The AIM-listed firm has chopped £10mln from its current year profit expectations after a review identified "areas of concern" related to recognition of historic accrued income, impairment of trade debtors and gross margins being achieved against prior expectations.
Essentially, the company thought it would supply more electricity and invoice for money than it actually did.
The ‘aged accrued income’ balance – the difference between expectation and reality – totalled £4.2mln for the year ended December 2017 and £4.3mln in the first half of 2018.
On top of that, lots of small businesses haven’t been paying their bills, forcing Yu to up its bad debt provision, while intense competition means the firm is guiding for a “significant reduction” to gross margins in 2018 and beyond.
The firm said it is committed to commissioning a forensic review of its systems to fully identify the underlying issues and implement all necessary further measures, with a return to profitability targeted for next year.
Focused on restoring profitability
Yü Group chief executive, Bobby Kalar said: "Our booked revenue from new sales remains strong and contracted revenue for 2019 is already £67mln as at the end of September 2018. We have improved internal controls around working capital management and the board is absolutely focused on restoring the profitability of the business.”
In late morning trading, Yü Group was the biggest casualty on the London market, with its shares plunging 81.5% to 110p.
AIM sentiment gets another knock
Russ Mould, investment director at AJ Bell commented: “Coming hot on the heels of the scandal at cake seller Patisserie, accounting problems at small-cap gas and electricity supplier Yü Group will do little to improve investor sentiment towards AIM, London’s junior stock market.”
He added: “It is worth saying the issues at Yü do not look as serious as those at Patisserie where finance director Chris Marsh was arrested and released on bail as part of a probe into potential fraud.
“However, it will be difficult for Yü’s management to regain their credibility as fixing problems with the way ‘historic accrued income’ is recognised and higher than expected non-payments from trade debtors are set to hurt reported earnings.
“You have to question why companies aren’t prepared to be very conservative with their accounting as, if they are not, it seems inevitable that at some point an event like this will arise.”
Dynamics shifting in energy supply sector
Mould concluded: “Yü’s ability to recover from this setback may be compromised by shifting dynamics in the energy supply market.
“Changes to the rules have made it easier for businesses and households to switch in recent years, supporting the growth of small independent suppliers and undermining the entrenched position of the so-called ‘big six’.
“However, the recently announced price caps may put more pressure on the smaller operators who lack the same capacity to absorb the impact of this move as their larger counterparts.”