Engineering and construction consultancy Driver Group (LON:DRV) today warned that full-year underlying profits would be below forecasts, causing an immediate fall in share price of around 30%:
This does not show the full story, and existing investors may be aggrieved that the share price also fell sharply in the previous Friday session as well, perhaps indicating that some people had advance notice of this coming.
Despite describing themselves as a ‘global consultancy’, Driver Group is still a small niche business. It does not build out projects themselves, but instead provides a vast array of professional services to clients operating in these sectors, and in recent times has specialised in dispute resolution. Clearly this may be quite forward-looking as contract issues and delays become more common in a downturn.
Driver has undergone a turnaround of sorts. Its business had slipped into loss a few years ago, and carried a relatively large debts of almost £10m. This position has been turned around entirely now, with the assistance of a very large share issue which has helped the cash position turn into a surplus. Before today the signs were bullish for the company with broker research giving profit upgrades. Stockopedia also liked this stock, with it having a 90+ rating until quite recently.
The warning is not couched as such, but comes in a trading update RNS. We see:
However, owing to a slowing in the speed of client conversion, in particular in the Middle East and south-east Asian markets as a consequence of local market conditions, the cumulative trading result is now behind the Board’s expectations for the current period and the Board’s judgement is that the shortfall is unlikely to be recovered in the second half. As a result, the Board now anticipates full year underlying profits before taxation to be slightly below the 2017/18 result at approximately £3.5m.
This miss is made a little more significant as a broker note (available on Research Tree) upgraded the same figure to £3.8m.
Current trading seems good:
The Company continues to perform well across markets, regions and sectors. It continues to enjoy great success with its Diales brand and in the recruitment of high quality experts and commissions. The Company’s new business enquiry pipeline is at an historically high level, and is approximately 20% higher year-on-year when compared with the corresponding period in 2017-18. Moreover, good quality enquiries are coming into the business across all sectors and regions. The Company’s recently reinstated, progressive dividend policy remains unaffected, underpinned by current cash balances of approximately £5.1 million.
What is not written here either is that cash levels appear to have decreased; the preliminaries showed a net cash of £6.9m.
Some other corporate speak follows, none of which is particularly meaningful:
Driver Group’s plans for further strategic growth and development are also unaltered. The Company continues to develop world leading, proprietary AI technologies to enhance client fulfilment, increase margin and strengthen its global competitive market positioning. The Company is also close to finalising a wider range of initiatives and structures designed to enhance its operational efficiency, lower its cost base and improve cash collection, in order to further cement the Company’s position as a leading global player.
It is fair to say that the group has arrested the slide and managed to turn itself around in recent years. Also striking that the growth seems to be paused for now. From the last annual report the trend was up:
Underlying profit is the measure used, which can be quite misleading: the adjustments made are share-based payments, exceptional items and amortisation of intangible assets, which offers some scope to present a smoothed figure.
For this year, £1.1m was put through the share based payments category, of which there seems to be very undemanding exercise prices:
Nevertheless, the cash position was good here. The preliminaries showed net cash of £6.9m and borrowings of £2.46m, which was repayable by 2020. There are facilities of a £5m term loan plus a £3m revolving credit facility, so combined with the cash balance there appears to be plenty of headroom and no immediate concerns.
As we can also expect, cash conversions were good as well in the past year, with a favourable working capital movement.
One problem to be wary of is that the share base has been diluted significantly over the years, reading across from 2013, this is the trend:
Shares in issue have approximately doubled in the past 6 years, which also goes some way to explain the share price movement over that period: shares today in nominal terms are worth roughly half as well.
It appears that Driver has a wide reach in a wide range of products and this makes them harder to analyse. In some respects they are closer to a litigation firm than a professional services firm. Segment reporting drills down as far as geography but not type of business.
Utilisation is a key issue here. The average staff count is 396, and wages and salaries totalled £41.2m – ie over an average of £100,000 per employee – perhaps unsurprising given their specialist nature. This may add an extra element of volatility to results.
The market capitalisation has dropped to £27m now, and this may offer a degree of temptation for some. There is a positive outlook, although this constitutes ‘jam tomorrow’, and may or may not emerge. The trouble with consulting businesses such as these is that revenues can be skewed by very large clients and delays to projects can have a knock-on effect on profits – this was the whole reason behind the profit warning today.
A few red flags have downgraded this for me: the suspicious sell-out on shares on Friday, the dilution of existing holders over the years, and the cash balance deterioration. I do believe that this would make a decent acquisition for another company and there may be a boost to the share price that way. 3/5.