Rok Hits The Rocks

Published in Company Comment on 8 November 2010

Another former high-flyer from the support sector crashes to earth.

Investors in Rok (LSE: ROK) woke to grim news on Monday. The firm has gone into administration, and trading in its shares has been suspended.

The two sentence RNS announcing the move gives no explanation as to what's changed at the building services outfit since 30 September, when Rok reported:

"The Board continues to have confidence that the Company will meet market expectations this year."

Given Rok had a market value of £35 million that day -- whereas I suspect Rok shareholders will now be left with nothing -- either the past five weeks have seen disastrous developments behind the scenes, or else the board was woefully out of touch with Rok's real prospects.

The latter seems possible, for all the darker allegations being voiced by angry investors in the wake of Rok's demise. After all, Rok's chief exec Garvis Snook spent £38,000 of his own money on its shares on 4 October, following a £50,000 investment he made in late August.

Accountant's error

Group finance director Sean Cummins also purchased shares the same day as Snook, laying out a shade over £39,000.

Cummins had only been in the job three days, after replacing outgoing finance director Ashley Martin, who had previously been suspended -- and ultimately exonerated -- by Rok after a breakdown in financial controls led to its latest profits warning in August.

Cummins is no wet behind the ears pup -- the 48-year old was mostly recently finance director at Yule Catto (LSE: YULC), the FTSE 250 chemical specialist. If he couldn't spot the problems at Rok before taking up his post -- to the extent that he risked tens of thousands of pounds of his cash by buying its shares -- then what hope did private investors have?

Some will allege that the directors' purchases were about trying to shore up confidence, which will leave a bitter taste in the mouth of any private investors who followed them into the shares.

But it's hard to call Snook's £88,000 outlay a token gesture; the buys increased his own position in Rok by around two-thirds.

Multi-bagger or bust

In any event, Rok's demise has hardly come out of the blue. This was a FTSE 250 company a few years ago, with a share price north of 200p after a 15-fold increase in seven years.

By the time of suspension, however, it had plunged to penny stock status, with its shares trading at under 20p.

G A Chester recounted Rok's numerous woes for The Fool a couple of months ago, so I won't repeat them here. He concluded that it was a potential multi-bagger if you believed its troubles were behind it, but said he personally would avoid it due to the weak balance sheet.

Such wariness has proved wise, yet ironically the news from Rok since then has been uniformly positive.

Following a review, the financial issues that led to the August profit warning were said to have been isolated to one part of the business. Rok also announced new contract wins, including a £40m deal with to provide Axa Assistance with emergency home services, and a £32m contract with the Scottish Government's development agency.

Rocky road ahead

We'll have to wait to discover what finally sent Rok off the rails (with nearly £50m of debts as of August, I suspect its lenders pulled the plug) but superficially its downfall brings to mind the recent demise of Connaught Group.

Both were former FTSE 250 stalwarts that fell from grace, both were headquartered in Exeter and grew rapidly in the mid-Noughties boom, and the last act at both companies came after profit warnings and rumours of accounting oddities.

Will they be the last? In the wake of the 'dash to trash' rally of 2009, some argued that companies were limping along in a zombie state. Sure, the unthinkable had happened in the banking sector -- bank runs brought about the end of Northern Rock and led to HBOS and Lloyds (LSE: LLOY) being merged -- but in the wider economy there seemed a lack of big casualties, given we'd seen the deepest recession since World War 2.

Perhaps the chickens are now coming home to roost, especially with the government taking the axe to public spending and house prices wobbling again.

Whilst I'm very confident about most of my individual shareholdings -- the emphasis in my portfolio is less on trash and more on companies with cash -- I'll certainly be keeping an extra eye out for over-confident directors and financial irregularities in the months ahead.

More positively, it's worth thinking who might benefit from Rok's demise. Obvious candidates could be Morgan Sindall (LSE: MGNS) and Mears Group (LSE: MER), who both picked up contracts from the wreckage left by the implosion at Connaught.

Their share prices have barely budged though, suggesting that fear not greed is the predominant emotion in the wake of Rok's collapse.

More from Owain Bennallack:

> Owain owns shares in Lloyds.

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lotontech 08 Nov 2010 , 2:50pm

I've held ROK at various times in my public trading account, so I had a minor panic when I saw this news. No worries -- I last stopped out on 15 Oct at 17.5p.

Good old Stop Orders, eh?

BelovedGasbags 08 Nov 2010 , 3:09pm

Great article coupled with G A Chester's review. I feel for shareholders after the recent encouraging news.

Might I digress please? Owain your comment above " bank runs brought about the end of Northern Rock and led to HBOS and Lloyds (LSE: LLOY) being merged". Sorry but I'm fed up of reading on the Fool of a merger between Lloyds & HBOS. HBOS was probably technically bust without the emergency loan of £25.4bn from you know whom. As a very hard pressed long term shareholder Lloyds was in a much better shape financially at the time of the deal - it was a takeover. Why do I keep reading of a merger – do you think that both Lloyds & HBOS were basket cases at the time of the deal?

zander8 08 Nov 2010 , 4:08pm

We also had Jarvis go down this year so this area seems to be fraught with low margin work.

BarrenFluffit 08 Nov 2010 , 5:59pm

Two largeish company's in the same sector spontaneously collapsing is unusual. That both should be based in the same town more so. maybe the local lenders had a change of policy.

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