Fenner - the canary is still singing

Fenner: At least the canary is still singing, despite the group’s exposure to the bloodied coal and oil markets. They have two divisions, the first being Engineered Conveyor Solutions (ECS), which has a large exposure to coal markets and is around two thirds of turnover. The other third of turnover is in Advanced Engineering Products (AEP) which has a 30% exposure to oil markets. Both divisions are feeling the chill wind from end markets as customer activity slows and new ventures are put on ice, although time lags mean that in AEP it is more an anticipation of pain for now. In ECS, replacement business will provide some resilience, but that is too is vulnerable to mines being moth-balled if current market conditions persist. In ECS the board points out that they are well invested and that, therefore, cash conversion will be strong. The Fenner board has reacted swiftly, with cost cutting measures being enacted and capital expenditure cut back with a £9m cash benefit cited. With the oil market in particular showing no signs of reaching a level of stability yet, there will be a while to wait until anything cheerful is likely to be heard from Fenner.

The board says that earnings expectations for the year to August 2015 will be slightly below previous expectations, which looked like 22p. So at 206p, 21p of eps would be a PE of 9.8x. Given the comments on ECS cash conversion and capex cut-backs, a maintained dividend of 12p looks do-able, being a yield of 5.8%. (Noting that balance sheet debt at £110m-£120m is not overly burdensome). For the year to August 2016 it seems reasonable to expect (hope?) that end markets will not be getting worse and that light might be visible at the top of the mine shaft. So the modest PE plus good yield may be attractive, bottom of the cycle, metrics. So, a very interesting share, unless you feel that coal and oil markets are going to be very slow to turn the corner into 2016. (Neil Cumming^, 14^th January 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower