If there’s such a thing as the British business establishment then Sir Roy Gardner, chairman of Compass and former boss of Centrica, is a member.
So, there was understandable surprise in May when Sir Roy took on the chairmanship of Connaught, a support services and social housing specialist that had grown quickly through acquisitions and had been dogged by concerns about its accounting policies.
Two months after he took on the position, Connaught unleashed a shock profits warning that obliterated its share price.
The company blamed the problems on its social housing division and specifically, contract deferrals by cost-conscious local governments.
However, things just did not stack up. Connaught’s biggest rival Mears said it was not “feeling any hurt” and analysts were at a loss to explain how £80m had been lost from the revenue line in the two months since publication of the interim results. There was also dark mutterings about Connaught accounting polices and particularly the amortization of costs.
Sir Roy must have been scratching his head too. But not for long.
On Thursday morning, Connaught announced the departure of its founder and chief executive (for health reasons), its finance director and launched an independent review of certain accounting policies.
Today the Group announces two further management changes. Mark Tincknell has agreed with the Chairman that in order to recover from recent health issues he will relinquish his role as Chief Executive with immediate effect. He will continue to have an on-going role in the Company. His 28 years experience in the business, knowledge of the markets and relationships with clients and employees will be invaluable to the Group going forward. The Board is grateful for the operational improvements that Mark has made since becoming CEO in February 2010 and see it as vital that these initiatives continue.
In addition, Stephen Hill has decided to step down as Finance Director at the end of October this year. The Board respects his decision and he leaves with their thanks for his contribution over the last four years. The Company will begin an immediate search for a suitable replacement.
The Chairman has initiated an independent review of the current accounting policy for mobilisation costs to ensure that, in light of the more contractual and tightened economic environment, this policy remains appropriate in its current form.
Surprisingly, market reaction to this news has been remarkably sanguine given the high level of uncertainty. At pixel time, Connaught’s shares were down just 1p at 116.8p. However, analysts are not as relaxed.
Oriel Securities is telling clients to steer well clear.
New Chairman, Roy Gardner, has decided to act on the concerns that came to a head with the profits warning less than two weeks ago.
Mr Gardner has also launched an independent review of the accounting policy for mobilisation costs (currently large mobilisation costs are capitalised).
This all leaves the group in limbo. We’d be inclined to stay on the sidelines until we have better clarity of precisely what is under there. SELL.
And Investec says sell.
The Chairman has initiated an independent review of the current accounting policy for mobilisation costs. As we stated in our note on 17 May (‘Cash flow dictates lower valuation’), we believe the capitalised mobilisation costs that we can see on the balance sheet represent 24% of stated operating profits over the last three years. We believe a material negative restatement of profits will be proved necessary.
The Chairman is clearly getting to grips with the issues at Connaught. However, we believe the risk to forecasts is still very high, and with debt increasing and an unfavourable valuation comparison to peers, we reiterate our SELL recommendation.
This has a very nasty smell about it.
Related link:
Shareholders fret over Connaught’s problems – FT