View from City Road: Queens Moat gets its come-uppance

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Queens Moat Houses' sorry financial predicament has come home to roost. It has been a long time coming, and yesterday's announcement should not have surprised as many investors as it did.

The company's underlying cash flow over recent years has been appalling. Finances have been artificially propped up over the past decade by seven rights issues and numerous cash-raising property deals.

Investors have placed far too much faith in the ability of John Bairstow, the chairman and joint managing director, to do wonders on the trading front, while ignoring financial problems.

This criticism does not just rely on hindsight. The company's problems were apparent to anyone who studied its source and application of funds statements. Take the last three years. In 1989 there was a pounds 123.3m increase in net liquid funds, struck after a pounds 144.6m share issue, pounds 64.4m of new loans, and pounds 10.4m from disposals. Cash derived from operations was just pounds 65.4m. It grew worse in 1990, the year when Queens bought the Norfolk Capital Group. There was a pounds 109m decrease in funds, despite a pounds 150m share issue, pounds 17.5m of disposals and pounds 123.2m of cash from operations.

Come 1991 and Queens was in an even bigger pickle. The pounds 265m increase in funds included a pounds 272m share issue, a pounds 56m reclassification of fixed assets, pounds 150m from disposals and pounds 79m from operations.

In short, Queens did not so much leak cash over those three years as haemorrhage it. The company was hell-bent on rapid expansion before and during the recession.

Investors should ask probing questions about the competence of the top management, starting with David Hersey, finance director, Martin Marcus, the deputy chairman and managing director who recently bailed out of half of his shareholding, and John Bairstow.

Investors must also ask questions of analysts. This month's Estimate Directory contains no less than seven buy recommendations from leading broking houses, while only four gave sell advice. Remember that when reading their next piece of 'research.'