The Austal Limited (ASX: ASB) share price sank to a two-year low this morning after its US boss was walked the plank.
The Austal share price slumped 19% to $2 at the time of writing – making it the worst performer on the S&P/ASX 200 Index (Index:^AXJO).
Mismanagement allegations sink Austal’s share price
Nothing sinks a ship faster than governance concerns! Investors jumped ship following Austal’s update on investigations by US authorities.
These investigations relate to Austal’s Littoral Combat Ship (LCS) program before July 2016. Its being undertaken by the US Department of Justice and the Securities Exchange Commission. The Australian Securities and Investments Commission (ASIC) is also looking into the matter.
No captain at the helm
The good news is that Austal believes any breach is relatively minor and has been corrected. But this didn’t save the company’s US president Craig Perciavalle, who resigned after Austal commissioned its own investigation.
Austal USA Chief Financial Officer, Rusty Murdaugh will take over in the interim until a permanent replacement is found.
What the investigation is all about
There’s a lot riding on this. The US operations are the most significant part of Austal’s business and the market does not like uncertainty.
The investigations centre around the write back of work in progress (WIP) that was announced to the ASX on 4 July 2016 relating to the LCS program.
Austal’s commissioned investigation found that the quantum of write back was appropriate given Austal’s revenue and profit following the revision that was made to the estimated cost to complete the remaining LCS vessels.
A few small leaks
But the devil’s in the details. Shareholders would be spooked to learn that Austal underestimated the construction costs of the LCS vessels. The blowout is driven by costs related to US Naval vessel Rules and mandatory shock standards.
This doesn’t speak well of Austal’s management skills although management believes it “materially complied with its reporting requirements with the US Navy”.
Austal also identified isolated instances of misallocation of labour hours between vessels in the early stages of the program.
Further, it didn’t install valves that meet the US Navy’s specification, although the US Navy has since accepted these valves.
The bigger worry for the Austal share price
While Austal’s transgressions could be far worse, US authorities can still penalise the company and that decision is yet to be made.
The bigger fear is that the US Navy will sideline Austal in future tenders, although management tried to reassure investors that it still has a close relationship with its largest client.
Investors are yet to be reassured.
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Brendon Lau owns shares of Austal Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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