The Rats of Repcol Ltd.

MELBOURNE AUSTRALIA 22 NOvember 2006 - We move from fat pigs to fat rats.  Although it looks as though these may be rather slimmed down rats.  We write of the profit warning released yesterday by Repcol Ltd. (ASX: RPC) We thought debt collection was supposed to be a hugely profitable enterprise.  Especially in an environment of rising interest rates.

Not if you are Repcol.  Following a media release to the Australian Stock Exchange under the title "Update on Performance & Withdrawal of Name Change", the company told investors that "Following a performance review Repcol Limited announces that it expects to report a net loss after tax for the six months ending 31 December 2006."

Obviously, with just a month and half to go until the end of the year, it has only just  become apparent that the previously profitable business will now turn in a "$7m-$9m" loss for the first half.

But guess what?  They tell us "It is expected that following management and structural changes the 2nd half should yield a significant improvement in performance."  This, they tell us will result in a "$2m-$4m" profit in the second half.  Well that's alright then.  We can wait.  Actually, it doesn't seem as though many are prepared to wait.

Following the announcement Repco shares fell by 15 cents, or 46% to 17 cents.

So, what could be the cause of such a dramatic turnaround in the fortunes of the company.  Clearly nothing the company has done wrong, it's all external factors which are obviously out of their control.  "During the first half the company has experienced an increase in operating costs relating to the collection of debt by Australian based resources and a decline in the valuation of ledgers principally located in the Brisbane office."

That's funny, because looking at previous press releases the company makes no mention of any short term loss in the valuation of ledgers.  The only reference they make to the decline in ledgers is in the Brisbane office, but they claim this should not have an impact for some time as these are existing ongoing contracts.

And they were serious about the "management" changes too, as chief operating officer, Scott Linklater apparently 'resigned' from the company on Monday.

Our brain is struggling to work out whether it is a good sign or a bad sign for the economy when a debt collection agency is not making a profit.  Does it mean everyone is doing fine and dandy and therefore the need for debt collection services is low.  Or is everyone doing so bad that even a knock on the door from 'Knuckles' doesn't elicit the settling of the debt?

Meanwhile we read that the OPEC is considering a cut in production.  Undoubtedly a response to the recent drift southwards in the crude oil price.  Last week the December contract traded on the New York Mercantile Exchange (NYMEX) traded below USD$55.  Now, with attention moving to the January contract, we see that its price is only a touch under USD$60 a barrel.

This, even before the cold winter months set in for the northern hemisphere.  CFC Seymour analyst, Steve Rowles told Agence France Presse (AFP) that "The market has bounced back because of talk of more cuts by OPEC at its December meetings.  The oil ministers from some member countries have spoken out, which has supported prices."

Is the price of oil getting set for another strong rally?  We shall watch with interest.

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Related Articles:

• None Found