Cleaning and catering services firm Spotless Group has inflicted more pain on shareholders in a massive clean-up of 30 per cent of its contract book which triggered $423 million of write-downs, and also permanently lowered the amount it will pay out in dividends.
Spotless took the knife to a range of poorly-performing contracts as chief executive Martin Sheppard attempts to remake the business and tilt it away from smaller, low-margin contracts which are a big drain on returns. They make up about 30 per cent of all the contracts Spotless has across the industries it works in including cleaning, catering, maintenance, mining sites, health services and education.
"There are literally hundreds of contracts in that tail," Mr Sheppard said on Tuesday. Spotless shares crashed by as much as 14 per cent in early trading on Tuesday to as low as 79.5¢. By early afternoon it was down 11 per cent to 85¢. This compares with the issue price of $1.60 when the company made a return to the ASX in mid-2014 in a $1 billion float after less than two years under the ownership of private equity firm Pacific Equity Partners.
Mr Sheppard said there were simply too many small, underperforming contracts and they were a big constraint. The company was undertaking a "reset" to try and deliver growth and rid itself of low-margin contracts generally in single service locations with short tenure and which cost too much to operate because they are in remote locations.
Spotless, which made a return to the ASX in mid-2014 in a big float with an issue price of $1.60, crashed to a bottomline loss of $358 million in the first half of 2016-17 following the one-off impairments and write-downs. This compared with a net profit after tax of $48.1 million in the first half a year ago. Total revenues were down by 9.4 per cent to $1.46 billion.
The company is also now enveloped in two potentially messy legal disputes over a shock profit downgrade in late 2015. Law firm ACA Lawyers said on Tuesday it had secured a funding arrangement with litigation funder ICP in an important step in pursuing a class action. It is separate to another class action already filed in the Federal Court by William Roberts Lawyers funded by IMF Bentham over an alleged breach of continuous disclosure over its 2105 financial results, which Spotless has vowed to defend.
Spotless shares were also under pressure on Tuesday because investors are also nervous about the outlook. Mr Sheppard said it was taking longer to win the more sought after contracts which had longer tenure and a multi-service component to them, sometimes because state governments were delaying decisions. Other contract wins were in areas where buildings needed to be constructed first. "What we're actually winning has delayed start dates," he said.
The company has sliced its dividend by 61 per cent and will pay shareholders an interim dividend of 1.35¢ on April 7. But the board has also decided to permanently lower the payout ratio for future years to between 40 per cent to 60 per cent of net profits, down from a previous benchmark of 65 per cent to 75 per cent of net profits.
Chairman Margaret Jackson resigned from her post on February 22 because of ill health. She was replaced by Garry Hounsell, who was a director at the firm and is also on the board of paint group Dulux and Penfolds owner Treasury Wine Estates. Mr Hounsell is also chairman of ASX-listed travel group Helloworld.
Spotless said there would be a controlled rationalisation of underperforming contracts, with some likely to be sold off while others would be continued until maturity. Most of the contracts which Spotless wants to exit reach maturity within two to three years.
Mr Sheppard said Spotless would also seek to renegotiate some contracts on better terms.
The one-off items booked by Spotless included $316 million in goodwill impairments, software write-downs of $15.1 million and onerous contract provisions of $15.8 million.
Spotless bought the electrical and technology services group Nuvo for $23 million in late October and is using this business as a flagship for a push into higher-end electrical and technology solutions across large-scale commercial and industrial projects.
