Questor share tip: Hold Weir as shares bounce

Weir
£11.37 +62p
Questor says HOLD

WEIR [LON:WEIR] is suffering from worsening sales and is cutting jobs. Despite little sign of a recovery at the engineer, the shares jumped 5pc yesterday.

Relief over rally

The bounce in the stock has more to do with investor relief that Weir managed to avoid a profit warning in its third-quarter statement. The company’s outlook is still tough, heading into the end of the year.

The Glasgow-based group manufactures industrial valves for the oil and gas business as well as pumps for the mining industry. Customers in both these areas are cancelling or delaying orders, as the commodities sector worsens.

Oil prices fell 25pc in the third quarter, having enjoyed a brief rally in July and August, and are now back below $50 per barrel.

Weir said orders for equipment in the oil and gas division were down 58pc in the third quarter when compared to a year earlier, following a 52pc decline in the second quarter, and a 23pc slowdown in the first quarter. This slump in orders translated into a 60pc fall in profits at the oil and gas division in the first half of the year.

The company’s minerals division, which provides heavy duty pumps for the mining industry, has proved more resilient, despite the prices of copper and iron ore continuing to fall. Orders in the third quarter were down 1pc, following a 5pc decline in the second quarter and a 5pc increase in the first quarter. Profits in this area have been more reliable, falling just 10pc in the first half.

Combined, the minerals and oil and gas divisions make up 85pc of the sales at Weir.

Cost-cutting exercises

Weir has responded to the weak trading environment by cutting costs. It has found another £25m in savings, bringing the total for the year to £110m. The company estimates that redundancies and related costs will cause an additional £15m to £20m hit to profits this year.

The company also remains cash generative despite the slowdown in trading. In fact, as sales slow Weir is experiencing an inflow of funds as it collects cash from the sale of equipment in previous quarters.

In addition, as the trading outlook is tough, it is winding down the level of stock it has in its inventory. The company estimates this will bring a £30m cash benefit this year.

Management are confident they can maintain the dividend, which is forecast to be about 44.4p this year, as it is covered twice by earnings and also by cash.

Optimistic earnings

Weir has been acquisitive in the past and attempted to complete a £3.66bn merger with Finnish group Metso in 2014. Weir eventually walked away after Metso rejected two takeover bids.

Keith Cochrane, Weir’s chief executive, said that, while he is always looking at takeover opportunities, it remains important to protect the balance sheet.

Weir said net debt increased in the third quarter. The company did not reveal an exact figure but it will be higher than the £817m announced on July 3. That stands against net assets of £1.4bn.

Weir’s shares have halved in value during the past 12 months, and are trading on 13 times forecast earnings.

Questor thinks the earnings figure and the multiple look optimistic given there is little recovery expected in commodity prices. Hold.