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Stadium Group – “Trading Update & Notice of Results” = Profit Warning

By Steve Moore | Wednesday 8 November 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

A “Trading Update & Notice of Results” announcement from Stadium Group (SDM) commences that “Significant progress continues to be made in transitioning Stadium from a purely electronic assemblies business to a design-led technology business. The company expects to report a year-on-year increase in revenues of 15% to £61m (2016: £53.1m)”. Sounds pretty good... “Whilst revenue growth and the development of the forward order book are in-line with expectations for the current year,”… Uh oh…

“The board now expects single digit percentage growth in normalised profit before tax, which is below current market expectations”.

This is attributed “primarily” to customer delays into 2018 for certain higher margin technology products projects, though it also added “global shortage of certain electronic components, particularly memory, integrated circuitry and passive components, has compounded the situation”. It is then also admitted that “the delays and some pricing pressure will continue to impact the group in 2018”, though considered that “the forward visibility provided by the order book and the strong design pipeline of newly awarded projects, provides confidence that the company will deliver double-digit revenue and profit before tax growth in the coming year”.

House broker to the company, N+1 Singer, has updated “we reduce FY17 PBT by 15% to £4.5m reflecting the delays. We prudently reduce FY18 PBT by 17% to £5.4m, assuming ongoing challenges throughout the year”. The new forecasts equate to respective earnings per share of 9.1p and 10.8p. These compare to 8.7p last year – though that was down from 9p the year before that and I also note net debt was £6.5 million at the half-year stage and, post an initial £2.5 million acquisition, is now forecast to be… £12.5 million at the year-end.

Singer states this “due to the ongoing challenge to source componentry”, though expects something of an unwind next year. The shares have currently responded quite a bit lower, towards 90p. However, I’ll await evidence of a sustainable recovery to decent free cash generation before considering a positive stance here. I currently avoid.

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