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KleenAir Systems (KSI.L) - profit warning
KSI.L
Comment by Objective Capital , May 27, 2008
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On 12 May 2008 KleenAir Systems warned in its AGM statement that its full-year results will be lower than current market forecasts, as sales have taken longer to come through than expected due to delay in the commencement of the London Low Emission Zone.
It further added it was adversely impacted due to the recent weakness of the pound.
Objective's view:
A profit warning coming four months after our initiation note, four months after a capital increase, and three months after the commencement of the London LEZ is a big disappointment.
The London LEZ certainly is not a shining example of local government planning and implementation but neither is it atypical. Poor planning, delays, and confusion as to meaning are part and parcel of such schemes.
There have certainly been problems: an 11th hour exemption for many engines previously thought to be non-compliant has reduced the size of the first phase, i.e. HGVs over 12.5 tonnes. This was however known when the 2007 results were published on 31 March. There have also been delays caused by vehicle owners leaving it to the last minute to order abatement equipment and that has undoubtedly been damaging for KleenAir.
In the Chairman’s statement, issued when results for the year to 30 September 2007 were released on 31 March 2008, the delays were mentioned as was the change in the exemptions. However, the statement went on to say that shipments had begun in October, that the company was ramping up shipments to complete the first phase and that it was commencing shipments for the second phase of the programme. It went on to say that the current level of shipments was equivalent to a market share of 8% which was within the range of the company’s expectations. Other delays such as the delay in obtaining certification were due to late submission of product and a backlog in testing facilities but this was known in September last year and should have had little bearing on this profit warning.
In our Initiation report, published in January 2008, we based our forecasts on extensive discussions with management and with other market participants. We pointed out key risks associated with the lack of their own IP and the dependence on a single supplier, DCL, without an exclusivity agreement.
The statement accompanying the AGM contains little by way of explanation for the warning. However it seems clear that the sales team was unable to convert expressions of interest at the rate anticipated. That may have been because KleenAir’s supplier, DCL, let them down and supplied filters to the Dutch market instead and possibly because of the shifting sands at TfL. Key members of the sales team left the company in February and March but have been replaced.
The problem with the market created by the LEZ is that it is time sensitive, once the compliance deadline is passed business dries up until the next phase, so orders lost are not likely to be regained. Management believes that any slippage is probably about six months but there is a risk that it is more than that. The warning also mentions currency having an adverse impact. The company’s main currency exposure is to supplies from DCL in Canada. The Canadian dollar has appreciated against sterling in the course of the last year but the entire move took place prior to the end of 2007. The GBP/CAD rate is the same today as it was on 2 January 2008.
The company has at least mitigated the risk of dependence on a single source of supply by concluding an agreement with a German supplier but again KleenAir will not be an exclusive distributor in the UK. There will still be potential currency risk.
The market will expect considerable clarity and reassurance when the interim statement is produced. No date has yet been announced but, according to AIM rules, it must be made on or before June 30th.
