A short-term blip?

Shares in specialist fluid power products supplier Flowtech Fluidpower (LSE: FLO) are down 7% after it reported worse than expected trading conditions in 2016. Its sales rose by 19.9%, but its margins suffered due to negative currency effects. Although it was able to pass on the vast majority of higher input prices resulting from sterling’s weakness, it was unable to do so on products sourced in euros and dollars, which were then sold in sterling.

As such, gross margins contracted in the latter part of the year. Alongside additional investment in central and sales resources, this means that underlying profit before tax will be between £7m and £7.2m.

Despite this, the company remains confident in its long-term outlook. Evidence of this can be seen in the decision by the board to raise dividends by 5% so that Flowtech now yields 4.4% from a dividend, which is covered 2.6 times by profit. And with its shares trading on a price-to-earnings (P/E) ratio of just 8.8 following today’s share price fall, they offer a wide margin of safety.

Therefore, while further volatility can’t be ruled out and margins may be squeezed somewhat by a weaker pound, for the long term, Flowtech has capital gain potential. Its investment in cost optimisation and acquisition opportunities could pay off and lead to improved financial performance in 2017 and beyond.

Disappointing divisional performance

Also releasing a profit warning today was Braemar Shipping Services (LSE: BMS). Its Technical division has continued to underperform and it has seen a marked deterioration in replacement work due to weakness in the oil and gas sectors. The effect of this on the company’s profitability will be a restructuring charge of £2.7m. Alongside a one-off gain of £1.7m from its disposal of an interest in The Baltic Exchange, this means that underlying operating profit for the 2017 financial year is expected to be between £3m and £3.5m.

The market has reacted negatively to the news and Braemar’s shares are down 16%. However, it has now largely completed the restructuring of the troubled division and expects to deliver annualised cost savings of £6m in the next financial year. This could boost the company’s profitability and with its other divisions such as Shipbroking performing relatively well, its long-term performance could improve.

With Braemar trading on a P/E ratio of around 12, it seems to offer good value for money. Its shares may remain volatile and the performance of the Technical division could act as a drag on its future profitability. However, with a wide margin of safety it could be a strong turnaround play.

The post Should you buy these 2 small-cap stocks after profit warnings? appeared first on The Motley Fool UK.

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Peter Stephens 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.

Shares of shipbroker Braemar now yield an enviable 8.64% due to a combination of steady dividend payouts and a 30% fall in share prices over the past year. Shares have reversed so dramatically because in the six months to September year-on-year revenue fell from £79.6m to £70.2m and underlying operating profit dropped from £7.1m to £1.4m.

The cause of this poor trading performance is down to depressed rates for cargo shipping and weakness in the oil and gas industry that led to lower demand for Braemar’s ship broking and consultancy services. But even after profits fell of the proverbial cliff the company maintained its interim dividend of 9p per share and analysts are expecting the full-year dividend of 26p to remain unchanged.

Of course, the question we must ask ourselves is whether or not this is sustainable. On this front there’s some cause to be positive, primarily because Braemar’s balance sheet could conceivably support a year or two of uncovered dividends. At the end of August the company had net cash of £0.7m and has access to a £30m revolving credit facility against annual dividend payments of around £7.6m.

Braemar’s relatively diversified revenue streams and asset-light business model would make it an intriguing bet by an investor who sees global trade or the offshore oil and gas industry bouncing back strongly in the coming years. Unfortunately this isn’t me, so I’ll be giving Braemar’s 8%-plus dividend yield a pass for now even though it appears management may be able to maintain solid dividend payments for the time being.

Wide berth?

Share of spread betting operator Plus 500 now offer income-hungry investors an astounding 9.83% annual yield as the shares have plummeted over 40% since hitting highs in September. The cause of this precipitous drop is twofold. In late September the founders sold a cumulative £115m worth of stock and then, even more damaging, the FCA announced in early December that it intended to clampdown on the CFD market.

Insiders selling 13% of the company’s shares is certainly a red flag for investors, but it’s the possible FCA actions that worry me the most. Regulators have suggested they will implement a maximum margin ceiling CFD platforms can offer their retail clients, who can make highly leveraged bets on the movement of currencies, commodities and equities.

While it’s possible that the proposed regulations will be watered down, I fully expect regulators to score easy political points by cracking down on these platforms, especially since they say a full 82% of ‘traders’ end up losing money. Potential regulatory problems combined with very low barriers to entry for competitors, the company already being forced to increase advertising spend to draw in new customers and rising compliance costs mean I’ll be giving Plus 500 shares a wide, wide berth, despite their impressive yield.

The post Are these 8%+ yields unmissable? appeared first on The Motley Fool UK.

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Ian Pierce 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.

The group has a new chief executive and appears to have put last year’s profit warnings behind it. May’s final results didn’t flag up any new problems and profits were as expected. The firm’s latest trading statement suggests performance so far this year is in line with expectations.

Improving outlook

UK Mail’s new chief executive, Peter Fuller, previously spent 19 years at Parcelforce. The Royal Mail parcel business is currently delivering double-digit percentage growth, so Mr Fuller’s credentials look strong.

Analysts expect UK Mail’s profits to continue their recovery this year. The balance sheet is strong and adjusted earnings per share are expected to rise by 20% in both the current year and next year.

This puts UK Mail shares on a 2016/17 forecast P/E of 13.5, falling to 11.5 in 2017/18. There’s also an attractive forecast dividend yield of 5.8%.

This modest forecast valuation gives UK Mail a P/E growth — or PEG ratio — of just 0.7. A PEG ratio of less than one suggests that the current share price may not reflect the full value of expected earnings growth.

At about 300p, I’d rate UK Mail as a buy.

Taking a longer view

The global shipping industry is currently suffering from a combination of low rates and having too many ships. Braemar Shipping Services (LSE: BMS) also has exposure to the oil sector, where the market for offshore services is understandably poor.

However, the group has a long and successful record in the shipping business. It operates a mix of technical, broking and logistics services that add diversity to the firm’s revenue and profit. Braemar is also a people business, so it’s not burdened with high levels of debt and ships that may be falling in value.

Like UK Mail, Braemar has a strong balance sheet. The group had net cash of £9.2m at the end of February and almost no debt. A key element of the stock’s appeal is its high dividend yield, which currently stands at 6.4%.

An income champion?

The dividend yield is attractive, but it’s worth remembering that Braemar’s dividend of 26p per share has been unchanged since 2010. The payout is only expected to be covered 1.3 times by earnings this year, so an increase is very unlikely.

Indeed, I’d say Braemar’s dividend is pretty much the maximum the group can afford. But there are signs that trading is improving. Braemar’s operating margin recovered from a low of 3.7% to 6.5% last year.

Earnings per share are expected to rise by about 5% to 33.2p this year, with a similar increase pencilled-in for the following year.

Braemar shares are probably priced about right on a short-term view. However, it has been trading since 1982 and is a quality business, in my opinion. I’m fairly confident that buying now should deliver decent long-term gains.

The post Are these small cap bargains too cheap to ignore? appeared first on The Motley Fool UK.

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Roland Head owns shares of Royal Mail. 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.

Excellent capital gain prospects

One company which could see its share price fall is Vodafone (LSE: VOD), as the telecoms company is heavily focused on both Europe and the UK. Although Vodafone is financially sound and has a very diverse product offering, its profit outlook could become less certain and a vote to ‘leave’ could cause investor sentiment to wane.

However, this doesn’t mean that Vodafone is worth selling before the referendum. That’s because the company’s shares appear to have a margin of safety included in their price, which means that their fall in the short run could be somewhat limited.

For example, Vodafone trades on a price-to-earnings growth (PEG) ratio of just 1.6, which given its size, scale and diversity, makes it a ‘buy’ rather than a ‘sell’ for long term investors. Certainly, the short run may be somewhat volatile, but in the long run Vodafone has excellent capital gain prospects.

Geographically well-diversified

Also trading on a relatively appealing valuation is Braemar Shipping Services (LSE: BMS). The company — a leading provider of services to the shipping, marine, energy, offshore and insurance industries — has a price-to-earnings (P/E) ratio of just 13.9 and this indicates that its shares may not be hit relatively hard by falling prices across the index, should the UK vote to leave the EU.

Furthermore, Braemar has a high yield, which could hold considerable appeal for more defensively-minded investors if the global economic outlook  were to deteriorate following a Brexit vote. In fact, Braemar has a yield of 5.8% at the present time and the fact its covered 1.25 times by profit suggests that it’s relatively affordable and sustainable.

Certainly, a slowdown in global growth would be likely to hurt Braemar’s long term profit forecasts. But with the company being geographically well-diversified and having a relatively wide margin of safety, it does not appear to be a ‘sell’ ahead of tomorrow’s vote.

One to avoid for now

Meanwhile, speciality chemicals company Elementis (LSE: ELM) has fallen by around 8% today after it released a profit warning. Due to challenging market conditions affecting its Chromium division, sales and margins outside of North America in for the year as a whole are expected to be materially lower than last year. As such, the company’s previous earnings guidance is now not set to be met.

This is disappointing news for investors in Elementis and its share price fall means that it has now declined by a third in the last year. This shows that investor sentiment is weak, and with its performance as a company also being very mixed, I think Elementis looks like a stock to avoid at the present time, irrespective of the EU referendum.

While its Speciality Products division remains a high quality business that continues to perform relatively well, the weak performance from Chromium, together with a P/E ratio of around 15, indicates that there are better options available elsewhere.

The post Should you sell Vodafone Group plc, Braemar Shipping Services plc and Elementis plc ahead of the EU referendum? appeared first on The Motley Fool UK.

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Peter Stephens owns shares of Vodafone. The Motley Fool UK has recommended Elementis. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.