Why I'm trying to catch this falling knife after today's 20% slump
Shares in Low & Bonar(LSE: LBW) are crumbling this morning after the performance materials company announced its CEO Brett Simpson has jumped ship to peer Fenner.
Simpson has been at Low & Bonar since 2014, and during his time performance has been mixed. Indeed, at the time of writing, shares in the group are changing hands at 53p, 44% below the five-year high of 96p recorded at the beginning of 2014.
Simpson will remain an employee until the end of April but will resign from the board immediately. Non-executive director Trudy Schoolenberg has stepped in to take over the CEO role.
According to today's news release on the matter, Schoolenberg has been non-executive at Low & Bonar for four years and has "extensive executive experience in the chemical, technology and petrochemical sectors with significant engineering and product development expertise from over 20 years' spent at Royal Dutch Shell." So it looks like Schoolenberg is an excellent pick for CEO.
Alongside the news of the management reshuffle, Low & Bonar also issued a trading update today in which it noted a "weaker than expected" final quarter due to an adverse product mix and timing of sales. Due to these pressures, the group is expecting pre-tax profit for the year to range £30m and £31m, marginally below City expectations of £32.2m. Net debt is expected to increase to £138m at the end of the period, from £111m.
Although the market dislikes today's update, I believe the declines are overdone and, as a result, I'm looking to buy into the group's recovery.
Starting to look interesting
Even though the company now expects to miss City expectations for growth for the year, it's still on-track to grow pre-tax profit substantially year-on-year. For the fiscal year ending 30 November 2016, the firm reported a pre-tax profit of £26m. So, even if profit comes in at the low end of expectations for 2017 (£30m), it is still set to grow by 15% year-on-year.
And according to my figures, after today's declines, even with a lower level of profitability, shares in Low & Bonar are trading at a deeply-discounted multiple of around 8.5 times forward earnings. The shares also support a dividend yield of 4.9%, covered twice by earnings per share.
But it's not just the low valuation that attracting me to the shares. The company has recently gained the attention of an activist hedge fund Sterling Strategic Value Fund SA.
Sterling claims to "work together with management and other shareholders to initiate change in a concentrated number of companies." At the beginning of December, Sterling hiked its interest in Low & Bonar to 10.9%, from 6.9% previously, which indicates to me that the firm is looking to shake up the materials business to unlock value for shareholders.
This means that as well as an attractive valuation, steady growth, and market-beating dividend yield, there's a catalyst that could ultimately unlock value for shareholders. That's why I'm looking to catch this falling knife today.
Not suitable for all
With an activist on board, I think it's only a matter of time before Low & Bonar makes a turnaround. But if this company does not look attractive to you, I highly reccomend that you check out the business is profiled in this free report from the Motley Fool.
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Rupert Hargreaves owns shares in Low & Bonar. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.