Xchanging's shares sink after new profits alert

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The Independent Online

Shares in the back-office outsourcing group Xchanging lost more than half their value yesterday after the group issuing a second profits warning, cancelled its dividend and announced the departure of its founder and chief executive, David Andrews.

The company, which sponsors the Oxford and Cambridge universities' boat race, has been battling for months against growing City misgivings over fair-value accounting policies, particularly in relation to the £83m acquisition of Indian rival Cambridge Solutions in 2008.

Yesterday's trading statement turned the skirmish into a rout. Xchanging's 2010 results will take a hit from a £12m impairment charge and a £100m goodwill writedown on the Cambridge business, the company said. Furthermore, 2011 profits will come in "below the lower end" of the £55.5m to £80.2m forecast range, dragged down by a string of factors including a £2m contract termination and the absence of the £6.9m worth of "contract settlements" recorded in the 2010 results.

Given the circumstances, Xchanging will not be paying a dividend for 2010, the company said.

There is also a shake-up at the top. Mr Andrews will step down with immediate effect, although he will retain an advisory role. Ken Lever, appointed as chief financial officer (CFO) last October, will take over the top job in the interim, while a permanent replacement for Mr Andrews is being found. The chairman Nigel Rich will become executive chairman. Xchanging's management stressed that "actions are being taken to mitigate the impact on operating profits in 2011 which include restructuring and cost-reduction initiatives". But investors took fright. The shares opened down 44 per cent at 65.25p, before plunging to just 54.75p later in the day, recovering only slightly to close down by 52 per cent at 56.5p.

Some City analysts were quick to smell blood. Henry Carver, at Peel Hunt, cut Xchanging's target price from 110p to 30p and warned that "bankruptcy remains a distinct possibility" citing squeezed margins, an uncertain cash position and the risk from the loss of Mr Andrews.

Even the more bullish commentators warned that the company faces a long road back to credibility. "The company will have to deliver on expectations in terms of profits, cash and contract retention," Mike Murphy, an analyst at Numis, said. "If all that falls into place, then it's conceivable that the stock could get back above £1 in 12 to 18 months' time."

"The fundamental point is that XChanging has a new CFO who has looked at the books and decided that maybe he ought to be more conservative in the way that he accounts for things," Mr Murphy said.

Xchanging's problems started with last August's warning of "slightly lower" revenues for the 2010 financial year, as what Mr Andrews described as "caution across industries and across geographies" left the group without the slew of private-sector deals it had expected.

The stock slumped by 12.5 per cent that day, and just kept falling. Within weeks it was down by 40 per cent - nearer 110p than the 200p it was at the end of July – and Mr Andrews was forced to take a public stand against "incorrect speculation" and "completely baseless rumours".