Thursday 4 June 2015

Morning Mumble: Pressure Technologies (Another profit warning), Vedanta and the "continuation of the paradigmatic shift for Iron Ore."

Good Morning,

Pressure Technologies (PRES) gave an update on trading and notification of interim results. It’s dire, with a material deterioration in the immediate prospects for the Group's Precision Machined Components and Engineered Products divisions. Worse, the Alternative Energy Division has now been completed but the division has experienced delays in securing new orders which will impact its performance in the current year. EMC: PRES December 14 (in addition see PRES Labels). 

With limited liabilities and cash at circa £5m the company is not going to go bust immediately, but in the absence of orders across the entire company the prospects are not looking good. After their update in February, things have clearly got worse. Valued at around £30M and a tightly held stock, there's likely to be limited support in the short-term, save for some speculative buying (knife catching). Simply put, any improvement in their divisions will be hit or miss. 

No doubt the technical analysers will be looking at the gap between 270 and 211 overnight, however the price appears to be overvalued as a result of today's announcement. The company has great potential for holders, simply not at this price with too many unknown risks, and that includes the businesses inability to forecast future revenue in light of the oil tumble. PRES is a well-run company, with an unfortunate set of events working against it, it will be overly punished. 

Today, Vedanta's (VED)'s update is an example why VED's structure is so difficult (perhaps even complex) that it needs to transfer equity between subsidiaries in order to enable "cash" to target the required resource. VED's structure appears to have limited tax benefits, so one would be wise to ask why exactly is the structure so complex. (See below: Vedanta). In simple terms it’s a corporate dinosaur with little in the way of synergies between entities. Today's actions appears to be "robbing Peter to pay Paul."



The "paradigmatic shift in iron ore" is likely to be played out very soon. With gossip a joint Baosteel and CITIC Group (China International Trust and Investment Corporation) "are likely to gain full FIRB (Foreign Investment Review Board) approval" for a direct investment in FMG. Expect some nationalistic issues about Chinese investments to be negative for Australia (close the stable door after the horse has bolted). 

China's selection of 'favourites' in the iron ore sector is a shrewd move. Not only does it weaken BLT/RIO's hold on price (if there was any left), and place a long-term low cost (ish) supply in their hands, it maintains a significant diversity in the market. As evidenced by the backtracking by the China's on view on the Valemaxes fleet with the recent deal with the Chinese. A complete backtrack on the part of the Chinese. (See: Aquila Resources BaoSteel deal)

Johnson Matthey's (JMAT) results are better than envisaged, but still overvalued. JMAT has been a technical short off 3475 for near 6 months. Irrespective, the revenues are down circa 10% (allegedly as expected) which contradicts the sell-off this morning. 

Stripping out the sale of the gold and silver refining business, profit was a head at £422.8M (£406.6M), near 4% on the previous year. With such a "positive year" despite a reduction in expenditure net debt was up £265.2 million to £994.4 million (net debt to £1,037.6 million if you include pension deficit and bonds). 

The divi-will support the share price, although 2% is supported only in part by the sale of refining business. Debt on the increase there are a lot of assumptions on the positive outlook that contradict the wider vehicle market including trucks including fleet age cycles. 

With the HDD (for those layman's: Heavy Duty Design) trucks being in a positive renewal cycle, JMAT will benefit as the older fleets are being replaced especially in America with economic 'recovery.' Remember, fleet renewal cycles are being run for longer, will JMAT  be impacted as the fleet renewal cycle peaks to the current level but in the short-term will benefit. 

Can growth keep pace with the increased age of heavy duty trucks in the longer term is another matter. Perhaps the answer is a reduced seasonality which will assist manufacturers in planning. This of course is contrast to the average age of cars declining by 12.5% over a 14 year period. No change in the view that there will be limited growth and the potential for adverse currency movements. So banking profits on a technical basis, it’s wise to review the position. 

Atb Fraser

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