Connaught goes from FTSE 250 to small-cap status in a month.
The past four weeks have been extremely painful for shareholders of maintenance company Connaught (LSE: CNT).
Connaught gets clobbered (part 1)
Connaught provides integrated services to the environmental, social housing, public sector and compliance sectors, and employs nearly 10,000 people. However, the company is particularly exposed to maintenance spending by government and other social-housing landlords.
Thus, the bad news for Connaught is that its largest market faces cutbacks by the new coalition government. As a result, the FTSE 250 firm has become the most high-profile victim of the post-election emergency Budget.
These problems first came to light on 25 June, when Connaught released a very downbeat trading update. This warned that 31 of its 200 social-housing contracts could be affected by the proposed austerity measures. The company estimated that revenue of £80 million and EBITA (earnings before interest, tax and amortisation) of £13 million were at risk in this financial year.
Although these figures were not exactly chicken feed, they were small when compared with Connaught's record bid pipeline of £5.3 billion. Nevertheless, Mr Market's reaction was savage, sending Connaught shares plunging from 320p on 24 June to 107p on 29 June. This 67% drop wiped out two-thirds of Connaught's £447 million market cap in just three trading days.
Connaught gets clobbered (part 2)
Connaught followed this earthquake with an interim management statement on 8 July. This didn't spook the market, so the firm's share price continued to bump along at around the £1 mark.
Alas, on Monday, Connaught dropped another bomb on its investors. In yet another worrying trading update, it warned that it is being squeezed by suppliers and sub-contractors and urgently needs additional funds. Even worse, net debt is set to spiral beyond the previous year-end forecast of £120 million, causing Connaught to breach its banking covenants.
The fact that the company has approached its lenders -- including taxpayer-backed Royal Bank of Scotland (LSE: RBS) -- for additional funding sent another shockwave across the market. Investors, fearing a wipe-out or debt-for-equity swap, rushed to the exits.
At their low yesterday, Connaught shares fell to just 19.1p, valuing the entire company at under £27 million. After the usual dead-cat bounce, the shares went on to close at 31.5p, down 90% in a month and a day.
Connaught gets clobbered (part 3)
Sir Roy Gardner, non-executive Chairman of Connaught since May, has brought in a fresh team to help him to turn the tanker around, adding four new recruits to the management team. These new appointments will tackle Connaught's problems with finance and funding, operational efficiency and cost savings, communication and the social-housing business.
Sadly, Connaught's problems are far from over. We now learn that City watchdog the Financial Services Authority (FSA) has launched an across-the-board probe into the events of the past month.
The FSA will look into whether Connaught disclosed price-sensitive information to investors in timely fashion. Also, it is set to investigate share sales by a senior Connaught manager just two days before its 25 June profit warning rocked the market.
From FTSE 250 to micro-cap
So, Connaught shareholders have seen the company's value plunge from almost £450 million to £44 million in a little over a month. What can other investors learn from this tragedy? A few stock-market sayings spring to mind:
1. There's never just one cockroach under the fridge
Just as you never find just one roach under the refrigerator, only rarely do we find only one isolated problem at a troubled company. As well as problems with contracts, Connaught has been accused in the past of aggressive accounting and overspending on IT -- and now faces an insider-trading probe.
2. Cash is reality
Although Connaught grew its revenue aggressively during the Noughties, its profits and cash flow failed to grow at the same breakneck pace. For example, Connaught's operations generated £13.7 million in cash last year, just half the previous year's figure. Hence, the expression "Turnover is vanity, profit is sanity, cash is reality" springs to mind.
3. One big fall isn't all
Often, big share-price falls are followed by equally scary dips. Indeed, Connaught's three-day plunge of 67% was followed a month later by a one-day crash of 69%. Hence, don't assume that a company has entered the value arena simply because its shares have, say, halved. There could be worse news to come!
More from Cliff D'Arcy:
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