What do double-digit slumps mean for Renishaw and Sopheon?

by Graeme Evans from interactive investor |

These are two great companies, but share prices have plunged. We look at causes and recovery potential.

Shares in highly-regarded Renishaw (LSE:RSW) and Sopheon (LSE:SPE) were both sharply lower today, even if the tone of their respective updates could hardly be more different.

For precision engineering firm Renishaw, the cause of the 12% slide in shares was clear cut as it warned that a slowdown in demand in Asia for its encoder products was likely to continue for the rest of the financial year. Profits are now set to be some 15% lower than the guidance range issued in late January.

At Sopheon, which provides software services for product life cycle management, the 14% slide in its share price was harder to fathom. The group's profits were 25% higher at US$6.4 million after two upward revisions in the year, driven by 18 new customer wins in 2018 compared with 13 in 2017.

Revenue visibility for 2019 stands at $20.6 million, which compares with $19.3 million for this time last year. While the sales pipeline is boosted by a number of large opportunities, the year-on-year growth figure is slower than the rate reported a year earlier.

That's likely to have impacted shares, which have continued their choppy performance in the year to date. Andrew Darley at house broker finnCap is more optimistic, though, having lifted his target price from 1,400p to 1,500p in the wake of today's results.

This values Sopheon at a price/earnings multiple of 25x, which he said was "bang in line" with the Megabuyte Accounting and Enterprise Software peer group. His first go at estimating 2020 figures point to growth of 13% in revenues and 17% for earnings, with a cash pile of $30 million making M&A, investment or dividend enhancement "all realistic and affordable".

Source: TradingView (*) Past performance is not a guide to future performance

Over two-thirds of the company's annual revenues come from existing customers, while five of its new license deals were for software as a service (SaaS) transactions. With a large and diversified blue-chip client base, Sopheon said the time was right to "accelerate investment and solidify our leadership position".

One emerging area of opportunity is the digital transformation market, where Sopheon can digitalise corporate strategic initiatives into a single platform in order to navigate digital disruption. It quotes research showing that over 40% of companies on the S&P 500 will no longer exist within 10 years due to their inability to operate with agility and speed.

Darley added:

"The perpetual enterprise licence model continues to attract new customers, often delivered on a hosted basis, contributing to a growing base of recurring revenue at a $15 million run rate including green shoots of demand for the SaaS version."

At Renishaw, shares have lost a third of their value since last summer amid a slowdown in demand from Asia. This was highlighted in recent half-year results, when revenues in the Far East fell 1% compared with a 9% rise in the Americas.

The region is comfortably Renishaw's largest, accounting for more than 40% of sales. It has seen a slowdown in demand for its optical, magnetic and laser encoders, including from large end-user manufacturers of consumer electronic products.

Analysts at UBS said today's downgrade backed their view after January's half-year results that the share price had not de-rated enough given the pressures in the Far East. Renishaw shares had been trading on a chunky multiple of 25 times profit in 2018.

The next catalyst for the stock will be a trading update on May 14, when Renishaw is also due to update on its strategy.

Source: TradingView (*) Past performance is not a guide to future performance

The Gloucestershire-based company supplies products and services used in applications as diverse as jet engines and wind turbine manufacture, through to dentistry and brain surgery.

It is also a world leader in the field of additive manufacturing (also referred to as metal 3D printing), where it is the only UK business that designs and makes industrial machines which ‘print' parts from metal powder.

Its roots are in aerospace, however, after Rolls-Royce was unable to find a measuring device with the accuracy it needed for Concorde's instrumentation pipes. Around 2,800 out of its 4,000 staff are employed within the UK, where the company carries out the majority of its research and development and its manufacturing.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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