Great Titchfield Street, London -- Back in August, I thought the share price fall of Guardian IT (LSE: GRD) might represent a good buying opportunity for a 'glitch' investment. Indeed, over the next four months, the share price doubled as investors backed the IT disaster recovery specialist in these times of turbulence.
However, that recovery has been wiped out completely. Guardian shares witnessed a dramatic 60% fall this morning after the revelation that trading hadn't recovered as expected. The recent appointment of a new finance director has unearthed some overoptimistic forecasts for 2001. As a result, this year's operating profits are expected to be around £13m to £14m, some 25% to 30% below previous expectations. More of a concern is the fact that the company is having to talk to its bankers in order to get additional flexibility on its loan covenants, as one of the conditions relating to operating profits will now not be met.
Guardian has £110m in debt, courtesy of an acquisition binge. This is £20m higher than it reported at the end of June, another worrying sign. The closure of its web-hosting business, announced in September, was only supposed to cost £4m, so it looks like capital expenditure has massively exceeded the cash generated by operations.
On the plus side, the group said it has not lost market share and added that its pipeline of new sales contracts was healthy. Many people thought disaster recovery services would be at a premium in the post-September 11 environment. However, it looks like the opposite is the case. This is another example of IT expenditure that many firms have decided they can do without, as they would rather focus their energies on meeting profit targets. That attitude is a concern in itself, but a natural consequence of the City's focus on the short-term.
So given all this new information, where does Guardian stand as a potential investment? This particular warning came out of the blue and there must be a worry that there is yet more to come. With underlying post-tax profits now looking like coming in at around £5m, the company is valued at 25 earnings for 2001. Prior to today's announcement, £10m was expected for this year and £15m for 2002. Profits of £7.5m, half the previous expectations for 2002, look like a generous assumption at the moment. That still represents a price to earnings ratio of 17 times. Given the increasing debt levels, the shares should be left alone until there is more clarity on the full extent of its problems.
More: Guardian discussion board
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