Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

DEBTMATTERS - is it the beginning of the end or simply the end of the beginning?

Debtmatters’ trading statement painted a fairly gloomy picture on the group’s IVA business while the market appeared to paint a gloomy picture on the future of the business as a whole.

IVA case acquisition costs have risen sharply in the face of rising competition and IVA conversion rates have worsened due to hardening creditor attitudes which have impacted on margins – in short, the banks didn’t like the IVA boys making too much money so they have started to apply a little extra pressure!

During September (that was only last week!) Debtmatters started to see certain creditors seeking to modify IVA proposals such that on Debtmatters' cases, average nominee and supervisory fees would be reduced. The impact of these additional changes on the IVA business means that should these fee modifications become the norm then Debtmatters would not be able to deliver IVAs profitably i.e. Debtmatters’ IVA business doesn’t appear to have a future.

The group has therefore decided to suspend all direct advertising on TV, radio and through the press and the IVA division will be scaled back, with staff being redeployed into other areas of the business as appropriate. At least they have acted quickly!

However, is it really as bad as the 72% fall in share price and resulting market cap of sub £5m now suggests. Here are some thoughts.

In theory they could simply shut the door on new IVA business, leave the market to others (and my word there is certainly a market out there!) and simply collect fees from those existing IVAs they are currently administering.

As at 31st March 2007 Trade and other receivables were £15.3m. Ignoring business between then and now and even allowing for a whopping 25% default rate which would effectively write off c£3.75m from the debtor book it still leaves c£11.5m to come in over the next few years.

Having raised c£3m in July 2007 debt levels should be at more manageable levels; assuming they haven’t sunk too much into the Debt management business.

For the 9 month period since acquisition to 31st March 2007 the Loanmakers business added £11.8m to group turnover and £2.1m to group profit before tax. The house broker estimates that the Loanmakers business will bring in EBITDA of c£3.5m for the full year.

The Loanmakers business was acquired for an initial consideration of £10m cash, back in June 2006 plus up to £9m of earn out.

Ges Ratcliffe the Chief Exec subscribed for 686,030 shares at 113p (with the shares at now at 18p, that’s a bit of a short term hit! Alright, he’s not exactly short of a bob or two having already made a bit of money when he placed 6 million shares at 330 p / share back in June 2006

The debt management business has some promise but is in its infancy and they’ve only got one client as far as I know. So not a lot for the short term here.

Finance costs for the full year ended 31st March 2007 were £450,000 and amortisation costs were c£250,000.

You’ve got that troublesome short seller whose also been playing around. No doubt he’ll be back in there buying at some stage and conveniently forget to tell anybody.

It still looks like there’s a lot to play for.


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