Shares in home care and personal care products manufacturer Pental Ltd (ASX: PTL) have sunk 19% following the company issuing a first half trading update in yesterday's trading session.
The company announced that net sales for the first half of the 2018 financial year are forecast to decline to approximately $38.4 million compared to the $41.7 million earned for the first half of the 2017 financial year.
EBITDA is also expected to decrease to around $3.5 million versus the $4.9 million recorded in the prior period. The forecast for net profit after tax was also slashed to approximately $1.2 million, well down on the $2.3 million made during the prior period.
The company attributed the slump in domestic sales to new competitors entering its markets which has resulted in pricing pressure for its various products.
The company is responding with increased investment in marketing initiatives, price matches, and promotional activity to defend its market share in an increasingly difficult retail environment.
Pental also announced it is undertaking new product development and attempting to expand sales in Asia via new commercial and industrial channels to diversify the company's revenue streams.
In 2017, 81% of Pental's sales were in Australia, 18% in New Zealand and only 1% ($1.8 million) in Asia. Consequently, the company would need to significantly increase its sales in Asia to make up for the shortfall in the Australian market to have a material impact on its bottom line.
Foolish takeaway
Pental's share price dropped 17% yesterday after the disappointing trading update hitting a 52-week low of 48.5 cents. It currently trades at a 6.5% dividend yield with a high dividend payout ratio of 76%. Yesterday's announcement of a 48% drop in forecast net profit is likely to lead to a dividend cut in 2018.
The company does maintain a strong balance sheet with no debt and approximately $11.6 million in cash at year end. There is some potential in the Asia story, but near term investors may want to look elsewhere as the company struggles in an increasingly competitive market with falling prices and shrinking margins.
