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Why earnings could be set to sink at this FTSE 250 stock

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CLS Holdings’ (LSE: CLI) share price remained stable in Wednesday trade following the release of first-half financials.

The company saw pre-tax profit clock in at £119.4m during January-June, soaring from £33.1m in the corresponding 2016 period and thanks in no small part to the impact of massive divestments, including that of Vauxhall Square in London.

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CLS saw EPRA net assets per share advance 9.3% year-on-year, to 268.5p, while it enjoyed a total return of 12% (up from 7.1% a year earlier). EPRA earnings per share dipped to 5.3p from 8.1p during the first half of last year.

Chief executive Henry Klotz said: “The first half of 2017 has been transformative for the Group. We crystallised the significant value our team created at the Vauxhall Square scheme and, through our significant recent investments in Germany, we have begun to redeploy the capital in well-located properties with good asset management opportunities, thereby rebalancing the portfolio.”

And Klotz struck a broadly-upbeat tone on the firm looking ahead, advising that “notwithstanding early signs of weakness in the UK property market, we are well positioned for future growth, with a high quality portfolio across the three largest European economies, a low vacancy rate with good tenants and a strong balance sheet.”

Too risky?

Despite this bubbly outlook, the City expects earnings to collapse 52% in 2017, although the bottom line at CLS is expected to get moving in the right direction from next year — a 3% rise is currently predicted for 2018.

As a consequence, the business sports a forward P/E ratio of 18.9 times, a little way above the value benchmark of 15 times or below.

Naturally, CLS is not immune to the pressures created by the political and economic turbulence currently rocking its home market — indeed, 58% of the company’s properties are located in the UK.

But glass-half-full investors may be encouraged by the London firm’s plan to expand its geographic footprint. Indeed, the imminent purchase of £165m worth of properties in Germany means that 53% of CLS’s assets will be right here in Britain, versus 31% in Germany and 16% in France.

I for one won’t be tempted to invest right now, however, given the real estate giant’s still-heavy weighting to the UK and its unappealing earnings multiple. 

Advertising ace

RhythmOne (LSE: RTHM), on the other hand, is not expected to endure the same sort of near-term earnings problems as CLS.

In the year to March 2018, the digital advertising expert is expected to flip to earnings of 1.8 US cents per share from the losses of 4.45 cents chalked up last year. And the good news does not end here, the business predicted to see earnings gallop to 5.3 cents per share in fiscal 2019.

Values investors may be out off by RhythmOne’s weighty forward P/E multiple of 24.3 times. But I reckon now could still be a good time to plough into the California company as its transition into fast-growing mobile, video and programmatic products clicks through the gears (sales in these areas soared 28% year-on-year in fiscal 2017).

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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