Shares in engineering services companyAmec Foster Wheeler(LON: AMFW) crashed by as muchthan 25% this morning after the company warned on the outlook for the remained of the year and announced that it was cutting its regular dividend payout by 50%. Its share price has since recovered marginally, but still remains 22.6% down.
Specifically, the company said that underlying revenue for the first nine months was in line with forecasts. However, due to the conditions in oil and gas markets, second half margins are going to be lowerthan expected. Amecnow expects profits for full-year 2015 to be below expectations.
To offset declining margins, Amec has increased its cost savings target from $55m to $180m by 2017. Also, the group is planning to exit low growth, low margin markets.
For the nine months to the end of September Amecs revenue totalled 3.8bn, which is 1.8% lower than last years result on a pro forma basis. The groups order backlog stood at6.5bn at the end of September, down by 0.1bn compared to the half year.
Commenting on todays news, chief executive Samir Brikho said:
For more than a year across many parts of our business we have seen customers reducing capital expenditure and putting more pricing pressure on the supply chain. We see no sign of these trends changing.
At our half year results, I said our priorities were to adapt to challenging markets and to stay lean and efficient. We have decided to intensify our actions. We have identified, and continue toseek,further cost savings. We are committed to increasing our focus on higher growth markets.
A profit warning
Theres no other way of putting it, todays second half trading update fromAmecis a thinly veiled profit warning, and managements decision to cut the companys dividend payout by 50% is something few saw coming.
In fact, before todays announcement, City forecasts suggested that Amecs dividend payout would be covered 1.9 times by earnings per share this year. So,Amecsdecision to cut its dividend to the lowest level in five years, suggests that management is preparing for the worst.
According to todays update, even after the benefits of Amecs additional cost saving measures havefiltered through, the company still expects its trading margin to deteriorate further next year.
Moreover,Amecis planning to refinance its debt at some point during the next six months, which could prove tricky in the current environment. The companys decision to acquire peerFoster Wheeler last year landedAmecwith net debt of 1.1bn.
Time to avoid
At first glance, it looks as ifAmecis in trouble. The companys decision to slash its dividend payout and increase cost savings by 230% seem to be emergency measures taken by a company thats running out of options.
Unfortunately, we wont know the full extent of the companys problems until it reports full-year results. Whats more, after todays shock announcement City figures are now out of date.
All in all, its impossible to value Amecs shares right now and with being the case its probably best for investors to stay away from the company for the time being.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
