In early trade on Friday, the Countplus Ltd (ASX: CUP) share price fell 15% as management provided a trading update ahead of the release of its 2017 half-year results later this month.
What happened?
Management announced that one of its member firms – Total Financial Solutions Australia Limited ("TFS") – is being investigated for breach of ASIC's licence conditions by an advisor.
Friday's announcement revealed that TFS is currently working with its insurers to obtain indemnity to fund damages in the event that any detriment caused by the breach requires rectification. TFS also introduced a new review and remediation program for clients affected by the advisor's advice with the intention of restoring clients' financial position back to the position they would have been in, but for the advice.
Although Friday's announcement reveals a positive step to restore the reputation of TFS, Countplus expects the review to result in increased legal and associated costs of $1.1 million. Further, it expects to record an impairment of $780,000 for its investment in TFS.
What next?
Undoubtedly the impairment and provision as a result of the incident is likely to impact earnings for the half year. As a result, management has opted to slash it's quarterly dividend by half, to 1 cent per share, until the quantum of the detriment of the TFS matter becomes apparent.
This is likely the key driver of Friday's share price plunge, given Countplus has historically been a relatively high yielding stock.
What should you do?
Whilst a halving of the dividend immediately halves Countplus' former 9.9% fully-franked yield (based on Thursday's close of 81 cents and full-year dividends of 8 cents per share), long-term investors should take solace in management's commentary around it's upcoming results.
Pleasingly, management announced that Countplus' unaudited preliminary accounts indicate an increase to profit before tax of 5% to 8% on prior year figures. Importantly, this excludes the financial impact of any fair valuation revaluations of Countplus' investment in Class Ltd (ASX: CL1).
Based on Class' most recent share price of $3.02 per share, Countplus should expect to record a substantial fair value gain to boost profits further.
Accordingly, the stock looks cheap in my opinion.
Foolish takeaway
Although Friday's trading update is cause for concern, Countplus' continuing operations continue to record profit growth.
With investors also set to benefit from an uptick in Countplus' Class investment and be compensated with a handy 4.95% fully-franked yield (assuming dividends are not halted completely), I'm inclined to back the company through this tough time and buy the stock.
