Why Is Speedy Hire Plc Crashing Today?

Shares in tool and equipment rental firm Speedy Hire (LSE: SDY) fell by more than 30% when markets opened this morning, after the firm issued a major profit warning.

Speedy said that after “a slower than expected start” to the year, profits for the 2015/16 financial year were likely to be “materially below the Board’s expectations” and below those reported for last year.

The company gives three reasons for its poor start of the year, but to be honest, I’m not totally convinced this is the whole story.

1. Equipment shortage

The firm says that there was a shortage of equipment during the network optimisation programme. This refers to the reorganisation of the company’s national and regional distribution centres.

However, in its final results, published in May, Speedy Hire boasted about the successful and early completion of this programme, during the last financial year. Why is it still causing problems now?

2. Ignoring customers

In today’s statement, Speedy Hire says that sales suffered because of a “focus on strategic accounts at the expense of SME customers”.

The firm’s strategic and major accounts accounted for 51% of sales last year. In last year’s results, there was a lot of waffle about new sales and support structures for strategic accounts.

At the same time Speedy Hire said that its market share of local and regional customers had fallen, due to its strategy of moving away from local markets. The firm said that it was “starting to re-engage with this customer base” but that it “was no small task”.

3. IT problems

The third reason given for today’s profit warning was “poor customer service caused by disruption during the implementation of a new IT and MI system”.

Yet in last year’s results, the firm claimed that it had completed the implementation of the new IT systems. If this is true, why is it still causing disruption?

CEO walks plank

In my view, all of these problems are the result of poor management.

I was not surprised to learn that the firm’s chief executive Mark Rogerson has decided to leave the business.

However, Mr Rogerson is being replaced by the firm’s finance director, making me question whether this management overhaul will be significant enough to solve Speedy’s problems.

What’s really wrong?

Speedy’s shares have now fallen by nearly 40% this year. The firm is the second listed equipment hire company to issue a profit warning this week — shares in HSS Hire Group fell by 25% yesterday, with the firm blaming weak demand from major customers.

I suspect that demand from strategic customers is not rising fast enough to make up for falling local sales. I wouldn’t be surprised if Speedy issues another profit warning later this year.

A full-year loss seems likely, especially as Speedy said today that negotiations with a potential buyer for its unwanted Middle East operations had failed to reach an agreement. This could lead to an impairment charge and possibly cash losses, later this year.

There’s also a risk that Speedy’s net debt, which rose to £105m last year, could become problematic.

Speedy’s profit warning highlights the risks of small cap investing. But the firm’s shares are still 81% higher than five years ago.

That's 50% more than the FTSE 100, which has only gained 31% over the same period.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.