Spotless Group Holdings Limited (ASX:SPO) provided a comprehensive report on its performance and FY16 outlook after the initial profit warning issued on 2 December.
Acquisition Underperformance and Integration Risks
Spotless announced that the recent short term factors will adversely affect its performance in the coming year. It stated that individual costs from bids for contracts and other expensing transactions will impact its FY16 EBITDA by $15 million. The company estimates the underperformance of its acquisitions in Launderies and AE Smith divisions will negatively impact FY16 earnings by $20 million.
Spotless acquired Aladdin Laundry, ILS and Prime Laundries in FY15. The company closed down two sites and redirected volume to two other existing facilities as part of its integration plan. This caused operational issues arising from differences in customer product mix and high volume demand. The company also announced that it might need one year to resolve integration and performance issues regarding these acquisitions. It stated that its AE Smith acquisition is operating well but the company will need to realise integration benefits of its self-delivery system.
Additional Expenses Worth $10 Million
Spotless also anticipates further $10 million expenses to its initial announcement on 2 December 2015. The company states this downgrade was announced due to a change in business conditions. Some of the anticipated new wins have not materialised and a few contracts have been delayed. Spotless also reassures that there has been no deterioration in revenue quality of its existing contracts.
The company also mentioned that it has downgraded its guidance provided a week earlier as it expects the costs of integration will not reduce in the second half of FY16.
Focus areas for the short to medium term are to attain synergies from acquisitions, drive renewals and new business wins and enhance the company’s market position as an integrated services provider.
Reconfirms NPAT Guidance for FY16
Spotless confirmed its guidance for FY16 as it expects NPAT to be approximately 10% lower than FY15. The company forecasts its revenue to materially exceed FY15, while EBITDA is anticipated to be flat. The reduction in NPAT is driven by the increase in depreciation, largely due to the impact of acquisitions, increased capex and capitalised bid and mobilisation costs.
Even though Spotless has shown a strong operational performance since its inception, it is facing uncertainties at the current stage. Investors are worried about its performance as the stock has fallen approximately 45% last week.
Author: Simon Herrmann
Dec 09, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.