Friday the 13th is never a popular day as it spells bad luck. And this Friday, 13 June, was no different for Azlan.
The Wokingham-based distributor asked the UK Stock Exchange to suspend its shares following a sudden 30p drop in value (PC Dealer, 18 June). The firm stated its year-end results would be delayed for at least a month while it conducts an investigation with auditor KPMG.
An Azlan representative told PC Dealer last week that the problem had been caused by the growth the distributor had experienced over the year and by the corresponding complexity of the accounting process, which will have a material effect on its results for the year to 30 April.
But this is euphemistic management speak for an almighty cock-up. ?Unresolved accounting issues? usually means overvalued stock and debtors. Word on the street is that Azlan is also having a problem with the implementation of a new computer system. Azlan maintains that there was no question of fraud.
The first victim of the ?unresolved accounting issues? was company secretary Adrian Lamb, who has resigned to assist in the resolution of the accounting issues identified.
An Azlan representative claims it is business as usual, while the distributor solves the problem with its auditors.
But Azlan?s little slip-up is very serious indeed. Companies do not lightly ask for their shares to be suspended. Azlan?s share price will nosedive when it returns to the stock market. Analysts say Azlan shares could come back at as little as 200p. At the time of suspension Azlan?s shares were valued at 555p, equivalent to a market capitalisation of #197 million.
According to Azlan, the auditing problem is entirely unrelated to the failure of its rights issue in January.
The announcement of accounting problems follows hot on the heels of the appointment of Peter Bertram, Azlan financial director. He joined the distributor in April, and is regarded as a safe pair of hands by SG Warburg, Azlan?s broker. Bertram organised the successful restructure of Automated Security Holdings before it was acquired by ADT.
Warburg was left with six per cent of Azlan stock after the distributor?s disastrous rights issue. Azlan announced the #48.5 million cash call to fund the purchase of Dutch training company Akam, and to refinance the operation, in November 1996. But between November and January, Azlan?s share price fell from 762p to 562p ? lower than the issue price. Less than one per cent of Azlan shareholders stumped up. As underwriter, Warburg had to foot the #50 million bill.
Azlan is the great success story of value-added distribution. The company established itself as Europe?s biggest networking distributor, with 1,800 employees in 11 countries. It operates on good margins ? for a distributor. Gross margins historically are 24 per cent, a figure that has remained constant for years. It has worked product lifecycles well, introducing high ticket, high-margin items as older technologies decline into commodity status.
The company also makes good money from services ? 50 per cent of its profits are services related. It is the biggest supplier of manufacturer certification courses, certainly in the UK. Training accounts for 25 per cent of all profits.
But this is all smoke and mirrors. Azlan is a distributor, and that is all there is to it.
Taking Azlan?s services business into account, its share price at suspension looks a tad optimistic ? Microsoft ATECs are currently being sold for 10 times earnings ? so this seems to be a big premium to pay just for Azlan?s technical and management skills.
Azlan has relied on the City to fund rapid non-organic growth, but it will find this harder in future. Accounting problems and failed rights issues are far too exciting for the average institutional investor. Azlan does not generate enough cash to buy companies from its own resources, so it looks like the distributor will have to think long and hard about how it is going to achieve its next round of growth.
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