SMS Management & Technology share price sinks: Here’s why

SMS Management & Technology Limited (ASX: SMX) has seen its share price fall as low as $1.46 today, and is currently down 15% at $1.56.

It’s the lowest share price the technology consulting firm has seen in the past 52-weeks and a long way from the high of $5.43 reached in October 2015, although there are a number of reasons why the share price has sunk this low…

  1. CEO Jacqueline Korhonen resigned today, effective immediately, despite only being appointed to the role in February 2015. A term of just over a year is a very short timeframe for a CEO, and it clearly indicates that the board is disappointed with the results achieved.

    Chairman Derek Young said today, “We have set out a clear strategy to grow our business over the next three years and have been working hard to execute this plan. However, recent performance has been disappointing and well below expectations.

  2. Signs were there in November 2015 that the new strategy was having a negative impact on the group’s revenues when SMS Management issued a profit downgrade for the first half of the 2016 financial year. EBITDA was expected to be down 15-20% on the previous year’s $13.5 million, and the company eventually reported $11 million in EBITDA.
    The fall was largely attributed to an unexpected client decision to terminate a large transformation project, and contract delays due to transitioning to a new organisational structure.
  3. SMS Management now say revenues for January 2016 to April 2016 are well down on the prior year, and the company expects to report full year EBITDA of $15.5 to $16.5 million. If you take out the $11 million reported in the first half, the second half is expected to be just $4.5 to $5.5 million – a greater than 50% fall compared to the first half.

Technology consulting is a tough business with low profit margins, and with a large fixed cost base, there’s little room for error. Data#3 Limited (ASX: DTL) had similar issues (high fixed costs and low margins) in 2014 as SMS faces now, which saw its share price crash.

What SMS Management will do with the former CEO’s strategy remains to be seen, but some might suggest a year is too short a time period to judge its effectiveness, while others might see that as enough evidence to classify the strategy as a failure.

Foolish takeaway

Investors might want to think twice before they invest in technology services firms – as their share prices can be highly volatile and need exceptional management to steer the ship. SMS Management’s dividend is likely to be cut too when the company reports its full-year results – so investors can ignore the 10.6% trailing dividend yield.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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