Shares of Amec Foster Wheeler (LSE: AMFW), Imagination Technologies Group (LSE: IMG) and Gulf Marine Services (LSE: GMS) plunged on Tuesday morning, after each firm published a trading update.
Do investors need to worry — or is this a buying opportunity?
Debt reduction is key
Shares of energy services group Amec Foster Wheeler fell by 7% this morning, after the group announced a contract win in the US coal market this morning.
No value was provided for the contract, which suggests to me it isn’t huge. But it’s a useful reminder that the group’s US division is winning new work in the face of the big downturn in the US oil sector.
Amec shares have lost 45% of their value over the last year. They now trade on just 8.5 times 2016 forecast earnings and offer a prospective yield of 4.6%. This should be a buy but the problem is that the group has net debt of around £1bn. To put this in context, it’s more than five times 2016 forecast profits of £195m.
Amec has previously said it expects to reduce net debt by 50% before June 2017 by selling unwanted business units. But there’s been no news yet on major disposals. In my view, Amec’s shares are likely to remain cheap until progress is made with debt.
Still a lot to prove
Imagination Technologies was 5% lower this morning after the group said that revenue from continuing operations fell by 23% to £120.8m last year. The group’s adjusted loss deepened by 46% to 9.2p per share.
On a more positive note, cash generated by operations turned positive and rose to £16.7m, while net debt fell slightly to £33m.
Imagination’s new chief executive, Andrew Heath, confirmed today that the company will now focus on its intellectual property business. Efforts continue to sell the Pure digital radio business, which Mr Heath says has had “considerable interest”.
Sales during the current year are expected to be relatively flat and forecast earnings of 6p per share put the stock on a 2016/17 forecast P/E of 30. Imagination shares have already risen by 30% in 2016. In my view, they now look fully priced.
This could be a big problem
Jack-up platform operator Gulf Marine Services has been attracting interest from private investors recently.
But the group’s shares fell by 15% this morning after the company admitted that pressure on pricing remained high. More worryingly, Gulf Marine said that two customers had cancelled charters early.
The value of Gulf’s secured backlog of charters has now fallen from $413.1m in May to just $275.8m and the company now says that 2016 earnings are likely to be 14.5 cents to 15.5 cents per share, below analysts’ forecasts of 16 cents per share. Net debt is expected to peak at $435m this year, before reducing gradually, but if fleet utilisation and charter rates fall, the cash needed to start repaying debt may not be available.
Given that Gulf Marine’s net debt is around eight time 2016 forecast earnings, I believe today’s profit warning is a serious risk and I suspect there could be more bad news later this year.
Shares in Gulf Marine Services are cheap for a reason. As things stand, I wouldn’t invest.