Today I’m looking at two turnaround stocks which have attracted mixed views in the investor community.
Marine services group Braemar Shipping Services (LSE: BMS) has had a mixed few years. Its recovery from the shipping downturn hasn’t been as convincing or rapid as some rivals. But I’ve been attracted by the group’s strong cash flow and modest valuation, relative to its historic profits.
Braemar published its half-year results on Monday, revealing a mixed picture. The group’s revenue from continuing operations fell by 5% to £66.6m, but operating profit, excluding acquisitions, rose from £1.4m to £2.3m. This helped to increase the group’s underlying operating profit margin from 1.9% to 3.4%.
Although much of this gain was due to a reduction in restructuring costs, I was encouraged to see that improved cash flow resulted in net cash of £6.4m, broadly unchanged from £7.1m at the end of February.
An improving outlook
The company says that its shipbroking and logistics divisions are now trading well, with new business in many areas. The technical division – which is heavily exposed to the oil and gas industry – has now been restructured. This is expected to result in annual cost savings of £6m. I’d expect this to allow the division to operate profitably at lower levels of activity.
Chairman David Moorhouse says that Braemar is “well placed to deliver a stronger second half” and the group is “in line to meet our objectives for the full year.”
My reading of this is that full-year results are expected to be in line with current forecasts. If that’s correct, then the shares currently trade on a forecast P/E of 14, with a prospective yield of 4.9%. I believe this could be an attractive entry point, and I’m considering adding more shares to my personal holding.
This is different
Shares of troubled outsourcing group Carillion (LSE: CLLN) spiked nearly 50% higher following September’s half-year results. But the stock has since given up these gains.
I’m not surprised by this. Carillion reported average half-year net debt of £694m in its results, and indicated that the average figure for the full year is likely to be between £825m and £850m. That’s seems far too high to me, given that the company is only expected to report an adjusted net profit of about £103m this year.
A second red flag is that the company’s equity or ‘book’ value – the amount left when liabilities are subtracted from assets – turned negative during the first half of the year. This implies that in a liquidation scenario, the company would be unable to satisfy all its creditors, leaving nothing for shareholders.
Carillion’s management is trying to address these problems by selling parts of the business and cutting costs elsewhere. This may succeed. But in my view the debt burden is so large that some kind of refinancing is likely to be necessary to strengthen the balance sheet and stabilise the group’s finances. This could be highly dilutive for shareholders.
The shares currently trade on a forecast P/E of just 2. In my view, this rating indicates the high risk of losses facing Carillion shareholders. I would continue to avoid these shares.
