Why the PS&C Ltd share price plunged today

PS&C Ltd (ASX: PSZ) saw its share price sink as low as 48 cents in early trading this morning, after the IT Consulting company announced an earnings downgrade.

The company says reported net profit after tax for 2016 financial year (FY16) is expected to be slightly above the FY15 result, but the usual end of financial year earnings lift the group normally achieves has not been as strong as in previous years.

PS&C says “depending on final deliveries and revenue recognition in the last weeks of the financial year, the Operating EBIT before non-operating income (deferred consideration write backs) and expenses (acquisition and non-recurring costs) could be up to 20% below FY15“.

Overall, it seems PS&C’s People business is performing strongly, its Security business is struggling and the Communications business is expected to be significantly down on FY15, with “customer demand more subdued” than last year and management’s expectations.

That’s despite the acquisition of governance and risk company Certitude for an initial cash payment of $2.1 million in January this year and the acquisition of Bexton IT Services in October 2015 for an initial payment of $2.9 million.

However, PS&C gave a similar update in June 2015 for the FY2015 results, including a ‘softer than expected last quarter’, and also a profit downgrade in June 2014. The company seems to be making a habit of it.

Rather than new acquisitions adding bolt-on value to PS&C’s existing business, it appears the company has struggled to integrate those acquisitions and failed to achieve any measure of synergies, with expenses growing rapidly.

As we wrote in February this year, PS&C includes deferred consideration adjustments as other income – which we explained in that note. Essentially it means acquired businesses aren’t performing as expected.

The messy reporting also makes it difficult for shareholders to establish what the underlying performance of the company is. (For one thing, PS&C reports earnings excluding head office costs. Head office expenses are essential to the business, so costs should be included).

Foolish takeaway

In the last half, PS&C reported negative operating cash flow and debt has ballooned to $13 million, suggesting investors need to be very careful when it comes to investing in PS&C.

The PS&C share price was down 19.5% at 49.5 cents in afternoon trading.

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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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