Pace shares fall amid ongoing supply woes

Shares in Pace lost nearly a quarter of their value on Thursday after the set-top box manufacturer warned that up to $50m (£31.7m) could be wiped from operating profits next year by the floods in northern Thailand, which have disrupted supplies of hard-disk drives.

Operating profits are expected to be just $141m this year, on revenues of about $2.3bn. This is down from the already lower $150m-$170m the group had forecast earlier this year. The impact of the Thai floods is expected to be about $9.5m this year.

Pace warned that the disruption could wipe $35m to $50m off operating profit in 2012. Even without the Thai disaster, margins would fall from 8 per cent to 7 per cent because of increased competition in North America from Motorola.

Net debt at the year end is expected to widen to $320m-$330m from £200.7m at the end of 2010, but Pace said it would remain within its banking covenants.

Neil Gaydon, chief executive, said Pace would re­organise its European business following a strategic review by Allan Leighton, who took over as chairman this summer. The reorganisation will mean an exceptional charge of $12m.

“This situation will be fixed,” said Mr Gaydon. “But if you look beyond the immediate supply chain issue the market for set-top boxes is good.” He said margins would rise to 9 per cent within two to three years, as Pace moved to providing software and services for set-top boxes, as well as just shipping the hardware.

Shares in Pace, which have lost more than 76 per cent of their value after a series of profit warnings this year, closed down 14.75p at 45.55p.

● FT Comment

Natural disasters aside, the fundamental question for Pace investors is whether they think the set-top box market has a future. If investors believe that in a few years people will mainly get their entertainment over the internet through services such as Netflix, Google and Apple, then Pace is doomed. If, on the other hand, they believe that pay-TV broadcasters such as Sky will continue to provide set-top boxes and monthly service packages to homes, then Pace is well placed and looks cheap. It is trading at about 4 times next year’s estimated earnings, far below the rest of the sector. Take-up for Google and Apple TV so far has been slow, so Pace does not look to be in immediate danger.

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