18/06/2008 - 22:00

Brierty battles through perfect storm

18/06/2008 - 22:00

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When earthmoving contractor Brierty Ltd ran off the rails, so to speak, with two profit downgrades in the space of six weeks during April and May this year, it laid bare some of the major pitfalls of operating in a boom-time environment.

When earthmoving contractor Brierty Ltd ran off the rails, so to speak, with two profit downgrades in the space of six weeks during April and May this year, it laid bare some of the major pitfalls of operating in a boom-time environment.

Brierty's derailment is one of the most striking examples of a perfect storm of bad news - with the problems of a hard-driving fast-growth company running parallel to its position as a newly listed company facing rising costs in a market that had gone sour.

Its share price reflects this reality, slumping to as low as 25 cents from a peak of $1.85 in December.

Founded by Alan Brierty (pictured) in 1981 and listed in December last year at the height of the stock market boom, Brierty Ltd had a blue-chip board, including Dalton Gooding and Harvey Collins, and listed at a hefty 65 per cent premium to its $1 issue price, climbing as high as $1.85 the day after it hit the boards.

Its client base was rock solid, including the mining majors and walking headline Andrew Forrest's Fortescue Metals Group Ltd, which was increasingly viewed by the market as the next big player in the iron ore scene.

In late February this year, still trading 20 per cent above its issue price despite the general stock market falls of the previous two months, it reminded the market that everything was on track to achieve its prospectus forecast.

But soon after, at least from the outsider's point of view, things went pear shaped.

In mid-April, Brierty advised the market that it was unlikely to hit its forecast net profit of $10.3 million, offering a range of $8.2 million to $9.2 million.

It blamed cost issues with a number of contracts, thought to principally include its major earthworks contract with FMG, which had been signed up the previous year to build about 80 kilometres of track on a lump-sum arrangement.

Just more than a month later, Brierty shocked the share market with a second declaration. Net profit was now likely to be $3.6 million. Mr Brierty stood down as managing director as a result.

While that number is presumed to be as cautious as is possible and may well turn out to be better, the share market pricing has very clearly reflected the changing earnings fortunes.

Representatives of the company were not prepared to speak to WA Business News, citing the need to focus on repairing the damage done and produce the result forecast.

Other companies, such as Neptune Marine Services Ltd, RCR Tomlinson Ltd, and Singapore-listed Ausgroup Ltd, which trades here as Ausclad Group of Companies, have issued profit downgrades, albeit once, not twice.

Neptune downgraded net profit to $10 million-$12 million compared with a forecast $14 million on the back of rescheduling of two contracts.

RCR said it had been affected by delays and increased cost pressures on fixed-price contracts, reducing net profit by $4.5 million.

Ausgroup has had to book a doubtful debt on a contract, believed to relate to CSBP's ammonia nitrate plant expansion. The company said it was still negotiating a final outcome on the contract.

It could be worse.

Hire Intelligence Ltd, which still trades, issued a profit warning within its first six months of listing, slumping from above $1 at listing in early 2002 to about 17 cents within the same year. It dived below 8 cents at one stage and now trades below 20 cents.

Warren Reynolds' Recruiters Australia Ltd listed in late 1999 and stated its profit was on track to prospectus forecast in March 2000, before issuing a warning in May. It went under in 2001.

Bell Potter industrials analyst Ian Crooke said he had a neutral rating on Brierty, a stock his company took to market, since he started research on it earlier this year.

Mr Crooke said part of Brierty's issue may be the fact that it took on larger projects than it was used to, a change he calls upsizing.

The FMG project was one of those, possibly pushing the company's systems beyond what they were capable of and leading to cost overruns.

"They have not retained sufficient control of their business reporting systems," Mr Crooke said.

A similar scenario is iiNet Ltd, the internet service provider which ran into trouble two years ago when internal systems failed to alert management to numerous damaging problems. The ISP has since recovered, though significant equity changed hands as a result.

"In general, Brierty are a quality contractor facing a very positive demand environment in WA over coming years," Mr Crooke said.

"If they can improve their business reporting systems, manage their contract pricing, and control costs going forward then they will have an opportunity to turn their share price performance around."

"However it will take time."

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