Elektron: What a disaster

ELEKTRON TECHNOLOGY PLC
A BRIEF HISTORY
Ten years ago 2005
In 2005*, Group Sales were £22.7m, and Elektron was profitable with pretax profit of £2.7m. The share price was c15p and the Company was capitalised at £11m (* y/e 31/01/05)

Today
In January 2015, Elektron trades on AIM at around 5.25p per share. The company is capitalised at less than £10m. Sales in the six months to 31 July 2014 were £22.1m, Exceptional Items were £1.0m, and the Pre-Tax Loss was £0.6m.

Acquisitions and building the business

Elektron has made a number of acquisitions since 2005:

Elektron therefore spent approximately £13m acquiring businesses that brought with them £44m of revenue, approximately £1.7m of annualised notional profits (mainly from Hartest) and £12.9m of assets. At the peak in 2011, after the successful acquisition of Hartest, consensus brokers' forecasts projected sales for 2012 of £68m and PBT of £6.7m. Yet since the forecasts of £68m were made revenues have fallen by c35%** and Elektron has eliminated profit of approximately c£7m. Net tangible asset value has fallen from £5m in 2005 to £1.6m ( last reported) despite the acquisitions. (** c£45m/£68m)

In addition, shares in issue at the end of 2004 were 76m with a price around 15p per share, whilst today, the comparable figure is 186m with the price at 5p per share – a similar equity value, but only after an additional 110m shares had been issued. Over the ten year period from 2005 to 2014, the net proceeds of new share issues were £7.7m (inc £3.3m raised in July 2014 after the last balance sheet date).

At its peak at c42p in 2012 the market cap was £45m and the share price has fallen almost 90% from that level.

Operating profit and Exceptional Items
Annual Reports and RNS announcements refer to constant reorganisation and restructuring of divisions, businesses and operations, with numerous closures and sales, and also acquisitions and new set-ups, both in the UK and overseas. These include a transfer of many manufacturing operations from UK to China, before a subsequent and separate closure of the same Chinese operation, and transfer of manufacturing onwards to Tunisia

The following table shows that since 2005 Group Operating Profit has totalled £22.6m, yet there have been Exceptional items every year, totalling £18.4m in aggregate.

The 2015 Interim Report ( to 31/07/14) shows continuing Exceptional Items: a further £1m of “non-recurring items" making a total of over £19m since 2005.

Destruction and Dilution of Shareholder Values

To quantify the loss of shareholder value in the ten year period to Jan 2014, the total proceeds of share issues added to the total of Operating Profits before Exceptional Items and other charges was £26.8m – in other words, the Board had access to an inflow of £26.8m of shareholder funds, but still there has been a significant collapse in the asset base.

Looking at the value reduction in this way, Tangible Assets in 2005 were £5m, whilst at January 2014, total Net Tangible Assets were £1.6m (after deducting Intangible Assets of £5.8m) – in other words, total profitability over a ten year term, and all proceeds of share issues, have been destroyed. This analysis does not include the year to Jan 2015, as yet unreported.

KPIs

The Elektron Annual Report lists KPIs in a table. In 2013, of the nine KPIs listed ( inc gross margin, net operating margin, interest cover etc) seven of them had deteriorated during the year. Only headcount was up ( hardly a good sign for a struggling company) and the number of new products ( just three, as they admitted no new products had been launched the previous year). In 2014 they kindly repeated the table: Elektron had failed to improve eight out of nine KPIs ( the only increase this time was the headcount). Elektron admits each year, in print, that it misses almost all its targets. Against a background of increased losses, declining revenue and soaring gearing, the headcount rose from 1014 to 1289 in the course of fiscal 2014.

Board Responsibility

For ten years, the Board has effectively been under the control of Keith Daley, who is both Executive Chairman and also the only director to have served for the entire period

For whatever reason, Daley has presided over the dismissal / resignation / recruitment of 13 other individuals as Elektron Directors. This has included the departure of three Finance Directors / CFO's, with the fourth and current incumbent having been in office less than a year.

Total severance pay over that period has amounted to £589,000.

Board Remuneration

Since 1 February 2011, Daley and John Wilson have been remunerated with salaries of £200,000 per annum each in their respective roles as Executive Chairman and Group Chief Executive Officer. In addition, there have been a number of ancillary benefits, bonuses, share options and other share incentive arrangements for both of them.

Board remuneration ( including severance payments and pension contributions, but excluding potential option values) over the ten year period Jan 2005 to date ( assuming similar levels in the year just ending to Jan 2015 as last year) has totalled £6.5m which represents 350% of total tangible assets, 66% of the current market capitalisation, and 200% of cumulative Profit before Tax over the entire ten years. In other words, total Board remuneration took 66% of 'aggregate net profit before remuneration' over the ten year term.

Over the period 2006-2015 Keith Daley's total remuneration will have been almost £1.7m which is more than the present tangible assets of Elektron. The total remuneration of John Wilson since his appointment in 2011 has been £1.1m.

Overhead and Operating Expenses

In 2010 prior to the Hartest acquisition, Group overheads were £10.1m. By 2012 they had risen to £21m. Even adjusted for the £6.7m of Hartest overheads acquired, total overhead cost had risen by £4.2m ( assuming no cost savings from shared overhead). By 2014 Group overhead had fallen to £15.5m ( prior to £5m of non-recurring items, bringing the total up to £20.5m).
One of the largest increases in cost has been the Cambridge Technology Centre. No figures are given for the cost of housing 40*** engineers in new product development in a modern expensive-looking office in the West Cambridge development. The 2014 accounts say £1.9m R&D was capitalised and £0.7m taken through the profit and loss statement and that in the last two years year there were 62,000 hours of internal engineering time. At 31 January 2014, the net book amount of capitalised R & D expenditure on the balance sheet amounted to £3.1 million. Elektron trumpets the share of revenue for new products developed. However, this was just £0.4m in fiscal 2013, £2.5m in 2014 and £1.9m in 1H 2015 ( 8% of sales). It is really difficult for shareholders to see the value of a £3m per annum development overhead when four years after it opened, there is apparently so little new product. (*** 2013 Annual Report)

JSOP and Dividends

In January 2012, EKT created a Joint Share Ownership Plan ('JSOP') in questionable circumstances – which some argue had the effect of creating an additional 10% of shares under the control of the board and Daley, without the requirement to subscribe for those shares at market price.

Further, in July 2012, having declared that dividends would be maintained and no share buy-backs were contemplated, EKT bought some 2.4 million shares into the Employee Benefit Trust using company funds – before cancelling the forthcoming dividend on 13 Sept 2012 on grounds of liquidity and shortage of cash. The EBT shares were bought at a price of 20p ( current share price 5p). The current JSOP offers participants shares at 25p and above, and is unlikely to vest in current circumstances. The Employee Benefit Trust now has 8.1% of the new total of 188 million issued shares in the Company, of which 2.6% was bought at inflated prices and 5.5% is held as Treasury Stock, with no immediate direct ownership, but can be used by the Board to vote.

Versarian

In 2013 Elektron announced the sale of Total Carbide for £2.3m to a new company Versarian, which would then float independently on AIM. EKT received £1.3m in cash and 10% of Versarian, then worth £1.05m ( at the listing price of 13.5p). These were sold shortly after Versarian floated for about 11p for a book loss of £300,000. Versarian share price is now 19p ( at its peak 35p, when 10% of the company would have been worth over £3.5m). Versarian is now capitalised at twice the value of Total Carbide's former parent: Elektron.

Net debt and rescue fund raising

As detailed above Elektron has always generated a reasonable level of operating profit. However, every year Exceptional Items, have almost wiped these profits out, or often exceeded them. These Exceptional Items are not just “accounting adjustments" or paper entries, but comprise cash expenditure on restructuring and other immediate cash outflows, or the write-down of previously capitalised assets such as purchased intangible assets or 'fair values' from cash-based acquisitions. In other words, over the ten year period, the Exceptional Item expenditure reflects a real destruction of the company's asset base.

In 2010 the Company had net debt of £3.4m. By January 2014 net debt had risen to £8m and the very existence of the Company was in doubt.

Latterly, EKT has undertaken a distress re-financing by placing 67m shares at 5p per share. The list of major shareholders now includes D & A Income Limited, with 24%

The Strategic Alternatives Process

In April 2014 the Company announced a Strategic Alternatives Process, looking at all alternatives for the Company from a sale to a refinancing. This started a formal Takeover Panel Offer Period. At one stage a quoted company Microgen became involved. There followed a heated series of announcements with Microgen accusing the Company of continuing “to refuse to provide due diligence information to Microgen" ( RNS 20/05/14). Microgen offered a significant capital injection of £12-18m ( RNS 20/05/14). In the end Elektron refused to cooperate with a serious and significant potential bidder and shareholders were never offered the chance to vote on any proposal. Only on 20 June 2014 were shareholders told by the Elektron Board of an offer ( from an unnamed party) at 10p per share, a significant premium to the share price.

In the end, on 23 June 2014, Elektron announced a £3.5m fundraising at 5p, far smaller than most observers thought the Company needed.

The shareholder letter

One of the extraordinary things is that all of these issues have been addressed before and the Company was challenged in 2012 by a group of shareholders. The letter is available in various places on the internet ( and is attached as a later post).

Shareholders representing 18% of the Company confronted the Board demanding the resignation of the Chairman. Yet, it is not clear why this was not followed up with the threatened EGM. In fact, more extraordinary is that one of the signatories to the 2011 letter ( when the share price was 18p), Graham Edwards of D&A Income, has recently bailed the Company out with the rescue fund raising at 5p.

After the 2012 letter, one signatory shareholder very publically sold their shares, making the following statement: “Elektron Technology plc experienced continued poor trading, due to challenging macro conditions and what, we believe is, a weak management team with poor financial discipline and corporate governance. Our lack of confidence in management to deliver the much needed turnaround in this company, combined with the fact that we believe the board is highly overpaid, has led us to exit from this holding after the year end."

Why, when the Company's continuing trading performance has been so abysmal, has there been no further call for heads to roll? Since the letter in October 2012 the Company has announced further Exceptional Items of £8.3m - a massive further destruction of shareholder value ( 2013 £2.3m; 2014 £5m; 2015 1H £1m).

The Future

No announcements have been made to shareholders regarding future strategy, plans for restoration of shareholder value, or indeed what actions are planned to vary the continuous negative trends over many years.

There has been no broker's coverage since 2013, there are no forecasts, no recommendations.

Elektron has become untouchable.