Why the Eclipx share price sank 8% lower today

The Eclipx Group Ltd (ASX:ECX) share price has tumbled lower after announcing between $110 million and $130 million in non-cash impairment charges…

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In morning trade the Eclipx Group Ltd (ASX: ECX) share price has come under pressure following the release of an update.

At the time of writing the fleet management company's shares are down 8% to 88.5 cents.

What was in the update?

In March the company announced that it would be testing the carrying value of goodwill in preparation of its half year accounts.

Based upon unaudited testing so far, this morning Eclipx confirmed that it expects to recognise non-cash impairment charges of between $110 million and $130 million in its first half results that are scheduled to be released later this month.

The non-cash impairment charges relate to the underperformance of Grays and Right2Drive business.

According to the release, the Eclipx board believes the businesses have not been effectively integrated and that their lower than expected earnings does not support their carrying values.

One positive, though, is that its directors do not anticipate the expected non-cash impairment charge to result in a breach of its debt covenant position. Further, management confirmed that it has received interest from a number of parties for the struggling businesses and they are currently being prepared for sale.

CEO exit.

In a separate announcement the company revealed that the recent period of disappointing performance has led to a "welcome" change in the top job.

According to the release, the independent directors have reached agreement with the company's CEO, Doc Klotz, that he will step down as CEO and as a director with immediate effect. Julian Russell has been appointed CEO.

In addition to this, Bevan Guest, currently Managing Director of Fleet Australia, has been promoted to the newly created position of Chief Commercial Officer.

Eclipx chairman, Kerry Roxburgh, said: "We all welcome these significant senior leadership changes. They represent an important step in delivering our stated strategy to improve performance and deliver better outcomes for our shareholders."

What now?

I can't say I'm surprised by these impairment charges and leadership changes. And whilst the company may now be over the worst of its issues, I wouldn't be a buyer until there are signs of improvement.

Until then, investors may be better off sticking with the likes of McMillan Shakespeare Limited (ASX: MMS) or Smartgroup Corporation Ltd (ASX: SIQ) if they want exposure to the industry. Though, I think other areas of the market may offer more value for money.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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