The Share Price Collapse Of Staffline

StaffLine are a recruitment agency that kept publishing good looking annual reports and positive trading updates.

StaffLine share price for the last couple of years
Then it all crashed from 1,300p to 35p as accounting issues were discovered, a share issue was needed debt grew again.

The issue that triggered the collapse was an internal process that suggested that the minimum wage hadn't been paid over a long period of time. This appears to be related those originally grey areas such as getting changed for work.

It also appears that the company expanded through acquisitions funded with borrowings.

Then COVID impacted everybody.

Key Point - The Delaying Of Accounts Is A Strong Danger Sign

When I first looked at Staffline I thought that the minimum wage issue was just an oversight, but as noted in the commentaries I had some concerns that the issue had been pushed onto the back burner.

It sounded like the sort of thing that many people knew about and were told yes we are doing something about it and eventually someone decided that they had to force the issue.

I was quite relaxed about the delay to accounts as I thought that I understood how the minimum wage issue could have occurred. I didn't take seriously enough was how it might have indicated that the company might be needing to defer the issue because the financial implications were so large.

The more that I see companies delaying accounts and then following up with much worse news the less tolerant I have become of it. It rarely seems to be the case that the delay is followed with that's okay the only issue was the one reported and at roughly that cost.

Lookers the car dealership had an issue that started out as a small fraud which resulted in a share suspension and the issue dragged on for months continually getting worse.

Key Point - The Need For Ongoing Research

When the first big loss appeared I spent a bit of time getting to know the company, but the announcement was quite vague.

As further announcements were made I spent more time doing further research and eventually put a note in the mental diary to look at the share price on and around the new share admittance date.

I found that by researching and waiting that everytime that I thought I had a clear view of what the problems were the reality was Wow, another big issue and price drop, surely it can't get any worse?

I don't track time spent on research as it is tricky to do, but I suspect that I have spent close on a couple of whole day on this company.

This is a lot of hours if you have a full time job especially even more so if you never trade the company.

In mid June 2020 the share price went from 28p to 48p in a day, this is the sort of change that gets flagged up all over the place. If you don't already have notes on the company then you could easily be panicked into buying thinking that a recovery is on the way.

If you are familiar with the company and then you know that only something massive could cause a change like that and for it to stick. Something that massive you could find with a few mouse clicks and if you can't its just a blip.

Key Point - Worry About Expansion By Acquisition

Companies expanding by acquisition are not new, but when the companies being bought are being bought of their founders worry.

It is all too easy for the newly bought businesses to become comfortable, some of the senior staff who have just had a big pay-out may lose their enthusiasm and those not benefiting from the sale can see promotions disappearing and their chance to get in to something big it its early stages gone.

Dignity, the funeral group grew by buying local undertakers and seem to have suffered a similar fate.

The Details - Staffline
Staffline For The About The Last Two Years
Staffline For The Last Year Or So

A8/Jan/2019 - Trading Update
A perfectly normal trading update for the period up to end of December 2018, it wasn't a great update and it caused a smallish drop in the share price of about 10%.

Revenue was up 18% on last year but an increase in net debt to £63m due to acquisitions and one off exceptional costs in transforming the People Plus division were downsides.

People Plus is a training operation heavily reliant on Government schemes, direct and indirect such as the apprenticeship levy, for training/retraining and this year they had £20m of one off exceptional costs.

Funding acquisitions with debt also seems to be part of the problem which will develop.

B30/Jan/2019 - Unexpected Announcements
A one paragraph RNS statement saying that the publication of the accounts has been delayed.

Later on in the day the company suspends trading in their shares.

Later another RNS announcement ..the Company can confirm that this morning concerns were brought to the attention of the Board relating to invoicing and payroll practices within the Recruitment division. and a report that in July 2018 the Company refinanced its £150m lending facilities.

C12/Mar/2019 - Trading Resumed
Trading in shares resumed.

It was announced that £7.9m was being put aside to cover the fact that the company had not been paying minimum wage, this was related to something like the agency workers weren't being paid for the time they spent changing for work.

Share trading was resumed and the price recovered to around 820p although this £7.9m was bad news as it was about half of the expected profit for the year and was up from £4.4m, it was a genuine one off cost.

D30/Apr/2019 - Trading Update
Trading Update issued saying some more work is being done on the minimum wage issue, but it was a reassuring update and the 2018 accounts would be released soon.

E17/May/2019 - Trading Update
A generally bad Trading Update, very few numbers, mostly predictions of difficult trading in 2019 aong with the Board now expects the Group to deliver adjusted EBIT in the range of £23 million to £28 million for the financial year ending 31 December 2019.

BrExit is affecting demand and there has also been a slowdown in new contract momentum in the current financial year, which the Company largely attributes to the impact of the delay in publication of the 2018 Full Year results.

People Plus - However, performance in 2019 will be affected by continued delays

Note that the minimum wage issue is still not yet resolved and oddly this is the moment that the share price collapses from 800p to 300p not the just about to come share issue that brings it down by another 50% to around 150p

F17/June/2019 - Notice Of Results
The Group intends to announce its audited results for the year ended 31 December 2018 on 27 June 2019.

The minimum wage costs have risen from £7.9m to £15.1m.

Additional exceptional costs included in the 2018 result relating to extended audit procedures will be £1.8m, taking total non-recurring exceptional charges for 2018 to £32.6m.These were £20m in Jan 2019.

An announcement of a plan to raise £30m from investors and another £7m from existing share holders.

Very roughly the share issue would double the number of shares in circulation

G27/June/2019 - Final Results And Confirmation Of Share Issue
Bad trading update dressed up a bit

Recruitment revenue flat on a like for like basis but up by 21% due to acquisitions, People Plus in decline -6% and Net debt at £63.0m, an increase of £46.5m and swing to a £10m loss from a £24m profit.

The share issue mentioned a few days was made, the Placing raised £34 million (before expenses) through the placing of 34 million new ordinary shares at 100 pence per share. The market price for the shares had dropped from around 240p when the issue was announced to around 100p.

The Placing Shares represent approximately 122% of the Company's existing issued ordinary share capital.

The £7m open placing was confirmed.

H15/July/2019 - Confirmation Of Open Share Issue
The smaller open share issue was confirmed as been fully subscribed and would be admitted on the 16th of July.

The Placing Shares represent approximately 10% of the Company's existing issued ordinary share capital.

I16/July/2019 - New Shares Admitted
The new shares started trading and by 19/July/2019 they had risen to 130p.

Adjusting for the new shares the historic price has been in the range 360p-504p (800p to 1200p) so the post issue price is roughly a quarter of the price over the last few years.

J19/July/2019 - Share Price Slowly Recovering
The shares are showing an upward trend and we are yet to see big public dumps of the newly issued shares.

K1/Aug/2019 - Share Price Slowly Recovering
A 35p price rise as an announcement was made that HRnetGroup Ltd had acquired a significant stake in the company, trebbling its holding to 24.9% and buying at 180p per share.

HRnetGroup is a recruitment business based in Singapore, so it seemed like they would know what they were doing.

L12/Aug/2019 - Share Price Static
Trading volumes have now dropped to an insignificant quantity and volume meaning that funds used to hold Staffline shares will not be generating any returns unless some unexpected news is released. So it may be time to note the date of the next trading update and possibly get out and then back in.

Auditors PWC resigned on the 8th.

M17/Sept/2019 - Poor Interim Results
A poor set of interim results send the price down to around 90p.

N18/Dec/2019 - Trading Update
A downbeat trading update which included an admission of a £4m misstatement of 2018 costs and underlying profits expected to be down from £39m to around £10m.

The Board expects year end net debt to be approximately £50 to £55 million, note that it was £63m before the £37m share placing and no reason was given.

O31/Jan/2020 - Trading Update
A downbeat trading update which included an admission that operating profit for the period ending 31st December 2019 to be materially below previous guidance.

P20/Feb/2020 - CEO Resigns
Chris Pullen resigns but we are now at the start of COVID affecting share prices.

The Group's net debt position at 31 December 2019 is expected to be £60 million, which remains subject to audit. This is after the share issue that was supposed to solve the debt problem.

Q25/Mar/2020 - Trading Update
COVID affecting demand in various sectors, some up and some down.

Year ending 2019 audit still ongoing, and VAT payments being deferred probably storing up problems for the future.

R27/Apr/2020 - Trading Update
COVID affecting demand in various sectors, some up and some down.

VAT deferral is mentioned again.

S29/Jun/2020 - Completion of Refinancing
The same overall facility was retained but an RCF was reduced and the overdraft removed and a Receivables Finance Facility was created, borrowing against invoices.

The Board expects to agree and implement a revised financing structure in respect of its main banking facilities...

T30/Jun/2020 - Results For Year Ending Dec 2019
As expected results were poor