ii view: Spectris shares sink after profit warning

Second quarter trading update  

ii round-up:

High-tech measuring instrument maker Spectris (LSE:SXS) today lowered its full-year profit forecast due to operational disruption in the aftermath of a new computer system and softer end-markets.

Spectris, which supplies industries like semiconductors, pharmaceuticals and electric vehicles, now expects adjusted operating profit for the financial year to 31 December to be at or marginally below the bottom end of City forecasts for £232-259 million. That’s down from £262.5 million in 2023. 

Shares in the FTSE 250 company fell as much 16% in UK trading before recovering over half their initial losses. They came into this latest news down around 15% year-to-date. That compares with a 16% increase for medical device maker Halma (LSE:HLMA) and a 4% increase for the FTSE 250 index.

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Spectris makes measuring instruments for research and industrial applications including the analysis of materials from proteins and polymers to battery and building materials. 

New Enterprise Resource Planning (ERP) for its Malvern Panalytical business, focused on analysing materials, had resulted in longer than anticipated disruption to operations, pushing around £15 million of sales and £10 million of profits into the second half.

Weaker Chinese demand given significant reduced battery development associated with the slowdown in sales of electric vehicles and slower pharmaceutical demand, had also hindered the Malvern business. This is expected to reduce sales by a further £15 million and profits by another £10 million in the half-year to 30 June.

Trading across its other businesses had remained in line with management’s expectations. A new finance head, Angela Noon, with previous experience at Just Eat, Royal Mail and Siemens, had been appointed, along with a new President for its Scientific instrument making business. 

First half results to the end of June are scheduled for 30 July.

ii view:

Started in 1915, Spectris today employs around 7,000 people across more than 30 countries. The group is split across two broad divisions. Scientific, including Malvern, helps measure and analysis materials as well as offering devices and services to measure particles down to a nano scale. Its other Dynamics business offers high precision sensing solutions to industries including aerospace and electronics. Geographically, the US generated its biggest slug of sales last year at 26%, followed by China at 17%, Germany 10% and many other countries all at under 6%.  

For investors, exposure to slower growth in China and economically sensitive industries such as automotive cannot be overlooked. Costs for businesses generally remain elevated, while overseas sales of more than 95% introduces currency risk.

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On the upside, diversity of both product, underlying industry and geographical region exist. A programme to rationalise its business portfolio started in 2019 has now been completed, bolt-on acquisitions to enhance remaining businesses have been made, while the dividend has grown for more than 30 consecutive years, leaving the shares on a forecast dividend yield of around 2.6%.  

In all, and while fans of this technology-driven end market company may remain loyal long term, other investors may decide to wait for evidence of an upturn in profits.  

Positives: 

• New product launches being made
• Progressive dividend policy

Negatives:

• Exposure to cyclical industries
• Potential currency headwinds

The average rating of stock market analysts:

Strong hold