The latest write down brings the combined FY 2014 profit write down to $150 million (approx.). Given the original size of these two projects, these are significant overruns in the 2 year period since Forge acquired CTEC. Investors will naturally now question whether these guys know what they are doing and how much other execution risk is in their books - given the giver nature of their business, ranging from asset management in the US to building power stations in the Pilbara, who really knows ?
What we do know is that having had circa $100 million in cash at June 30, FGE now has no cash and has increased its borrowings. The company now has a total pipeline of $1.5 billion, down $300 million from its November update, and a FY2014 delivery schedule of $600m, down from $900 million in November. I don't know where the $300 m fall came from but it appears to have moved into the tender pipeline. It just continues the company's track record of minimal disclosure. Obviously more detail will be revealed when we see the half year accounts.
Based on a previously mentioned net asset position of $213 m at June 2013, the profit write down of $150 m puts a big dent in this, albeit not paying a dividend provides some add back (up to $18 million based on initial 2014 profit expectations), but this may be offset by a goodwill write down. The announced cost savings also help.
The company also mentioned the tough and tight conditions they are witnessing. They are also probably being a lot more conservative when tendering for deals, a natural reaction from their board and lenders when you have big write downs. This means that the combination of internal and external factors will make it harder to restore the 2015 profit to the 2013 record level of $61 million. It doesn't mean disaster for FGE, just greater challenges and a longer time to repair the balance sheet.
I still believe FGE need to undertake some form of capital raising, to which my comments will no doubt be howled at by all the FGE bulls. Sorry for trying to help by providing unbiased analysis.
To the credit of FGE management, they are saying less in the hope of restoring the share price and to buy some time for the performing parts of their businesses to generate the expected profits. The problem with this is that the lack of disclosure makes large institutional investors uneasy in committing to a capital raise if it is needed.
The biggest risk is that they suffer another blow from one of their projects and it proves to be mortal, whereby the banks cap their support and there is no possibility of raising capital, thereby generating a Hastie type outcome. I still think this is very low risk, but in the desire to protect existing shareholders from a dilutive capital raising soon, the FGE directors are taking a very big risk that they won't see further profit write downs and the banks will provide long-term support for their now weakened balance sheet.
To all players in FGE, keep your eyes wide open, your positions manageable and your expectations realistic. Good luck to all ! .
FGE Price at posting:
$1.08 Sentiment: ST Sell Disclosure: Not Held
