Further accounting restatements at energy consultant Utilitywise (UTW:AIM) are 'a material risk for investors' according to the latest update from bearish Panmure Gordon analyst Michael Donnelly.
Donnelly's previous warnings on the stock proved justified at full year results announced last week (27 October) when Utilitywise restated historical accounts by £3.6 million, around 10% of book value, because of an 'accounting error' – the second time it has done so in 24 months.
The move also inflated 2015 reported profit by more than £1 million, as previously reported by Shares, raising further question marks about the firm’s financial statements.
Now Donnelly, in an updated research note, has reiterated a 'sell' rating on the stock and says his 174p target price does not factor in the potential for similar accounting adjustments in the future.
'We make no further adjustments to this valuation to account for the risk of further accounting restatements, although this remains a material risk for investors in our view,' writes Donnelly in a note out today.
'This means investors still face downside risk in the share price from current levels, so we maintain our 'Sell' recommendation.'
Full-year results reported by Utilitywise were higher than indicated in an earlier trading update. Better-than-expected profits were a result of historical adjustments which increased 2015 earnings before interest, tax, depreciation and amortisation (EBITDA) by at least £1 million. Reported EBITDA was £17.8 million.
'Did Utilitywise beat numbers?' asks Donnelly in the note.
'The prelims of 27 October 2015 showed sales in line with management's August guidance, but an EBITDA some 10% higher than our £16.2 million forecast.
'The £1.3 million-plus EBITDA beat arises from the correction of an 'error' made in the 2013 and 2014 accounts where the 15% provision for 'leakage' was 'too low' (and short term).'
Utilitywise believes it can reliably estimate its customers’ energy usage in advance, allowing it to book 85% of the expected value of these contracts as revenue when they are agreed.
'Leakage' is the remaining 15% of the expected contract value, which represents a provision in case customer energy usage is lower than expected.
In 2013 and some contracts in 2014 leakage was higher than the 15% forecast as a result of lower than forecast consumption and customer defaults to suppliers.
This resulted in a downwards historical restatement of the profitability of the earlier contracts.
Now Utilitywise says leakage is back around the 15% mark previously estimated – and may even be falling – so will continue to use this measure in the future.
A 1% increase or decrease in leakage is worth around £1 million in operating profit, chief financial officer Jon Kempster told Shares after the results.
Utilitywise says its new calculations of contract value and leakage are more forensic and should therefore be more accurate in the future.
Alongside the results, management also took steps to reassure investors over poor cash conversion in 2015 by announcing improved payment terms with a major supplier.
On 29 October, Utilitywise announced 150 contract wins in its Energy Services Opportunity Scheme compliance service.
There are three 'buy' ratings and one 'sell' rating on the stock, according to Thomson Reuters data.
Shares in Utilitywise trade 4% lower at 185p.