The “tick-tock” series of articles will examine companies that have an imminent deadline pending.
Staffline announced on 8th January that their full-year results to December 2018 would be published admirably quickly on 30th January. In the event the market was treated to not one but three announcements:
- 07:00 results are delayed
- 15:30 shares suspended pending an announcement
- 18:14 possible accounting issue – shares remain suspended.
On 12th March that they reported that one of the issues was with National Minimum Wage compliance, that they had previously been aware of an issue and were in discussions with HMRC. They had planned a provision of £4.4m in the accounts but following legal advice had increased this by a further £3.5m, that the results would be lower than expected by this latter amount, but that business was on track with good cashflow. At the same time they reported a couple of contract wins. The suspension was lifted and the shares recovered half of their losses from the 30th January.
Nothing more was heard about the delayed results until 30th April when they confirmed that discussions with HMRC and advisers were ongoing.
On 17th May they issued a profits warning blaming Brexit uncertainty resulting in companies moving Staffline-managed EU workers to direct permanent employment contracts (which somehow apparently doesn’t result in Staffline getting a percentage of their first year’s salary) and customers worrying that they haven’t published their results yet. The latter seems unlikely, however I can see how being party to illegally underpaying workers would affect their standing in the industry and here the worst is probably still to come in the form of publicity when the fines are announced.
Following the profit warning, EBITDA is now forecast to be £23-28m vs (what looks to me) around £45m for FY 2017. They have significant debt with some covenants are based in EBITDA. A subsequent brokers note reportedly cut FY 2019 EPS by 46%, increased year-end debt. The covenant situation appears to be as follows:
- Debt at December 2018: £63m. If held steady then that’s 2.2-2.7x which is uncomfortable but likely to be within covenants.
- Forecast debt for December 2019 was: £52m which would allow EBITDA to fall to £17m before troubling a hypothetical 3x covenant.
- BUT, forecast debt for December 2019 is now £85m which is 3.0-3.7x which is likely to be a breach.
To make matters worse, and the subject of this article, they confirmed that they were still working with the HMRC on the minimum wage issue and could not produce their FY 2018 results until this was resolved and an audit carried out. That means, as of today, under AIM rule 19 they have 3 weeks until the shares are suspended (again). Not surprisingly this has caused the share price to progressively drift down.
A further twist is that New York based Andrew Bellas has been stakebuilding through General Equity Partners including buys immediately before the latest profits warning at over £8 and afterwards at under £3.
So, what is likely to happen next? My guess at the probabilities are:
- 10% – they will request suspension themselves in the next two weeks if and when it becomes evident that it is impossible to meet the results deadline – this could happen at any moment.
- 10% – they are about to publish results and again this could happen at any moment.
- 80% – they either hit the deadline or request suspension immediately beforehand.
In the meantime the share price is likely to continue drifting and falls may well accelerate as the deadline approaches. If I were a holder I would probably join the sellers.
The temptation is to buy in order to take advantage of this and hope for a rise when the situation is resolved. However if they actually hit the deadline the odds of this ending well don’t look good – here are the 9 companies that fell foul of the deadline this time last year:
- Flowgoup – Never returned, in administration
- Premier African Minerals – Flat on return.
- Herencia Resources – Suspended 20 days, re-suspended in February
- Tau Capital – Flat on return (market cap £0.25m)
- The People’s Operator – Never returned, in administration
- Defenx – Fell on return
- Greka Drilling – Delisted
- Akers Bioscience – Flat on return (only suspended for a few days)
- 7Digital Group – Flat on return (market cap <£1m)
Most / all of these companies looked in worst shape than Staffline now, but high debt/equity, the covenant situation and ongoing reputational damage are enough reasons for me to steer clear. A final warning: the forecasts on Stockopedia appear to be out of date.