Why I'd avoid catching falling knife Utilitywise plc after today's 15% collapse

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Utilitywise logo

Shares in utility business Utilitywise(LSE: UTW) have crumbled today after the Neil Woodford-backed business issued yet another disappointing update to investors. 

It was trading lower by as much as 15% in early deals this morning after the company announced yet another delay in reporting its results. The company has always attracted criticism in the way it books and reports revenue, and now it seems critics could be proved correct.

Having delayed the publication of its results to 21 November, its external auditor, BDO LLP has, "requested that [it] obtains additional advice from an independent accounting firm in respect of the group's estimation methodology for expected consumption levels on live contracts." The publication date for Utilitywise's annual results is now unclear. 

The firm cannot proceed with the compilation of its results until the new review is completed, which is expected in early December. 

Put simply, it looks as if investors will have to wait another few weeks to find out about the company's financial position. 

From bad to worse

It has been a terrible year for Utilitwise's shareholders. The company's shares have lost 75% of their value, and investor confidence has taken a battering. 

In June the group announced that it was going to have pay back some of the commission it earned on energy contracts due to under-consumption. A profit warning then followed in July.

The latest issue stems from management's decision to move to the IFRS 15 accounting requirement a year in advance. Under the new accounting standard, companies have to change how they book profits and revenues from multi-year contracts. Under the changes, Utilitywise's adjusted profit before tax would have been £9.4m lower in 2016 (47% lower than the actual figure reported if the same accounting standards were applied) and £13.8m lower in 2015 (a reduction of 83%). The changes only affect the income statement. Cash flows will remain unchanged. 

Today's news from the business implies that it is having a more complex time changing its accounting processes than initially expected. Assuming the additional scrutiny does not turn up any skeletons in the closet, the delay is not going to be a disaster for the business. Cash flow forecasts should remain unchanged, and the move to IFRS 15 is a requirement, not an option -- Utilitywise would have had to make the switch sooner or later. 

Buy, sell or hold? 

With a near 30% stake in the business, Neil Woodford is Utilitywise's largest investor, and it seems as if he still believes in the company's outlook. 

It certainly looks as if the business can continue to produce steady dividends for investors. Last year, the group generated £12m in cash from operations and free cash flow of around £11m, which easily covered the total dividend payout of £4.2m. A similar level of dividend payouts would give a yield of 12.6% this year

However, the dividend estimate above assumes that nothing is hiding on the company's books that has concerned the auditors. If that's the case, there could be further declines ahead for the shares. 

Not suitable for all 

Utilitywise might look as if it can continue to maintain its payout but this small-cap isn't for the fainthearted. There are plenty of other growth and income plays out there with brighter outlooks. 

One such business is profiled in this free report from the Motley Fool.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.


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