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Swallowfield – “broadly in line with expectations”… so why the significant share price decline?

By Steve Moore | Thursday 12 July 2018

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.

Personal care and beauty products company Swallowfield (SWL) commences a trading update with that “the board is pleased to announce that overall the group has traded broadly in line with expectations for the full year”. ‘Broadly in line’ = slightly behind… but the shares are more than 15% lower, at 265p. Hmmm…

“We expect group revenues to be similar to those reported in the prior year, driven by a strong double-digit growth in our Brands business and single digit decline in our Contract Manufacturing business. We expect group pre-tax profit for the full year to be significantly ahead of that reported last year… Brands… full year profitability will be significantly above both management's expectations and the prior year as a result of improving margins”. Sounds ok – with also it stated the noted Contract Manufacturing business decline “against very strong prior year comparisons” and “as expected”.

However, overall anticipated is “underlying operating profit marginally behind last year”. This is with “a reduction in LTIP charges” and the Contract Manufacturing business also impacted by material cost inflation and a slower than anticipated start-up of three major new contracts.

The company seeks to mitigate that “actions are underway to mitigate the material cost increases and the new contracts are now in full production and expected to contribute positively to future growth… We remain confident in the prospects for the new financial year and we expect our Brands business to continue to grow strongly. Whilst cost pressures are anticipated to continue, we expect our Contract Manufacturing business to return to stronger profitability”.

Hmmm, expecting such is rather simpler than delivering with continuing cost pressures and I also note an increased net debt position of £11 million – again the company “expects net debt to reduce significantly early in the new financial year”. The shares have previously been recommended here – before a 50%+ profit was banked at 370p last year, and I’d now rather wait for the noted expectations to start being delivered before being sufficiently confident to consider returning to a positive stance.

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