Poor results from Codan (ASX: CDA) have seen its share price plunge nearly 80% since a profit downgrade in June last year, while The Reject Shop (ASX: TRS) is down nearly 50% since January after its half-year trading update saw major shareholders sell out. Lynas Corporation (ASX: LYC) returns again for the third week running as shareholders twig to the unsustainability of its current operations.
Codan is currently trading around $0.615, down about 83% in the last year.
All four of Codan’s revenue streams for the December half of 2013 were significantly lower than the same half in 2012 and shareholders have abandoned the company in droves, sending its share price spiraling downwards. Codan’s profit margins have also shrunk as a result of fewer sales of high-margin gold detection equipment, which was itself caused by weaker demand.
Codan has maintained its investment levels in new products in order to bring new products to market quicker, but I don’t know if that will be enough to turn this company’s fortunes around. Gold demand looks likely to remain subdued for the foreseeable future, particularly as global production rises and U.S. quantitative easing winds down (the price of gold often rises during periods of loose monetary policy).
I was also concerned by a line in the half-yearly accounts regarding a rise in Codan’s total borrowings: “The payment of the final dividend and tax liabilities from the record FY13 year were major contributors to the increase in borrowings.”
I would hope this doesn’t mean that Codan is paying its dividends with debt; particularly given its financial future is considerably less glossy than it was 18 months ago. Bearing all this I mind, I recommend investors steer clear of this company for the moment.
The Reject Shop
The Reject Shop is trading around $8.95, down about 45% in the last year.
Despite growing revenue by 17.7% in the first half of last year, The Reject Shop disappointed investors with flat comparable store sales and a net profit attributable to members figure that was down 15.9% on the prior corresponding period (almost entirely due to a $2 million insurance payout and increased costs associated with new store openings).
Major shareholders responded by jumping ship en masse, with Australian Super, Swiss bank UBS AG, and Commonwealth Bank of Australia completely selling out. All in all it looks like around 15% of The Reject Shop’s shares were sold in a short space of time, which is no doubt responsible for the plummet in share price. Curiously, Commonwealth Bank and UBS only became substantial holders mere days before the negative trading update, which leads me to believe they were expecting much better results than were announced.
I suspect that UBS and Commonwealth both lost considerable chunks of money during their short tenure as shareholders, and ultimately their actions created opportunities for fund managers Clime Investment Management to jump on board with a 5.38% share in the company, and Westpac subsidiary BT Super to increase its stake by 1.2% to 9.99%. Shrewd retail investors also have a golden opportunity to get in on the action, because The Reject Shop’s results were nowhere near as disappointing as a 47% drop in share price would indicate.
Lynas Corporation’s stock is trading at $0.18, down 69% in the last year.
Lynas has dropped another 25% in the last two weeks as investors pull their money out of the stock. Those who are still holding may want to look at doing the same within the next month or so — if not immediately — because any loss is better than a total loss. For a full overview of the woes plaguing Lynas Corporation, see Mike King’s recent article, “Is Lynas Corporation peering into the abyss?“.
Codan and Lynas are companies to avoid for the time being, but investors would do well to add The Reject Shop to their watchlist. Future store margins and sales results will be crucial to the its success, and a falling Australian dollar has the potential to eat into profits, but if you are a believer in the business I very much doubt if you will see a better time or price to buy into The Reject Shop.
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