James Fisher & Sons Profit Warning: Shares in James Fisher & Sons (LON:FSJ) slipped a massive 35% today after a trading update gave investors not just one but several points of concern. The share price action was pretty unforgiving, and the longer-term chart is quite surprising:
There has been no dilution of shares over the years, so the value of the company is now roughly a quarter of what it was a couple of years ago. As we can see from the more recent years, this was sold off with most things into the pandemic. But unlike a lot of other shares there has been little in the way of recovery; todays price marks a new low for the company. This is despite the company operating in marine services in a wide range of industries; they also own their own fleet of ships which should give some advantage.
What did the James Fisher profit warning say?
The bad news comes in a trading update this morning. The reasons are summarised in bullet points and are pretty self-explanatory:
· Following a difficult start to the year, improvement in the Fendercare ship-to-ship transfer business remains below the rate previously expected, with some growing evidence of market shifts in some key territories.
· JFD has reached an impasse in negotiations over c.£2m due on a long-term project and is no longer forecasting a resolution in 2021.
· Customers of the Group’s Marine Contracting, Decommissioning and Nuclear businesses have further delayed projects in recent weeks. The projects were previously expected to commence, and in some cases finish, in 2021. The continuing challenges presented by the global pandemic, particularly in the safe mobilisation of teams to work sites, have influenced customer decision-making processes.
· A recent deterioration in the condition of a financially distressed customer has increased bad debt risk by c.£2m.
· Tankships experienced a poor month in September and as a result has a more cautious outlook for the full year.
· Revenue in the quarter ended 30 September 2021 was 7.6% higher than Q3 2020 and 8.7% higher than Q2 of 2021. Year to date revenue is 3.9% below prior year.
· The Board now anticipates Underlying Operating Profit for the full year, before separately disclosed items, to be in the range of £27m – £32m.
None of these issues are large on their own – this is a company which did have operating profits in excess of £50m recently. However, cumulative they add up, and they also would have been a disappointment for holders reading the half-year results in September. This forecasted underlying profits to be around the same for FY2021; the new range is some way off.
One line that may make people nervous was about covenants:
The Group continues to trade within its banking covenants (which are formally measured at each half year end) and at 30 September had headroom of c.£100m against its revolving credit facilities.
The solution to the problems don’t sound particularly easy:
In response to the latest short-term trading outlook, management is performing a detailed review of the Group’s cost base and balance sheet. Aligned with the Board’s commitment to ‘fix or exit’ non-core and underperforming businesses, the Group is continuing to advance at pace the divestment of non-core businesses and assets aimed at generating significant proceeds over the next year, to reduce net debt and financial leverage as well as to simplify the business.
James Fisher: The Business
In some ways James Fisher is definitely a British success story. They can point to over 170 years of history as shipbuilders and were founded by the original James Fisher in 1847. At one point, they were the largest shipowners in the country. They are also still based in Barrow, where the company was founded and did employ over 3,000 people.
The modern era saw the company diversifiy its operations in the marine field, mainly by the route of acquiring other companies. Today they offer a wide range of services underneath the ‘Marine support’ banner including consulting, design and operations. They are a global business, with most of the revenues coming from outside the UK. Last year delivered a bad blow as the pandemic sent the company into making a statutory loss; however before this it was consistently profitable.
One thing that is noticeable that even before the pandemic, its metrics were slipping:
There are a lot of moving parts to the business, so the margin is a composite. This can hide that some are moving in different directions: the marine support and specialist technical revenue segments have had decreasing returns. By contrast the offshore oil and tankships margins have been more resilient. Unfortunately for Fisher the latter two are the smaller segments by revenue. This trend seems to have continued in the ‘Divisional Summary’ part of the trading update.
Another trend is that until 2020, the debt had been increasing – in 2019 this figure reached over £200m and had doubled in the space of 5 years. During this spell the company were still being acquisitive and also paying dividends. The debt is pretty much the reason why there was no capital raising to pay for these items. The pandemic year of 2020 saw a change – £35m of debt was paid down. This has continued into this year, with one of its vessels recently being sold and more divestment looks on the way.
The convenant tests referenced in the warning are mentioned in the annual report. Those tests are ratios of net debt to EBITDA and net interest costs to underlying earnings before interest. Whilst those tests were passed in 2020 it does not mention how much by. Clearly if earnings are going to fall, either net debt or the interest paid on that debt will have to come down as well. With physical asset backing, this appears to be a comfortable enough situation for lenders if we can assume the business does not deteriorate.
However, much like the ships themselves, momentum can be very powerful as costs are slow to be cut. If business continues to drift there may be a situation where further debt is not possible due to the convenants. This leaves raising by equity as the preferred option but results in dilution for current holders. The company does not run a high cash balance; the sale of assets offers a boost but also over £13m has gone into pension defecit contributions in the last 2 years. One sign of this is that the headroom has shrunk from the last update: going from £117m to £100m. Another bad sign is that there is little director skin in the game.
One of the nuances here is the widespread use of underlying profits. Many items are disclosed separately such as acquisition related expenses, impairments of assets, restructuring, litigation, and profits or losses on disposal of assets, and of course, tax and interest! Some of these are non-cash adjustments, however some of them are not. In the past year the numbers of these items were vast: separately disclosed items totalled £84m. This was enough to turn a statutory £43.5m operating loss into a £40.5m underlying operating profit. It seems that from the trading statement that these items will be quite numerous in the near future, so something to be wary of. In the past these adjusting items were more benign.
Is the James Fisher profit warning a buying opportunity?
Personally I think this is a complicated situation that may require industry knowledge. Clearly macroeconomic factors are against some parts of its business. High oil prices and climate sentiment may have massively reduced exploration capex for now, but conversely acute shortages may also bring that back. Shipping woes may come to the fore this winter as supply chains really get disrupted. Despite being very unseen and unfashionable – big ships have been around for centuries now – it may be that they are integral to things running smoothly. Thus demand for services will not go away, and may actually increase.
The questions are more on the financial side. Further poor trading may put pressure on the business, and like other land-based contractors many projects may involve large amounts of working capital to be fronted, with revenue being recouped in stages. Personally I have a feeling that an equity raise is a possibility in the future. With the kind of large profits we saw in the past not likely to return any time soon, it could produce further weakness in the share price. 2/5.