The thing is, this seems to be a company going places. Azure is at the forefront of a once-in-a-generation move for hospitals as they digitise their systems and utilise software such as Azure's nurse call systems, which enable them to manage their beds more effectively (so I understand). So, the question is whether a PR error can represent a buying opportunity.
On Monday Azure said it expected first half profits for the December half to be about $1 million, compared with the previous year's first half profit of $2.2 million. It put in doubt the $3 million to $4 million net profit the market was expecting for the full year.
The reasons for the shortfall, we understand, were delayed revenue receipts and the loss of a contract, although the company stated that the principal reason was also increased spending on staffing and research and development expenditure for "future anticipated growth".
The big problem was the lack of detail. When there is an information vacuum, investors fill it with sell orders. The market annualised the lower than expected half-year profit and quickly cut the share price by a whopping 47 per cent.
Not helping matters was the defensive manner of executive chairman Robert Grey in conversations immediately after the profit downgrade on Monday (Grey remains an 18 per cent shareholder).
As one disgruntled shareholder said of him, "He's passionate about his company, but the guy is a loose cannon. He doesn't like investors telling him how to run the company." The other factor weighing on investors' minds is that only last September, Grey sold more than 20 million shares of his personal holding at an average price of 45 cents to raise just over $9 million.
The market suited him then.
On closer analysis, the situation doesn't look so bad, however. A downgrade more in the region of 20 per cent was in order (the broker Wilsons HTM actually downgraded its fiscal 2015 profit forecast by 17 per cent and its revenues by only a couple of per cent).
Andy Gracey, manager of Australian Ethical Investment's Smaller Companies Trust, took advantage and purchased stock: "I think the market overreacted because of the lack of information, which also indicates why there was a bounce. We have added to our position because we still like the story, but it's indicative of small companies coming to terms with accurate investor communications."
Azure's shares might have bounced but they are a long way from recovering. At 29.5 cents, they are a third lower than their 45 cent levels before the announcement. At least some of this decline is due to the damage done to investors' confidence in the company.
Running a public listed company is not easy and involves spending considerable amounts of time articulating the story. Managing directors are first and foremost sales people.
The two take-outs here are that expectation management is the key in any business, and that investors in small caps have to expect hiccups. If you understand why you're in a stock, it's most likely that you will see those hiccups for what they are, and not panic. Sometimes they can even be a buying opportunity.
AZV Price at posting:
30.0¢ Sentiment: None Disclosure: Not Held
