Third profit downgrade for Forge

Forge issued a third profit warning in as many months. Rather than the previously expected earnings before interest, tax, depreciation and amortisation (EBITDA) of $45-50m, the company now expects to book a loss of $25m. That excludes depreciation and asset write-offs. Results, when released, will be ugly.

Although the company described the loss as ‘one-off’ there are signs of ongoing distress. In need of immediate cash flow, it has been unable to bid for new work and margins on existing work have fallen. The entire industry has become more competitive as participants hunt for cash generating work. Forge’s dilemma is hardly unique.

Management have appointed a broker to sift through third party offers. The business is effectively for sale, perhaps the ideal outcome for its banker and suffering shareholders. The company also lodged paperwork to allow it to raise 15% of its market capitalisation in fresh equity without shareholder approval. There can be no greater hint that, should conditions not improve or a buyer fail to materialise, a capital raising is on. Although the share price has fallen another 30% since More losses at Forge on 15 Jan 14 (Avoid – $1.09), we’re not tempted. As discussed in Risk, uncertainty and Forge (Avoid – $1.37), we may be tempted at prices around 40c. Until then, AVOID.