The market may be mulling the positive implications for the falling Australian dollar, but Netcomm’s (NTC) profit warning this morning shows the exchange rate is a double-edged sword.
The wireless equipment maker cut its 2012-13 earnings before interest, tax, depreciation and amortisation (EBITDA) forecast by a third to $800,000, blaming the 6% drop in the local currency to around 91 US cents for the disappointing news.
“This deteriorating exchange rate, gives rise to a non-cash, unrealised foreign exchange loss on revaluating the company’s US$ denominated borrowings,” said Netcomm.
It was only a month ago that the company said EBITDA for the full year would come in at $1.2 million.
While the profit warning shouldn’t be a shock given that it is the season for downgrades with a string of companies coming out to lower investors’ expectations this month, the bad news from Netcomm will still be jarring to shareholders for a number of reasons.
Firstly, shareholders had only just rallied strongly behind Netcomm’s recent $700,000 capital raising, which was heavily oversubscribed. Investors tipped in $1.2 million to buy new shares at 25.5 cents a pop and those impacted by the scale back could well be counting their blessings.
The other issue is that Netcomm is developing a bit of a track record when it comes to profit warnings due largely to the lumpy nature of its sales contracts.
This is why Netcomm is trying to reposition itself into the machine-to-machine (M2M) space, which includes contactless payment systems and smart electricity metres, as orders for M2M components are more predictable and consistent.
However, given that Netcomm is at a transition point (it is promising a turnaround this financial year) and has wooed shareholders to help fund the move, investors would be particularly sensitive to anything that would shake confidence in the company.
The relatively illiquid stock has not traded this morning but last closed at 25.5 cents on Friday.