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I first recommended shares in foundries and engineering company Chamberlin (LSE:CMH) on a website that I do not mention any more, back in November 2003 at 161.5p. Now at 187.5p, the bare stats show that this is one that has not exactly roared ahead. However, those who kept the faith – and averaged down aggressively as I advised – when the shares were trading at sub 40p in early 2009 are probably a bit happier. The current share price represents a more than 4½ year high and is a testimony to the focused modernisation work that has been undertaken within the company by its top notch turnaround CEO Tim Hair. But what does a trading statement issued today mean for the shares? This is my take…
Today’s update states that:
“trading results for the first six months of the financial year are expected to be in line with management expectations, with profitability ahead of the comparative period last year. Chamberlin’s financial position continues to be healthy, with the group generating strong cash flows. This has been achieved against a trading backdrop which has seen signs of softening market conditions as the European economies slow. Chamberlin will provide an update on prospects for the full year when half year results are published at the end of November.”
The shares currently trade unchanged at 187.5p in response to the news – this capitalising the company at £14.9 million. In its year ended 31st March 2012, Chamberlin recorded an underlying pre-tax profit of £1.66 million (earnings per share: 18.3p) – this enabling it to pay £0.152 million out in dividends and reduce net debt by £1.32 million, to £1.56 million. At the year-end net current assets totalled £2.42 million, with £3.19 million of non-current liabilities while net tangible assets reached £8.40 million.
There is thus decent balance sheet support but the company’s significant exposure to European economies concerns me somewhat. The specialist nature of its products should shelter it from the worst of the chill economic winds but the statement note of “signs of softening market conditions” creates some doubt in my mind that full-year expectations will be met. These were for a pre-tax profit of £2.2 million (generating earnings per share in excess of 20p). The company’s house broker, Charles Stanley, has nudged its forecasts lower on the back of today’s announcement – noting “for the moment the outlook is a little more muted in common with the recent experiences of most industrial businesses”.
Chamberlin is a well-managed business (Tim Hair has done a cracking job and is a top man all round) with some positive long-term opportunities – such as in the turbocharger market. Given this and the balance sheet support, it is certainly not one to short at current levels and I will continue to monitor it as I believe there will likely be an attractive opportunity in future to get on board again. But I think that opportunity will come at a lower price when there is increased earnings visibility. For now, pro tem, given the short-term outlook, the safest play right now looks to be to take the profit and sell.
