Questor share tip: API profit warning

API
68½p-5.5
Questor says HOLD

A PROFIT warning at API pushed the shares down 10pc yesterday. The company, which makes packaging for the drinks and tobacco industries, said that strong trading in the second half of its financial year hadn’t been enough to offset weak sales in the previous six months.

Analysts at Numis took a red pen to their forecasts for the full year ended March 31. They downgraded adjusted pre-tax profits from £7m to £6.3m, reducing earnings per share to 8p. The broker also slashed the outlook for future years, citing a weaker dollar, which will hit sales in North America, and new tobacco packaging legislation, which will hit sales. Numis cut adjusted pre-tax profit forecasts for next year by 15pc to £7.5m.

The labels on bottles of spirits and cigarettes are a key area in the battle for customers, and feature more complex designs and technology. API has been investing in manufacturing so it can place holograms and other brightly coloured features on products to attract customers.

However, the loss of a long-term contract involving holograms resulted in this division slumping to a loss during the first nine months of API’s financial year. The company said the holographics arm is now breaking even after a cost-cutting programme.

There were also pressures in the core laminates division, which generates about 90pc of the group’s operating profits. A decline in the volumes printed here, as well as a big UK drinks firm cutting back its orders, resulted in tough trading.

API is returning to dividend payments after a break of more than a decade. It is expected to pay an annual dividend of 2p, which provides a current yield of 3pc.

API was the subject of takeover speculation last year as two key investors, Steel Partners and Wynnefield Capital, attempted to sell the business. The pair have a combined shareholding of about 62pc.

The shares have had a tough time, down 10pc so far this year and now trade on about eight times forecast earnings. The forecast dividend yield is now 3.3pc. However, Questor wouldn’t look to catch this falling knife.

API is facing challenges in a number of its divisions and until there are signs of improvement they are no better than a hold.