Passing the test

Global testing, inspection and certification services group Intertek (LSE: ITRK) has had a good year, with its share price up 50% in that time. However, today’s half-year report has left markets underwhelmed, with the share price dipping 1.5% at time of writing. That’s despite the company posting double-digit revenue and earnings growth, plus an interim dividend of 19.4p, up 14.1% from 17p last year, maintaining its progressive dividend policy. 

Pre-tax profit rose 15% from £149.8m to to £172.5m, with revenues up 13.2% to £1.2bn. Management said Intertek is on track to hit full-year targets and Brexit was unlikely to hurt future growth opportunities. The company has grown strongly through acquisitions and perhaps the main reason for today’s market scepticism is that at 25.5 times earnings and yielding 1.46%, future success is priced-in.

Food for thought

Back in February, Real Good Food (LSE: RGD) had lost its flavour. It issued a profit warning after investing heavily in staff and product development, as it shifted focus to its “three pillar markets” of cake decoration, food ingredients and premium bakery. The £22m cap company claimed this was just a temporary setback and its net debts would be greatly reduced by the £44.4m proceeds from the sale of sugar business Napier Brown.

Today’s full-year profits evidently tasted bitter to investors, with its share price down almost 10% at time of writing. Real Good Food’s trading update on 26 April 2016 forecast profits before tax of £13.9m, but that number was cut to £12.9m today due to working capital adjustments, written-off acquisition costs and higher staff pension costs. Executive chairman Pieter Totté said recent trading was “satisfactory” but sounded downbeat with warnings of challenging times for the food industry with “increasing legislative burdens, the growth in the minimum wage and ever-demanding consumers”.  Yet with net debt cut from £30.1m to £5.1m, investors may soon regain their appetite.

Mirror, Mirror

Publishing group Trinity Mirror (LSE: TNI) is the only one of these three stocks to enjoy a boost today, its share price up 6% after publishing its half-yearly report. The Daily Mirror publisher reported a 44.3% leap in adjusted operating profit, driven by the benefits of November’s acquisition of Local World and tight cost control. This offset its losses from the launch of daily newspaper New Day, which closed in May. Its digital audience and revenues grew strongly, the latter up 14.4% to £39.7m, although digital classified revenue fell.

Like every newspaper group, Trinity Mirror is hoping to manage the shift away from print by protecting revenues from this source while driving further digital growth. It’s a tricky balancing act, one the group says has been made harder by Brexit, with subsequent lower UK growth forecasts hitting revenues. The share is down 43.1% over the last year and trades at just 2.21 times earnings, yielding 6.48%, so despite today’s positive reaction it remains a risky stock to invest in.

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Shares in diversified food business Real Good Food (LSE: RGD) have slumped by over 20% today after it released a profit warning. It now expects earnings before interest, tax, depreciation and amortisation (EBIDTA) from continuing operations to be flat versus last year, due to lower than expected margins. Clearly, this is disappointing for the company’s investors and has lead to some of them taking their money and running.

The key reason for the reduced margins is the transitional period that the company is currently undergoing. It’s investing heavily in people, products and brand across all of its businesses, and, when combined with other one-off events, this means that profit from continuing operations is set to disappoint.

Looking ahead, Real Good Food’s share price could continue to come under pressure in the short term as the market adjusts to its updated guidance. However, with its shares now being at their lowest since April last year, it may be of interest to long term investors who are relatively less risk averse.

Further downside ahead

Also posting major share price falls thus far in 2016 is online clothing retailer ASOS (LSE: ASC). Its shares are down 8% in the year-to-date and this takes their fall over the last two years to 50%. That’s despite the company making significant improvements to its strategy and business model, including focusing to a greater extent on key markets instead of attempting to expand quite so rapidly into new territories.

While ASOS offers excellent customer service, and a superb range of items that has kept its offering highly relevant and popular among its target market of twentysomethings, its valuation appears to be rather high. Certainly, earnings growth of 23% for the current year is an impressive outlook, but with the company’s shares having a P/E ratio of 56.8, there appears to be a further 20% downside ahead.

Share price in free-fall

Meanwhile, shares in mobile payments solutions provider Monitise (LSE: MONI) have been an even worse place to invest than ASOS or Real Good Food in recent months. In fact, they are down by 11% today and this takes their fall in 2016 to 41% even though the company’s recent update offered hope to investors waiting for Monitise to deliver a black bottom line.

Although the company now appears to have a more disciplined approach to costs and a logical strategy to win customers and turn a profit, it remains some way off that goal. For example, it is due to make a pre-tax loss of £27m in the current year and, with its share price seemingly in free-fall, a further decline of 20% from its valuation could be very much on the cards.

That’s despite the company having an excellent product and a long list of blue-chip clients. As such, it is a stock that may be worth watching but until there is evidence of a step change in its profitability, it may be prudent to look elsewhere for capital gains.

The post Will Real Good Food PLC, Monitise Plc And ASOS plc Fall By Another 20%? appeared first on The Motley Fool UK.

Profit Warning

Today’s news comes just weeks after Real Good Food released a profit warning. The key reason behind the disappointing news was weakness in EU sugar market prices, which were severely hurting the bottom line of Napier Brown. And, while the division had returned to profit in the first half of the year, it was expected to post earnings that were significantly below market expectations for the full year. Encouragingly for the company’s investors, though, the rest of Real Good Food’s divisions were trading ahead of expectations, with Napier Brown being the blot on an otherwise improving copybook.

Logical Move

As a result, the sale of the company’s one struggling division, Napier Brown, seems to be a logical move. Not only should it allow the rest of the company to deliver results that are ahead of previous expectations for the full year, it should also mean that Real Good Food moves from a net debt position to a net cash position, with net debt standing at £36.3m as at the end of September 2014.

Furthermore, the sale of a struggling division can be good news for the remainder of any company. That’s because it allows more resources, notably time and money, to be focused on other areas that may offer more appealing medium- to long-term growth potential. And, with the EU deciding to end beet production quotas from 2017 onwards, it appears as though the lack of direct integration with a sugar producer could mean that Napier Brown’s bottom line comes under considerable pressure. As such, the sale to French co-operative sugar group Tereos seems to be a good move for both Napier Brown and for Real Good Food.

Valuation

Clearly, Real Good Food is some way off its three-year high of 71p, with shares in the company currently trading at about 40p even after today’s rise. However, there appears to be considerable scope for further share price rises, with Real Good Food trading on a relatively low valuation. For example, it currently has a market capitalisation of around £29m, but as at the end of September 2014 had £81m in net assets.

And, while the company was loss-making in its most recent full-year and half-year results (meaning net assets could fall), its potential net cash position and renewed focus on its better performing divisions may allow it to post improved results moving forward, with it having the potential to return to its three-year high over the medium to long term.

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