Once again the market’s unhappiness with a company delivering news outside expectations has been shown with the poor reception given to the interim results from equipment hire giant, Coates Hire.
It reported lower net first half earnings, then ‘spun’ the result by saying that it expects growth of between full year earnings to grow by 13 and 17 per cent or to between $106 million and $110 million.
All well and good.
But that wasn’t enough for investors, they didn’t like the surprising news of a volatile sales performance in the December half, while the company revealed a restructuring of its Australian business aimed at simplifying operations, always a handy fallback position when sales growth is spotty and profit margins under pressure.
There was no warning of this and the shares were sold off sharply, shedding more than 7 per cent, or 44c in trading to close around $5.67.
This was in a strong market up around half a per cent on the day.
Coates said net profit of $46.5 million was six per cent down on the previous first half after the company included a one-off tax benefit in the previous period.
Operating net profit after tax was up 8.1 per cent while earnings before interest, tax, depreciation and amortisation increased 14.6 per cent to $149 million, which was a solid result.
During the period, Coates acquired and integrated the heavy equipment assets of Allplant, combining them with Coates’ Allied Equipment business to increase scale.
Coates announced a fully franked first half dividend of 10 cents, up from nine cents in the previous first half, again a sign of confidence but also a way of keeping nervy investors mollified.
All fairly standard operating procedure really but what took the market by surprise were comments that the net profit after tax of $46.5 million for the first half of the 2006-07 year was “after overcoming a period of uneven operating conditions at the start of the period.”
“Although Coates’ total sales re-accelerated in the last quarter of 2006, the weaker than expected first quarter held overall sales growth to a respectable 9.5%, to reach $377 million, a seventh successive period to period increase in hire sales for the Company.
“The weaker than expected sales did result in a slight decrease in gross margins, to 45.3%. EBITDA margins in contrast were up to 39.5% and EBITDA rose 14.6% to $149 million. Coates is continuing its focus on margin management and has implemented a number of efficiency initiatives and cost containment programs.”
A case of oops, ‘we didn’t know about this’ and surprising given the general strong trading conditions with the resources boom still powering along and the infrastructure and civil contracting business more than making up for weak housing in NSW and Victoria.
Then there was the surprise ‘re-organisation’ of the Australian business (excluding the just acquired Allied).
Australia forms the heart of Coates hire business and to be re-organising in the midst of plenty but after a spotty sales record in the first half, is a sign perhaps of deeper problems.
“The Company also announced that it will be re-organising the structure of its Australian business, excluding Allied, and consolidate the current six business units into four geographically-based businesses. At the same time, the Company will unify its operations under a single brand name, Coates.
CEO Malcolm Jackman was quoted as saying: “The aim of these initiatives is to simplify the way in which we ‘face’ the customer, both from a sales and operational stance. At the same time it will unify the company under a single culture and a single brand.”
“Restructuring costs are expected to be approximately $9 million, which will be booked in FY07 (including approximately $4 million of non cash items). Long-term savings are expected to be in the order of $10 million per annum.”
This is what’s called a ‘surprise on the downside’ and markets in their present optimistic state, don’t like that.
Contrast the reaction to the news to that given to Telstra last week which delivered a down profit, but slightly better than expected performance. But Telstra did what it told the market it was going to do. Coates didn’t.
