View from City Road: Kunick looks a poor gamble

IT IS hard to believe that Kunick, the fruit machine and nursing home operator, could undermine investor confidence in itself even more than it has already. But it has.

Kunick's figures yesterday made clear the full significance of its restructuring announced last October when it hived off its nursing home operation into a 50/50 joint venture between itself and County NatWest Ventures Investments.

Conveniently, the lion's share of Kunick's borrowings went with the nursing homes into the new outfit, called Goldsborough. In one fell swoop the balance sheet of Kunick, whose wholly owned business is now hiring out fruit machines to pubs and practically nothing else, was spectacularly transformed.

Kunick may argue about semantics but what it has done is shift debt off the balance sheet. Before the formation of Goldsborough, Kunick was squirming under borrowings of pounds 47m but after the deal Kunick had just pounds 10.3m of debt. The ratio of net borrowings to net assets has dropped from 86 per cent to 19 per cent.

The Goldsborough transaction showed just how desperate Kunick had become. First, it was prepared to part with pounds 2.9m in fees to lawyers and others connected with the refinancing.

Second, and more telling, it was compelled to hive off the stronger part of its operation to stay in business.

In the year to 30 September nursing homes increased operating profits by pounds 100,000 to pounds 3.2m while operating profits from fruit machines collapsed to pounds 3.3m from pounds 11.5m. Fruit machine profit margins were shot to pieces and Russell Smith, chief executive, said revenue increases were difficult to impose on publicans.

Including pounds 12.8m exceptional items relating to the reorganisation (in which 200 lost their jobs), Kunick's overall pre-tax loss for the year to 30 September was pounds 12.5m. The comparable profit for last year was restated to pounds 8.5m from pounds 12.4m - which also cut the scale of the earnings reverse, of course.

Christopher Burnett, chairman, was upbeat in his current trading statement and in brisk business, Kunick shares gained 0.75p to close at 6.5p yesterday. But if you are thinking of Kunick as a recovery play, think again. Avoid the shares.

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