Shares in global consulting firm RPS (RPS) slid more than 15% to 145p after it revealed a significant drop in 2019 profits and said at best it expected a ‘stable’ result from its various divisions this year.
The firm was impacted last year by a drop in revenues and earnings in its Australia Asia Pacific business and its UK and Netherlands Service business. In addition it suffered the loss of key staff in a couple of regions which impacted sales.
TROUBLE ‘DOWN UNDER’
Fees from the Australia Asia Pacific division fell 16% to £98.3m on political uncertainty caused by state and federal elections during the first half and a ‘subdued’ property market.
Although activity picked up in the second half it wasn’t enough to rescue the full year, and profits fell by a whopping 52% to just £6.4m.
As a result of the risks facing the Australian economy, management has concluded that ‘the prospects for the business, particularly from historic acquisitions, are less certain than in previous impairment reviews.’
Therefore it has taken a goodwill impairment charge of £19.8m for its Australia Asia Pacific business, contributing to a drop in reported profits from £41m in 2018 to just £4.8m last year.
UK OUTLOOK WEAK
Despite political uncertainty in the UK for most of the year, demand for consulting services remained firm in Northern Ireland and the Republic of Ireland leading to good fee growth.
However the UK remains ‘subdued’, even after resounding outcome of the general election, and although the business ‘is capable of fee growth’ this year the need to invest in a new ERP system and other projects means profits ‘will be slightly down compared to 2019.’
Meanwhile the UK and Netherlands services business saw fees drop nearly 9% to £101.4m and profits drop 20% to £10.8m as the UK water business was on hold until the new government spending plan which comes into effect this April.
The company says prospects for 2020 ‘rely on the ability of our strong water services business to take advantage of the anticipated cyclical upturn’, and that it expects the services business to grow but it appears to have little visibility as it stands.
ISSUES IN THE US
Fortunately, strong demand offset weak execution in the North American business which continued to suffer the departure of key staff during the course of the year.
Fee income was more or less flat at £58.3m but profits dropped 33% to £3.4m. The firm says it is ‘better positioned’ now and doesn’t expect a further decline in fees or earnings.
However, among the exceptional costs is a £1.4m charge for ‘legal fees incurred investigating potential issues regarding the administration of US federal government contracts and/or projects’, a phrase which is likely to strike fear in the hearts of most investors.
Moreover, the firm says while it is investigating the matter to try and work out the implications, the impact of its review is ‘unknown’ and ‘further exceptional costs for legal fees will be incurred in 2020.’
Facing ‘potential issues’ on US government contracts and possibly a large legal liability is a big red flag for us, and until the matter is clarified we would be very wary of buying this dip in RPS shares.
