In today’s article, I’ll take a look at the latest updates from Daily Mail and General Trust (LSE: DMGT), Chemring (LSE: CHG) and HSS Hire Group (LSE: HSS). I’ll also explain why I won’t be adding these companies to my portfolio.
Daily Mail and General Trust
Shares in Daily Mail owner the Daily Mail and General Trust fell by 6% this morning after the group reported a sharp fall in profit and a continuing decline in its newspaper business.
Adjusted pre-tax profit was down by 4% to £281m, while revenue fell by 1% to £1,845m. The fall in profit would have been greater but for a heavy focus on cost-cutting at the Daily Mail, where print circulation and advertising revenues continue to fall.
There was a small dividend increase, from 20.4p to 21.4p, but the stock’s 3.2% yield isn’t outstanding.
The group also cautioned on an uncertain outlook for its financial publishing business, Euromoney, and said that the continued decline in print advertising would be likely to weigh on 2016 results.
It all adds up to an uncertain picture, in my view. Although the shares aren’t massively expensive on a forecast P/E of 12, debt levels are rising and I believe there are better buys elsewhere.
Chemring
After shocking investors with a profit warning on 27 October, Chemring shares have bounced back strongly and are now up by 40% from their opening low of 136p on that day. Although the shares remain down by 14% on their pre-warning level, Chemring is likely to benefit from any rise in defence spending over the next few years.
Today’s post-close update was enough to push the shares up by another 5%, to 193p. Chemring flagged up a big increase in its order book, which rose by 17% to £570m last year.
The group said that the delayed 40mm ammunition contract which helped trigger October’s profit warning had now received export approvals. Payments should follow.
My concern is that Chemring’s finances are not robust enough to cope with such occasional delays, which are inevitable. The firm admitted today that it is still discussing the effect on its debt covenants of the events in October. The firm’s balance sheet should be strengthened by Chemring’s planned £90m rights issue early in 2016, but I think there are better buys elsewhere.
HSS Hire Group
Investors who took part in the IPO of equipment hire firm HSS earlier this year are probably regretting it. Since March, the group has issued two profit warnings. The firm’s shares have fallen by 77%.
Today’s trading update confirms that performance is in-line with full-year expectations. Revenues for the first nine months of the year rose by 10.7% to £230m.
However, the outlook for profit was less encouraging. Adjusted earnings before interest, tax and amortisation — a similar but less conservative measure than adjusted operating profit — fell to £13.8m, down from £23.8m for the same period last year.
The big problem is that HSS has far too much debt. Interest costs are high and the group’s net debt of £210m is greater than the value of its fixed assets, which was £175m at the half-year mark.
For me, HSS is a non-starter. Even if there isn’t another profit warning, the risk of debt-related problems is too high, in my view.
