Citigroup downgrades Essentra after profit warning

Citigroup downgraded Essentra to ‘neutral’ from ‘buy’ and cut the price target to 430p from 500p following the company’s third profit warning in the space of a year on Monday.

The maker of cigarette filters and plastic packaging cautioned that it expects profit to be below expectations due to operational issues at its health and personal care packaging unit.

For the 2016 calendar year, it expects operating profit to be at the bottom of or modestly below its previous guidance of £137m-£142m. The company said that due to continuing operational issues in the Health & Personal Care Packaging unit, there was a further “significant” decline in revenue and profitability during the last two months of 2016, and there is no expectation of a near-term improvement in 2017.

Citigroup cut its earnings per share forecast for FY16 by 4%, for FY17 by 22% and FY18 by 21% as it incorporates further margin erosion. The bank now expects profit to drop to £12.9m in the second half of 2016 from £22.1m in the first half.

Citi said that in FY17, further measures will need to be taken to stabilise costs at underperforming sites and improve service levels to re-ignite sales. While these measures are being taken, it expects H&PC margins will remain depressed, declining to 6.5% in FY17 from 13.6% in FY15.”

“Following successive earnings downgrades in 2016, the shares are trading at a steep valuation discount to both historic averages and the broader FTSE 250.

"Despite the valuation support, Essentra is experiencing operational challenges, which we assume will limit earnings recovery in FY17e. We do not expect near-term catalysts to emerge until the company re-defines its strategic direction under new CEO, Paul Forman, who began 1 January 2017.”

At 1100 GMT, the shares were down 3.2% to 420.10p.