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.

LUPUS CAPITAL (LON:LUP) – a relic from another age?

The ‘highlights from Lupus Capital’s results for the year ending 31st December 2008 smoothed over the true picture. Given the group’s seemingly precarious position the postive nature of the highlights came as a big surprise!

- EBITDA* up to £42.870 million (2007: £36.559 million)
- Pre-tax profits* up to £27.685 million (2007: £25.021 million)
- EPS* up to 14.83p (2007: 14.82p)- Strong cash generation- Substantial cost reduction achieved
- Debt negotiations continuing

Note all the items preceded by ‘*’.

The note supporting this reveals that items preceded by ‘*’ were ‘before amortisation of acquired intangible assets, deferred tax on amortisation of intangible assets, exceptional items, unwinding of discount on provisions, amortisation of borrowing costs and the associated tax effect.’ That’s a fairly long list of items that management consider doesn’t warrant inclusion in the earnings per share.

The diluted earnings per share were actually only 4.92p compared with the highlighted 14.83p!
They are unable to pay a final dividend and it’s hard to see when they will be able to resume dividend payments.

Finance costs were a massive £11.7m against operating profit of £20.8m.

Operating cash flow was good (£30.8m against operating profit of £20.8m), however, it’s got to be to support the mountain of debt and the high finance costs which are no doubt set to climb when debt is renegotiated.

Perhaps of greatest concern for this business is the last of the above highlights, being the continuing debt negotiations. New banking facilities and an easing of covenants will probably come at a high price.

They also highlight the impact of a weakening pound against the US Dollar on the group’s US$224m borrowings. Apparently if the exchange rate on 31st December 2008 had been the same as at 31st December 2007 their equivalent net debt in Sterling would have resulted in a £9.46m reduction in group borrowings – so, given the materiality why didn’t they hedge their currency exposure? Net debt at the year end was £145m, compared with £99m at the end of 2007.

The outlook statement doesn’t instil much confidence either with the group’s businesses both in the US and Europe facing unprecedented market conditions which may continue to deteriorate for a while longer.

Intangibles of £369m will surely be subject to big impairment charges

One broker observed that the results were better than feared – the mind boggles what they were actually expecting!


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