In many ways the test of management is how you handle the unexpected. On that basis, the board of recruitment company Staffline (STAF) failed horribly.
First came the shock announcement on the day that results for 2018 were due that they were postponed indefinitely. Since the most recent update, issued on January 8, had said that the figures would be in line with expectations and revenue would be 18% higher, investors naturally feared something awful and the shares plunged by a third.
The board then shut the stable door after the horse had bolted by asking for trading in the shares to be suspended.
Finally came the admission that concerns had been raised over book keeping in the recruitment division, concerns that could have a material impact on profits. The board “is confident that its policies are appropriate, particularly given that these practices have been the subject of prior audits”. I think we’ve all learnt how much trust we can put in past company audits.
Although Staffline did not say who had raised the query, reports suggest it was the auditor. If so, why was the problem spotted only at the last minute? The auditor had already been through all the figures and presumably had accepted them. So who blew the whistle? A lot of questions need answering.
One appreciates that the directors were caught on the hop by allegations raised only hours, perhaps minutes, before the announcement was due to go out but shareholders were entitled to know what was going on before the market opened for trading. Suspending the shares at 7am could hardly have done more damage than was caused by indecision.
As the shares are suspended there is nothing shareholders can do but wait. I’ve been generally keen on the larger, global recruitment companies and while it is possible that whatever has gone wrong at Staffline is also an issue elsewhere, I think that is unlikely, just as the accounting problems at Patisserie Valerie (CAKE) were not replicated among its competitors. I am therefore retaining my holdings in Hays (HAS), which has held its own since the Staffline debacle, and Robert Walters (RWA), which has gained 3% in two days.
Diageo Sells More at Higher Prices
One of the great advantages of having a wide geographic range of customers is that if one part of the globe slides back, another part can compensate. It’s even better, though, when all the world seems to be marching firmly in step.
This is the position at drinks group Diageo (DGE), where all regions contributed to a 5.8% increase in net sales in the six months to December 31. The improvement would have been 7.5% had unfavourable currency movements not proved a headwind. Operating profit was up 11%, driven by organic growth of 12.3%, as Diageo sold more bottles at higher prices, offsetting cost inflation.
Cash flow continued to be strong, allowing Diageo to raise the interim dividend by 5% to 26.1p.
The group admits that the first half was flattered a little by one-time factors but it is still confident of decent growth in the second half to June.
Such a performance is naturally already reflected in the share price, which has risen over the past three-and-a-half years from just below £17 to a new peak at £29. A 4% gain on the results propelled Diageo past last summer’s peak.
Existing shareholders should give themselves a pat on the back and stay in for another round. It wouldn’t be wrong to buy in belatedly at this level but if you are interested it may be worth seeing if the shares fall back a little. The risk is that you may once again miss the best chance to invest, but that’s a chance you often have to take in investing.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.
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