Here’s why the Programmed Maintenance Services Limited share price soared today

Programmed Maintenance Services Limited (ASX: PRG) saw its share price zoom more than 10% higher to $1.62, after the diversified services group reported a 24.5% increase in underlying net profit.

However, the company was forced to take a $102.4 million dollar impairment on its Marine division thanks to the big fall in oil prices. Another $34 million in integration expenses for its acquisition of Skilled Group and various other one-off items saw Programmed report a statutory loss of $98 million for the 12 months ending March 2016 (FY16).

Underlying earnings per share (EPS) were 21.8 cents, which equates to a current P/E ratio of ~7.5x – hardly expensive. And a fully franked dividend of 11.5 cents for the full year represents a yield of 7.1%.

However, Programmed is considering underwriting its dividend reinvestment plan (DRP), which essentially is handing out cash to shareholders with one hand and taking it back with the other. It means that the underwriter will pay Programmed as if every shareholder opts in to the DRP and receive shares effectively diluting existing shareholders. For the company, it means no net outflow of cash.

Looking out to FY17, Programmed is forecasting earnings before interest, tax, depreciation and amortisation (EBITDA) of between $120 and $130 million, excluding one-off (or non-trading as the company calls them) items.

Programmed’s divisional performance was as follows…

Revenues EBITA Margin
Staffing 896.7 21.7 2.4%
Maintenance 960.5 41.1 4.3%
Marine 348.8 18.3 5.2%
Other 3 -15.6
Total 2209 65.5

Source: Company reports

Like other services companies including Spotless Group Holdings Ltd (ASX: SPO) and Broadspectrum Ltd (ASX: BRS) – formerly Transfield Services, Programmed benefits from increasing in size and scale, which should allow the company to grow its margins over time – particularly after the acquisition of Skilled Group.

Foolish takeaway

Despite the promise, Programmed operates in a tough industry with skinny margins and one troublesome project that runs over budget can turn a profit into a loss in a relatively short period. With substantial net debt of $239 million ($406 million market cap), Programmed is not that attractive – although other investors certainly appear to think so today.

3 Blue Chips that are better bets than Programmed Maintenance

Discover The Motley Fool's top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the very real prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.