It’s often worth taking a closer look at shares that fall heavily when the market opens. Stocks like these can sometimes rebound sharply after a big sell-off.
De La Rue
De La Rue’s shares fell by 9% to 500p on Wednesday morning, after the firm cut its dividend by 41% to 25p. The firm’s reported profits fell by 35% to £38.9m last year, while underlying earnings per share dropped 25% to 45.3p.
The problem seems to be that intense competition is driving down profit margins on bank note printing. De La Rue managed to achieve a 5% increase in print volumes last year, but only through “a tactical approach” to pricing. In other words, the firm lowered its prices to win more business.
However, today’s fall could mark the low point for De La Rue. It’s possible that the firm’s new chief executive, Martin Sutherland, is keen to get the bad news out of the way as quickly as possible.
What’s more, the firm’s shares now look quite reasonably priced. Based on today’s results, De La Rue is trading on an underlying P/E of 11.0 and a dividend yield of 5%. A rebound is possible.
The problem is that Providence has been unable to secure a farm-out deal to finance the development of Barryroe.
Providence shares fell by another 9% this morning, after the firm admitted that it was still no closer to its goal. Although a provisional deal was agreed in February, it was dependent on the unidentified partner securing financing. This still hasn’t happened.
Providence shares have now fallen from a peak of almost 700p to just 25p. On the face of it, the shares offer value, but this company could also be a value trap.
At today’s oil price, Barryroe isn’t as attractive as it used to be. The firm has $24m of debt due for repayment over the next 12 months, and cash is tight, despite raising $28m through a placing earlier this year.
Providence shares are effectively a gamble on a farm-out deal. The firm has already failed to deliver for the last three years. I’d stay clear.
According to Iofina, iodine prices fell sharply last year. This meant that while Iofina’s production rose by 92% to 327.7 tonnes, revenue only rose by 35%. Iofina ended last year with just $7.0m in cash and $18.8m of debt, of which $15m is due for repayment in May 2017.
In today’s results, the firm said that earnings before interest, tax, depreciation and amortisation (EBITDA) were positive during the first quarter of 2015. However, it’s not clear to me whether this will translate into an operating profit, unless iodine prices improve.
The problems experienced by Iofina and Providence highlight how small commodity stocks can be the victims of market circumstances, even with good assets.