MIDAS SHARE TIPS UPDATE: Our tip Senior has a bumpy ride, but sales are poised to take off
Poor David Squires, chief executive of engineering group Senior. When he took the helm on June 1 last year the shares were 315p. Today, they are 237p. It has not been a great start.
Squires has done nothing wrong, but stocks in general have had a rough time and some of the sectors in which Senior operates – such as commodities, oil and gas – have really been in the doldrums.
Even so, the shares have gained ground since Midas recommended them at 177p in January 2012. Looking ahead, the stock should make considerable progress, particularly over the longer term.
Sales rise: Airbus has placed orders at Senior for parts for its new planes
Senior has two main divisions – aerospace and Flexonics. In aerospace, the company makes products such as specialised parts for engines and ducting systems that allow air, oil and other fluids to flow around aircraft. Customers include plane makers such as Boeing and Airbus, as well as suppliers to those manufacturers, including Rolls-Royce, GKN and GE.
The Flexonics arm supplies complex components for lorries and off-road vehicles, and specialises in systems that control emissions in diesel engines (though it had no part to play in the Volkswagen emissions scandal). Customers here include Caterpillar, General Motors and Ford.
This division was particularly hard hit last year and the prognosis for this year remains uncertain. In response, Squires has been trimming costs where possible.
However, he is determined to avoid cutting into the meat of the business, as sales should pick up quite strongly once market conditions improve – and that turning point is expected either late this year or early next.
The outlook for the aerospace division is bright. Boeing and Airbus have new aircraft and engines coming into production this year and orders have already been placed for Senior components. Sales should pick up sharply in the second half of this year and continue growing into 2017 and beyond.
Air traffic has grown by about 4 per cent annually since the 1970s, but that yearly rate is expected to double over the next 15 years as consumers in emerging markets, particularly Asia, start to fly.
Brokers expect profits of about £96million this year, rising to £103million in 2017 and more than £110million the following year. Senior has a decent dividend policy, too, so the payout is expected to increase from 6.2p to 6.3p this year and to 6.8p in 2017. In a trading update last week, Senior was optimistic, even though conditions at Flexonics are tricky in the short-term.
Squires joined Senior from Dorset-based aerospace engineer Cobham, where he was chief operating officer for six years, during a period of expansion and attractive share price performance.
Senior is valued on the stock market at just under £1billion, while Cobham is worth more than £2.4billion, but Squires is hoping to deliver plenty of growth in his new post.
Midas verdict: Senior is a robust company, with world-class products and Squires is determined to make it even better. Existing investors should hold. New investors could also snap up a few shares at the current 237p price.
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