Has the market overreacted after Luceco delivers another profit warning? (LUCE)

By Patricia Miller

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A month ago, I highlighted the big drop in share price of LED lighting manufacturer Luceco (LSE:LUCE). The shares had hit 59p, and subsequently bounced to 90p, a 50% rise within a week. A profit warning and admission of error in calculating inventory values had come just weeks after CEO John Hornby sold £4.69m of stock at £2.34. In a trading update yesterday, the company has delivered a further double whammy of disappointing news.

Firstly, Luceco now anticipates reporting 2018 profit after tax will be in the range of £12.0-14.5m. The company blames the fact that trading conditions ‘have remained difficult in our UK consumer facing business, as a result of well publicised weak consumer confidence and a weaker dollar.’

On a more positive note, the company points out that this only affects their UK consumer business which currently accounts for approximately 25% of group revenue. But this offers little comfort when you read more of the update and discover yet another error in reported profit for 2017 It has been downgraded further from £13.2m to £11m.  Don’t forget original market expectations prior to the calamitous December update were £16.7m.

The market is clearly not impressed, with the share price plummeting to a new low of 46p today.

Could this be an opportunity?

If all the bad news is out, this could well offer up a decent value play. At 48p the company appears significantly undervalued with a Market Cap of just £78m. That’s a P/E of 7 based on 2017 profit, and a forward p/e of less than 6 for 2018!

The risk is of course further disappointing news or errors, but are things as bad as they seem?

Hornby commented: ‘”I am extremely disappointed by these developments. However, most parts of the business continue to grow strongly, highlighting the benefits of our long-term diversification strategy.  Our margin mitigating actions outlined in our December update are on track to deliver the expected margin improvement during H2 2018.”

Providing a company is generating profit and has no immediate requirements for funding there is little reason for them to be concerned about day-to-day share prices movements. However, every shareholder who bought in the Secondary Market must be holding a losing position at the moment, and that’s in stark contrast to a director having just sold stock at near record highs.

In fact, Luceco shares are now available at a staggering 80% discount to the price the CEO sold at around 3 months ago. It’s going to likely require a continuous flow of positive news to reverse sentiment here after such a run of disappointment, perhaps a director share buy would be a good start?

Chart-wise, 46p offers some level of support based on the current suggested price channel, and the Relative Strength Index (RSI) is screaming oversold. Even a doubling of the current share price to 98p would only equate to a P/E of 14 based on the most recent quoted profit figures for 2017, but investor faith will need to be restored.

Author: Stuart Langelaan

Disclosure: The author of this piece owns shares in the company written about above

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This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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