Today has seen the release of profit warnings for two small-cap stocks. Their share prices have fallen by between 7% and 16% so far today, which is clearly hugely disappointing for their investors. However, could their declines signal a potential buying opportunity? After all, they could offer better value for money as well as scope for successful turnarounds.
A short-term blip?
Shares in specialist fluid power products supplier Flowtech Fluidpower (LSE: FLO) are down 7% after it reported worse than expected trading conditions in 2016. Its sales rose by 19.9%, but its margins suffered due to negative currency effects. Although it was able to pass on the vast majority of higher input prices resulting from sterling’s weakness, it was unable to do so on products sourced in euros and dollars, which were then sold in sterling.
As such, gross margins contracted in the latter part of the year. Alongside additional investment in central and sales resources, this means that underlying profit before tax will be between £7m and £7.2m.
Despite this, the company remains confident in its long-term outlook. Evidence of this can be seen in the decision by the board to raise dividends by 5% so that Flowtech now yields 4.4% from a dividend, which is covered 2.6 times by profit. And with its shares trading on a price-to-earnings (P/E) ratio of just 8.8 following today’s share price fall, they offer a wide margin of safety.
Therefore, while further volatility can’t be ruled out and margins may be squeezed somewhat by a weaker pound, for the long term, Flowtech has capital gain potential. Its investment in cost optimisation and acquisition opportunities could pay off and lead to improved financial performance in 2017 and beyond.
Disappointing divisional performance
Also releasing a profit warning today was Braemar Shipping Services (LSE: BMS). Its Technical division has continued to underperform and it has seen a marked deterioration in replacement work due to weakness in the oil and gas sectors. The effect of this on the company’s profitability will be a restructuring charge of £2.7m. Alongside a one-off gain of £1.7m from its disposal of an interest in The Baltic Exchange, this means that underlying operating profit for the 2017 financial year is expected to be between £3m and £3.5m.
The market has reacted negatively to the news and Braemar’s shares are down 16%. However, it has now largely completed the restructuring of the troubled division and expects to deliver annualised cost savings of £6m in the next financial year. This could boost the company’s profitability and with its other divisions such as Shipbroking performing relatively well, its long-term performance could improve.
With Braemar trading on a P/E ratio of around 12, it seems to offer good value for money. Its shares may remain volatile and the performance of the Technical division could act as a drag on its future profitability. However, with a wide margin of safety it could be a strong turnaround play.