Investors hoping for a reversal in Morgan Advanced Materials’ (MGAM) plummeting share price could have a very long wait ahead of them.
The ceramics and carbon manufacturer has warned of yet more challenging trading conditions, but this is increasingly looking like a poor excuse for its failure to deliver growth.
The £661 million cap’s share price has plunged 28% over the past year to 237.6p after a marked slowdown in many of its end markets, such as oil and gas, transportation and mining. This led to a profit warning on 12 November.
Morgan’s new chief executive Pete Raby unveiled his strategy to resurrect the business in February, but Panmure Gordon analyst Sanjay Jha says the new strategy ‘is nothing special’.
Like the old strategy, it relies on self-help and ‘attractive’ markets. ‘Rearranging the deck chairs, reducing costs and re-investing is not going produce growth from products that delivered a miserly CAGR (compound annual growth rate) of 1.3% between 2008 and 2015, and destroyed value,’ says Jha.
Over £120 million has been spent on restructuring since 2007 and the net result has been a decline in operating margins.
Since 2008, £440 million has been invested, which has yielded just £219 million of additional sales and just £21 million of additional operating profits. As a result, the post-tax return has fallen from 9.5% in 2008 to 6.5% in 2015.
‘We would probably have given the new CEO the benefit of doubt if he had taken the bold step of suspending the dividend and using the resources to reposition the company in new markets,’ Jha adds.
A trading update on 6 May warned of persisting challenging market conditions, with declines in the carbon and technical ceramics division and the North America thermal products business.
Jha points out that Morgan failed to deliver growth between 2012 and 2014 when things were not challenging.
‘In the short-term, we are also struggling to see how the company can deliver on 2016 consensus of a mere 2% sales decline given the further project delays in industrial markets (recent warning from Fluor Corp) and pressure on transportation markets,’ he says.
The stockbroker forecasts a 4% sales decline in 2016 and reckons pre-tax profit will drop from £88.2 million to £75.2 million.
