Why the Citadel Group Ltd share price fell 8% despite fast growing profits

The Citadel Group Ltd (ASX: CGL) share price fell 8% to $6.60 after it released its half year results this morning. Revenue grew 13% to $47.5 million and net profit after tax (NPAT) rose 23% to $6.6 million. Delays resulted in some contracts falling through to the later part of the year, which is expected to lead to a stronger second half.

Earnings per share rose 29% to 10.1 cents per share, and the company announced dividends of 4.8 cents per share, in line with last year. Citadel has $19.2 million in cash and $0.6 million in net debt, which it may draw on to make further acquisitions in the future.

Management announced $62 million in renewed and new contracts won, and margins improved as the company starts to benefit from the scalability of its services. Despite investing in its Citadel-IX platform and the newly acquired Charm health software solution, Citadel will likely see margins continue to improve over time if it is able to keep adding customers. This is because the costs of the software platform and sales are relatively fixed, so each new customer is more profitable for the business.

Notably Citadel also corrected “accounting errors in relation to the recognition of accrued revenue for particular projects and customers. As a consequence, revenue was overstated for the half year ended 31 December 2016.” (i.e, first half 2017).

Citadel stated that this error was corrected in the full year financial statements. However, I couldn’t see any reference to a correction in the full year results. The result may have been corrected then, but this appears to be the first time Citadel has acknowledged it. If that is so, it could explain why shares are down 8% on what would otherwise be considered a very strong result. The company stated it has put safeguards in place to prevent similar errors in the future.

Citadel has a solid collection of technology solutions (the Appendices in today’s presentation are worth a read), and the business appears in a good position to continue growing. I am still in the early stages of looking at the company, but I am interested and think Citadel Group is worthy of further investigation.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Citadel Group Ltd. 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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