Senior slumps as Peel Hunt downgrades on FX headwind

Senior was under the cosh on Thursday as Peel Hunt downgraded the stock to 'reduce' from 'hold' saying a recovery in sterling could be a headwind.

Peel noted the shares have risen over the summer, recovering much of their losses from over the previous two years and said the wave of aerospace M&A activity is likely to inflate sector multiples. However, it highlighted the fact that Senior is a big dollar earner and said the sharp recovery in sterling poses a potential headwind for next year.

Peel pointed out that nearly 60% of group revenues are generated in the US, so the translation impact for a 10 cent movement in the US dollar is £4m at the pre-tax profit level.

"We believe it is prudent to take profits until the momentum in key Flexonics end markets and the extent of sterling recovery become clearer."

The average exchange rate in the first half was $1.27 and Peel Hunt has a full-year average rate of $1.25 this year and next. If the current spot of $1.35 prevails, it expects a £2m headwind in the second half and a £4m headwind next year, versus its current forecasts.

The brokerage cut its FY2017 pre-tax profit estimate by £1m to £68m and its earnings per share estimate by 1% to 13p.

"Although there is a modest shift in the divisional mix, as we no longer anticipate a material improvement in the Flexonics margin in H2, the net PBT reduction largely reflects a £2m increase in central costs, offset by a £1m reduction in net interest."

At 1440 BST, the shares were down 4.6% to 259.40p.