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Here’s why Hills Ltd plunged 20% today

Shares of small-cap communications and electronics company, Hills Ltd (ASX: HIL), fell as much as 26% this morning following a market sensitive announcement, before recovering to trade 18% lower.

After recently divesting away from its troubled steel-making businesses, Hills started a transformation in an attempt to become a leader in electronic communications, security, healthcare and audio visual services.

However, the transition has been anything but smooth. After reporting a strong 2014 result, the company plunged 32% in a single day of trading when it reported a steep fall in half-year profit earlier this year.

At the time it attributed the weaker results to downward pressure on the Australian dollar and poor trading conditions. However it predicted a full-year net profit of between $18.5 million and $19.5 million (which would’ve been down from 2014’s $27.3 million in underlying net profit).

However Hills said in its ASX announcement today that it expects full year net profit after tax (NPAT) attributable to owners to be in the range of $11 million to $14 million.

The mid-point of that guidance implies a whopping 54% fall in profit, year-over-year.

The company said it did not expect the usual pick-up in fourth quarter sales and has not been able to overcome margin pressure following the significant declines in the Australian dollar (AUDUSD).

In response to the falls, the company is focused on reducing group overheads with non-executive directors receiving a 20% wage reduction from 1 May 2015.

Despite the reduction in forecasts; Hills said it remains conservatively geared and continues to evaluate acquisitions. In this respect it also stated that it “has incurred and continues to incur certain due diligence and related costs on completed and potential acquisitions.” These costs are not included in the group’s underlying profit figures which it uses to provide profit guidance.

Should you buy Hills shares?

Personally, I was quite bullish on Hills’ transformation away from its capital intensive steel business. However the profit downgrades brought about by both internal and external challenges have caught me off guard.

Whilst they could arguably be better value now than they were a year ago, I’m holding off buying Hills shares, for now.

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Motley Fool contributor Owen Raskiewicz has no position in any stocks mentioned. Owen welcomes your feedback on Google plus (see below) or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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