Worrying cracks in Forge's credibility. STEPHEN BARTHOLOMEUSZ BUSINESS SPECTATOR JANUARY 30, 2014 12:00AM
ONCE is happenstance, twice perhaps a coincidence. But three times?
Yesterday's latest earnings downgrade from Forge Group shreds its credibility.
In November and this month, Forge disclosed earnings writedowns associated with two West Australian power projects: $127 million in November and $23m-$28m more two weeks ago.
Forge weathered those writedowns with the forbearance of its bank, ANZ. The bank waived covenants on its loan facilities, expanded the group's working capital facility and, in exchange, was issued with warrants that, if exercised, would give it about 13 per cent of the former market darling.
Forge's share price took a hammering last year in line with the downturn in the engineering and construction sector. It was hit even harder as problems with the power projects surfaced.
But the fact that the two earlier downgrades were confined to those power projects, which Forge chief executive David Simpson had inherited, provided some comfort that the larger group was holding up quite well in a difficult environment.
After the second downgrade, there was a question of whether the current management had a proper handle on the depth of the issues within the two projects. But at least the problems appeared to be isolated.
Forge, after revising its guidance for 2013-14 earnings before interest, tax, depreciation and amortisation down to between $45m and $50m a fortnight ago, now says it expects an EBITDA loss of between $20m and $25m.
It blamed the further deterioration in its outlook on a number of "one-off and macro factors".
Those factors included the necessity of focusing on cashflow generation, which had impacted on margins on some contracts and resulted in the settlement
of some commercial claims against it.
Two contracts within its Pilbara Logistics joint venture were incurring cost pressures and were now expected to be unprofitable.
It said that domestic market conditions remained challenging, with increased cost and margin pressures.
That losses are emerging from sources other than the power projects and that "macro conditions" have somehow deteriorated since the last trading update two weeks ago have really damaged Forge's credibility.
The only mildly positive aspect of yesterday's announcement is that Forge says it still has ANZ's support and that it has received approaches from a number of parties.
It has appointed advisers to "manage" those approaches.
Forge says it will shortly lodge a notice of meeting to renew its 15 per cent annual placement capacity, which would enable it to issue shares up to that level without prior shareholder approval.
That may indicate that Forge is considering introducing a strategic shareholder to its register to inject capital and reduce its reliance on (and vulnerability to) ANZ Bank.
As Forge said today, ANZ's support was enabling it to operate on a "business as usual" basis.
Had it not been for Forge's comments about the interest from third parties and ANZ's continued support it could have faced another bloodbath in the market yesterday.
The prospect of takeover activity or a third-party recapitalisation provides the possibility of a more stable future or an exit on better terms for existing shareholders.
Forge does have a $1.5 billion order book and a meaningful asset-management business.
After three writedowns in less than three months, anyone kicking its tyres would probably think it unlikely that any further losses of significance would emerge.
Shareholders might have also held that view a fortnight ago.
Stephen Bartholomeusz is a columnist for Business Spectator. Visit businessspectator.com.a
FGE Price at posting:
82.0¢ Sentiment: None Disclosure: Not Held
