Managed services IT and Communications supplier Redcentric (RCN:AIM) has sacked chief financial officer Tim Coleman after discovering misstated accounts.
The balance sheet review swipes £10m off its net assets and potentially doubles net debt.
The market had reckoned on about £16m to £17m of borrowings, the firm's debt pile today stands at nearer £30m.
Analysts believe the scandal will probably not threaten the survival of the company despite the share price collapsing a staggering 70% in trading on Monday, plunging from 150p to 47.5p.
'The company does not appear to be in any fundamental danger given the higher and more accurate net debt of £30m is still only just over one-times full year EBITDA,' says Philip Carse, analyst at IT analysis boutique Megabuyte.
'It has £50m of total debt facilities; debt continues to be repaid out of cash flow plus the recently announced sale of MANs for £5m, and the company has said that the accounting misstatements relate only to prior years.'
FinnCap analyst Andrew Darley has withdrawn his forecasts on the company following today's shocking news.
He comments: 'While new business sales in the last six months have been in line with management expectations, the accounting adjustments arising from the review are expected to lead to a write down in historic profits and the restatement of audited accounts for prior periods and the likely reduction of net assets by £10m.'
This is an absolute fiasco of the highest order, in our opinion.
It will force the company to completely rethink its banking arrangements and covenants. Don't expect any quick fix on that issue.
'The announcement of interim results has been delayed from the original planned date of 14 November, with the board under CEO Fraser Fisher and chairman Chris Cole “absolutely focused” on getting results out as soon as possible,' states Numis analyst Will Wallis.
'The incident has clearly rattled investors,' says Martin Courtney, analyst at IT analysis website TechMarketView. 'But we think a greater risk could be presented by any subsequent loss of confidence among Redcentric customers which adversely affects future sales.'
This is important for a managed services business. Around 85% of Redcentric’s turnover is recurring revenue from managed network, security, cloud and collaboration infrastructure services.
The impact of the accounting problems will take time to filter through as customers come to renew, or not, those contracts.
So here's the real question for investors. Given the enormous stock sell-off that has slashed Redcentric's market value from £218m to less than £70m, is there a risky bargain to be had?
With forecasts withdrawn by analysts at N+1 Singer, Numis and FinnCap, there is precious little reliable data on which to make a call.
