Shares in engineering services company Amec Foster Wheeler (LON: AMFW) crashed by as much than 25% this morning after the company warned on the outlook for the remained of the year and announced that it was cutting its regular dividend payout by 50%. Its share price has since recovered marginally, but still remains 22.6% down.
Specifically, the company said that underlying revenue for the first nine months was in line with forecasts. However, due to the conditions in oil and gas markets, second half margins are going to be lower than expected. Amec now expects profits for full-year 2015 to be below expectations.
To offset declining margins, Amec has increased its cost savings target from $55m to $180m by 2017. Also, the group is planning to exit low growth, low margin markets.
For the nine months to the end of September Amec’s revenue totalled £3.8bn, which is 1.8% lower than last year’s result on a pro forma basis. The group’s order backlog stood at £6.5bn at the end of September, down by £0.1bn compared to the half year.
Commenting on today’s news, chief executive Samir Brikho said:
“For more than a year – across many parts of our business – we have seen customers reducing capital expenditure and putting more pricing pressure on the supply chain. We see no sign of these trends changing.
“At our half year results, I said our priorities were to adapt to challenging markets and to stay lean and efficient. We have decided to intensify our actions. We have identified, and continue to seek, further cost savings. We are committed to increasing our focus on higher growth markets.”
A profit warning
There’s no other way of putting it, today’s second half trading update from Amec is a thinly veiled profit warning, and management’s decision to cut the company’s dividend payout by 50% is something few saw coming.
In fact, before today’s announcement, City forecasts suggested that Amec’s dividend payout would be covered 1.9 times by earnings per share this year. So, Amec’s decision to cut its dividend to the lowest level in five years, suggests that management is preparing for the worst.
According to today’s update, even after the benefits of Amec’s additional cost saving measures have filtered through, the company still expects its trading margin to deteriorate further next year.
Moreover, Amec is planning to refinance its debt at some point during the next six months, which could prove tricky in the current environment. The company’s decision to acquire peer Foster Wheeler last year landed Amec with net debt of £1.1bn.
Time to avoid
At first glance, it looks as if Amec is in trouble. The company’s decision to slash its dividend payout and increase cost savings by 230% seem to be emergency measures taken by a company that’s running out of options.
Unfortunately, we won’t know the full extent of the company’s problems until it reports full-year results. What’s more, after today’s shock announcement City figures are now out of date.
All in all, it’s impossible to value Amec’s shares right now and with being the case it’s probably best for investors to stay away from the company for the time being.
