Things will get worse before they get better
MANY DECADES AGO I coined a law of corporate performance: that companies whose results deteriorate in the first halfyear do even worse in the second half. While that was largely based on experience, it’s easy to find reasons for the phenomenon. Companies usually underestimate how difficult it is to cure a problem and then often find the problem itself is more severe than was thought.
During the years company profits only went up, “Coulson’s Law” fell into abeyance. But current hard times could make it relevant again. Take the case of Faritec, the IT company that recently reported it fell into loss for the six months to December 2008, partly due to adverse market conditions and partly because its cost base is too high. It’s hoping to cut R4m/month off costs; but with a pre-tax loss of R31m for the six months that on its own won’t restore profitability.
Six-month sales of R414m were 17,5% down on R502m the year before and a whacking 23,2% down on the six months to July. Yet despite not expecting a “significant” improvement in trading conditions in the second half, Faritec hopes to return to profit.
Well, we shall see. CEO Simon Tomlinson has always struck me as capable and committed and he’s now chalked up a decade in charge. But Tomlinson could have another problem: when I did a small assignment for the company while founder Tony Farah was still in charge I was struck by how much even senior executives were not so much in awe as in fear of him. I’ve had experience of companies built up by one dominant individual that couldn’t survive his departure and I can’t help wondering if the shadow of Farah even now makes Tomlinson’s task harder.
It also seems to me that Faritec has an above-average turnaround of both executive and non-executive directors.
Now I don’t want to appear to be picking on Faritec and nobody will be happier if it does return to the black in the second half. Really, I guess I’m trying to prepare investors for a realisation that corporate profits generally probably didn’t bottom out in the immediate past but, overall, are going to get worse.