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Lakehouse maintains council properties

You know the parable of the wise man whose house was built on rock and withstood the rain and wind, but “great was the fall” of the foolish man’s house built on sand? There is an equivalent parable for wannabe public market companies built on water: Lakehouse.

Shares in the Romford-based fixer upper of council houses, which floated at 89p in March last year, fell nearly 30 per cent to 34.5p last week. That was after new chairman Ric Piper warned investors to cut their full-year profit expectations by a quarter.

The company has barely been quoted a year and this was its second profit warning. The first one in January triggered a bruising fight between its executive chairman and top shareholders over governance. Lakehouse emerged from that battle with three new board directors including Mr Piper and Steven Rawlings, the 62-year-old ex-roofer who founded the group in 1988.

Mr Piper wants to put all that behind him and move Lakehouse on. But it will take more than a lick of paint. The company’s woes have been a long time in the making and are in its footings.

A lot of the blame can be laid at the door of Stuart Black, Lakehouse’s executive chairman since 2008 until he left last month. The group grew fast during his tenure. But cracks began to appear once the company floated.

As Mr Piper says ruefully: “When a company is public, the good and bad news is played out in public. The clue is in the name.”

Mr Black is the man who abruptly quit as chief executive of rival Mears in 2007. Bob Holt, the plain-speaking founder-chairman who replaced Mr Black, says: “The job was too big for him. He rubbed people up the wrong way. That may be all right in a private company but you can’t get away with things in the public arena. A lot of people want to run a public company but many just aren’t up to it.” 

After the first profit warning, Mark Slater of Slater Investments, which holds about 6 per cent, and Mr Rawlings, with 15.5 per cent, called for change. Mr Black quit Lakehouse last month.

He refutes criticisms of his governance or strategy, blaming the group’s problems on external factors. It is true that the company is in an industry teeming with rivals competing for work from councils, housing associations and schools whose budgets have been slashed.

These are not high-tech contracts. Lakehouse’s 2,400 staff paint railings, mend roofs, read meters, service boilers, renovate kitchens and advise tenants on how to cut their energy bills. 

Some of Lakehouse’s problems are out of its control. The company is at the mercy of government policy whether on carbon credits or rent caps — what Mr Piper calls “headwinds”.

But the company has also mismanaged projects. Roofing projects cost the business £2m in earnings at the half year, and operating profits, excluding acquisitions and other nasties, fell 80 per cent to £1.7m.

Lakehouse spread itself too thinly, acquiring 10 businesses in five years. When one area of its business dipped, it moved into others, such as roofing. 

There were clues in the prospectus. Advisers drew neon lights round Lakehouse’s “adjusted ebita”, earnings before negatives such as interest, exceptional costs and amortisation of acquisitions.

On that basis, profits doubled in two years from £5.4m to £10.8m in the year to September 2014. But warts-and-all profits before tax fell from £4.1m to £104,000 in those two years and cash levels halved.

International accounting regulators are rightly launching a crusade to stop companies and stock market analysts thrusting glossy ebitda numbers in investors’ faces to distract attention from less flattering statutory pre-tax profits. But it is too late for Lakehouse’s backers.

One investor says as a rule he does not back initial public offerings: “It is a challenge at the IPO when a company hasn’t got much of a public history and there are lots of things you can’t see.” Lakehouse was an exception but his experience there will not make him less wary.

The group was valued at £140m or eight times projected earnings at the float. At 35p, it is four times earnings. That is only cheap if the company does not hose down shareholder expectations again. But that is unlikely given Lakehouse’s proximity to water. 

kate.burgess@ft.com