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High pound also impacts Renishaw and GlaxoSmithKline

Following on from my blog post a couple of days ago about the high pound impacting the profits of technology companies, yesterday saw final results from Renishaw (RSW) and interims from GlaxoSmithKline (GSK) which reflected the same issue. However, the currency impact in both companies was not the main impact on the subsequent share price move.

At Renishaw, profits would have been £6.8m higher on top of an “adjusted” figure of £70.1m for the year, but for the currency impact. Last years corresponding figure was £79.2m, so underlying profits fell sharply and more than accounted for by the currency impact.  Did the share price fall on these dismal results? No the share price actually rose 23% on the day of the announcement. Allegedly this was because of a very good fourth quarter which resulted in the adjusted e.p.s. being ahead of forecast. The company also reported an exceptional profit of £26.3m on its holding of Delcam shares which was the subject of a takeover bid during the year. This made the overall, statutory, results look good of course.

At GSK, turnover declined on a “constant exchange rate”  (CER) basis by 4%, but declined 13% at real exchange rates. Core (i.e. “adjusted”) earnings per share was down 12% at CER but 25% at actual rates. This appears to be mainly down to below budget sales of Advair – not yet replaced by new drug Breo.

The company put the usual positive spin on the numbers – a good pipeline of new products, expect to maintain leadership in respiratory products, etc, but the negative exchange rate move has put a stop to more share buy backs as cash flow is not as high as expected. In addition the company plans to dispose of some older products – which suggests more downsizing to follow on from disposal of some of their OTC products. The share price declined 5% on the day of the announcement, but had also been in decline for the last few weeks. The looming threat of legal action over bribery in China does not help of course, plus general pricing pressure in markets such as the USA. Earnings seem likely to be flat as against the previous year at best.

Comment on GSK: It’s a case of two steps forward, one step back in the long term recovery of GSK. If they continue to underperform despite claiming to have a great drug pipeline, they may end up with a bid if they are not careful, like AstraZeneca. Getting a clear picture of the financials and prospects is of course difficult because of the numerous “adjustments” to the accounts. This half year included £101m of restructuring costs and £47m of legal costs which were treated as “exceptionals”.  Like SSE I have commented on recently, GSK are serial offenders in presenting their figures in the best light possible, but with repeated exceptionals, the story becomes both repetitive and unjustified.

Roger Lawson

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