The phrase ‘when it rains it pours’ is apt for this UK air conditioning installer which has seen its full-year results destroyed by the awful summer weather. But a secure balance sheet and a market that should soon resume its long-term growth trajectory means this is a gamble well worth taking.
Gamble of the week: Worthington Nicholls (Aim:WNG)
The phrase ‘when it rains it pours’ is apt for Worthington Nicholls. First, its shares were hit by market turbulence, and then on Friday it released a nightmare trading update – saying full-year results had been blown apart by the awful summer weather. Worthington Nicholls is a leading UK installer and servicer of air conditioning, ventilation and heating systems. Customers include a range of blue-chip firms (Hotel du Vin and Hamleys, for instance), operating across many sectors, from retail to offices.
In last Friday’s statement, Worthington Nicholls said that it “expects results to be materially below market expectations”. The main reasons for the revenue shortfall were contract delays, disruption caused by flooding, and reduced demand for maintenance work because of cooler temperatures.
To add to the woe, profit margins were also hit by the higher-than expected costs of expanding its sales-force, coupled with the decision to take on lower-margin customers to build relationships. Unsurprisingly, the stock crashed 60% to 20p on the day, with institutional investors particularly disgruntled because in May they had funded a £19.1m placing at 170p.
So is Worthington Nicholls really a gamble worth taking? Firstly, the balance sheet looks secure with £12m (or 13.8p per share) of cash at 16 August. Secondly the UK air-conditioning market should return to its long-term growth trajectory once the inclement weather ends. Hotels and offices are installing these systems as standard in most new buildings to improve both customer satisfaction and employee working conditions. Worthington Nicholls should also benefit from a buoyant refit market, boosted by European legislation banning the use of less environmentally friendly R22 refrigerant gases. Removing R22 usually requires the replacement of entire air-conditioning units, with the new devices also requiring more frequent servicing.
In financial terms, the board has withdrawn its guidance for next year, but expects the company to break even for the year ending September 2007 on a turnover of £31.5m. Even after this appalling last six months, second-half sales and underlying profits should still be in the region of £22.7m and £170,000 respectively. I would expect the group to cut overheads hard and recruit new blood in the future. Assuming the turnaround is successful, then in two years’ time, I could see Worthington Nicholls hitting annualised sales of £50m, operating profit margins of 10% (versus 15% in 2006) and earnings per share of around 4p. These ball-park figures do suggest that the recent sell-off has been somewhat overdone – and indeed, investors have piled back in rapidly after Friday’s plunge. I would suggest the brave buy at up to 30p.
Recommendation: HIGH-RISK BUY at up to 30p (market capitalisation £26m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments