Eddie Stobart Logistics (ESL) may be forced to seek a new injection of capital to ease investor concerns over mounting debts, an equity analyst has told motortransport.co.uk
The company shocked investors last week when it suspended trading in its shares and announced CEO Alex Laffey was to step down. It has since also been revealed that ESL made it difficult for auditor KPMG to obtain "sufficient audit evidence" as it tried to compile the company's annual accounts.
This prompted the accountancy firm to resign as its auditor last November, triggering an investigation by ESL chief financial officer Anoop King that exposed a £2m hole in the accounts.
ESL sent further jitters through investors last week by admitting that profits for the first half of 2019 would be “significantly lower” than forecast.
According to Dario Carradori, an analyst at Edison Investment Research, ESL’s woes could now see “some form of fund raising” become inevitable as it looks to reassure investors.
“Investors will be focusing very much on the implications for the dividend policy and how that will evolve,” he explained. “ESL has indicated it is going to review the dividend policy."
Read more:
- Eddie Stobart Logistics management obstructed auditor, KPMG letter reveals
- Eddie Stobart Logistics suspends shares as CEO steps down
- Eddie Stobart Logistics increases turnover but feels profit pinch
Investors will also be concerned by its implications for the financial structure of the company as the level of debt (leverage) was higher than the target at the end of 2018.
“ESL has said EBIT is going to be significantly lower than expected but we don’t know by how much,” Carradori continued. “But depending on how much lower it is, the leverage will change. Leverage is usually calculated as net debt divided by earnings. ESL has said the earnings will be significantly lower in the first half of the year so the debt ratio will be higher and will be a key thing investors will focus on.”
Asked how the situation might play out, Carradori said ESL would first have to give clear feedback to investors on its accounting revision and make sure they are happy with the review.
“They have to make sure this is it and that there will be no more revisions,” he said. “And then they have to understand whether the financial structure requires adjustments or any other actions are needed.
“There are various things a company can do when debt is excessive. They can either try to reduce it with cash flow generation, or, in the worst case, a company with excessive leverage will require a capital increase. The implications for ESL will largely depend on the announcement in early September.”
