Companies: ACE   

Originally backed by GCI at 285p, the UK’s second biggest accident management business, Accident Exchange, enjoyed a terrific share price run on the back of stellar growth rates before profit warnings put a severe dent in its market valuation earlier this year.

On a number of fronts the West Midlands-based group had a very positive year to April, growing its motor dealer referral base to a record 1,119, its rentable vehicle fleet from 2,217 to 4,033, and revenues by 90% to a record £116.9m. A move to larger premises, a first acquisition and graduation to the Main Board provided further highlights.

However, growth was at a slower rate than originally expected and ‘normalised’ pre-tax profits growth from £16.7m to £18m was substantially short of original forecasts, with chief executive Steve Evans conceding that ‘we allowed the market to get ahead of us’. Conspiring to depress profits were as yet unresolved legal issues relating to a minority of outstanding claims that ate into management time and slowed cash collection in the second half of the year. Furthermore, a migration away from a higher proportion of prestige credit hire rental towards ‘mainstream’ hire, as well as reduced fleet utilisation, depressed gross margins to 36.9% (46.8%).

Though the full year dividend was maintained at 3p, cash flow has improved and should continue to do so and Accident Exchange remains robustly profitable, we think newcomers should avoid the shares for the time being while uncertainty prevails. Existing investors yet to sell should sit tight, with another year of strong revenue growth expected and the dividend-paying shares looking oversold on a historic earnings multiple of 7.3.