Morning Mumble: Pressure Technologies (Another profit warning), Vedanta and the "continuation of the paradigmatic shift for Iron Ore."

Good Morning,

Pressure Technologies (PRES) gave an update on trading and notification of interim results. It’s dire, with a material deterioration in the immediate prospects for the Group's Precision Machined Components and Engineered Products divisions. Worse, the Alternative Energy Division has now been completed but the division has experienced delays in securing new orders which will impact its performance in the current year. EMC: PRES December 14 (in addition see PRES Labels). 

With limited liabilities and cash at circa £5m the company is not going to go bust immediately, but in the absence of orders across the entire company the prospects are not looking good. After their update in February, things have clearly got worse. Valued at around £30M and a tightly held stock, there's likely to be limited support in the short-term, save for some speculative buying (knife catching). Simply put, any improvement in their divisions will be hit or miss. 

No doubt the technical analysers will be looking at the gap between 270 and 211 overnight, however the price appears to be overvalued as a result of today's announcement. The company has great potential for holders, simply not at this price with too many unknown risks, and that includes the businesses inability to forecast future revenue in light of the oil tumble. PRES is a well-run company, with an unfortunate set of events working against it, it will be overly punished. 

Today, Vedanta's (VED)'s update is an example why VED's structure is so difficult (perhaps even complex) that it needs to transfer equity between subsidiaries in order to enable "cash" to target the required resource. VED's structure appears to have limited tax benefits, so one would be wise to ask why exactly is the structure so complex. (See below: Vedanta). In simple terms it’s a corporate dinosaur with little in the way of synergies between entities. Today's actions appears to be "robbing Peter to pay Paul."

The "paradigmatic shift in iron ore" is likely to be played out very soon. With gossip a joint Baosteel and CITIC Group (China International Trust and Investment Corporation) "are likely to gain full FIRB (Foreign Investment Review Board) approval" for a direct investment in FMG. Expect some nationalistic issues about Chinese investments to be negative for Australia (close the stable door after the horse has bolted). 

China's selection of 'favourites' in the iron ore sector is a shrewd move. Not only does it weaken BLT/RIO's hold on price (if there was any left), and place a long-term low cost (ish) supply in their hands, it maintains a significant diversity in the market. As evidenced by the backtracking by the China's on view on the Valemaxes fleet with the recent deal with the Chinese. A complete backtrack on the part of the Chinese. (See: Aquila Resources BaoSteel deal)

Johnson Matthey's (JMAT) results are better than envisaged, but still overvalued. JMAT has been a technical short off 3475 for near 6 months. Irrespective, the revenues are down circa 10% (allegedly as expected) which contradicts the sell-off this morning. 

Stripping out the sale of the gold and silver refining business, profit was a head at £422.8M (£406.6M), near 4% on the previous year. With such a "positive year" despite a reduction in expenditure net debt was up £265.2 million to £994.4 million (net debt to £1,037.6 million if you include pension deficit and bonds). 

The divi-will support the share price, although 2% is supported only in part by the sale of refining business. Debt on the increase there are a lot of assumptions on the positive outlook that contradict the wider vehicle market including trucks including fleet age cycles. 

With the HDD (for those layman's: Heavy Duty Design) trucks being in a positive renewal cycle, JMAT will benefit as the older fleets are being replaced especially in America with economic 'recovery.' Remember, fleet renewal cycles are being run for longer, will JMAT  be impacted as the fleet renewal cycle peaks to the current level but in the short-term will benefit. 

Can growth keep pace with the increased age of heavy duty trucks in the longer term is another matter. Perhaps the answer is a reduced seasonality which will assist manufacturers in planning. This of course is contrast to the average age of cars declining by 12.5% over a 14 year period. No change in the view that there will be limited growth and the potential for adverse currency movements. So banking profits on a technical basis, it’s wise to review the position. 

Atb Fraser

Disclaimer

The PM edition: Pressure Technology + retreat or defeat.

EMC Pressure Technology & 1 December 2014 at 21:47 commentary appears to have upset a few of the longs. The market is re-correcting and so are the pricing expectations for engineering services, parts and the suppliers all of them coming under pressure (bad pun). Today was the day to close fully on Pressure Technology, not because of the abuse of the "long only contingent" but because its about the money now. What next, being blamed for the rouble crash and oil oversupply. 

The Russian debacle has left Putin with two possible denial options, the first is give in and retreat east from the Ukraine, the other being to not give in and retreat financially (the defeat). Not many options are left for Putin and Chums. With Russia heavily weighted on oil et al, one would be wise to avoid those leveraged plays. More so, Putin's position is now untenable, with cuts more than likely across the board but this is not going to be popular.

Evraz, as a prime example of a leveraged U$D dominated debt is a company is running out of options and at what point do the writedowns occur? Evraz have shelved their infrastructure IPO (Evraz Said to Delay North American Unit’s IPO on Falling Oil) as margins are likely to come under further pressure and a premium valuation becomes unlikely. In the absence of the first of two denial options, Evraz are set for near 50 pence; just to break a few rules.

Atb Fraser

Belatedly: The market woke up the realities of what Pressure Technologies did (PRES)

Pressure Technologies today finally informed the market they're in the oil sector being unfortunately punished (Disc: Short). Its unfortunate as the company is well managed and has been a significant long until more recently. Today's final results are positive but one would be wise to work on a 20% reduction in revenue for the year ahead as a conservative approach.

As a separate note, it was amusing to share my thoughts on Petropavlovsk (POG) today with a target price of circa 5.25 pence. Its amazing certain people are supporting the rights issue, would someone be kind enough to remind me if certain parties sold significantly higher so of course it would be rude not to support a rights issue at...5 pence. With the current state of oil likely to have implications (negative) for gold its not a placing without risk.

Atb Fraser

Addition: I had been asked today quite a few times what is happening with Kenmare. The only thing I can conclude is that Kemnare's likely to be an all share offer in the current climate which means any offer is materially lower because of the Iluka Resources share price, down near 30% and dropping since September. 

Amusingly it was some tittle tattle that stated that Rio had a few chaps walk out their offices the other day whom may suggest there's corporate activity going on. It shall be interesting as the market, like I, has removed any possibility of a corporate action on a number of levels. That is not even considering the regulatory approval needed. Perhaps once could have another crap co spin off for certain assets. 

The noise coming out of the investor day for Anglo American (AAL) isn't positive either. Currently with a lethal case of some lurgy no woman could survive its with regret I wasn't able to take the time. So here's a few items, including the webcast and presentation. AAL despite my views should be congratulated for taking this approach of transparency.