A tough lesson on the risks of buying into an IPO.
Investors who bought shares in Promethean World (LSE: PRW) in spite of the market's growing fears had a rude reminder on Friday that the market often knows best.
Listed in March at 200p, the digital whiteboard maker didn't look too expensive given its market position. Early investors in the IPO buckled in for rising profits and upgrades from analysts.
But Promethean World has taken shareholders to the school of hard knocks. The expected upgrades haven't come -- rather, downgrades have -- and the shares have slid remorselessly lower.
And on Friday, even falling knife-catchers -- such as yours truly -- who had judged the market was overreacting due to Promethean World's lack of history discovered again that 'past performance is no guide to future performance', as the small print always insists.
Proper profits warning
As I write, Promethean World shares are down 30% to 54p, on the back of a truly nasty profit warning.
The confirmation of the market's worries is bad enough:
"The Board now believes that fourth quarter revenues will be lower than in the same period last year and that therefore full year results will be below market expectations."
But there's worse. Firstly, after recalling that management had alluded to these concerns in the soft profit warning of 28 October, Friday's statement continues:
"...the Group has seen a deepening of these uncertainties and constraints particularly in the United States, and also in Europe."
Of course the October statement wasn't half as pessimistic as management now claims. Back then it said:
"We are confident of sustaining solid revenue growth for the fourth quarter and for 2011."
Sudden and unexpected deteriorations do sometimes hit businesses, although management might have originally been more cautious in light of everyone else's concerns. But news that spending constraints have spread to Europe is a shocker -- the company said nothing about Europe in October, and indeed issued a parallel update confirming a big contract win in Italy.
Then there's the sucker punch. After some waffle claiming the slowdown is a result of "deferred spending", Friday's statement says:
"Promethean will continue actively managing its cost base, and this will lead to an exceptional charge in the fourth quarter."
So we've gone from "solid" revenue growth in October to restructuring significant enough to warrant an exceptional cost just five weeks later -- despite orders supposedly being merely deferred! And there's no indication of how high the charge will be.
You might give some companies the benefit of the doubt, but investors may conclude they've given Promethean World enough rope already.
The past is a different country
Any reason to be positive involves an appeal to the past, and to Promethean World's market position. Its share price graph might look like that of a company selling ice-creams in an ice age, but it's not entirely a tinpot operation.
Promethean World supplies interactive whiteboards (IWBs) to more than 500,000 classrooms in over 100 countries. It is the second largest player to NASDAQ-listed Smart Technologies.
According to Futuresource Consulting, IWBs were in 70% of the UK's 700,000 classrooms by the end of 2009. But the bullish case is the overseas opportunity, with the UK and Ireland now representing less than 10% of revenues.
Sales to continental Europe and the rest of the world had previously been surging, with the latter up 84% year-on-year in the first half of 2010, albeit only to 14% of total sales.
But it's the US -- where fears of cuts have grown deepest -- that's crucial. Sales grew 33% in that same period to deliver 65% of total revenues.
There are eight million classrooms in the US and Continental Europe -- more than ten times the UK market -- and IWB penetration is far lower, at just 26% and 8% respectively. Then there is China and India, where an expanding middle-class wants educational parity. If Promethean World can get through the current rotten patch intact, there still seems long-term potential.
The Italian contract win I mentioned, for example, will see its technology go into 8,000 classrooms, and historically the initial win has been just a first foothold. There have been three such continental European tenders, and Promethean won them all.
Bad maths
In the absence of any firm figures, however, we'll have to wait until a promised update in January to evaluate Promethean World's financial outlook.
In the wake of the third-quarter update, analysts had expected 2010 profits to double to £32m and earnings of 11.3p per share.
But all that's now out of the window, as we've gone from slowing profit growth to -- as best as can be discerned -- losses. At the least, the imminent exceptional charge might wipe out a big chunk of profits earned to date.
In terms of downside protection, the company was paying a well-covered dividend, but that may now be lopped. There's not much tangible asset protection beyond £14 million in net cash at the last count, either.
Down but not (yet) out
Rival Smart Technologies already issued a profit warning, so at least we know this is not a Promethean World specific problem -- even if it reiterates the latter's tardiness in coming clean.
I also wonder whether predators will see value in the company, given its longer-term potential. The market cap is just £108 million, compared to over £400 million shortly after it listed.
For these reasons, I will spend the weekend reflecting on my shareholding before taking any decision to sell. It still seems to me this is a company with an exceptional position in a previously fast-growing market. Continuing to hold would mean gambling on that position one day being reflected in the share price; the shares comprise less than 1% of my portfolio, so it's a risk I can afford to take.
But I say "gambling" deliberately. Be under no illusions, Promethean World is now a high risk investment. There's no visibility to earnings, and even if it recovers the current management will probably never be entirely trusted again.
More from Owain Bennallack:
> Owain owns shares in Promethean World.
