Small Cap Value Report (6 Feb 2014) - WIN, RHL, CBUY, PTD, MTEC

6th Feb '14 by Paul Scott

10 comments 20465 reads

Good morning!

Wincanton (LON:WIN)

This is a logistics group (e.g. transport & warehousing) with one of the worst Balance Sheets you are likely to ever see. It amazes me that the auditors (KPMG) are happy to sign off their accounts, when the company's financial position is so bad.

Not only is there a £101.9m deficit on net current assets (being £254.9m current assets, less £356.8m current liabilities) shown in the last Annual Report (as at 31 Mar 2013), but there is an additional £405m of long term creditors! (being £196.9m debt, £148.7m pension fund deficit, and £59.4m in other provisions).

So strip out intangibles, and net tangible assets were negative to the tune of £400.9m! That's beyond bad, it's off the scale horrendous. Therefore this share is completely uninvestable at any price in my opinion. It's frightening how many investors are completely ignoring financial strength at the moment, cheerfully ignoring massive liabilities in this case, and just valuing the business on its PER.

The trouble with that, is that in all likelihood this business will need all the cashflow it generates for the foreseeable future to service & reduce debt, and the pension fund. Dividends stopped in 2011, and it would be reckless for them to re-start. Therefore the way I look at things, these shares are worth nothing.

Anyway, not that it really matters, but the company reports today that it is trading in line with market expectations.

Redhall (LON:RHL)

I went through the accounts of Redhall in detail about a month ago, and came to the conclusion that it was very high risk - with far too much debt, and operating in a low margin, difficult sector - similar activities to Silverdell, whose bank unexpectedly pulled the plug on them last year for reasons that are still unknown. In that case the CEO & a vulture company hived off the decent parts of the business, leaving shareholders with nothing, which most people agree was a total disgrace.

Redhall's financial position actually looks to me worse than Silverdell, with more debt, so they are completely reliant on the ongoing support of the Bank - who have extended facilities to Sep 2015, but do I really want to invest in any situation…

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MrM

6th Feb '14

If we're heading for another stock market mania, cloud businesses would be top of my list.
Besides CloudBuy (@UK), there is also Outsourcery, with it's Dragon's Den investor, Piers Linney, and CloudTag.

As Charles Kindleberger wrote, "There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich."

Are there any of these businesses that actually make any money? I'd hate to get left behind.

harry34

I bought into Pittards (LON:PTD) too Paul, (although before the recent share consolidation). Another reason to buy is their declared intention to resume dividend payments. I have no idea on the likely level - could be just a token - but a promising sign. Thank you again for your wonderfully insightful, and refreshingly honest reports.

mrmodha

The reason I would not invest in Cloudbuy (LON:CBUY) is probably the same as yours - I can get zero handle on what value their service adds, or why it would be deemed worthy by their potential market. To me, sadly, another bandwagon jumper with cloud services that don't actually offer a solution that people want or need.

stocktrawler

The high net debt and poor cash-flow on Pittards put me off

eastheath

I get it that WIN's balance sheet is awful, what I don't get is the sp 'recovery' from 40p to140p in last ten months. Were they lucky punters or clever punters, those that bought in April 2013?

pdownes

Wincanton (LON:WIN) did manage to reduce it's debt around 20% between March and September according to Investor's Chronicle which seems positive if they keep it up.

MacroVal

Paul,

As an ex auditor (specifically, and in this context appropriately, with KPMG) I feel it necessary to point out that the auditor doesn't take a view on signing off the accounts - their job is state that they reflect the position of the company in a true and fair manner.

KPMG could have included a statement about the going concern of the company if they felt that this was something that should be brought to the shareholders attention. Similarly. they could have offered a qualified opinion as to the validity of reported results.

It's the directorate's job to ensure the numbers are any good!

From the report, and for reference:

Respective responsibilities of Directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 38, the Directors are responsible for the preparation of the financial statements and for being
satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Further on going concern:

As part of the year end process the Directors have undertaken a going concern review,
as required by IAS 1 Presentation of Financial Statements, including determining the
headroom available when the Group’s facilities are compared to the forecast monthly
cash flows for the forthcoming financial year and sensitising the borrowing covenants
to give an indication of the headroom therein. Having undertaken this review the
Directors have a reasonable expectation that the Company and the Group overall
have adequate resources to continue to meet their obligations as they fall due and
satisfy their borrowing covenants for the foreseeable future. Accordingly these
financial statements have been prepared on a going concern basis.

MacroVal

Paul Scott

Hi MV,

I take your points, but given the extreme negative net assets position with WIN, I am very surprised that KPMG did not choose to cover themselves by including an emphasis of matter type paragraph in the audit report, which are sometimes used in situations when going concern is an issue.

I think this case shows how little value one should ascribe to the audit report (speaking as an ex-auditor myself too). I've often heard investors say things along the lines of, "everything must be fine, as they got a clean audit report", which is dangerous, as the audit report really provides virtually zero investor protection.

Regards, Paul.

I agree with you points - which is why we a probably both ex audiotrs...!

Can still see a shake / break up of big 4 somewhere down the line

I always take Northern Rock's clean audit report as case in point - right before its failure in 2007

I suppose this is a reflection of the folly of forecasting - I'm reminded of Montier's excellent little book of behavioral investing.

Either KPMG were vindicated in giving a clean bill of health if Wincanton turn it around tomorrow, or the criticism is justified.... Only time will tell

(Like youI, I'll stay well clear)

mpat89

Auditor in training speaking here... surprising to see no emphasis of matter paragraph if the company has net liabilities, even if post year end position has improved?!

Small Cap Value Report (6 Feb 2014) - WIN, RHL, CBUY, PTD, MTEC

Wincanton (LON:WIN)

Redhall (LON:RHL)

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Paul Scott

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