7:59 cut – STAF

I was not prepared for any news this morning and also expected an early SCVP to cover anything that did come up, so apologies for the short report. [Edit: I crossed with the SCVP]

It looks like Staffline have reached agreement with HMRC over minimum wage issues and they annual report is now just pending audit. The expect it to be published by 27th June, but of course we have seen with RDL Realisations how they can be delayed at the very last minute. [Edit: for example, the auditors need carefully consider whether the audit is on a “going concern” basis]

The HMRC news is bad and highly material, forcing the RNS. Costs are far higher than previously announced – perhaps HMRC felt they were in a strong negotiating position under the circumstances and also wanted to make an example of them.

They have confirmed that they are in breach of their debt covenants and in negotiations with lenders. The cancellation of the dividend was inevitable.

They have announced a planned emergency fund raise. At the current share price they would need to issue half as many shares again and the new shares would then comprise a third of the total. The share price action today will be critical to determining the level of dilution – it could be better or a lot worse than this. Either way the dilution will limit the amount the share price can recover if the business recovers. [Edit: This approximates to all exceptional cash costs for FY 2018]

The only positive point, and something they are to be congratulated on, is the inclusion of an open offer in the fund raise so that all existing shareholders can participate. It also makes good sense because it gives shareholders some reason to hold on to their shares until the qualification date (once announced).

Strangely, previous reported poor trading due to reputational issues of not having produced an annual report have not continued and they report trading inline. The worst publicity will surely come today (and potentially again later if HMRC make a statement), and if there was any truth in their reported customer confidence issues then they can surely expect contract delays between now and the 27th.

Expect volatile trading this morning.

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