shares since the September results announcement), there are safer bets with more upside and thus, for now, my stance is sell.
Tom , any analysis on Kefi? Been buying at 3p and they look to go past 5p today.Lot of interest in them now.
the wires
I am afraid I do not know enough about Kefi to offer an opinion.
V sorry
Tom
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