Somero has now released their interim results for the year ending 2019.
Revenues decreased when compared to the first half of last year due to a $3.3M fall in North American revenue, a $1.9M decline in European revenue and a $1M decrease in Middle East revenue. Cost of sales declined to give a gross profit $4M lower. Selling expenses were down $351K, share based payments fell by $137K and other admin expenses were $337K lower but engineering expenses increased by $118K to give an operating profit that was down $3.3M. There was a small growth in finance income and tax charges were down $647K which meant that the profit for the period was $8.1M, a decline of $2.5M year on year.
When compared to the end point of last year, total assets declined by $4.6M as a $2.1M growth in inventories, a $1.9M increase in right of use assets, a $1.8M growth in accounts receivable and a $1.8M increase in intangible assets was more than offset by a $13.1M decrease in cash. Total liabilities increased during the period as a $1.5M decline in accrued expenses was offset by a $1.7M increase in lease liabilities and some other smaller increases. The end result was a net tangible asset level of $43.8M, a decline of $8.4M over the past six months.
Before movements in working capital, cash profits declined by $3.6M to $8.7M. There was a cash outflow from working capital and despite tax income increasing by $479K the net cash from operation was $4.4M, a decline of $7.9M year on year. The group spent $587K on fixed assets, $138K on intangibles and $2M on acquisitions to give a free cash flow of $1.7M. This didn’t come anywhere near paying for the dividends of $14.2M and there was a cash outflow for the period of $13.2M to give a cash level of $15.1M at the period-end.
Overall the first six months fell short of their full year expectations at the start of the year, mainly due to heavy rainfall in the US that depressed sales in the largest market. The US non-residential construction market remains healthy and as the weather improves, the board expect to see an improvement in performance.
Towards the end of the period, trading in Europe and the Middle East fell below the prior year, in part due to the timing of certain contracts. Despite this the remain confident in delivering improved second half results, broadly in line with guidance for the full year, notwithstanding the macro pressures in Germany, the Middle East and Australia. Despite the disappointment in trading in the first half they don’t see a fundamental change in the end markets.
The high levels of rainfall in the US hampered construction activity, resulting in project delays that in turn slowed the pace of equipment purchases. North American sales declined by 11%. In the US there are multiple variables contributing to longer term economic uncertainty but the construction industry is healthy and contractors and builders remain busy with backlogs well into 2020.
The European market reported a $1.9M decline in sales compared to the first half of last year. Their activity level was positive but this did not convert to their targeted level of sales at the end of the period, attributable in part to the timing of project starts. They have not observed a fundamental change in construction activity in the European market and anticipate continued positive activity in the region for the remainder of the year but they have noted an increasing level of concern driven by longer term economic uncertainty in the region with the German market particularly illustrating this.
China reported flat sales year on year with consistent trading and positive movement towards the end of the period. The US-China tariff disputes did not directly impact trading volumes but newly imposed tariffs and competition in the low-end productivity segment of the market are resulting in margin pressure. Capturing the long-term opportunity in China remains dependant on growth in demand for quality concrete floors which has been slower to take hold than initially expected.
The Middle East reported a sales decline of $1M to just $200K primarily as a result of timing of projects which are impacted by the continued geopolitical uncertainty in the region. They expect to see meaningful opportunities in the second half but continue to expect uncertainty in the region will impact trading and as such don’t expect to recapture the first half shortfall. In India, there has been an increase in demand for quality and sales in the region doubled to $1M.
In January the group acquired Line Dragon for $2M in cash and additional consideration up to 2031. The performance payments are calculated at 3% of gross revenues from the sale of SP-16 of Line Dragon concrete puller or placer equipment. The acquisition generated $351K of goodwill. The integration is progressing well but sales have impacted by the poor weather in the US. They are completing the design of the next generation product in this family and anticipate its launch in the second half.
Going forward the board carry a positive outlook for the rest of the year in the US and expect to deliver full year results broadly in line with market expectations. This outlook is based on the healthy construction, the high level of confidence displayed by their customers and the expectation of an improvement of weather conditions in the US. They are also encouraged by the interest shown in their new products.
In Europe they anticipate solid interest across the region but expect H2 trading to fall modestly below last year due to concerns over longer-term economic activity in the region. In China, performance is solid but they will continue to monitor the trade dispute with the US.
At the current share price the shares are trading on a PE ratio of 6.3 which increases to 6.9 on the full year forecast. The shares are currently yielding 10.5% but this falls to 7.3% on the full year forecast. At the period-end the group had a net cash position of $15.1M compared to $20.7M at the same point of last year.
Overall then this has been a difficult period for the group. Profits declined, net assets reduced and the operating cash flow decreased with very little free cash being generated. Much of the blame has been put on the poor weather in the US and if this is indeed the reason for the downturn then this should improve in the second half. More of a concern I think is the poor market in Europe. This looks more like a real slow-down here and should this move to the US too then the group could be in real trouble. These risks could be priced in already though as they certainly look cheap with a forward PE of 6.9 and yield of 7.3%. Tricky one this. Could be risky to continue to hold but the returns could be good.