Speedy Hire stumbles on dodgy accounting

Just weeks after announcing its first-half results, Speedy Hire (SDY) made a shock revelation that accounting irregularities had been discovered in its international division. Following management changes in the international business, accounting balances were found to have been mis-stated, apparently with deliberate intent. Although not directly implicated, chief executive Steve Corcoran said he would step down, and Speedy's shares nose-dived 22 per cent.

Speedy said that only a limited number of smaller contracts were affected and that the UK business, which generates 96 per cent of group cash profits, was not involved in any way. The mis-statements aren't expected to have a material impact on cash, but they will hit the P&L account. Speedy estimates the total impact to be in the region of £5m, with around £3m shaved off current year profit before tax.

Since the initial announcement, Speedy has provided clarification on what this means for its loan arrangements. While the company has remained in compliance with the financial covenants of its banking facilities, certain other, unspecified terms have been breached - but Speedy believes these have been waived by its lenders.

Peel Hunt says…

Sell. We are obviously stunned by these events, and had considered the international business to be an important future growth driver. We sense that it will be some time before the events and impact are fully understood, and this should be reflected in the near-term rating. However, the UK business remains well positioned for an upturn and should prove resilient to the events overseas. We also consider that the underlying asset value (47p a share) should provide an important support for the shares. But we downgrade our 2014 forecast for pre-tax profit by £3m to £17.5m, to give EPS of 2.6p (from 3p). We caution that further downgrades are possible, given that investigations continue and the breach of certain banking terms.

RBC Capital Markets says...

Sector perform. Our discounted cash flow valuation for the group, leaving all else equal, drops from 70p to 60p due to EPS downgrades. Hence, if the accounting issues are found to be an isolated incident, we believe there's clear value in the group. This is based on a UK business where profitability is improving on the back of a changing model and a cost reduction strategy. This should lead to significant operational leverage should markets recover, which we believe isn't currently factored into forecasts. However, given the uncertainty at the moment, we believe a discount to our valuation is warranted - attributing a 15 discount generates a target price of 51p.