Shares in water and filtration specialist Amiad Water Systems (LON:AFS) declined over 20% in the first hour of trade this morning as the company warned that the profits and revenues would be beneath expectations. Today has been a bit of a special day in the markets, with last night’s Conservative victory in the elections buoying many share prices, especially those of smaller companies. Without that, todays fall may have been even worse:
The share price was a gradual faller here, and reached a low point at approximately the end of the first hour: anyone buying early and hoping for a bounce may have been disappointed. Since then, it has recovered a tad but markets may be volatile over the next couple of days.
As an investment, there is perhaps no surprise that there is a little excitement in Amiad’s products: they manufacture water filtration systems for a wide range of applications in various industries. Water, and the saving of it, is clearly an industry that will have a permanent use in the future and typically these companies have traded at high multiples, such as Water Intelligence, who manufacture technology designed to minimise leaks.
Amiad has been listed since 2005 but its share price performance since then has been erratic, hitting highs of almost 400p in 2012 but more recently have been in a range of 100p-200p. We have also seen a progressive dividend in reverse, with payouts getting smaller and were cut last year, although they may be re-instated this year.
What’s gone wrong at Amiad Water Systems?
The bad news comes in a trading update delivered today, we get straight into it:
As noted in the Company’s interim results announcement on 11 September 2019, Amiad entered the second half of 2019 with a higher order book and larger sales pipeline than at the same point of the previous year. During the second half of the year, the Company was successful in converting this pipeline into sales and expects to achieve revenue growth for full year 2019 over 2018. However, owing to a number of global macroeconomic factors, in particular those impacting the Americas, certain projects did not proceed due to a lack of capital investment. As a result, the Company expects its revenue for full year 2019 to be slightly below market expectations.
This seems a fairly standard reason nowadays: orders being pushed back. There is worse news in the form of profits:
As a result of the lower-than-expected revenue, the gross margin pressures and the impact of the adoption of IFRS 16, the Company expects net profit for full year 2019 to be $3m-$5m below market expectations.
Stockopedia guides net profit at $4.83m, so potentially this wipes out everything. IFRS is potentially a mitigating factor, but there are no broker notes supporting this.
Amiad Water: An asset-heavy company?
One thing that may have tempted investors into to Amiad in the past is the valuation to book value: book value per share has remained remarkably stable over the years at around $2.50 per share. Yet the share price has been under this for a lot of the time and in some cases a long way under (in 2017, the price of a share was around £1.20).
A look on the balance sheets showed that the company seemed to be in good shape: minimal intangibles, a strong asset position formed of property/plant/equipment. The current ratio today stands at over 2 although much of the current assets stand in inventories and receivables.
So we could infer that the business is not rated that highly. A look at the recent history shows why this may be the case:
Both revenues and profits have struggled to gain any upward momentum: after this profit warning we can forget the projected lines and they will be flat (or worse). With a relatively high demand for capex (approximately half of operating cash flows in recent years) this has had a detrimental effect on the finances. A few years ago net debt was falling and dividends were being paid, in recent times debt is rising slowly back up and there are no dividends to be paid. That trend looks set to continue.
Finance headroom looked to be about $7m from the last annual report with no covenants attached – perhaps just as well given the loss of profitability. In the short-term a chunk of long-term debt has come up for renewal this year. At just over $1.1m in finance costs for borrowings alone this may be a significant expense in future. Weighted interest costs on US borrowings went up to 4.09% last year from 3.23% the year before.
The group is truly an international one, and its revenue is split quite evenly over the world, with North America, Europe, The Far East, Australia and its home country Israel all being major regions. There also appears to be some customer concentration as well with one single customer accounting for $20m of revenues from a total of $113m last year.
IFRS has been tricky for Amiad as it requires leased assets to appear on the balance sheet and a depreciation charge being made every year. It seems that this factor is temporal only: higher depreciation charges hit profits harder earlier on and then drop off later. A further complication is that Amiad reports in dollars but many of its operating leases are paid for in other currencies. Capitalising these as reported assets has led to a revaluation which has been adverse. So in some ways the profit fall is not as bad as reported.
Are Amiad shares good value?
There has been a sharp fall today, but the shares are still way above the low levels seen at the end of March 2019 when it almost touched 150p. In some ways the share price as a whole has been volatile with recoveries being indented by profit warnings.
There will be some who may be prepared to take a longer view on this, and for these people there does appear to be some value: FY2020 expected earnings are $7m, putting the shares on a forward P/E of around 11 which compares extremely favourably to Water Intelligence. On the flip-side that share price was also pricing in top-line growth and that may be brought into question now. In the RNS the board are very optimistic, but whether this is standard bluster we can’t be sure.
Some institutions may agree: there is a pending capital raise of £17.6m from existing shareholders, which would put the company on a very sound financial footing, potentially putting net debt to zero and giving some room for expansion. This may be re-negotiated now as the purchase price was £2.30 a share, and the current market price is under that.
There will be others who may choose to give this a wide berth. People have been burned before by Israeli companies on the AIM market amidst concerns of governance, the shares have a relatively small free-float which leaves most of the power in unknown entities.
Clearly their products must have some value to be traded worldwide, but this is something I feel could go either way. At present the gut feeling is that it is probably fairly priced. 3/5.