Profit downgrades are never pretty and when the markets are jittery and on edge, any bad news is punished severely.
This has been the case with software provider GBST Holdings Limited (ASX: GBT) after releasing a market update on Tuesday. The share price has now plunged more than 30% since the announcement and more than 47% from its 52-week high of $6.84.
GBST is a provider of platform software to the financial services industry in Australia, Europe, Asia and North America. GBST comprises two divisions including Capital Markets and Wealth Management. In that it sense it has similarities to more established provider Iress Ltd (ASX: IRE).
Worryingly for investors (including myself), the long-serving managing director announced his intention to retire less than a month ago and this has compounded the negativity surrounding the stock as some investors begin to link the two announcements together.
More concerning for investors, however, should be the fact that GBST announced this profit warning only two months after releasing strong Financial Year 2015 (FY15) results. Although market conditions can change quite quickly, GBST provided an upbeat outlook and there was no warning about the potential for delays and timing issues that the company may face in the year ahead.
Despite the recent plunge in the share price, GBST still remains one of the best performing technology stocks on the ASX over the last five years with an annualised return of 38% per year.
Investors will now be asking – "Is this a temporary hiccup or a sign that the best is over for GBST?"
To answer this, it is important to take a closer look at the reasons behind the profit downgrade and the revised outlook.
In terms of the profit downgrade, GBST now expects that EBITDA could potentially be 22% lower in FY16 compared to FY15 with the majority of earnings weighted to the second half. These figures do not include the costs to replace the current managing director and the recruitment costs for the replacement.
The cause of the reduced profit comes down primarily to two factors. Firstly, GBST has experienced delays in rolling out some of its products to major clients and this will affect the annuity streams that come from these products. Secondly, GBST has already committed to additional spending and staffing costs to manage the anticipated growth over the coming year.
The company's revised outlook remains upbeat and it expects to return to growth in FY17. For many investors, FY17 is just too far away and I think many of them would prefer to wait until FY17 before putting their hard earned money into the business.
Personally, I think the issues facing GBST are short term in nature and have actually resulted from a company that has experienced rapid growth and not been able to meet the growing demand for its products. The company remains in a healthy financial position with minimal debt and strong positive cash flows.
At the current $3.60 share price, I think investors who are willing to hold the stock and remain patient may be pleasantly rewarded. With that said, it is unlikely the share price will make a significant recovery in the short term as the market waits until GBST finds a new CEO and at the very least, meets its new revised guidance.
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