Pace drops as plant closure takes toll on profits

Shares in FTSE 250 set-top box manufacturer Pace slumped 17% on Thursday after the group confirmed that full-year profits will be well under previous estimates due to the problems arising from a plant closure in Thailand.

The firm now expects full-year operating profit to be $141m, down from previous predictions of $150-170m, however, it did warn back in October that this initial forecast would not be met.

US software firm Western Digital was forced to suspend production at its Thai factory last month as a result of severe flooding, causing "Hard Disk Drive (HDD) supply issues" for Pace. These issues have resulted in a $9.5m adverse impact to operating profits this year.

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Furthermore, due to the reorganisation of the Pace Europe business which is current underway, the firm will realise a one-off charge of $12m this year. The restructuring is expected to save around $7m a year.

Revenues will be around $2.3bn in 2011, still higher than the £1.33bn ($2.10bn) reported last year. Due to the impact to cash through lost profit and higher working capital, however, net debt is expected to rise to $320-330m this year, up from £200.7m ($316m).

In regards to 2012, Pace expects the operating margin to be 7% (down from the earlier 8% estimate) and revenues will be flat, even before the impact of HDD supply issues, which are expected to have a $35-50m impact on operating profits, the majority of which will fall in the first half.

As a result of the strategic review which began in May, the group thinks that an operating margin of up to 9% is a realistic medium-term objective. However, Peel Hunt analyst Alex Jarvis said today: "we enter 2012 facing a tough H1 and believe it will be at least another 12 months before the new margin target looks credible."

By 12:57, shares were trading 17.33% lower at 49.85p. The price has now declined some 46% over the last month.

BC