Brammer plc is bailed out with a cash offer: Will these companies be next?

Roland Head looks at two companies which could receive takeover offers, following today’s bid for Brammer plc (LON:BRAM).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Bargain-hunting investors who snapped up shares of Brammer (LSE: BRAM) earlier this year will be smiling this morning. The inventory management and parts specialist has received a £221.5m cash offer from private equity group, Advent International.

Longer-term shareholders will probably be forced to exit this investment at a loss. The bid price of 165p per share represents a 10% discount to Brammer’s share price at the start of 2016, and a 41% discount to the stock’s value two years ago.

Without today’s bid, it seems as though Brammer’s shareholders would have been asked for some fresh cash. In today’s statement, the board said that they believed a turnaround would take “at least three years” and incur “significant cash reorganisation costs”.

In this article, I’m going to consider the outlook for two other firms that I believe have takeover potential.

Are jacked-up profits likely?

AIM-listed Gulf Marine Services (LSE: GMS) runs a rental fleet of self-propelled jack-up support vessels, serving the offshore energy industry. The firm’s fleet is new and modern, and should be attractive to potential customers.

The problem is that Gulf Marine’s fleet expansion has coincided with the oil crash. Customer demand is soft and hire rates have fallen. But because the company’s new vessels were funded with borrowed cash, Gulf Marine expects to end the year with peak net of $395m.

After-tax profits are expected to fall by 52% to $43.4m this year. A further 32% decline to $33.5m is expected next year. I believe there’s still a reasonable chance that Gulf Marine’s debts could force the firm into a rights issue or placing.

However, the oil and gas market will eventually rebound. In the meantime, Gulf Marine’s low valuation means that the firm’s enterprise value (market cap plus net debt) of £493m is significantly less than the £675m value of its fixed assets. A potential buyer could pay a 50% premium for Gulf Marine’s stock, and still buy the company’s assets at less than their book price.

This stock could be cheap

Component manufacturer Essentra (LSE: ESNT) issued its second profit warning of the year on Tuesday. The group is seeing slower growth than expected, across many of its operations.

Earnings forecasts for the current year have now been cut by about 30% since the start of 2016. The share price has fallen by 54%. Essentra shares now trade on a forecast P/E of just 9.5, with a prospective dividend yield of 5.4%.

This dividend looks safe for this year. But debt levels have risen as a result of dividend payments and the weaker value of the pound. Net debt was £433.9m at the end of June, giving the group a net debt to EBITDA ratio of 2.2x. If this rises much further, the dividend could be at risk.

Essentra’s new chief executive, Paul Forman, will take charge of the firm in the New Year. In my view, Mr Forman’s top priorities should be cutting costs to restore the group’s falling profit margins, and reducing debt.

Mr Forman may pull off a stunning turnaround, and could attract a trade buyer. But the firm’s problems may also turn out to be worse than expected. That’s why I’m going to remain a spectator, until we learn more about trading in the New Year.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Essentra. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The Legal & General share price has gone nowhere. Why?

The Legal & General share price has performed much worse than the the FTSE 100 over the past five years.…

Read more »

Investing Articles

Where will the BT share price go in the next 12 months? Here’s what the experts say

The BT share price has been sliding for years. But after the latest set of results, it looks like the…

Read more »

Investing Articles

Are National Grid shares now a brilliant bargain?

National Grid shares look exceptionally cheap following last week's selloff. Is now the time to buy the FTSE 100 firm…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Up more than 15%! — this small-cap company is delivering phenomenal dividend growth

There’s more good news in this company’s interim report and it may be shaping up as a decent dividend growth…

Read more »

Electric cars charging at a charging station
Investing Articles

Big news for Tesla stock investors!

Tesla has just quietly dropped a key target it set for itself just a few years ago. What does this…

Read more »