ASX company, ex-CEO accused of failing to reveal massive earnings downgrade

ASIC alleges shipbuilding business of failing to tell the public in 2016 that its previous profit forecast had turned into a significant loss.

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An ASX-listed company and its former chief executive have been taken to the Federal Court to face allegations of holding back information about a major earnings downgrade.

The Australian Securities and Investments Commission (ASIC) has started a civil case against shipbuilder Austal Limited (ASX: ASB) after investigating its behaviour in 2016.

In December 2015, the company provided the market with guidance that its US business would be profitable for that financial year.

At the time, Austal projected an earnings before interest and tax (EBIT) margin to be between 4.5% to 6.5% for the 2016 financial year. This is a measure of operating profit as a percentage of the US shipbuilding revenue.

ASIC alleges that on 4 June 2016, the company became aware that a writeback of at least US$90 million would be likely. This would turn the profit into a “significant loss”.

Austal did not reveal this change of fortunes publicly until an announcement to the ASX on 4 July. That announcement flagged a writeback of US$115 million and a statutory EBIT loss between $116 and $121 million for the financial year.

Austal accused of breaching continuous disclosure laws

ASIC will allege in court that the Western Australian shipbuilding business breached continuous disclosure obligations between 6 June and 4 July 2016.

Austal is also accused of “misleading or deceptive conduct” for failing to correct or withdraw the prior earnings guidance.

The company’s chief executive at the time, David Singleton, is alleged to have violated the Corporations Act for his involvement in the non-disclosure, and “failing to exercise reasonable care and diligence as a director”.

ASIC is seeking both declarations and financial penalties from the Federal Court.

In a statement to the ASX on Thursday morning, Austal indicated it would consider the court filings before “deciding its next steps”.

Austal shares were down 3.02% on Thursday morning, to trade at $2.25. The business currently has a market capitalisation of $809 million.

During the 2016 financial year, a major source of revenue for Austal was from its US operations, thanks to large contracts with the US Navy.

ASIC on Thursday acknowledged the US Securities Exchange Commission for its assistance with the Austal investigation.

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Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Austal Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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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