Why the Scottish Pacific Group Ltd share price crashed today

The Scottish Pacific Group Ltd (ASX: SCO) share price plunged 27.3% to $2.69 today after releasing a downgrade to its forecast profit for the 2017 financial year (FY17).

The company said in an announcement to the ASX:

The Company advises that it has experienced lower than expected levels of borrowing during the first four months of FY17, predominantly among some of its larger clients, who are borrowing less than expected. As a result, this has impacted gross income and hence Net Revenue is below expectations at this point in the Company’s financial year.

Revenues are expected to fall by $8.2 million (7.5%).

As a result, the financial service provider – which mainly provides debtor financing to small-to-medium companies (SMEs) – says it expects to produce pro forma profit before interest and tax (PBIT) of $40.7 million and pro forma net profit (NPATA) of $30.8 million for FY17.

In the company’s prospectus, Scottish Pacific had forecast PBIT of $44.9 million and NPATA of $31.8 million.

It’s yet another downgrade by a private equity float – which is one reason why the small downgrade to earnings and profit has seen a savage reaction from the market. It’s also another disappointing IPO, with shares issued at $3.20 in July this year.

And it raises questions about the quality of IPO forecasts.

Dick Smith Holdings, Spotless Group Holdings Ltd (ASX: SPO), Healthscope Ltd (ASX: HSO) and Estia Health Ltd (ASX: EHE) are all private equity offerings that ran into issues with forecasts.

Dick Smith eventually fell into administration amidst accusations of accounting trickery, after being bought for a song by private equity and then tarted up and listed on the ASX for multiples of the purchase price.

No wonder many investors are steering clear of private equity floats – and even IPOs – today. Some floats have either had to be repriced or have been postponed until next year.

These Low Interest Rates Could Totally Devastate Your Retirement!

With global interest rates set to remain at these "emergency low" levels for years -- perhaps even decades -- unless you take decisive action NOW, your retirement could be seriously at risk. Click here to learn how to NOT run out of money in retirement.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.