There are is one main reason why I did not make an investment into Senior Plc (LSE: SNR) yesterday after it’s mixed trading statement: on an earnings basis the Senior Plc (LSE: SNR) stock is beyond the realms of sensible value with a PE Ratio of over 20
If I were a long-term shareholder I would not be panicking right now and just leave my position open whilst counting the dividends as they roll in.
The thing about those earnings is that they have been in a choppy decline for some time and free cash flow has plateaued.
Taking a look at the finals results from 29 February 2016 the downward trend becomes clear as both pre tax and operating profits fell as did EPS.
The dividend and revenue both increased (10% and 4% respectively) and the dividend looks safe for now but revenue growth was the result of three acquisitions and a forex gain.
Organic revenue actually declined due to revenue declines in the Flexonics division.
Still, the reason I would not panic right now if I was a long-term shareholder is because the CEO David Squires clearly identifies the difficulties that lay ahead for Senior’s Flextronics division and see’s growth in the Aerospace division:
In 2016 we expect growth in our Aerospace business as volumes start to ramp on the newer programmes. Flexonics faced difficult market conditions in 2015 and we expect that to continue into 2016 and so the Group continues to take appropriate mitigating cost management and efficiency actions. The Group is financially robust and remains well positioned for the future as new Aerospace and Flexonics programmes and products enter production and as Senior increasingly benefits from its strong customer relationships and global footprint
Those strong customer relationships are impressive and include serving global mega caps such as Rolls-Royce, Boeing and GE to name just a few.
The obvious worry is the Flexonics division but where’s the growth to come from?
Here’s an interesting line from Squires:
The level of net debt at the end of December 2015 was GBP194.6m and the ratio of net debt to EBITDA was 1.4x, within the Group’s normal target range of 0.5x to 1.5x and comfortably below the Group’s bank covenant level of 3.0x. The Group is financially strong and is able to fund future organic and acquisitive growth.
So a mix of buying growth and creating growth are on the cards but Squires also expects revenue to decline even though he also expects an increase in Aerospace business:
In Aerospace we expect further revenue growth in 2016 with a stronger profit in the second half, driven by increasing revenues and the operational improvements we are implementing across the Division. However, challenging market conditions in some of our Flexonics markets, including truck and off-highway and oil and gas, mean that the outlook for Flexonics remains uncertain. Whilst the Group will continue with its focus on cost management and efficiency initiatives, these challenging conditions are expected to outweigh progress in the Aerospace Division
- If you’re a long-term shareholder don’t panic.
- If you’re an aggressive investor buy some stock, but just a little.
- If you’re a traditional value investor put Senior’s name on your watch list.
I’ve done number 3.