Taking a loss on a business that disappoints is a routine part of investment. But what we really want to avoid is companies that go bad and result in a 100% loss.
Carillion and Patisserie Valerie are two high-profile examples from recent years. Carillion was easy to spot, Patisserie Valerie not so much.
The latest shock stock is recruitment group Staffline (LON:STAF). This AIM firm had its shares suspended on 30 January, after the board became aware of “concerns … relating to invoicing and payroll practices”.
I added Staffline to the SIF Folio in October and bought the shares for my own portfolio at the same time. So I am keen to know what’s gone wrong. The SIF holding (and my own) were suspended showing a loss of nearly 50%, but this is academic. Until the shares come back from suspension, they’re effectively worth zero.
As my SIF stock screens are not offering any new shares for me to consider buying this week, I’m going to devote this week’s article to taking a closer look at Staffline. Was there something I should have seen?
The story so far…
Let’s start with a look at a timeline of events so far.
4 July 2018: H1 trading update receives warm reception.
Staffline issues H1 pre-close trading update. Everything seems fine. Graham Neary reported a positive impression of the firm in the SCVR on that day. The shares start climbing and gain 30% by early September.
25 July 2018: Interim results look fine.
H1 results appear to confirm the positive story. Shares keep rising.
8 January 2019: Full-year trading update flags unexpected costs.
Perhaps the first sign of problems. The shares fall after the group’s full-year trading update said results would be “in line with market expectations”, but revealed £20m of exceptional costs.
These costs had not previously been mentioned. They related to acquisitions made during 2018 and to the ongoing transformation of the PeoplePlus training business following the end of the Welfare To Work scheme. The end result was that 2018 year-end net debt was expected to have risen to £63m.
To put these figures in context, in 2017, Staffline reported a net profit of £18.33m and net debt of…
