Mouchel Group's chief executive quit yesterday in the wake of an accounting error that forced a profit warning, and the resulting sell-off wiped off a third off the services company's value.
The group, whose operations include maintaining the UK's highways, revealed in a statement to the market that Richard Cuthbert had tendered his resignation in a shock announcement three weeks before it was due to release its full-year results.
One analyst said the group was now likely to breach its banking covenants, adding he the company was almost certain to tap shareholders for more cash.
This comes less than four months after the shares tumbled 10 per cent as the company admitted its order book had fallen from £1.9bn to £1.5bn year on year. It also said its financial chief David Tilston was leaving despite joining the previous September.
Yesterday, the company revealed that a one-off gain it had previously announced would actually be £4.3m lower than expected "as a result of an actuarial error". The statement added it would have "an immediate and corresponding impact" on the profits the group is set to announce for the year to the end of July.
Mouchel's new financial director, Rod Harris, has been conducting a review of the company's operations and following his findings the company "has decided to increase provisions in respect of these contract risks and project claims by a similar amount to the reduction in the one-off gain".
John Lawson, an analyst at Investec, said he was likely to lower his pre-tax profit forecasts from £14.3m to just £5m in the wake of the announcement, dubbing it "another disappointment". He added: "Current trading remains challenging, we believe, so we will also be reviewing our forecasts for 2012."
The news prompted a sell-off in the shares, which at one stage tumbled by more than half, although edged up, losing 10.5p to close at 20.5p.
Christopher Bamberry, an analyst at Peel Hunt, said: "With a probable covenant breach and an over-leveraged balance sheet, it is hard to see how a rights issue can be avoided." He added: "Once again concerns over customer confidence make us question Mouchel's ability to win and retain work." The company is set to kick off the process to find a replacement to Mr Cuthbert. Its chairman Bo Lerenius has been handed the role on an executive basis until a new chief executive is found.
He said yesterday: "The board will focus on maintaining Mouchel's position in its core markets in the interests of all its stakeholders."
Mouchel has suffered in the wake of the spending cuts as the majority of its clients come from local authorities.
Andy Brown, an analyst at Panmure Gordon, said the update "does not make for good reading" and slashed its target price from 75p to 35p.
He continued: "As harsh as it sounds but management change may be the only catalyst to get the share price moving up."
The group has been the focus of four bid approaches. Earlier this year the group rejected a 164p per share from Costain. Interserve, which had offered 170p per share, slashed its bid to 130p after carrying out due diligence. Yesterday the shares fell as low as 15.5p. VT Group had tabled a proposal of 294p per share last year.Reuse content