Redcentric shares plummet as 'forensic review' launched into misstated numbers

'Some write-down in historic profits' expected, sending its share price plummeting by two thirds

Redcentric is expecting to have to write down historic profits after discovering "misstated accounting balances" in its balance sheet, which has prompted the firm to begin a forensic review.

This morning's announcement has seen its share price fall by more than two thirds. Shares closed at £1.50 per share on Friday, but this morning they were worth as little as 44p (down 70 per cent).

In a London Stock Exchange announcement this morning, Redcentric said its CFO Tom Coleman resigned as director of the company yesterday and has been placed on gardening leave with immediate effect. An external interim CFO will be appointed.

Analyst TechMarketView described this morning's announcement as "embarrassing and damaging".

An internal review by the company's audit committee, relating to its results for the six months ending 30 September, discovered "misstated accounting balances in the group's balance sheet, the announcement said.

"The board has commenced a forensic review of the group's current and historic balance sheets which will delay publication of its interim results (originally scheduled for 14 November)," it said. "The work to date has identified that audited accounts for previous years are likely to need to be restated, resulting in some write-down in historic profits. Current indications are that all issues relate to prior periods. New business sales and recognition of those sales into revenue over the six months ended 30 September 2016 have been in line with management's expectations.

"The board believes from the information available to date that the impact of correcting these cumulative historic accounting misstatements would result in a need to reduce net assets by at least £10m.

"The net debt guidance announced in the pre-close trading update is now believed to be unreliable. The board now believes net debt at the half year was approximately £30m. The board also believes that the underlying net debt position at 31 March 2016 was materially higher than as reported and thus the business has reduced its underlying net debt in the six months to 30 September 2016."

Redcentric said further details will be given regarding the new date for the publication of its results.

For the year ending 31 March 2016, Redcentric's operating profits fell 3.4 per cent to £8.4m, on revenue which jumped to £109.5m from £94.3m the year before.

Chris Cole, chairman of Redcentric, said: "The board is absolutely focused on completing the internal review to resolve the situation in a timely manner and release the company's interim financial statements at the earliest time. Management's focus remains on working with our motivated staff to provide critical IT services to our customers. The indications are that these accounting issues relate to prior periods and that the current levels of new business sales by the company are as expected."

Martin Courtney, principal analyst at TechMarketView, said the impact of today's announcement could be felt far into the future.

"The incident has clearly rattled investors," he said. "But we think a greater risk could be presented by any subsequent loss of confidence among Redcentric customers which adversely affects future sales. Around 85 per cent of Redcentric's turnover is recurring revenue from managed network, security, cloud and collaboration infrastructure services, and any impact will take time to filter through as customers come to renew those contracts."