Fenner defiant as it sees orders slowing in US

Nick Hobson
Nick Hobson
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ENGINEERING group Fenner insisted it is on track to meet full-year expectations despite weak coal consumption in the United States hurting its conveyor belting business.

In an update covering the period since March, the Hessle, East Yorkshire based group, said its Engineered Conveyor Solutions (ECS) arm has seen “some slowing of orders” from the US coal market after a mild winter and “uneconomic” shale gas pricing.

But Fenner said it is already seeing early signs of coal stockpiles returning to more normal levels as gas prices recover, plus an increase in US coal exporting.

“Overall, recent trading supports our confidence in meeting our expectations for the full year,” said the group.

Fenner’s chief executive Nick Hobson said the current US coal consumption rate is down about five to 10 per cent year-on-year.

“First and foremost, the biggest single effect was the unseasonably warm weather in the winter which caused less power consumption,” he said. “That’s been aggravated by a shale gas glut which has caused some power stations to switch from coal to gas.

“We are going to have to work extra hard in other territories to make up for that slowdown.

“We don’t see it as being disastrous but it’s just something we have to deal with.”

Despite the US order slowdown, Mr Hobson said Fenner continues to see strong demand from other markets. He said the US consumption decrease is “less than the growth rate in South East Asia and China”. “They are still building one coal-fired power station every three days between India and China.”

He added the group is encouraged by the recent pick-up in gas prices, plus anecdotal evidence some power stations have started to return to coal firing. The company expects shale gas prices to remain severely depressed for one or two more quarters.

Fenner continues to invest in its factories, and is adding production lines to plants in The Netherlands and Australia which make steel cord for conveyor belts. The work should be complete by spring 2013.

The production line in Australia, which will supply the country’s booming iron ore industry, will cost about 15m Australian dollars (£10m). The upgrade in The Netherlands will cost about 10m euros (£7.9m) and be used to supply parts of central America and Africa.

Fenner added its Advanced Engineered Products division is on track.

Fenner’s shares have fallen steeply from a high of 505p in March. Yesterday they shed another 29.5p to close at 344.8p, a 7.9 per cent fall.

Mr Hobson said he believes the stock market has overreacted to the US situation.

“People do not really understand the extent to which our business is related to the volume of material which is handled, and not the price of the material. Although the coal price has fallen that does not necessarily mean that production has fallen by as much.

“We would argue that the decline in our share price has been more than it should have been because people who are not totally familiar with our business tend to assume that our business is related to mining capex (capital expenditure) or commodity prices, but both are incorrect statements.

“Some 87 per cent of our ECS business is opex (operating expenditure).”

Fenner added it refinanced its banking facilities in May with a £100m revolving credit line. “The strong balance sheet and satisfactory gearing level will enable us to continue to pursue our accelerating organic and acquisitive growth plans,” it said.

FinnCap analyst David Buxton, who has a buy rating, said: “We maintain our forecasts and believe the shares represent good value trading on a P/E (price to earnings ratio) of 10.4 times to August 2012 and 9.8 times for 2013, having been heavily sold off over recent months partly over US coal fears, which now appears to be abating.

“In this respect we see today’s announcement as encouraging.”

Liberum Capital’s Ben Bourne said: “We believe opex (operating expenditure) exposure (aftermarket represents 87 per cent of the ECS division), combined with growing market share and the likelihood of accretive acquisitions in the overlooked AEP division provide cause for optimism.”

But Investec analyst Michael Blogg said it is cutting growth estimates for Fenner for 2013 and 2014, in line with the brokerage’s more cautious stance on earnings for industrial stocks.

“EPS (earnings per share) reductions and the de-rating of the peer group lead to a lower target price and a hold recommendation, notwithstanding Fenner’s confidence in the longer-term outlook,” he said. “For 2012/13 and subsequent years, the long-term growth drivers are still intact but we are taking note of deteriorating macroeconomic and anecdotal indicators for the immediate future and reducing estimates for virtually every stock in the industrial sector.

“For Fenner, we are reducing EPS growth rates from circa nine per cent to circa four per cent for the next two years, with profits in both divisions reduced.”

Life began in a rented room

The Fenner story started in 1861 when the company was founded by Joseph Henry Fenner in rented rooms in Hull. Its early products included leather belting.

By the 1890s, the company was exporting its products across Europe and into India. In 1921, Fenner began developing woven textile belting and in 1937 became a public company.

After suffering heavy damage during the Second World War, it resumed expansion in the 1950s, establishing companies in South Africa, Australia and India.

It made its first acquisition in the USA in 1970.

In the 1990s it completed a major restructuring and two rights issues. It now operates across five continents.