A breakdown in financial controls has triggered the second profits warning in four months from building maintenance company Rok and forced the suspension of its finance director.
Investors in a sector already reeling from problems at Connaught, which is also heavily reliant on social housing contracts, took fright and the Rok's shares fell by more than 40% to close at 16.34p.
But the group's chief executive, Garvis Snook, insisted that the problems at Rok were very different from those at Connaught. He said the company had identified the trouble in its plumbing, heating and electrical (PHE) business and that underperforming contracts and a restructuring had led to the April profits warning. But when the PHE business did not respond he had ordered a thorough review by accountants BDO.
"In order to be certain that the full extent of the problem was known, the board appointed BDO to conduct an independent review. BDO has now reported back to the board and has stated that there have been serious failings in the financial controls. BDO has also confirmed that this is the full extent of the problem," Snook said.
It is thought that the decision to suspend finance director Ashley Martin with immediate effect and replace him with David Miller, a specialist chief financial officer, was designed to reassure the market that the problems had been contained. "The board has decided that the company must have new financial leadership," Snook said.
But some analysts were unconvinced and raised concerns about whether the problems were more wide-ranging.
Philip Sparks at Evolution Securities said: "Rok believes the problems were limited to the now closed PHE operation in England. If that proves to be the case, Rok's shares will be strong performers. However, the market will need to see Rok go through several sets of solid results before confidence is fully restored."
Others cited the Connaught factor as a contributor to the Rox share price reaction. Analysts accept that if the problem has been contained to the PHE division, then the shares look cheap. However the problems at Connaught, which have escalated to the point where the company is at risk of passing control to its creditors, provide a significant deterrent.
"Questions over financial controls in one area will no doubt create uncertainty about wider group control. We remove our buy recommendation. The issues here appear to be Rok-specific. Although we appreciate that this, along with the recent Connaught issues, creates a lot of uncertainty," said Panmure Gordon analyst Andy Brown, as he downgraded his share price target to 10p from 53p.
Not all private shareholders agreed with this. Internet bulletin boards hummed with comments from investors who felt that the market had over-reacted to Rok's announcement. "Someone must have thought this was the same story as Connaught, it clearly isn't. A massive overreaction in these volatile computer-programme 'sell' days," said one.
Rok will announce its half-year results next week. Investors are hopeful that the company will give more detail of the extent of the problems, which are as yet unquantified. Todaythe company would say only that the PHE business had underperformed and would not make a contribution to group profits this year.
"The board therefore anticipates that this will have a material adverse impact on group profit for the year to 31 December 2010 and that overall underlying pre-tax profit for the year will be significantly below market expectations," the company said.
Rok also says that it is confident that it will not breach its banking covenants on its £84.5m banking facilities. It said that cash generation had increased in the first half of the year and that this should lead to a material reduction in net debt which stood at £46.7m at the end of 2009.
"In consequence, the group continues to have adequate headroom on its banking facilities, and the board is confident in the group being able to meet its covenants," the company said.