Blackfriar: After a year to forget, Pace’s fortunes rest on two factors

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2011 is likely to go down as set-top box maker Pace’s ‘annus horribilis’.

Yet the year started so well.

Over a five-year period the Saltaire-based company had transformed itself from a struggling loss-maker to the world’s largest producer of set-top boxes.

But then everything went horribly wrong.

The company came crashing off its pedestal in March when it upset the market with the surprise announcement it would miss revenue forecasts in 2011.

The group failed to mention in its regulatory news announcement that the shortfall was due to a major order being pushed back.

This came out at the analysts’ meeting, landing the company in hot water for not informing the market first.

Pace then shocked the City in May with the news that profits would be hit for a diverse range of reasons.

These included a poor performance in Europe, the Japanese earthquake, inventory issues and the surprise closure of the group’s MultiDweller business.

One analyst commented that the only excuse that hadn’t been used was that the dog had eaten the company’s homework.Then in October Pace shook the market with its third profits warning of the year following the floods in Thailand.

Chief executive Neil Gaydon accepted that some of the problems were the company’s fault; it built up the inventory and bought at the wrong time, but then the natural disasters struck.

Last month Mr Gaydon warned: “The worst isn’t over.

“We’ve got to get through the first half of next year.”

This doesn’t sound too promising for new chief executive, Pace’s US boss Mike Pulli.

Although he will have that excellent, time-old excuse of being able to blame the previous boss. Pace’s fortunes next year will rest on two factors.

The first is the Thai floods, which have ravaged the country, but there is little sign of the situation returning to normal any time soon.

Analyst Jonathan Imlah, at Collins Stewart, said it is likely to be several weeks or even months before we get full clarity on the situation in Thailand and the implications for Pace and the rest of the set-top box industry.

A post-close trading update in early January is expected to shed some light on the immediate outlook.

Bearing in mind two out of the three profit warnings have been triggered by the Japanese tsunami and the Thai floods, there have been questions about whether Pace should avoid countries prone to natural disasters.

In the past the group has tried to avoid earthquake and flood zones, but no-one forecasted the floods or the tsunami.

Following the lessons learned in Japan and Thailand, Pace is lining up not just two main suppliers for its products, but also third and fourth suppliers.

This should help the company in the future.

The second factor that will affect the group’s fortunes is the strategic review.

Try as hard as he could, Blackfriar couldn’t really get his head around what the long awaited review meant.

There were hints of job losses in France, a reorganisation of the European business, the need for a sharper focus and the development of software and services. It wasn’t exactly clear what Pace was proposing.

And it wasn’t just Blackfriar who was nonplussed.

Yesterday analyst Ian Robertson at Seymour Pierce said: “We were unimpressed by the strategic review but look forward to hearing what exactly Mr Pulli is going to do with this business when he presents the full-year results in the new year.

“We suspect that, given his actual hands on understanding of the industry, the strategies he applies could be a little more pragmatic and a little less ‘strategic’ than those presented in November.”

Indeed.

It would be good to know exactly what Pace has up its sleeve.

Blackfriar suspects that Mr Robertson will be disappointed when Mr Pulli presents full-year results in the new year.

The chances are that he will need a lot longer in the job to decide exactly what direction Pace should take.

Investors warmly greeted yesterday’s news that Mr Pulli has taken over the top job, with a 4.5 per cent rise in the group’s share price.

But Mr Pulli is going to have to come up with some more concrete plans to keep shareholders sweet in 2012.

The group has undoubtedly been unfortunate when it comes to the natural disasters that have best the company.

But the market will not take kindly to any more mistakes from management.

If you have a view on this email us at citydesk@ypn.co.uk