Is Fairpoint a fair investment?

Fairpoint plc is currently trading at a P/E of 1 based on Stockopedia broker targets of an adjusted P/E of 14p for the current year. I’ve been a shareholder in this company before so I
am interested in seeing whether the market is now overlooking potential value. Dividends are currently suspended here so ignore the Stockopedia estimated dividend of 50%! 

Why is it so poorly rated?

Fairpoint has been a ‘debt management solutions’ provider to individuals. A few years ago it began acquiringlegal services businesses – with Simpson Millar the most notable acquisition.
  Fairpoint (LON:FRP) attempted to provide a clear, transparent price list to consumers seeking legal services which was, and probably still is, fairly unique in legal services. This was a way of diversifying the business while interest rates were low and the economy performing well, which meant fewer people were strugglingwith debt.

Over the last 12-18 months the company has hit numerous problems including:

  • Declining revenue in its debt management business;
  • Regulatory changes in debt management meaning part of its business became unviable;
  • The costs associated with attempting (and failing) to move staff from the problematic
    part of the debt management business;
  • The costs of acquiring legal service companies coupled with the problems above, which
    means the company has a net debt of £19.9m. The current market cap of £7m.
  • Regulatory changes to whiplash and personal injury claims, compounded by the company’s lack of initial transparency about the potential impact on its profit. (See the
    company’s most recent trading update to see the expected current impact).
  • Suspending its dividend – the way this was announced (alongside declining performance), towards the end of the day on a Friday in December, also angered shareholders.
  • The resignation of the CEO.

Are you tempted to invest yet?!

All this sounds pretty terrible. My main concern is whether the business has sufficient working capital. Debt is high(ironically). According to the company “At 31 December 2016 the Group's bank facilities comprised a revolving credit facility of £17.0m plus a term loan of £6.4m. Net debt at that date was £19.9m (2015:£13.6m). The Group continues to operate within its
facilities, which mature in May 2019.” So you need to be very careful about relying on adjusted figures only when the statutory profits and debt looks very poor! Note the company recently…

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