Stock markets have been hitting new highs lately but not all companies have risen with the tide. In fact, some have seen a marked fall in their value over recent months. North Yorks miner Sirius Minerals (LSE: SXX), whose shares have declined 37% since last summer, is one such company. International staffing group Empresaria (LSE: EMR), which released a trading update today, is another.
Confidence dented
I was bullish on Empresaria in an article in October. Management had said in the group’s half-year results that it was “confident” of meeting full-year market expectations. Forecast earnings of 13.9p a share put it on a very cheap price-to-earnings (P/E) ratio of 9.1. And with the group also being nicely diversified by recruitment sector and geography, I rated the shares a ‘buy’ at 127p.
My confidence (and that of management) proved misplaced, because the shares dived over 20% on 21 November when the company issued a profit warning. It advised that while it still expected to post a record profit for the year, it would be lower than anticipated. It said this was primarily due to reduced margins in Germany following changes to temporary worker legislation, and a continuing weak market in the Middle East, resulting in additional costs for resizing that business.
Considerable scope for growth
Today’s update on the full-year outturn has received a more positive response from the market, with the shares up 6% to 107.5p, as I’m writing. The company said it has worked to minimise the impact of the legislation in Germany and that resizing the Middle East business has resulted in an improved performance. It advised that it expects to report a record adjusted profit before tax, up 20% year-on-year, and a 9% increase in diluted adjusted earnings per share. This would equate to 12.3p, giving a P/E of 8.7.
Diversified by geography and sector, and continuing to invest in its existing business and to identify complementary acquisitions, I believe this £53m cap AIM-listed company has considerable scope for growth in the years ahead. I continue to rate it a ‘buy’.
Major investment proposition
FTSE 250 firm Sirius Minerals is a fascinating investment proposition, as it develops its giant potash mine. It made good progress on meeting its 2017 milestones aside from a slight delay in preparations for shaft sinking, but management is “confident that this small loss of time will be recovered over the remainder of the project schedule.”
That schedule targets first production for 2021, with full volume of 20m tonnes a year being reached in 2027. A number of offtake agreements for its polyhalite product have already been struck at $150 per tonne. This implies revenue of $3bn a year at full production and an EBITDA profit of about $2.35bn at the mid-point of the margin range forecast by the company. I envisage a net debt/EBITDA ratio of two and an enterprise value/EBITDA multiple of 10 as reasonable. This would give a market cap of $18.8bn, compared with $1.4bn at today’s share price of 22.22p and current exchange rates.
Management is aiming to keep shareholder dilution to a minimum. Big share price gains and a potentially massive dividend yield (annually increasing over the mine’s 100-year life) could be on offer for investors today. I rate the stock a ‘buy’, accepting the various risks associated with such a project.
