NSR

If the health provider can solve its problems it could rally, but investors must wait and see

by Rachel Robson

History could repeat itself for Nestor Healthcare (NSR) which may face breaching its banking covenants by December if it fails either to complete the sale of part of its business or renegotiate its banking facilities. Investors should steer clear, although recent share price surges in house builders Barratt Developments (BDEV) and Taylor Wimpey (TW.) and chip firm Pure Wafer (PUR:AIM), where covenants have been renegotiated or may be about to be, suggest the stock could rally rapidly in the event of a successful deal.

Just under a year ago, Nestor warned it would breach one of its banking covenants after admitting it would miss market expectations for profits in 2007 and 2008. The company so far has had little success in selling part of its business, which would provide cash to pay off some of its debts, though talks continue. Nestor says it is negotiating with its debt providers about facilities going forward and hopes to make a further announcement this month.

The group also recently posted interim results, which came in below analyst expectations. For the six months ending 4 July, the Hertfordshire firm posted revenues of £84.5 million, against £89.7 million a year earlier, with pre-tax profits of £3.4 million against £5.6 million, 5% lower than Investec's forecasts. The shares have plummeted from last year's high of 194p, and fell a further 8% to 33p after the results.

'Trading remains disappointing and given the quantum of the likely downgrade, Nestor's banking covenants may come under pressure in December (when the covenants tighten), unless it can put down a material amount of debt with the proceeds of the potential disposal, or renegotiate its facilities,' says Sebastien Jantet of house broker Investec. 'Negotiations with the banks are already under way, but irrespective of the outcome there are likely to be further downgrades, with any potential disposal likely to be dilutive to earnings or any new facility-incurring arrangement and potentially punitive interest rates.'

The £36 million cap also has yet to find a replacement for chief executive Stephen Booty, who stood down at the end of April. Meanwhile Chairman John Rennocks is assuming the role.

Shares says: With the outlook so uncertain, the shares are unlikely to recover any time soon. Sell