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CRASH: Why Spotless Group Holdings Ltd’s share price plunged 42% today

Investors took an axe to the Spotless Group Holdings Ltd (ASX: SPO) share price today, sending the shares down as much as 42.5% to an all-time low of $1.265. That compares to a 0.4% decline for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

So What: Spotless Group floated its shares on the ASX in May 2014 at an issue price of $1.60 per share before hitting a high of $2.51 in April this year.

The company is a market-leading provider of outsourced facility services (e.g. catering and cleaning) as well as laundry and linen services in Australia and New Zealand. With a market capitalisation of roughly $2.4 billion prior to today, the company employs more than 39,000 people and is the leader by revenue, scale and breadth of services within its market.

While the share price has been rising steadily lately however, the shares fell off a cliff today after the group released a terrible trading update to the market.

Although it noted that the business (excluding acquisitions) is still performing well, profit growth from new business wins has slowed due to “tighter economic conditions and tender decisions being delayed or deferred.”

That’s never good news for any company, let alone one that spent $99.4 million on business acquisitions in the latest financial year (including $84 million in goodwill).

Essentially, integration of the new businesses is taking much longer than anticipated while synergies are not being recognised. This is especially the case for laundries where more restructuring is required than first anticipated.

The result? Revenue will climb strongly thanks to these acquisitions, but EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to remain flat compared to FY15 while NPAT (net profit after tax) is tipped to fall 10%.

Now What: Spotless Group is one of several big-name companies whose share prices have crashed recently. Others include Slater & Gordon Limited (ASX: SGH) and Dick Smith Holdings Ltd (ASX: DSH), both of which have rebounded in the time since.

Although it’s possible that Spotless Group will do the same, investors also need to assess the health of the business and whether it is really the kind of company they want to own a piece of in the long-term. Acquisitions are a big part of Spotless Group’s growth strategy and if it can’t get that right, or if integrating those businesses continues to be an issue, then the shares could fall even further than today’s price.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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