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It was a slow week, as expected in mid-August, and the news that did arrive tended to be bad, making it largely a week to forget for investors. Here are a few of the more memorable moments from amongst the profit warnings:

Ebiquity (EBQ.L) - Trading Update

The unusually strong H2 weighting becomes a profits warning here, as they often do. The revenue decline highlights how large the operational gearing is:

The Group's cost base is largely fixed, as its distinctive, premium service levels depend on the retention of expert talent which means that the profit impact of a revenue shortfall is acute. In light of reduced revenues, Adjusted EBIT for H1 2023 is expected to decline by 61% to £2.3 million (H1 2023: £6.0 million) compressing Adjusted EBIT margin to c6% (H1 2023: 15%).

It now becomes clear why the CFO left earlier in the month.

However, there seem to be genuine reasons for H2 optimism rather than just general hand-waving:

The Board's expectations for a strong performance in the second half are underpinned by contractual visibility and the Group's existing pipeline.

Significant execution risk remains, though:

The Board is also mindful of a material level of execution risk associated with delivering this steep ramp up in new business and renewals during H2 2024 and the weakness of the Group's performance in H1 2024. As such, the Board believes profits for the full year will be below its previous expectations.

The balance sheet has never been particularly strong here, so news of increasing debt also adds to the risk:

Net debt as at 30 June 2024 was £15.3 million with cash balances of £6.7 million and undrawn bank facilities of £8 million. The expectation is that net debt will increase somewhat during the third quarter but then return to around the current level by year end.

The debt means that, despite a 30% fall in share price this week, this still doesn’t look particularly cheap on an EV/EBITDA basis, and there would need to be further share price falls before the risk/reward starts to look favourable.

H&T (HAT.L) - Interim Results

Reading these results, investors could be forgiven for thinking that everything was going well here. For example:

Profit before tax of £9.9m (H1 2023: £8.8m), up 12.5% year on year as the core pawnbroking business continues to be the foundation of Group profits.

However, when the brokers’ notes arrived, it became clear that Shore's 2024 forecasts had been cut again. Since the start of December, FY24 forecasts have been cut three times, none of which the company explicitly said, but let the broker break the bad news.

Hardman puts the blame at redemptions for their cut to profit forecasts. Seasonally higher spring redemptions were first seen in 2023 but were even greater in 2024. Due to this two-year pattern, they are changing their year-end. It sounds like they are shortening the 2025 financial year, which is less of a red flag than lengthening a financial year.

There's been multiple massive screwups over guidance. On the results call, we didn't detect any such aggressiveness this time around. But nor was there any acknowledgement let alone apologies for these screwups which have been entirely company-specific within the sector. What is bizarre is that investors never seem to learn, with the share recovering after each profits warning, only to fall back when they inevitably warn again.

They say hope springs eternal, and this pattern may well be tradable. However, for long-term investors, this is surely uninvestable now. They have delivered multiple closet profits warnings via the broker instead of simply stating it in the results, plus there was the bizarre acquisition. For those who want exposure to the sector, Ramsdens has none of these issues and remains materially cheaper once net debt/cash is accounted for, despite a rise in price this week.

Macfarlane (MACF.L) - Half-Year Report

When you read enough RNSs, you get a feel for where things are going very quickly. So, when a company begins their results with the dreaded R-word in the title, you know there is trouble to come:

Resilient performance in the period; trading broadly in line for the full year

“Broadly” always means below, of course. Then, when they started their Full-Year Results with the results table and now begin with the narrative, investors are sure to fear the worst. In reality, this is a relatively minor profits warning, with Shore reducing EPS from 12.5p to 12.0p and similar changes in future years.

Handily, Shore have also been given the real numbers we want to know:

Revenue decreased by 8% (-11% organic, split equally volume and price with +3% from acquisitions

It's a freely accessible note, but in principle, we don't like the idea that a company only communicates the key information that investors need to know to make an informed decision via the brokers. In light of the volume down by 5.5%, this is a pretty good margin performance, helped by higher-margin manufacturing, which is growing as a proportion of revenue. You have to wonder how long margins can hold up against volume declines, though.

Shore are forecasting no real growth over the five-year period to 2026:

This gives ammunition to both the bulls and the bears. The bears will point out that a P/E of 9.6 looks high for a company unable to generate any organic growth over the medium term, that has just warned on profits. Particularly in the current market where many companies that aren’t growing EPS rapidly or have warned look even cheaper. The bulls will point out the longer-term success story and say that these figures won’t include anything for acquisitions that could be funded from free cash flow. Perhaps the reality is somewhere in between, and the market has priced this one about right for the moment. At least until there is a clearer picture of whether this warning is the start of a negative trend or if acquisitions will prove current forecasts too conservative.

That’s it for this week. Have a great weekend!