Bottom Line: Happy endings a long way off at Tiphook

AS TIPHOOK shares embarked on their latest roller-coaster ride yesterday, some fund managers will have smiled ruefully and thought: 'I told you so.' The container leasing company's rapid expansion, huge debts and a host of other queries have long provided a heady cocktail for the doubters.

Over the past year, Tiphook has tried hard to appear as candid as possible, producing reams of financial information. Yesterday's warning that profits will fall 20 per cent short of expectations covered five pages and was accompanied by further details of the sale of 9,532 of its older and less attractive trailers.

Tiphook blames the profits shortfall on the recession. The trailer operation has continued to lose money as some 44 per cent of Tiphook's trailers have stood idle.

The trailer sale will return the business to a profitable utilisation level of about 75 per cent and will also save Tiphook about pounds 15m a year, mostly by reducing depreciation.

However, the deal will bring in little cash. The quid pro quo is that Tiphook is committed to buy pounds 387m of new trailers from the manufacturers to which it is selling its old equipment. It will make an initial 'deposit' of pounds 109m, which means it will see little of the estimated pounds 130m fetched by the trailers.

This deal may throw up a handy pounds 16m profit over the trailers' book value, but it also leaves Tiphook with a huge five-year investment commitment and postpones the reduction in its borrowings. It must be wondered whether Tiphook could have arranged to buy the new equipment more cheaply and more flexibly without the connected sale of unprofitable assets. The company's powerful new rival, General Electrical Capital Corporation, which has just bought TIP Europe, will be able to buy more cheaply.

Tiphook's redemption of pounds 150m of preference shares also poses questions. These shares were covered by a loan covenant requiring interest cover of 1.5 times, believed to be the most likely trigger point for bankers' concern. Tiphook, which should make pre-tax profits of pounds 55m or more, says, however, that it has plenty of headroom over its covenants.

Tiphook's profits remain highly sensitive to small falls in container and trailer utilisation rates. With the German economy likely to drag Europe into recession, an investment with the company still involves many risks, notwithstanding signs of recovery at home. It would take a brave investor to hang on to see if the story has a happy ending.