Today I am running the rule over two of Friday’s significant fallers.
Halosource
Water filtration play Halosource (LSE: HALO) has extended its rotten run of form in end-of-week trade and was recently dealing 26% lower from Thursday’s close around 8.75p per share.
A range of operational problems mean the business is now trading at a mere fraction of its 166p price seen five years ago, and although share values had picked up during the past year, a series of poor updates in recent weeks has eradicated all of these gains. Halosource is now dealing at levels not seen since last September.
Halosource set the ball rolling in November when it advised that product rollout delays by key customers, along with capacity expansion issues in China — problems that will dent its ability to meet client orders — will cause revenues in 2015 to fall “materially lower than market expectations.”
And investors headed for the doors again today after Halosource advised that, while its Chinese facility was now back up and running, that further orders delays are expected. Indeed, all of these orders may not be able to be met until the first quarter of 2016, it noted, and total sales are now expected to register at $18m-$19m this year versus $21m in 2014.
With net losses also expected to be subsequently higher than forecast, and net cash expected to stand at $4m at the end of the year, Halosource advised that it is “exploring opportunities to strengthen its balance sheet and improve cash generation.”
There is no doubting that surging demand for clean water in emerging markets provides terrific growth opportunities for the likes of Halosource. But with the US-based business facing a murky near-term sales outlook, as well as potentially-drastic action to mend its battered finances, I believe the firm is a risk too far at the current time.
Pennant International Group
Defence specialists Pennant International (LSE: PEN) also shocked the market with a disappointing update in Friday business, and the stock was subsequently dealing 14% lower from the prior close.
The Cheltenham-based firm, which supplies products and services to the defence, rail, naval and aerospace segments, advised that it had only signed off on one of two critical contracts for 2015.
As a result Pennant International now expects “the loss for the second half… to be significantly greater than that reported in the first half.” This year’s sales expectations were based on total contracts worth £15m being rubber-stamped.
In more encouraging news, Pennant International advised that a strong order book for 2016 and 2017 should deliver underlying revenues of £10.2m for each of these years, exceeding expected sales for the current period.
But should Pennant International experience further contract delays — a common theme in the company’s core markets — shares could be in for a further battering looking ahead. Like Halosource, I reckon Pennant International carries too much risk at present.