Sunday, January 24, 2010

Reason to be cautious on Nuplex forecast

2009 was Nuplex Ltd [NPX.NZ] worst year on record, with a massive capital raising big losses and a huge dilution of value for their shareholders.

2010, according to Nuplex, is going to be their best year on record with an estimated profit of between NZ$120-135 million. This is after 3 profit upgrades in the last 6 months.

This is good news for the company and as shareholders you might be thinking that and you are probably right to think that but then I believe you must treat these results with an element of caution and this is why.

Like their worst year in 2009, management did not "foresee" that coming and according to managing director John Hirst the 2010 upgrade has been:

"...proving as difficult to forecast the upside of the post global financial crisis period as it was the downside at this time last year..."

In addition to management's inability to forecast accurately, their current forecast is expressed as, earnings before interest, taxes, depreciation and amortization (EBITDA). This measure of accounting practice can be used to hide detail that should be known by the shareholder and is pretty much the accounting equivalent of hiding nuts under shells. Unfortunately it is used far too often by lazy, ineffectual accountants directed by lazy dishonest directors to hide bad figures from shareholders - look deeper Nuplex shareholders!

Given the inability of the company to accurately forecast results over the last 2 years and also given that the same management who governed the company into their worst ever year in 2009 and left them on the brink of bankruptcy (they would have gone down the tubes if not for generous shareholders) are still at the levers of power, one would have to take a closer look at Nuplex forecast for 2010, especially when one considers their "cavalier" attitude to accounting practices and therefore their shareholders .


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