Shares in business energy services supplier Yu Group (YU.:AIM) have slumped by 82% to 107.5p after issuing a shocking announcement that will have many investors recalling the recent scandal at cake chain Patisserie (CAKE:AIM).

The accounting bolt from the blue confirms massive miscalculations on previous accrued income, trade debtors and gross margins after an internal probe. The net effect is a £10m hole blown into this year’s profits.

As recently as September analysts at the firm’s own broker Shore Capital were anticipating £5.4m of adjusted pre-tax profit, so you don’t have to be a mathematics expert to work out the depth of losses now likely.

‘It is worth saying the issues at Yu do not look as serious as those at Patisserie where finance director Chris Marsh was arrested and released on bail as part of a probe into potential fraud’ points out AJ Bell investment director Russ Mould, but the scale of reputation and share price damage is vast.

It is extremely rare to see a share price fall in a single session by as much as Yu’s today. Its stock had been as high as 800p before the recent stock market sell-off and hit a record £13.45 in March.

WHO CARRIES THE CAN?

Without further detail the buck for this disaster must surely lay with chief executive and founder Bobby Kalar.

Chief finance officer Paul Rawson has only been in the job since August so deserves the benefit of the doubt (he may have launched the accounting review) but previous finance chief Nick Parker only left the business in May, which begs questions regarding his own culpability.

The fact is that management have a major task to win back shattered investor confidence and we can only hope existing business energy customers will not walk away.

This is hugely embarrassing for Shares given our long-run support for the company and its investment potential, including a very positive article on 23 August.

But how can investors, and other observers, be expected to make reasonable judgement on potential investments when they cannot rely on the numbers presented?

We wrote that August article based on information from the company and analysts at the time of writing. Today’s announcement clearly changes the investment case.

WHAT NOW?

Yu is trying to put a brave face on future prospects, saying it remains confident of achieving profitability for its 2019 financial year, backed by around £67m worth of contracted revenues already booked.

‘Yu retains a strong balance sheet with net cash reserves of circa £11.5m as at end September,’ says Shore Capital’s Robin Speakman. But the analyst has been forced to pull his forecasts until he’s had a chance to talk through the details with management. New estimates will make for interesting reading, when they come.

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Issue Date: 24 Oct 2018