Armorgroup trading update (ARG)
Well that makes me look like a pillock
Armorgroup has come out with a profit warning today which makes my note last Friday look pretty stupid.
As I noted then, talking to a company can be misleading. If they do their job properly, and don’t give away non-public information, you can fool yourself into thinking things are better/worse then they actually are.
To summarise the profit warning:
- FY 2007 operating profit will be less than the $10.6m reported in 2006.
- CEO David Seaton will stand down with immediate effect.
- Contracts in Iraq have been delayed due to the Blackwater incident.
- Profitability in Afghanistan has been hit by onerous requirements on the US Embassy contract.
- The falling dollar will hit profits by $0.9m this year.
- Armorgroup has been negotiating an acquisition and will have to write off $2m if it does not go ahead.
That is a pretty comprehensive set of bad news. The contracting business model has problems. ARG has built up a high fixed cost base, but constant delays to contracts mean that revenues are struggling to keep up, and there is not enough margin priced in to compensate for these risks.
An acquisition would also be troublesome. I think that ARG shareholders would have to oppose an equity issue at this price - it would be too dilutive - and gearing up the balance sheet would be expensive and risky. A small, cheap takeover might work, but given that Armorgroup expects the most established and reputable companies to benefit post-Blackwater, surely it makes more sense to drive out weak competitors?
As for the positives, such as they are:
- Armorgroup remains profitable and cash generative. A pre-tax loss, including restructuring charges, goodwill right-offs etc must now be quite likely, but we might still get the equivalent of 2-3p per share at the operating level.
- The board has acted to shake up management and cut costs. A wider retrenchment from the fixed cost base would be welcome.
- It sounds like the acquisition may not go ahead. I think that’s probably good news, even if it does cost $2m.
It’s hard to predict what happens next. It wouldn’t surprise me if things get even worse and Armorgroup makes losses for the 2007 and 2008 financial years.
At 30p, however, ARG is trading on about 0.54x book value ex-goodwill. That’s a bankruptcy valuation, and I don’t think Armorgroup is going bankrupt. I have a five-year time horizon for any stock I invest in and will continue to hold.
Disclosure: I own shares in Armorgroup.
Disclaimer: Today’s fall in Armorgroup is a reminder to please note the disclaimer above, to remember that investing in any share carries the risk of losing money, and to always do your own research.
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8 Responses to “Armorgroup trading update (ARG)”
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“charts don’t lie but companies do” is the best phrase I have heard in a long time.
I got a similar response that “all was well” a week ago!
Shows you that the poeple at ARG havent got a clue what they are doing, and I believe there could be an FSA investigation into Seatons conduct, massaging the figures.
I also predict a whopping great hole in the balance sheet.
I cant believe in september they said they remain confident in the full year!
Only hope is a takeover from another company, however in the current climate that seems unlikely (unless there is a war on iran, which seems unlikely since the us will kick out GB next year.
Therfore I firmly belive this one is going bust.
Could be worse you could have been backing Paragon…
sorry were paragon saying all was well 3 months ago?
Do you have any particular concerns about the balance sheet? I suspect they’ll have to write off some goodwill but apart from that it’s mainly vehicles and debtors.
yes a load of bullet ridden humvees and some property in a war torn country, give it a break the analyst, this compnay is as good as bust.
cant make a dime on nearly $270 Million t/o = joke.
Where they going to pay next years divi from?
How they ging to fund this suppsoed aquisition?
Reminds me of that pharma comnay that went bust a couple of years ago.
In a vain attempt to hide losses they tried to take over a huge compnay (elan maybe)
Failed went bust 3 months later
No matter what is said the company misled everyone with the “all is well” rns a few month back.
Are you telling me that thses majotr problems only developed in the last few months, balls, the makret has known about them for months, hence the declining shareprice.
ARG lost out to aegis who kicked a$$ against these sorry mercenaries.
Bust in 3-6 Months, no CEO required
I wonder how Armorgroup will respond to questions about their cash-flow forecast? Terrible margins for years, combined with a market capitalisation that is unlikely to attract decent credit. Add to this a $2m write-off for a failed attempt to sell themselves - they couldn’t afford to buy anyone and the wording used recently is deliberately vague.
What would happen if they got into a dispute with one of their major clients, who then withheld payments. They don’t have extensive cash reserves and they can’t sell most of their ‘assets’. The troubled contract with the US Embassy in Kabul represents an enormous risk to ARG. How are client relations with the State Department, given the issues there?
Corn & Michael - good points. I don’t want to fall prey to confirmation bias and defend this just because I’ve thought it was a good idea in the past.
I accept that Armorgroup would not realise book value for its “bullet-ridden humvees” in a bankruptcy sale (although I think they drive Fords!)
I’d also accept that relations with the State Department and DoD are probably a bit ropy at the moment - although that will be an issue for all the PMCs.
There are clearly operational problems and risks out there that could bankrupt the company. The challenge is to weight them correctly and come to an appropriate valuation.
if you read the evening standard, they have the gaul to blame “mischevious ex employees” for their woes.
Lol how about, falire to hit any profit or revenue targets.
Underbidding for contracts
Failing to hedge the dollar
Screams of inept managmement
Question is…Is this a going concern?