Vertex sinks on profit alarm

By PAUL PANCKHURST

Plastics manufacturer Vertex was savaged by the sharemarket yesterday for issuing a profit warning just 9 1/2 weeks after its $61 million float.

A 25 per cent fall in its share price to $1.38 wiped $14.7 million from the company's market capitalisation.

Managing director Paddy Boyle largely blamed the sales and cost problems of the company's fastest-growing business, the Hamilton-based Technical Injection, for the profit downgrade.

The company cut by 15 per cent the prospectus forecast of $5.2 million in earnings before interest and tax (ebit) for the six months to September 30.

It cut the full-year ebit forecast of $11.2 million by 10 per cent but stuck with plans for a fully imputed dividend of 14.2c a share.

Market observers and shareholders attacked the company for raising capital on forecasts so quickly proven inaccurate.

It seems likely the Securities Commission will investigate.

Sounding stunned,, Boyle said: "It is a shocking day".

The float on July 1 disposed of the stakes of the two main shareholders, the Sydney-based Pacific Equity Partners and Bain Capital, which bought the company from Carter Holt Harvey in 2000.

Broker JBWere promoted the offer with advertisements bearing the slogan "Share in the household name you've never heard of".

The company's core business makes plastic packaging, such as foam food trays, ice-cream tubs and industrial containers, while Technical Injection makes injection-moulded products, such as parts for drench guns.

Boyle said Technical Injection's problems were 60 per cent sales-related and 40 per cent cost-related.

Last month, Boyle "began to lose faith" that Vertex had an accurate fix on manufacturing costs within Technical Injection, where at least 12 of 25 products were less than a year old.

An "activity-based costing review" by an operations specialist - called in from Melbourne - revealed problems such as altering a product at a customer's request but failing to pass on the extra cost.

The cost issue was compounded by "lumpiness" in demand that saw Technical Injection sometimes running only 10 of 17 Machines.

Sales problems for Technical Injection came to a climax in the third week of August, when a major United States customer unexpectedly cut its forecast orders. Two more customers were delaying introducing new product lines.

Simon Botherway, of Brook Asset Management, one of the shareholders in Vertex, called the warning "extremely disappointing", adding, "You've got to question the prospectus forecasts - the integrity and veracity of them".

Macquarie Equities senior investment analyst Arthur Lim said: "Here the issue is now one of credibility. From the market's viewpoint, can you now trust the rest of the profit forecast in the prospectus?"

On the positive side, the company points out that profits - while below forecast - will still be well above last year's.

JBWere analyst Carlie Eve said the core business, accounting for 85 per cent of revenue, was still trading at close to the prospectus forecast.

In a letter published in the National Business Review on June 21, Boyle reaffirmed the directors' confidence in the profit forecasts in the prospectus, after questions were raised in newspaper articles.

The float was eyed warily by some after the float by Pacific Equity Partners and Bain Capital in 2000 of Frucor Beverages - a company that failed to meet earnings forecasts.

Boyle said he had more than 600,000 shares in Vertex - meaning a paper loss of at least $276,000 on yesterday's price fall.