Warning bell sounded at Low & Bonar

Low & Bonar had a great first half, posting sharp increases in both first-half sales, margins and profits, and the specialist materials group looked odds-on to hit full-year numbers. New chief executive Brett Simpson, who takes over on Monday, must have been licking his lips. But less than two months later the mood has soured and the share price has plunged as much as 18% to its lowest in over a year. So what's gone wrong?

In one word: Europe. Demand has dropped across the company's European civil engineering markets, which makes up about a quarter of group sales. Management blamed a slowdown in construction activity and the ongoing economic and geopolitical problems in the region.

But the writing was on the wall back in July. Then, the firm warned that demand for its products in commercial building applications remained subdued in Europe, although the problem was perhaps masked by a US building boom and by the £16 million acquisition of Texiplast - a Slovakian producer of soil reinforcement and erosion control products - which on its own was responsible for two-thirds of the 14% increase in half-year civil engineering sales.

Like-for-like sales at the division - up 4% in the first half - are now only expected to be flat for the full-year. Low & Bonar has also previously flagged up slower than expected order intake at its civil engineering joint venture in Saudi Arabia. It's now expected to lose at least £1 million this year.

And there's the inevitable impact on profits. Annual profit could be no more than last year at £25.3 million, and likely no better than £26.5 million, far less than expected.

For now, the shares have found technical support at around 66.5p. If Europe picks up, the shares might begin to look cheap again. Shareholders will be praying ECB President Mario Draghi's asset-buying splurge will do the trick. Even if it does, the benefits will take time to filter through.

Analysts at N+1 Singer now pencil in full-year adjusted pre-tax profit of £25.3 million, as guided, giving adjusted earnings per share (EPS) of 5.4p. They’re still hopeful that next year the firm will do £29.8 million and 6.5, respectively. That puts L&B shares on a forward price/earnings (PE) ratio of more than 12 for 2014, dropping to 10.2 for next year.

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