Small Cap Value Report (4 Sep 2014) - TAST, TRAK, EMR

4th Sep '14 by Paul Scott

49 comments 32990 reads

Good morning! It's very quiet for results today, so I'll have a ramble about something else - the Scottish Independence vote. Putting aside the politics of it, which would not be appropriate for me to comment on here, it's the potential impact on the markets which worries me. With the latest poll at 47% Yes, and 53% No, it's now looking very close, and the Yes campaigners seem to have momentum, and to be successfully convincing many voters through a mixture of emotion and highly questionable economics, that a Yes vote will be economically beneficial for Scotland. Whereas it seems to me the consequences would be potentially catastrophic. Sadly the main flaw with democracy is that you are asking people to make a decision on things that very few properly understand.

In all likelihood an independent Scottish Govt would massively over-spend, and would eventually default on its debt. So existing holders of UK Gilts are now facing the possibility that their Gilts might perhaps be split into an English part (which should remain pretty solid), and a Scottish part which would inevitably be regarded as far more risky, and could eventually default - bearing in mind that the oil tax revenues are not reliable, and are declining. Why would anyone who bought UK Gilts want to hold Scottish debt? So a run on UK Gilts could easily happen. A run on sterling might also happen - what if UK base rates have to be hiked up to (say) 5% (or more) in order to stem the capital outflows? It would plunge us into a horrendous Recession.

There would be years of uncertainty, which markets hate, as hundreds of years of laws & commercial relationships are unpicked & replaced. It seems to me complete madness to be doing this at a time when the UK is still running a gigantic annual budget deficit, and is dependent on ultra-low interest rates for a recovery. Why put that at risk? Whoever had the idea to do this Referendum now needs to be pensioned off before they can do any more damage!

Even if there is a No vote, if it's close (as seems likely) then the Union will be holed beneath the waterline, and without a convincing vote of popular support, markets will surely realise that it's only a matter of time before the Union eventually breaks up.

Trouble is, I don't want to adjust my shares…

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jraitt

4th Sep '14

Quirk of history that the Union was only formed to rescue Scotland from financial ruin caused by their over reaching ambition - The Darien Scheme.

The colonization project that became known as the Darien Scheme or Darien Disaster[1] was an unsuccessful attempt by the Kingdom of Scotland to become a world trading nation by establishing a colony called "Caledonia" on the Isthmus of Panama on the Gulf of Darién in the late 1690s.

From the outset, the undertaking was beset by poor planning and provision, weak leadership, lack of demand for trade goods, devastating epidemics of disease and increasing shortage of food. It was finally abandoned after a siege by Spanish forces in April 1700.

As the Darien company was backed by between a quarter and half of all the money circulating in Scotland,[2] its failure left nobles, landowners – who had suffered a run of bad harvests – as well as town councils and many ordinary tradespeople[2] almost completely ruined and was an important factor in weakening their resistance to the Act of Union (completed in 1707) -( wikipedia)

plus ca change plus ca la meme chose

rick

In answer to your question "do you have an example in mind where independence for a reasonably well-developed (or any!) country led to economic catastrophe?". The list is extensive if you care to research it. But Russia / Ukraine and the potential spit up of Iraq are both very topical. The Ukraine economy is a complete mess, with capital markets treating it as a barge-pole job. The smaller brother always comes off worse, but the big brother does not fair too well either! In debt markets 4 + 2 = 8.

James1314

Thanks for this Rick. Good example. I suppose that's what happens when the large country really wants to hold on to the smaller one and resorts to extreme bullying and economic vandalism. Hope that's not what England has in mind for Scotland if there is a 'Yes' majority.

Don't think you need to invoke vandalism (although true in Ukraine), the capital markets will give both Scotland and the rest of the UK some stiff punishment. But the irony is that the Scots will have to negotiate with George Osborne for sure if they vote YES. He is not known for his generosity!

evoh_1

An independent panel should commision a report on the potential beenfits and risk of independence.

Then, to take a vote on the matter your should have to read said document and make up a decision based on those finding rather the tirade of two parties with a interest in manipulating the figures to their own goals.

I do think this has become a serious issue for the asset markets as they stand.

Bezhe

The topic of reduction of share premium came up on a previous occasion here:

http://www.stockopedia.com/content/small-cap-value-report-13-dec-vlx-per-trk-vlk-off-aly-snx-79920/

TMFMayn

Tasty is now where Prezzo was about ten years ago. Back then, Prezzo raised about £8m I think via a placing that really kick-started the group's growth. Look back at the placing details and adjust for the share split and you can work out the share-price gain for anyone bagging Prezzo at the time. I spoke to Sam Kaye at the Tasty AGM this year and the update is on the ShareSoc website.
Mayn

cig

Cost-benefits is a bit of a mug game in the long run, and surely people should draw up country boundaries, which are pretty sticky, based on cultural allegiances and how various groups get on together, rather than speculative bean counting? It's a bit like people who decide who to marry by commissioning someone to do a discounted cash flow analysis of their prospective spouse's lifetime earning potential.

Paul Scott

Really good discussion today, thanks for all the interesting points made!

Regards, Paul.

Splode

Flack - All English parliament? Think again!!

Funderstruck

We shall never cease to be astounded by politicians decisions in their quest for glory; as with A .Salmond he will get it with either 'Yes' or Divo' Max but to achieve it he is putting at risk the future of both countries for a decade if it is close to a 50:50 vote. The Nuclear position is indeed that. If the markets collapse don't expect a 150% recovery bounce in 5 years as this time
Don't need to go back to 17th. century to highlight the wizardry of Scottish financial acumen ...remember the Investment Trust debacle & the Two banks of very recent times.
As of Scottish ancestry I am appalled.

foxy1959

No vote currently 1/4 on Paul, not too many poor bookies around, Calllm down calllm down as they said on Brookside

jonesj

Scottish Independence means fewer Labour MPs in London. I would vote for that.

extrader

Hi all,

Interesting situation if Scotland DOES vote for independence and negotiations start for unwinding of the Union.

There's a General Election in rUK next year, do the Scots get to vote during the transition period ?
Assuming not (how can you vote if you're leaving?), then the Conservatives seem a shoe-in.
They have committed to hold a referendum on post-negotiation Europe.
If rUK decided to pull out of Europe, where would that then leave 'newly independent Scotland' - still trying to keep the pound ? Or still processing its application to join the Eurozone ?

A bit messy, whichever way you look at it, and markets HATE uncertainty !

And - since there's no cost (to the individuals) attached to the process, even a vote to stay together won't settle the matter : what's to stop the pro-independence lobby from seeking another vote in a few years' time, cf. the 'neverendum' seen in Quebec ?

ATB

carla77

5th Sep '14

If the ungrateful Scots vote YES they will be an economic basket case within 3 years, they currently gorge off of the English taxpayer via the ridiculous Barnett formula which provides C£1800 extra public spending for every Scot, that is how they can have free tuition fees, free nursing care etc. etc.

Salmond is a slimy chancer, effectively trying to blackmail his way to using sterling by threatening to default on Scotland's liabilities. The English taxpayer has already bailed out Scotland once when RBS and BOS nearly bankrupted the UK and I hope the idiots at Westminster don't agree to a sharing of our currency, let them join the dodo, read euro or revert to the groat (an ancient silver coin worth about six old pence).

A break up would be bad for the union, however, there would be a major benefit as it would kick out a lot Labour MPs and hopefully Britain would revert to a more "right of centre" political scene instead of the liberal extremism we have had for the past 20 years.

PJB

SevenPillars

Not entirely right. When you say the English taxpayer bailed out Scotland, that's not true is it? The UK banks were bailed out by a UK Government being able to borrow and print new money. The UK banks, all of them regardless of where they were based, took advantage of conditions and laws passed and approved by the UK and other Governments which more or less began in the 1980's, big bang onwards.

You don't believe that the UK Government actually had the money at the time in 2008 to do the bailouts do you? They didn't have the money, but the one advantage that the State has is that it can tax both now and in the future its citizens and businesses. Markets know this and it's why they like to increasingly see Government guarantees and backing in the event things go wrong. Hardly a free market, but that's the way it's become.

So, all of the UK citizens including those in Scotland who are taxpayers are used by the state as the guarantors. Because the monetary system is inflationary by design, countries like the UK simply add it to debt that will at some stage be paid back in the future, aided by inflation which helps to inflate it away, backed by the taxpayer now and into the distant future. It was not the English taxpayer that rescued Scotland, just as "English" banks leading up to the crisis were not a model of prudence either.

Flackwell

Why?

Fangorn

"Not entirely right. When you say the English taxpayer bailed out Scotland, that's not true is it?"

Hmm population of England 52.9m. Scotland population 5.29m, Wales 3m odd.

England is, indisputably, where the majority of the wealth lies. As indeed is where the majority of the tax paying public given the clear population numbers.Hence the majority of any tax revenue raised,and that borrowed(secured on the tax revenue of England as a guarantee) will most definitely have come from England to bail out predominantly Scottish banks, both run into the ground, one by a Scot.

So yes. The English taxpayer effectively bailed out Scotland.

Sterling is also the currency of the Union - not England's specifically. So you leave the Union, you don't get the currency.

Salmond's threat of "if you dont give us Sterling, we wont pay out share of the debts, both those arising outside of the bank bailout , but also though directly coming from bailing out Scottish banks" is a hollow one.

Sure he can threaten that. But then, if Scotland doesn't take it's share of the debts, then England is perfectly entitled to say they don't get their share of the assets(ie North Sea Oil - which isn't actually Scottish, the majority belongs to the Shetland Islands. Perhaps we should give them a referendum as they have more in common with Norway than Scotland)

Perhaps Salmond will take those assets. Population Scotland 5.29m, England 52.9m +
Don't rate Scotland's chances in any major war frankly especially as it's an myth the majority of the British Army is Scottish.It clearly isn't.

Whatever happens in the forthcoming referendum, if the Vote is NO, but very close, there will be calls for more devolution. No issue with that as long as England, in similar fashion, gets devolution and more powers as well

Wol

30th Sep '14

Paul
On Empresaria could you expand a bit on the non-recourse invoicing. I had thought that this was a form of factoring in which the factors take on the risk of a failure to pay. If so, how can this create a credit balance in the balance sheet that could be set off against debtors?
Thanks
Julian

Julianh,

With Empresaria (LON:EMR) my understanding is that some debtors are sold to a bank on a non-recourse basis, and hence are shifted off balance sheet. So this has the effect of shifting both the Debtors and the related bank financing off balance sheet.

Therefore, if this financing facility were withdrawn, then EMR could potentially go bust - because it is relying on this debt facility for day-to-day funding. It's a big risk, and it's not reflected in the net debt figures they quote, although it is mentioned in the narrative to the accounts.

I can't think of any other Listed company which I cover that adopts this accounting treatment.

I need to see all the debtors, and all the creditors, on the Balance Sheet.

A fundamental accounting concept is "no netting off", but that seems to be exactly what Empresaria are doing!

Regards, Paul.

Small Cap Value Report (4 Sep 2014) - TAST, TRAK, EMR

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Paul Scott

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