The punishment of Macquarie Group (MQG) shares yesterday might have seemed illogical to many in the market, but the treatment meted out to shares in Programmed Maintenance Services (PRG) seems justified after it sprang a surprise earnings downgrade and impairment charge on the market via a “business update”.
The reason for the downgrade and restructuring (with associated losses) wasn’t hard to see – the slide in oil and gas prices and the impact that has had on service companies such as Programmed that is still digesting the $700 million takeover of Skilled Group last year which, ironically, pushed Programmed deeper into the resource sector.
The shares were sold off heavily, losing more than 35% of their value, closing at $1.175.
PRG 1Y – Programmed smashed over downgrade
Dividends to shareholders will be maintained, but more than halved with a final of 5 cents a share promised yesterday. That’s less than half the 11.5 cents paid in 2015. But the company paid a steady 6.5 cents a share interim last month.
But this reaction, while understandable to yesterday’s surprise statement, shouldn’t have been such a shock – after all, Programmed warned of a small impairment of goodwill late last year and other costs in the wake of the completion of the Skilled takeover – and those impairments of around $27 million were taken in the resource division.
And investors then put Programmed on a watch list as the shares softened from $2.99 on November 11 to $1.82 on Wednesday, before yesterday’s slump which took the loss in the past 10 weeks to 60%.
Programmed CEO Chris Sutherland said yesterday that he was surprised at the speed of the oil price slump, but so then was the rest of the sector, as we have seen from the toll of losses and write-downs from even the biggest majors such as BP and Chevron in recent days, plus downgrades from credit rating groups.
Mr Sutherland says the company now sees oil prices staying at around current levels (just above $US30 a barrel) for the next year.
Programmed revealed in the surprise trading update that revealed that from offshore oil and gas companies had dropped sharply in the past six months.
The company’s marine labour business has 750 fewer people working in it compared with six months ago. Mr Sutherland said the company’s marine crew numbers had been cut heavily as well.
Given those job losses, it’s no wonder that the $75 million impairment of goodwill is being taken in Programmed’s marine operations thanks to the slump in oil and gas prices and expected revenues over the next year or so which in turn has seen the sale of vessels by its Broadsword marine services business.
The company said yesterday while it has been experiencing solid demand from the property and infrastructure industries, although revenues from industrial customers has fallen in the last six months because of the slowdown in the mining sector.
Mr Sutherland defended the Skilled takeover, saying it had given Programmed the size to withstand the tougher conditions than if it and Skilled had remained separate companies. But there were a couple of positives from the update. Firstly the company will pay a final dividend "The board expects to declare a final dividend in line with its policy of paying dividends equivalent to 50% of after-tax profit before one-off items and non-cash amortisation. Based upon the above forecast, the final dividend is expected to be 5 cents per share, fully franked,” the company said yesterday. The final will be down sharply from the 11.5 cents a share paid in 2015 as the final. The company has committed to paying the 6.5 cents a share interim (which was unchanged).
Secondly, it remains committed to cutting debt – which has been trimmed in the last couple of months. "Net debt at 31 March 2016 is expected to be in the range $260 – $290 million, compared with $302 million after financial close of the Skilled acquisition on 16 October, and notwithstanding the larger one-off integration costs being incurred in FY16 to deliver greater cost savings in FY17 and subsequent years. "The company remains committed to reducing debt in the short term through the group’s strong cash flow, sales of non-core assets and other means,” Programmed said yesterday.
