Is Regenersis PLC A Buy After Today’s 20% Drop?

Shares in tech support outsourcing firm Regenersis (LSE: RGS) fell by 18% during the first hour of trading this morning, after the firm announced the loss of a major customer contract.

The firm’s shares have been drifting lower for most of this year, and this morning’s fall to around 161p means that Regenersis shares are now worth 46% less than one year ago.

Is Regenersis a falling knife that’s best avoided, or does the firm offer good value at the current price?

What’s gone wrong?

Regenersis says that as part of a process of consolidation, one of its larger clients will shift its European business to another supplier next year.

This is a significant loss for the firm’s Depot Solutions business, which provides outsourced electronic repair and refurbishment facilities to major manufacturers and retailers.

In this morning’s profit warning, the firm says that while results for the year ending 30 June 2015 will be unaffected, profit growth in 2015/16 will now be “modest”.

How will this affect profits?

The latest consensus forecasts for Regenersis (published before today) show a 21% rise in earnings per share for 2016.

In my view, today’s update suggests that most of this expected growth will be wiped out by poor performance from the Depot Solutions, leaving forecast profits broadly in-line with 2014/15 results.

That’s not necessarily a disaster. Earnings per share for the year just ended are expected to be 17.5p, implying a P/E of just 9.4 after today’s fall. The firm is expected to pay a dividend of 5p per share, giving a yield of 3%.

The good news

Depot Solutions accounted for almost half of Regenersis profits during the first half of the year. The remaining 52% came from the firm’s Advanced Solutions division.

This appears to offer much more potential. Regenersis reported an adjusted operating margin of 20.0% for the Advanced Solutions division during the first half of last year, compared to just 5.2% for Depot Solutions.

Regenersis expects “strong growth” in the Advanced Solutions division this year, Profits should also be helped by growth from a recent acquisition, Blancco, which provides data erasure services for businesses.

This is apparently a profitable business. Blancco’s adjusted operating profit rose by 45% during its first full year as part of Regenersis, according to today’s update.

The big risk?

I’m beginning to think that Regenersis could be an interesting contrarian buy, but I do have some concerns.

Regenersis raised £100m in a placing in March 2014 to fund the acquisition of Blancco and repay debt. At the time, the firm said that it believes opportunities for growth remained strong.

In today’s update, Regenersis appeared to do something of a U-turn on this statement, saying that in 2016 the board will “focus on actions to maximize shareholder value”.

This suggests to me that the firm is not expecting much in the way of growth, so will try to keep shareholders happy by hiking the dividend or perhaps disposing of some non-core assets.

Buy or sell?

In my view, Regenersis looks reasonably priced following today’s fall. However, there is a risk that more profit warnings could follow today’s announcement.

I plan to do some further research before deciding whether the shares rate as a buy.

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