Legal services outsourcer Fairpoint (FRP:AIM) looks to be at the mercy of its lenders after a profit warning brought year-to-date share price losses near to 90%.
A cheekily timed profit warning just before the close on Friday is to blame and shares trade 11% lower at 18p today on top of heavy losses late on Friday.
Earning are weak across its key divisions and the business owed £16m to Allied Irish Bank at 30 June 2016.
Fairpoint is now valued at £8m even though it has splashed at least £20m of shareholder cash on acquisitions over the past two-and-a-half years. Just over a year ago the business was valued at around £100m.
TRADING TROUBLE
Fairpoint’s 9 December trading update confirms trading is weak across the group.
In debt services, cost-cutting measures are not delivering as quickly as expected. Consumer legal services revenues dropped off in November and December also started badly.
Profit for the year to 31 December 2016 will be ‘materially below expectations’ as a result, says chief executive Chris Moat. Prior to the trading update, analysts estimated earnings per share at 14p.
DEBT PROBLEM
The true extent of the damage to earnings at Fairpoint will be more apparent when full-year results are reported early in 2016. Now a distressed business, Fairpoint's £16m of net debt via loans from Allied Irish Bank becomes an issue.
Shareholders may be asked to provide more capital though a successful equity raise would require more clarity around what value can be salvaged from the remains of Fairpoint's different businesses.
TOUGH TIMES
Fairpoint’s traditional business model has been to provide debt management plans and individual voluntary arrangement (IVA) services to customers with debt problems.
Facing a slowdown in the debt services market, partly because of increased regulatory and compliance costs, Fairpoint tried to diversify into consumer legal services via acquisitions including a £15m deal for Simpson Millar.
A surprise government crackdown on whiplash personal injury claims announced in late 2015 means the outlook in consumer legal services is now also tough.
Shares previously warned of risks to Fairpoint’s business model after the government announced changes to whiplash claims when shares traded at around 160p. However, we turned bullish on the stock too early at 85p in September this year.
