Having issued a profit warning after Friday's (19 Apr) market close, the implications of this setback are now being felt in Albemarle & Bond's (ABM:AIM) share price. Investors have headed for the door, dragging the pawnbroker down 30% to 130p.

 

This month's sharp fall in the gold price is the key reason behind the problems so let's look at how closely the shares track the price of the precious metal.

 

Here's the 10-year chart which shows how Albemarle tracked the stellar rise in the gold price to its peak in 2011.

 

10yABM - Comparison Line Chart (Rebased to first)

 

The past decade has seen a monumental rise in the gold price. The metal went from $258 per ounce in February 2011 to $1,898 per ounce in September 2011. This was a significant business catalyst for Albemarle as consumers capitalised on the price strength by selling jewellery to the pawnbroker, which then re-sold at a greater value.

 

Albemarle's share price was highly leveraged to the gold price rise, peaking at 397.25p in July 2011, a mere two months before the metal price hit its ceiling. Sadly for Albemarle shareholders, the share price has subsequently fallen much faster than the gold price.

 

 USEABM - Comparison Line Chart (Rebased to first)

 

The above chart shows the past three years' performance. While gold only experienced marginal movement during late 2011 and all of 2012, the pawnbroker saw a massive sell-off. Key to this event was a change in market activity.

 

The rise in the gold price triggered massive competition among gold buying in the consumer space. In addition to pawnbrokers seeking to make a turn on jewellery was the proliferation of new companies taking stalls in shopping malls to buy gold from consumers.

 

The market got too crowded and the likes of Albemarle saw a large decline in gold-related income (beyond simply the reduction in the metal price).

 

6mABM - Comparison Line Chart (Rebased to first)

 

This chart shows the past three months' activity. The pawnbroker immediately took a nose-dive amid this month's gold price slump, yet Friday night's profit warning has now taken the share to below 2008's trough level when all stockmarkets experienced a massive sell-off as global economies crumbled.

 

So where does that leave the business going forward? The chief executive officer (CEO), Barry Stevenson, has suddenly departed on the back of the profit warning. Previous CEO and current non-executive chairman, Greville Nichols, will assume control through an executive chairman role while the company looks for a permanent CEO.

 

Stockbroker N+1 Singer has downgraded its pre-tax profit forecast for the current financial year by 15% to £14 million. The price target has gone from 238p to 198p, but it still maintains a 'buy' rating. It says: 'We continue to believe that there is underlying value in the pawnbroking model despite short-term profit volatility.'

 

Future earnings forecasts have also been reduced. The broker has cut 2014 pre-tax profit by 27% to £13.7 million and 2015's numbers by 19% to £15.7 million. It has rebased the dividend so it is twice covered by forecast earnings per share. It expects 10.3p per share this year, putting the shares on a prospective 7.9% yield. Next year's dividend is forecast to be much less at 7.9p; and 2015 even less at 6p per share.

 

Stockbroker Numis says it prefers H&T (HAT:AIM) in the pawnbroking space, calling it a 'better managed, more conservatively forecasted business.' It is worth noting, however, that Numis is the house broker to H&T, so such a positive recommendation could be seen as slightly biased.


Issue Date: 22 Apr 2013