Troubled Perth-based engineering group Forge Group (FGE) has put itself up for sale, as it has confirmed a worsening financial state with a loss of up to $25 million for the year to June because of huge losses on two dud power station contracts in Queensland and NSW.
After weeks of speculation, huge rises and then falls in the group’s share price, the company came out of a trading halt yesterday to reveal that it had ‘hardened‘ up its 2013-14 performance estimate.
As a result, instead of reporting earnings before interest, tax, depreciation and amortisation of between $45 and $50 million, the estimate was now a loss of $20 to $25 million. That’s a turnaround (into losses) of up to $75 million.
The operating loss will probably be over $150 million because of the costs associated with writing down the value of the dud contracts and the losses taken under them by Forge.
As a result, the company said it has appointed Euroz Securities to handle third party interest in bids for the group.
"Following a number of approaches by various third parties, the Board of Forge Group has appointed Euroz Securities Limited as corporate advisors to formally manage these approaches," Forge told the market.
"This appointment will ensure Forge Group’s management team is focused on managing the operations of the business and delivering current projects in a timely and cost effective manner."
And to cover the possibility of any interested party wanting to cement the relationship, Forge said it plans to renew its rules that allow for a 15% share placement without prior shareholder approval. Shareholders though need to give that the greenlight, which might be the opportunity for CEO Mr Simpson and the board to be given a roasting over the company’s problems.
“The Company will also be shortly lodging a notice of meeting to renew its 15 per cent annual placement capacity, as set out in ASX Listing Rule 7.1. This is a prudent measure to take into account the current circumstances and the Company continues to assess its capital requirements going forward.
"If approved by shareholders, this will provide the Company with the flexibility to issue equity securities up to the 15 per cent placement capacity without the requirement to obtain prior shareholder approval."
Forge shares finished the day on 82c, down 8.9% as investors feared the company might be left unwanted by possible suitors.
FGE 1Y – Forge up for sale, does anyone want this mess?
The shares had been as low as 75c in the aftermath of the release of the update and downgrade. The shares then bounced to 91c, before easing to close a touch lower.
Back in late November, Forge survived a big sell-off after revealing the extent of the losses on the two contracts and the way they had destroyed the company’s viability. Forge needed strong support from the ANZ Bank (which is continuing) to keep its head above water.
Then in December and January the shares gyrated as talk emerged of possible takeovers, with big global fund manager Blackstone a surprise buyer of Forge shares.
There was at least one ASX query about the share price moves which came to nothing. Rumours persisted of possible interest until the latest suspension last Friday and then the update yesterday.
In something of an understatement, David Simpson said in yesterday’s statement, “Financial year 2014 has been a challenging year for Forge Group and for the broader engineering and construction sectors, with increased competition and slowing activity in the domestic market."
“This is reflected in today’s full-year earnings guidance.”
Further cost pressures associated with the group’s Pilbara Logistics Joint Venture are expected to make the project unprofitable, said Forge.
“Forge Group’s immediate priority is to close out current projects in the Power sector, which has resulted in less emphasis being placed on booking new major projects which will have a short-term earnings impact,” the company said in the statement to the ASX.
"To meet Forge Group’s immediate cash requirements for completion of some major projects, the foremost focus has been on generating cash flow. This has impacted profit margins on some contracts and the settlement of commercial claims which has therefore impacted overall earnings. However, it is allowing Forge Group to deliver on its current work-in-hand.
"Forge Group expects the performance of two contracts being performed by Forge Group’s Pilbara Logistics Joint Venture as part of the Company’s Indigenous Involvement Strategy to incur further cost pressures resulting in both projects being unprofitable. One project is now complete with the other expected to be completed within the next three months.
"Domestic market conditions remain challenging, with increased cost and margin pressures," the company told the ASX.
Forge said it was continuing to work closely with ANZ, who had previously stepped in to keep the company afloat.
"ANZ continues to provide overall support to the Company through existing facilities. This support enables Forge Group to deliver on current work in hand and operate on a business as usual basis," Forge said yesterday.
Of course the chances of any payment to shareholders is off the agenda this year, if Forge survives.
Remember Forge shares were trading at $4.91 before November’s update. The $4 or so a share in losses for some shareholders is a terrible outcome.
The takeaway for those still interested in Forge (and I hope there are not that many) is that this latest downgrade shreds Forge’s reputation and the looming possibility of some sort of takeover is a good thing.
But who will be game enough to buy into such as mess. The ANZ Bank has done the right thing by sticking with Forge and its business (and no doubt extracting big fees), but eventually it will want its money back via a takeover. If no one is game enough to bid, then Forge is a dead duck.
