Industrial products supplier Coventry Group Ltd (ASX: CYG) has seen its share price hammered down 17% by lunchtime today, after yesterday's trading update.
So much for the company's plan on paying five dividends between July 2014 and August 2015. And the cancellation of the share buyback in mid-January also hasn't helped.
But yesterday's announcement clearly shows a company struggling to make a profit. From four businesses, Coventry will now have two divisions, Konnect/Artia and Coopers. The 75%-owned AA Gaskets will continue to be managed as an investment. The company is divesting its IT solutions business MSS, which is currently losing money.
Coventry plans to close its Sydney and Adelaide distribution centres and has engaged external consultants to perform a thorough review of its distribution network. Annual operating costs are expected to fall by around $4 million within two years as a result.
The company is also cutting 100 positions from its 680 staff to further cut costs by around $7 million each year. As a result of the above changes, Coventry is likely to face one-off costs of between $6 and $7 million.
In a good move for shareholders, the company has abandoned its previous strategy of making acquisitions, in favour of restoring its existing business to profitability.
If you're wondering why Coventry has found itself in this position it's because many clients operate in the resources sector. As the downturn intensifies, competition has increased in the fasteners business while volumes are being impacted in Copper Fluid Systems.
As we've seen with Bradken Limited (ASX: BKN) and Coffey International Ltd (ASX: COF) recently, the downturn in mining investment and falling commodity prices is forcing miners to severely taper their spending. That means any company that relies on the sector for revenue is going to be hit, including companies like Coventry.
And that's one reason why I'm avoiding the sector. With better ideas like the one below, there's no need to take the risk.
