7:59 cut – STAF

Staffline (STAF) – FY Update

Audit Background

On 27th June (5 months later than the previous year and 3 days before the suspension deadline), Staffline issued their full-year results and Annual Report 2018. Prior to resigning the previous auditors said (amongst other things):

Our preliminary extended audit procedures identified evidence which raised concerns regarding the completeness of information provided previously by management to us in relation to customer claims and disputes.

After a number of frauds, perhaps most notably Patisserie Valerie, auditors have been taking a much more cautious approach and have been increasing the resources put into audits. As well as increasing costs to their customers, this has created somewhat of a labour shortage which has enabled them to be more picky over who they take on. Considering also the undesirability of being involved with a company with a history of minimum wage breaches, it was not surprising that Staffline took until mid-November to find a replacement.

Arguably they then got lucky – one auditor had some spare capacity after losing a client and had limited fear of reputational risk: Grant Thornton, previous auditor to Patisserie Valerie.

Nonetheless, it is certain that Grant Thornton would have insisted a very thorough audit (and higher fees) for their new, high risk client.

Today’s Statement

Few should therefore be surprised to hear that Staffline’s new auditors have found problems with their FY 2019 accounts.

These will be delayed (compared to FY 2017 and previously) and are on-going, but they are currently expected to include significant provisions and write-downs. It appears that some of these problems relate to FY 2019 business as well as one-off items related to previous years, because they say that even adjusted operating profit will now be materially below previous guidance.

They repeat hints of a disposal and reiterate FY 2020 guidance.

Also announced today was a “Directorate Change”. When you see this together with a profits warning it often indicates senior management have resigned. However, as previously noted, Chris Pullen has no shame and is still hoping the buck will stop at the CFO who was forced out earlier in the year.

Conclusion

Shareholders may be relieved that there is no apparent cash element [edit: Liberum say £3m cash] to the latest FY 2019 downgrade and that the board does not “anticipate any covenant issues”, although that may be different from saying none will be broken. Positive FY 2020 trading and a hope of disposals in H1 may also be received well.

As befits the company’s reputation, news of today’s announcement apparently leaked into the market a few days ago leading to a 15% share price fall.

I suspect the bottom may be approaching but I remain cautious until the HMRC ruling has been finalised / publicised and worried over company culture while Chris Pullen remains in charge.

[Edit: 50-55p earlier might have been the bottom (if it doesn’t go busy), but the current 67p looks fully valued to me at this point]

[Edit2: Liberum say “Unusually we leave FY 2020 estimates unchanged, given that we believe these were conservatively set in December and there is no new information today about the outlook”. This is a very weak argument for holding estimates and I consider them at high risk of further downgrade]