Shares in Sydney-based McPherson’s Limited (MCP) plunged more than 20% yesterday as investors reacted negatively (as they would) to the market update and profit downgrade issued well after trading ended on Tuesday afternoon.
The shares finished the day at $1.44, down 39c or 21.3% after at one stage dropping 46c or 22.7% in early trading.
The share plunge was the usual reaction to a downgrade, but the statement from McPherson’s made it more understandable with news also of a $50 million asset impairment, besides the lower profit and no joy from the $24 million fund raising in early March to finance the purchase of Home Appliances, an importer of cooking appliances and other products.
MCP YTD – Hit by $50 million write-down and lower earnings
The company paid $22 million for Home Appliances, but despite that, the company reports that trading has slowed in the past three months and discounting by retailers has intensified, leading to lower profit margins.
As a result the company expected to report a net profit of between $17 and $18 million which will be steady on last year’s result. But net profit from continuing businesses will be down by more than 10% at $15 million to $16 million from the $18.2 million earned in 2011-12.
That means there will be a rather large $30 million – $35 million loss after the impairment charge is taken.
McPherson’s has been revamping itself over the past 18 months after emerging itself from its printing business. There have been three strategic acquisitions – Cosmex in January 2012, Footcare International in August 2012 and Home Appliances in March 2013 – "all of which are exceeding expectations". As well the company has restructured its logistics and IT operations and expanded its warehouse capacity at its Sydney HQ.
The company said in the statement that while the company’s revenues have "remained strong" during this period of transformation "earnings have more recently been affected by lower margins and higher operational costs".
"Margins in parts of the business have suffered due to pressure on McPherson’s from some retailers to provide additional promotional support in order to maintain the strong market positions of the Company’s brands in the current subdued retail environment. In addition, higher manufacturing costs in China have not been able to be recovered through price increases.
"The company has now embarked on a strategic review of its brands, with the aim of focusing on categories and channels where its sourcing, brand management and supply chain expertise can add the most value. This activity will complement the company’s commitment to pursuing its strategy of diversifying its channels of distribution and expanding sales of higher-margin branded products.
"Although the transformation of the Company is progressing to plan and a lot has been achieved, as a consequence of the challenges that came into focus in the fourth quarter, this year’s profit performance will be lower than expected," the company said.
Directors said the weak result will occur despite a rise in revenue to approximately $300 million from $276 million the previous financial year. That will see statutory profit steady on a year ago of around $17 to $18 million. But earnings from continuing operations will be lower at $15 to $16 million from 2011-12’s $18.2 million, directors said in Tuesday’s statement.
"The Company takes a prudent approach to the valuation of its intangible assets. Although this matter is still under review, initial indications are that a non-cash impairment charge of approximately $50 million affecting goodwill will be recorded in the FY2013 result. (Just what assets are considered to be impaired wasn’t made clear in Tuesday evening’s statement.)
"Cash conversion from EBIT remains strong and net debt at 30 June 2013 is expected to be lower than a year earlier, with pre-impairment gearing (net debt / shareholders funds + net debt) forecast to be approximately 28%.
"The company remains focused on maximising shareholder returns and its policy of distributing fully-franked dividends of at least 60% of net profit before amortisation and impairment remains in place," directors said.
