Morning Mumble: Direlight (DIA), Chemring (CHG), Kenmare Resource (KMR) and Majestic Wine (MJW) their economic moat!

Good Morning,

Dialight have given strategic review & trading update. Over to Dialight (see additions by EMC in bold):

Trading Update

Trading in the three month period to 30 September 2015 was characterised by continued weakness in the oil and gas sector and reduced levels of industrial capital expenditure, particularly in North America. As a result, reported lighting revenue growth for this period was 5%. The cost reduction actions announced on 7 August are on track to deliver their targeted reduction in operating costs and we are encouraged by the strength of our order book. However, with market conditions having become more challenging during the third quarter, and Dialight's financial performance weighted as usual to the seasonally-strong fourth quarter, the Group faces an increased level of uncertainty in the remainder of the current financial year.

But...By the end of 2018, Dialight is targeting to achieve:

• Over 25% annual revenue growth
• Over 40% gross margin
• Over 15% EBIT margin
• Over 80% cash conversion

The market is wising up to the realities. See: EMC: Direlight (DIA) June 2015.

Chemring (CHG) trading update that isn't good news with a "potential" delay in the 40mm contract. The concern being, this is yet another company flag waving a rights issue so far in advance it raises significant questions about any understanding of the market. 

Admittedly, with a bit of good fortune, Chemring could turn the situation around by gain the necessary permits and export approvals associated with this contract, although one senses the board find this highly unlikely. Over to Chemring, additions in bold. 

Key points

• Despite significant progress having been made, there is potential for delay to revenues from the 40mm ammunition contract announced on 14 September 2015

• As a result of this and other issues, there is now a realistic prospect that year ending 31 October 2015 ("FY15") underlying operating profit1 could be reduced by approximately £16 million to approximately £33 million

• Order book at 30 September 2015 of £606.3 million; £344.6 million for delivery in FY16, representing more than 75% of expected FY16 revenue of £450 million

• Discussions will be held with debt providers to negotiate amendments to the operation of covenants and the waiver of any event of default that may result from the 40mm contract delay

• Proposed rights issue (the "Rights Issue") of up to £90 million in Q1 2016; fully underwritten on a standby basis by Investec and J.P. Morgan Cazenove

• Resultant medium term target capital structure of 1.0x - 1.5x net debt to EBITDA

The company's debt levels have been a concern and impeded them for some time, so Chemring elect to kitchen sink their issues today with:

"The recent progress of the Group has been impeded by its high levels of debt and associated interest costs. Significant time has been spent managing this debt, at the expense of further operational improvement and fully capturing the longer term growth opportunities open to the Group. We have therefore announced today that the Group proposes to launch a fully underwritten rights issue to raise up to £90 million, the proceeds of which will be used to fundamentally address the high levels of debt and to provide a competitive capital structure."

It begs the questions of why the rights issue isn't now...shareholder value? The cash advance whether recognised in this year or next is immaterial to the overall issues the company are facing. Target price now likely to be near 87 pence. If it quacks like a...This company has a momentual task just to maintain existing shareholder value, 

Kenmare Resources (KMR) forgot to mention some key ingredients within their  Q3 trading update. Namely the pricing environment over and above anything Kenmare can do will remain challenging. Iluka Resources is fully aware of the KMR financial position when such terms as "Super Senior Facility" are utilised it rather suggests who has the stronger hand.

A question: exactly how much time have the "board / management" spent out at Moma? More so, what is the purpose of the board if an external consultant has to be appointed to support and extend this ongoing cost control and efficiency programme? We'll ignore the stock levels and the like for now, as all the cards are in China's and Iluka's hands at the moment. 

In the current environment, Iluka Resources have no need to save Kenmare and there is a real risk of downward pressure on any offer price. For a perhaps more open outlook, please read Iluka's Q3 (see the market conditions section). 

The market is waking up to the realities of Iron Ore, scrap prices are falling quicker, steel prices down. More so, there's now evidence Steel Mills are bringing forward larger maintenance works and/or shutting capacity due to the limited demand. We acknowledge the likelihood of a larger sized steel mill default. 

With two significant events currently under way the 18th CPC and the Fed, there are likely to be considerable trading events. We have Aluminium production in China yet again on the increase, the average operating rates of Chinese copper processors is steady but nothing to shout home about, Zinc inventories in Shanghai, Tianjin and Guangdong are on the up and finally, scrap prices in China fell through the floor evidencing the realities/contradictions of the alleged balance in supply and demand.

Finally, it would be unfair not to consider Majestic Wine (MJW) whom pulled the proverbial plug out of their economic moat of six bottles or more. Apparently, MJW trialled no minimum bottle requirements at 23 stores for 5 months. Its allegedly had no impact of volumes, really?? 

The question is, did the removal of the 6 bottles or more criteria improve sales? Or just increase the cost per sale? Is this a flag waving event where they firmly placed themselves within the supermarket sector where such benefits of 6 or more bottles may have insulated them to a degree. Surely if one is an off-license location is key!

If someone could be so kind as to point out where Majestic announced to the market that they were trialling the no minimum bottle purchase, it would be appreciated. As in yesterday's announcement of a new pricing strategy stated, "follows the previously announced successful trial in selected Majestic stores since Spring 2015 proving popular with both new and existing customers." Perhaps one is just being tardy, a quick email to Majestic's IR might assist. 

With the results out on the 16th, and one has a suspicion there's been a leak to the supermarkets! Quite why Majestic Wine's didn't merely launch their own online offering of wines via post/text is a very pertinent question

Atb Fraser

Apologies for grammar a quick one!