Shares in AIM-listed home improvement installer Entu (LSE: ENTU) fell by 30% to 64p this morning, after the firm issued a major profit warning and cut its dividend forecast.
Entu is pinning the blame for the problems on its solar division, where sales have fallen below expectations this summer. The firm says that it expects the market environment for solar to become “increasingly difficult”, due to fears of VAT increases on solar panels and sharp cuts to electricity feed-in tariffs for solar power.
Entu now expects to report a loss of more than £2m on its solar activities this year, compared to the firm’s previous forecast for a £1.6m profit.
As a result, Entu has decided to discontinue retail sales of solar installations, on the basis that market conditions seem unlikely to improve. Larger-scale commercial installations, such as the £4.5m commercial solar project mentioned in this firm’s half-year results, were not discussed in today’s update.
Dividend cut
Entu said this morning that full-year results will be below expectations. Operating profit from continuing activities is expected to be around £8m, down by 22% from £10.3m in 2014.
The firm has abandoned its intention to pay a final dividend of 5.33p and now expects that the final payout will “not be less than 2.67p”. If so, this will reduce the forecast payout for the current year by 33%, from 8p to 5.34p.
However, it’s worth remembering that solar is only one part of Entu’s business.
The firm also sells other home improvement products like doors and windows, along with insulation and boilers. Entu said this morning that these divisions are all trading in line with management expectations, with forward orders of more than £30m.
Still a chunky yield?
Today’s share price fall has been so great that despite the dividend cut, Entu shares now offer a prospective yield of 8.2%. My calculations suggest that at 65p, the shares may now trade on a 2015 forecast P/E of around 7.5.
Could this be a great buying opportunity? Are the problems with its solar business simply the result of bad luck and government meddling?
It’s tempting to think so, but I’m not sure it’s worth the risk. Entu has been a listed company for less than one year and has already issued a big profit warning and cut its planned dividend payout.
Even before today, these shares looked cheap to me. In my view, this suggests that big investors lack confidence in the firm’s ability to maintain its profitability.
One possible explanation is that although Entu’s sales have risen steadily over the last few years, from £67m in 2011 to £115m in 2014, this is a cyclical business. At some point the housing market will cool. I wouldn’t expect that to happen quite yet, but I do believe we are much closer to the top than the bottom of the market.
In my view, the outlook for Entu is now quite uncertain and another profit warning is possible. I’m not sure I’d risk an investment, but if I am wrong the potential returns could be impressive.
