Toilet roll specialist Accrol (ACRL:AIM) is stinking out the market today, an unscheduled update containing not only a severe profits warning, but also news the shares have been temporarily suspended on AIM as crunch talks with its bankers are underway.
The Lancashire-based maker of toilet rolls, kitchen towels and industrial wipes warns earnings for the year to April 2018 ‘will be significantly below existing market forecasts’ and net debt will be higher than expected.
FLUSH WITH EXCUSES
Trading conditions have become more challenging, the company has been hit by a ‘further material rise’ in parent reels (paper) and has been unable to hike prices to the extent hoped to recoup these costs.
This demonstrates a lack of pricing power and the extent to which retailers can squeeze suppliers such as Accrol, whose customers include B&M European Value Retail (BME), Wilkinson, Aldi, Lidl and major grocers such as Tesco (TSCO), ASDA and WM Morrison Supermarkets (MRW).
There’s also news the tissue converter has ‘incurred higher than anticipated costs in relation to the operational changes associated with preparing the business for growth’, which broker Liberum Capital says relate to labour and wastage.
And to cap things off, Accrol is bracing itself for a larger than expected fine from the Health and Safety Executive (HSE) pertaining to an incident in May 2016, before June 2016's IPO, which will hurt its cash position.
Net debt will be higher than forecast at year-end and Accrol, whose strong cash flows and income-generating characteristics formed a key part of the bull case, will review the dividend for the current year too.
RED FLAGS IN HINDSIGHT
Shares in Accrol have been in a down-trend for most of the year. There was a renewed bout of weakness when Accrol revealed that CEO Steve Crossley had been abruptly shown the door, ‘stepping down from the board with immediate effect to pursue other interests’ in the polite parlance to be replaced by long-serving DS Smith (SMDS) operator Gareth Jenkins.
In an accompanying trading update, Accrol said it continued to trade in line with market expectations ‘in terms of revenue, with profitability being broadly in line with market expectations’, often City code for an impending earnings disappointment around the corner.
Accrol's shares are temporarily suspended at 132p while it holds talks with lenders. ‘Whilst the board considers the anticipated impact of the above on the company's net debt position, pending clarification of its financial circumstances, the company has applied for suspension of trading in the Company's ordinary shares on AIM with effect from 7:30 a.m. today,’ reads the statement.
As for Liberum, it comments: ‘In a very disappointing and rather unforeseen set of circumstances we are putting our forecasts and recommendation under review. The shares have been suspended pending funding discussions with the company's lenders. We will update our views and forecasts as and when there is greater clarity.’
Accrol’s maiden results for the year to April (10 Jul) revealed a 58% surge in adjusted pre-tax profit to £13m on sales up 14.2% to £135.1m. Before today’s alarming update, Liberum’s forecasts for April 2018 looked for pre-tax profit of £14.6m, earnings of 12.5p (2017: 11.8p) and a hike in the dividend from 6p to 7.5p.
