View from City Road: Not quite off the hook yet

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ROBERT MONTAGUE, the chairman of Tiphook, says his container rental company is 'trying very hard' to be understood. To this end, Tiphook's statement yesterday covered 17 pages, setting out details of its cash flow, its balance sheet and much else besides.

The stock market responded in churlish fashion, marking the shares down by 57p to 330p. This was because pre-tax profits of pounds 86.4m were short of expectations - the result of bad debts, reorganisation costs and more prudent accounting.

The trouble with Tiphook is that sceptics do not have to look hard for the bear stories. This is a company that has grown explosively by acquisition. It is in leasing, which few are sure they really understand. It has built up huge debts of pounds 832m, still nearly three times net assets. It pays no corporation tax. Its treatment of goodwill has been queried. It has a highly paid management who appear a bit flash.

Mr Montague would respond that many of these concerns are criticisms of Tiphook as it was rather than as it is. The group's past acquisitions have given it commanding positions in its markets - number one in European trailer rental, number two in the world container market. It can now concentrate on getting the best from them.

As Tiphook reins in its capital expenditure, from pounds 228m last year to an expected pounds 80m this, its strong cash flow will significantly reduce its debt-to-equity ratio. Interest payments are more than twice covered by profits even in a recession that has left the trailer rental business only marginally profitable.

Containers remain the great strength, increasing profits from pounds 70.9m to pounds 85.3m on turnover of only pounds 172.2m. Container utilisation remained unchanged at 88 per cent against a break-even level of 50 per cent.

Despite a 5 per cent fall in earnings per share, Tiphook is paying a final dividend of 13.8p a share to make an adequately covered total of 17.3p. This is a 25 per cent increase and a further 20 per cent seems possible this year.

The benefits of the recent reorganisation of the trailer business and its eventual recovery would seem to give Tiphook plenty of scope for medium-term progress. But it is hard to recommend the shares until Tiphook has proved its critics wrong.