Premier Farnell - the dividend is threatened

Premier Farnell (PFL.L): Ouch. I have been becoming increasingly concerned that this stock might have to cut its dividend. Today’s profit warning has made me think that the dividend should be cut, a message which Premier’s shareholders and lenders will probably also be telling Premier right now. The second quarter seems to have been something of a disaster with group sales growth per day slowing to 1.2% from 5.4% in the first quarter. This leaves the first half sales growth figure at 3.3%. In a gloomy roundup the group cites the UK and North American markets as being particular weak, with the overall European division slowing from 5.9% to 2.2% and the Americas from 2.2% to just 0.4%. Even these group numbers are flattered by sales of the lower margin Raspberry Pi (despite “constrained availability”) without which group sales slowed from the first quarter’s 1.9% to 0.8%. A ray of light is that gross margins should have picked up a bit in the second quarter and operating costs are still under their cosh. When they crunch all this through they now expect first half underlying operating profits to be down 10% on last year and at similar levels in the second half. This has led the board to go for the strategic review option, with the results due alongside the interims being announced in September. It all seems a long way from the upbeat targets of the recent 2014/15 strategic review.

Now for my fag packet calculations, which are just that, but give a flavour of the issues. There is a £2m provision release due, but let’s simply pencil in pre-tax profits down 10% and adjusted eps down by the same to 12.4p. That would be a PE of just 11.3x at today’s red-ink share price of 140p, but suggests that the market can see the CEO, Laurence Bain, eyeing up a kitchen sink. The dividend of 10.4p would still be covered, just, which would be a 7.4% yield. However, net debt to EBITDA at the latest finals was 2.5x and despite good headroom on their debt facilities, lenders will be worried that the ratio must be up to 2.8x just based on the EBITDA forecast reduction. We must be at the point that shareholders and lenders tell the board that the current high dividend is now a luxury to be given up in September. Then the next stage would be whether a company with a sales line of £1bn and an enterprise value of under £800m would attract a new bunch of investors, but there seems little rush.  (Neil Cumming^, 29^th July 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