Spotless has questions to answer

Fresh off the heels of Dick Smith's (ASX:DSH) $60 million write down of its inventory, commercial caterer, cleaner and all-round annoying jobs doer Spotless (ASX:SPO) has announced that 2016 should see its EBITDA remain flat and net profit fall 10% due to writedowns relating to bid costs and acquisitions.

Spotless shares finished Wednesday 40% lower than the previous close and are down almost 5% today. That news has been well communicated. What hasn't are the very interesting questions regarding the company's disclosure.

On Thursday 22nd October the company held its annual general meeting, during which chair Margaret Jackson announced that the company expects 'FY16 results to materially exceed the FY15 results'.

In its trading update on Wednesday, this same claim was made but the word results was changed to the words revenue. That's a little odd don't you think? As for the other results, you could say that they were expected to be materially worse.

It also seems likely that the reasons for the write-offs would have been clear for a while and haven't appeared out of thin air. The AGM, after all, was little more than six weeks ago. Have things really deteriorated that quickly? And if not, why weren't shareholders informed at the AGM and offered the opportunity to ask questions of management, in person?

We were quite scathing of Spotless's float last year and advised our members to steer clear. We were particularly sceptical of the company's 2015 forecast EBIT margin of 8.4%, commenting that if it got close to that target it would be the first time since 1999 it had enjoyed an EBIT margin above 5%.

The timing of the announcement means the company was indeed able to report an EBIT margin of 8.3%, coincidently very close to the forecast figure in the prospectus – but the costs of achieving that forecast are now becoming apparent.

We will never know the truth behind the timing of the announcement.

Perhaps management only realised tighter economic conditions, delayed tender decisions and failure to realise synergies from acquisitions were having such an adverse impact in the few weeks between the AGM and its trading update – but you have to wonder.

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