Is Utilitywise plc a falling knife to catch after plunging 40% today?

Neil Woodford owns under-pressure Utilitywise plc (LON: UTW) shares, so should you join him in the search for a bargain?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Utilitywise (LSE: UTW) has been lighting up investment radar screens all around the country — for the wrong reason.

The consultancy that supplies multi-utility packages to businesses had seen its shares topping 350p back in early 2014, but the price has plunged as low as 36p as I write.

That includes a 40% fall today, on the back of another profit warning. 

Its business model had attracted criticism, with its policy of recording commissions from energy suppliers as income a year or even more before the cash actually arrives. 

In this case the energy firms are surely not going to renege on their commitments and not pay. But it can bring uncertainty and can lead to rising debt.

At the interim stage however, net debt stood at a relatively modest £9.6m (down from £16.8m at the same stage in 2016). That’s close to adjusted EBITDA of £9.7m, and would not alone cause me any sleepless nights.

Profit warnings

On 29 June, the firm revealed a hit to its commission levels due to anticipated “material levels of under-consumption” against a major energy contract, with the overall result likely to be a total charge in the current year of around £11.2m — £7.7m being an exceptional charge and £3.5m a reduction in underlying profit.

And now we hear that Utilitywise has lowered its revenue predictions for the full year to between £4m and £4.5m below previous expectations —  apparently down to “same supplier renewals contracts which form a substantial proportion of the revenue secured by the group in the final months of the financial year.

The company has also now adopted IFRS 15 accounting standards, and we were told that had these rules already been in operation we wouldn’t be seeing the same drop in expected revenue. But it’s surely going to take some time to get the full picture under the new regime.

Should we buy?

The big question for investors now, of course, is should we buy? Or even sell?

The shares were already on very low P/E ratings, but after today’s price collapse we’re looking at a forward multiple of a tiny 2.2, dropping to a minuscule 1.8 based on the 19% EPS rise forecast for 2018. 

And the mooted dividends would now yield 18%.

What it will all look like once forecasts are reworked in accordance with the latest news (and based on different accounting standards) is something we can only guess at, but there would have to be something pretty catastrophic coming out of any reworking to make valuation levels like these look too expensive.

A dilemma

On the plus side, ace investor Neil Woodford owns Utilitywise shares, so he clearly saw value in its business model. I’d also say we’re looking at a classic growth story that’s gone off the rails a little, with the resulting desertion of the shares — and that could well mean an oversold bargain.

What would I do? I’d worry about whether future customers might have second thoughts having seen the series of problems this year — would they put their trust in a firm whose market capitalisation has now plunged as low as £27m?

I’d like to see full-year results (ideally with a restatement of previous results) under a more conservative accounting regime before I’d consider buying. But at the same time, if I owned the shares I don’t think I’d be selling.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »

Investing Articles

I think the Rolls-Royce dividend is coming back – but when?

The Rolls-Royce dividend disappeared in 2020 and has not come back. But with the company performance improving, might it reappear?

Read more »

British Pennies on a Pound Note
Investing Articles

Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Stock market bubble – or start of a bull run?

Christopher Ruane considers whether the surging NVIDIA share price could be symptomatic of a wider stock market bubble forming.

Read more »

Investing Articles

Buying 8,254 Aviva shares in an empty ISA would give me a £1,370 income in year one

Harvey Jones is tempted to add Aviva shares to his Stocks and Shares ISA this year. Today’s 7.37% yield isn't…

Read more »

Investing Articles

Is the tide turning for bank shares?

Bank shares are trading on stubbornly cheap-looking valuations yet business performance in the sector is broadly robust. Should our writer…

Read more »