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Why did Silver Chef drop by 30% on Friday?

Small-cap business finance company Silver Chef (ASX: SIV) issued a shock profit downgrade on Friday, sending the shares into a tailspin to close down 29.38% at $5.24 after hitting an intra-day low of $5.05. It’s now down 40% from a mid-year high of $8.92. The company owns the Silver Chef and GoGetta brands that offer rent-try-buy financing options to the hospitality and similarly capital-intensive industries.

Silver Chef announced that net profit after tax (NPAT) for the year ending 30 June 2014 would be 10-15% below previous guidance of $13 million. Barring any further downgrades, Silver Chef now expects NPAT to fall between $11.05 million and $11.7 million, compared to $11.5 million for the full year to 30 June 2013.

The company blamed slower than expected growth in the GoGetta business. The GoGetta brand services all industries except for the restaurant and hospitability industry, and represents the higher-growth part of the overall Silver Chef business. By the sounds of the media release, GoGetta saw slow growth through the whole 2013 calendar year, however the company noted that recently implemented initiatives had stimulated growth in recent weeks to the point where it should achieve its targets in the first-half of 2014.

For a larger company, a profit downgrade of 10-15% would likely result in the share price dropping by a similar amount, but Silver Chef’s 30% fall follows the recent trend of smaller-cap stocks being smashed following relatively small downgrades. Investors in small-cap stocks have taken a ‘sell first, ask questions later’ approach as evidenced by the sell off in Codan (ASX: CDA) in the days around its recent profit downgrade.

In this writer’s view the stock has been oversold and will likely see a reasonable recovery over the coming months, as long as consumer and business confidence numbers get a boost. The Christmas months are tipped to be strong for retailers, which will hopefully spur sales in other industries.

Foolish takeaway

Silver Chef offers an invaluable service to many small Australian businesses, however it competes with similar sized rivals such as Flexigroup (ASX: FXL) and Thorn Group (ASX: TGA), and larger rivals including the big four banks and Macquarie Group’s (ASX: MQG) lending and leasing divisions. Regardless, it has shown great growth in the past and appears to have put in place strategies to continue that growth into 2014 and the future.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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