Tough Second Quarter Sees Airea Shares Floored by 30%

By | 27th June 2019

Shares in commercial flooring specialist Airea (LON:AIEA) slumped by as much as 30% as the company issued a profit warning after a tough second quarter impacted sales. The share price reaction was large and instant:

The share price has been choppy here, but longer-term holders would still have done well out of this. Even considering today’s warning the share price sits ahead of the 52-week lows, and the share price is still way above the levels of 12p which it saw in 2015. The shares have seen a re-rating a couple of times in previous years which has seen the price jump quickly. Today’s warning appears to be the first blip.

Airea produces commercial flooring of the type seen in retail and office premises through its main brand Burmatex. It is much changed nowadays, with the company previously selling off its residential division. As this was loss making, this was really a noose around the company’s neck and since this sale, things have moved ahead quickly with a rapid improvement in sales and an improved focus. This makes a lot of sense to me, as the residential market seems a lot more competitive.

The last set of preliminary results were good, with a marked increase in sales (again), and an increased dividend for investors. This occurred less than 3 months ago, so it is interesting to see what has gone wrong now.

The Warning

Part of the market reaction seems to be in the warning, which is very short on details, this is it in its entirety:

Despite a very strong order book and first quarter and with continued growth from our export markets we will announce revenue slightly down and a lower operating profit for the half year compared with the corresponding period in 2018. This is due to significantly tougher conditions during the second quarter.

Revenues were £9.1m and operating profits £1.5m, so there appears to be a degree on uncertainty on the latter figure as the word ‘slightly’ does not occur here.

No mention of jam tomorrow, but given the brevity the last part seems hardly reassuring:

Like many UK businesses the economic headwinds are against us and we are experiencing a high level of market uncertainty; however, the business is well positioned to continue to prosper despite this continued economic uncertainty.

No explanation as to why, or where these sources of uncertainty lie. Also no mention of dividends.

The Business

There is a fair amount of ire going around the investor community, and I guess it must be something to do with this:

A CEO cashing out his shares just ahead of a profit warning seems suspicious in retrospect, as he would have known at this time that the second quarter trading would be poor. This was not just a token sale, but his entire holding in the company. This type of red flag may have allowed other investors to jump ship as well but given that not all reasons for CEO sales are automatically bad there may be others who were not that fortunate.

It does seem that he has picked the top almost perfectly. 2018 was indeed a year that the groups fortunes rebounded as it went from loss to profit. Unencumbered by the loss-making residential division, Airea posted bumper profits of £3.27m and had a very healthy operating margin of 17%. Refurbishing offices is nice work if you can get it.

And its other performances have not been that poor, it has booked a profit in 5 of the last 6 years and also generated cash, which it has distributed to shareholders in the form of dividends. In the last couple of years this dividend payment has exceeded free cash flow, so this could be a sign that it may be cut. The dividend was very costly to the company last year, totalling £2.79m and caused the cash balance to decrease.

Said cash balance is good. There is no debt, £2.7m cash (as of the last statements) and a £3.4m freehold property under its assets. This is quite something considering the market capitalisation of the company now stands at around £20m. This is balanced out by a pension deficit totalling £3.7m which also is fairly large relative to company size.

Assuming a marginal decrease in trading there does not seem to be any immediate worry.

Comment

The apathy towards the share price reflects a couple of things: firstly the circumstances surrounding the CEO’s share sale and secondly the rather content-less manner of the update. There is no real reason why things could not have been quantified a little better, doubly so because there appears to be no house broker articles that investors can read. This lack of information gives way to a large amount of uncertainty.

So we can only really deal with the few words that are in the profit warning. The second quarter was poor, we can obviously see that. But what are the conditions which made this poor, and are these going to be replicated in future? It does not seem that Airea is a case like Somero, where external conditions such as the weather can provide an excuse. Thus given the current outlook I would be inclined to assume that these conditions will persist and it could well be that there are further profit warnings in the future.

On the flipside, this type of company may well be decent as an acquisition for a larger fish: a decent balance sheet and can be immediately earnings enhancing. James Halstead held talks last year with the share price at a similar level with no agreement reached, although we can see from the recent news from Bonmarche that companies can change their mind about what is good value for their shares.

Evidently the 72p level was too rich for Neil Rylance. I do think this is (or was) a good company but having being burned before in cases where directors have no skin in the game I am inclined to have a more neutral opinion. 3/5.

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