Azure's misleading disclosure

The clinical workflow company’s market update today lacks the required details to assess its full-year profit potential.

Azure Healthcare (AZV) has this afternoon given an update to profit expectations for the first half of 2014-15. I must say from the outset that it is potentially the worst attempt of market disclosure I have seen.

Management stated: “The Company wishes to advise that it anticipates a net profit after tax for the 6 months ended 31 December 2014 in the range of $0.8 to $1.2 million compared to NPAT of $2.17 million for the previous corresponding period.”

If you took this statement on face value you would assume that something has gone seriously wrong with the company, and the strong growth outlook that we recently wrote about has suddenly disappeared.

The reality is more likely to be that extra costs have been taken on to support future growth, with some of that coming through in the second half. It is only my suspicion though as there is certainly not enough detail in the announcement.  

Azure (AZV) has been one of Eureka’s highest conviction “buy” recommendations since we first wrote on them in March this year. Alan Kohler also interviewed chief executive Robert Grey for Eureka TV on August 23.

Since this interview a broker initiated coverage with a 69 cent valuation and a couple of days later, with the help of the same broker, Mr Grey sold down over a third of his holding – 11% of the stock.

The reasoning for the chief executive selling given at the time was that the company wanted to improve the liquidity of the stock and also bring institutional clients onto the register that may assist in any plans of growth by acquisition. In hindsight maybe we shouldn’t have been fooled by this explanation and stuck to the rarely broken rule that management sell-downs happen for a reason.

This same broker this afternoon sent an update to clients that they believe there has been an additional $1.3 million of costs to support future growth, and that they also believe the company has recently received four large contract wins that won’t hit the profit and loss statement until the second half. They stated: “AZV has issued a downgrade to 1H14 NPAT but has advised that full-year revenue and NPAT growth remains on track with our expectations.”

Although the company has clearly dropped the ball in this attempt at market disclosure, they are operationally a very strong management team and have always been very conservative in the past.

The biggest mistake they have made today is not actually telling the positive growth story as it is. For one, the 2014-15 net profit is still likely to grow. Secondly, revenue in North America is still likely to double each year for the next three years.

The market didn’t take much confidence from the statement: “The Company continues to increase its sales pipeline including increased software sales and maintenance revenues with total revenue and gross margins in line with or exceeding the previous corresponding period despite being impacted by lower contract revenues in New Zealand, Canada and Asia.”

Obviously given the company’s low scale, it is going to be at least a few more years before the half-year matching of costs and revenue can be more easily managed.

Management further explained: “During the period the Company has increased staffing and R&D investment expenditure compared to the previous corresponding period in order to resource itself for future anticipated growth.” 

If we conservatively assume that 2014-15 NPAT remains flat from 2013-14 then the stock is on a 2015 PE of 12. We view this as a strong “buy” given that the long-term supportive growth outlook remains intact.

We assume that further information will be released in coming days or at the AGM on November 20. Although it is difficult to adjust forecasts without the required disclosure, we would be surprised if the stock remains under 30 cents after the AGM.

 We maintain our “buy” recommendation, and strongly urge existing holders not to panic and wait for further details around today’s announcement. We will review our 55 cent valuation after the AGM.