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Questor: why has Staffline suspended its shares and what does it mean for shareholders?
Questor share tip: the recruitment firm has admitted to ‘concerns’ over its accounting practices. We look at what it might mean for investors
Uncertainty is, famously, what investors hate above all else – and nothing breeds uncertainty like the suspension of a company’s shares.
This is the fate that has befallen Staffline, the recruitment firm tipped here two years ago. On Wednesday last week the company said it had “concerns” over its accounting practices and, while it was investigating, had asked for trading in its shares to be suspended.
It also delayed publication of its 2018 results, which had been due that day.
In such circumstances there tends to be an almost complete lack of information, and Questor will not be able to give a firm view on the stock until more details come to light and trading resumes. However, we have spoken to several well-informed people in the City in an attempt to get some sense of Staffline’s position.
First, though, we’ll report what the company did say in its announcements to investors.
On Jan 30 it said: “This morning concerns were brought to the attention of the board relating to invoicing and payroll practices within the recruitment division.
“The board is confident that its policies in relation to these matters are appropriate, particularly given that these practices have been the subject of prior audits. However, if the allegations are substantiated this could have a material impact on the group and its profitability and until further investigation has been undertaken the board cannot assess the potential materiality.”
It said its financial position was otherwise “unchanged”, adding: “As reported on Jan 8 the company expects to report net debt of about £63m for the year ended Dec 31 2018 and can also report that in July 2018 it refinanced its £150m lending facilities.”
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On Jan 8 Staffline had said trading for the full year should be in line with market expectations, with sales expected to be about 18pc higher. However, it unnerved investors by saying it also expected exceptional costs of £20m in 2018, largely because of restructuring in one division.
It added that, while it remained “highly cash generative”, these costs, together with the cost of acquisitions, would result in the increase in net debt mentioned above.
What Questor has learnt
One former investor in the company said: “We didn’t see this coming – the company appeared to generate cash, which is normally a reliable screen against fraud. We changed our view because growth was slowing, there was a changing of the guard with the founder [Andy Hogarth] leaving, new contracts with the Government were stuck and we were concerned on the blue collar recruitment side.
“I don’t know what has been happening on the accounting side but it looks pretty ominous. These days, accounting issues have really burned investors, which is presumably why they shoot first and ask questions later.”
The shares fell by a third on the day of the suspension and had already fallen by 22pc in the aftermath of Jan 8’s announcement.
Ken Wotton of Gresham House, the fund manager whose holding in Staffline prompted our original tip, said: “Everything is very uncertain until the company has conducted its investigation into the alleged issues, hence the sensible decision to suspend the shares pending the outcome.”
- Questor archive: telegraph.co.uk/questor
We also spoke to Andy Hogarth, who was Staffline’s chief executive until January last year. Our tip of two years ago drew attention to his practice of setting ambitious targets for the company and his habit of meeting them. We also pointed out that he owned a stake of about 6pc in the company at the time, which was worth about £18m.
Hogarth said yesterday that his stake was now about 500,000 shares or about 1.8pc of the total, worth about £3.4m at the price at which the shares were suspended.
He added: “I’m not worried about my money. Although I’m not au fait with what’s going on inside the company anymore, I am confident that it is fine, that there has been no fraud and that everything will be resolved.” He said he had “absolute, total confidence” in Chris Pullen, the current chief executive, and his team.
Hogarth added that he was likely to hold on to his shares when trading resumed.
We will update readers again when new information comes to light. Investors have no choice but to hold while the suspension remains in place.
Questor says: hold
Ticker: STAF
Share price (suspended): 670p
This article was amended on Feb 6 2019 because it originally stated incorrectly that Andy Hogarth's stake was now £500,000, not 500,000 shares