The discovery of accounting irregularities and subsequent resignation of its chief executive has shocked investors in Speedy Hire (SDY). The shares fall 16.7% to 53.75p, not helped by analysts slashing their earnings forecasts.
Speedy told the stockmarket late last night that a number of accounting balances in its international arm had been mis-stated. Group boss, Steve Corcoran (pictured above), has resigned and will leave once a replacement is appointed. That could be Mark Rogerson, the former head of Costain's (COST) natural resources division who is joining Speedy next week as chief operating officer. He also brings experience from Serco (SRP) where has ran the defence and aviation operations.
Addleshaw Goddard will conduct an investigation into the accounting matters and forensic accountants are in the process of being appointed.
The finance director of the international division has been suspended; other senior members of staff are under investigation.
'The emergence of control issues within the business will raise uncertainty as to the execution risk of managing nascent overseas operations,' says Liberum Capital analyst David Brockton. 'Speedy still has ample headroom on its facilities well within its banking covenants, but it has breached terms related to honest financial reporting covenant. Waivers are being agreed with Speedy’s lending banks and we would expect little issue from those that lend to its UK business. Speedy does have a facility for its international business, with HSBC, but we understand only a small amount has been drawn on the facility.'
Speedy reckons the issues will reduce pre-tax profit for the financial year to 31 March 2014 by £3 million. It will have to restate accounts from 2012 and 2013.
The international division was seen as an important growth driver for the business. It shows showing Speedy's skills at a broader outsourcing business rather than just a tool hire company, as we discussed in a Griller interview earlier this year. Last month it entered into a joint venture with J&J Denholm to provide asset management and equipment rental services to the oil and gas sector in Kazakhstan.
In 2012, it won a five-year, $50 million contract to provide logistics, asset management and rental services to support drilling and processing activities by ZADCO on four artificial islands in Abu Dhabi being used for drilling on a very large oilfield development.
Speedy says the accounting irregularities are believed to affect a 'limited number of smaller contracts'. It adds: 'These issues do not relate to the ZADCO and Al Futtaim Carillion contracts nor the Kazakhstan joint venture.'
Despite its strategic importance to Speedy, the international division only contributed a small part to earnings. The group's UK business represents the bulk of the company's income: 95% of revenue and 96% of earnings before interest, tax and amortisation (EBITA) in the year to March 2013.
Investec has puts its target price (formerly 100p) and rating (previously 'buy') under review, saying there's many questions that still need to be answered. It reduces pre-tax profit forecasts for the year to March 2014 by 15% to £17.5 millino; 2015's numbers are slashed by 13.6% to £21 million.