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I advised shorting AIM listed financial services group CPP (LSE:CPP) back in the autumn on November 21st at 26.75p on the grounds that the bid talks it claimed to be in were just not going to result in any bid happening. And so it came to pass and the shares duly halved. The problem is that CPP’s business model is not working. But it is now getting much worse. Much, much worse.
You can read why and about its woes in that original piece HERE
Since the collapse of bid talks the company has stated that it will have made a profit in 2012 but that it has lost two major contracts (RBS and Santander). And so 2013 numbers will be far worse than those in 2012. But worse still the company now faces a bit of a balance sheet issue.
The last statement on the balance sheet showed borrowings of £43 million but net cash of £19 million. However that net cash position was partly season and was expected to revert to £8 million by the year end. Then came a series of FSA fines which are phased but will have eaten into the cash and trading is probably pretty grim by now. The problem is that the debt facility expires on March 31st (this Sunday) and may not be renewed. And so CPP has just a few days to find a replacement and as it admitted last week time is running out. Moreover any replacement may involve a major haircut for shareholders.
This is not just me saying this. The company has ‘fessed up too stating:
The Board continues to work on a number of financing solutions and, inter alia, continues to have constructive discussions with the Group’s existing lenders, but to date no financing solution has been achieved. However, it is clear to the Board that there is significant uncertainty as to what value any such financing solutions may deliver to CPP’s ordinary shareholders, particularly given the current trading price of the ordinary shares.
Given that the 2013 trading outlook is already grim and there is a clear risk of further contract losses I cannot see why anyone would provide a facility to CPP. There has to be a good chance that there is no way out. That is why the shares now trade at 4.625p – but that still values the company at nearly £8 million which seems remarkably generous given what may happen in the next few days. The best case scenario is survival but with zero earnings visibility and profits exceedingly unlikely and a possible mega dilution of shareholders. But that is the best case scenario. The worst? 0p by the time markets re-open after Easter. The shares are still a sell.
Tom Winnifrith writes for 10 US and UK websites. You can follow his no-holds barred thoughts on twitter @tomwinnifrith or by links on his own website www.TomWinnifrith.com
The premium website where all the best thoughts of Tom appear first is the Nifty Fifty. It is co-produced with infamous bear raider Lucian Miers and with Steve Moore, Tom’s collaborator at t1ps for many years. You can access the Nifty Fifty HERE
