Quercus (QUPP): Christmas woes

I like to keep up with a lot of the companies I've looked at and decided against on the blog. It's a bit of a masochistic habit - it doesn't take long in investing to realise that one throws away a lot of companies which go on to shoot up in price (and lots which go on to bomb and would have lost us a fortune, but we tend to not be wired to have such a generously perspicacious perspective), and I feel a little pang of pain when I see that a company which I thought was 'quite interesting' has since doubled. There's two facets to that pain; the irrational bit, which bemoans myself for not investing, and the logical bit, which bemoans the shortening of my pool of potential investments, since it's probably now even further out of my interest range. Lots of the companies I look at go the other way, though - they either hover ambivalently or continue to drop in price (not unlikely, since I'm tending to look for shares which are misunderstood or in 'trouble' in one sense of another). This is where it gets really interesting. Price falls are big buying opportunities if the fundamentals haven't changed. If the fundamentals have changed, they're a chance to catch back up and reassess - maybe the fall is overdone.

I'll begin by saying, then, that Quercus Publishing (OFEX:QUPP) were interesting to me only a few weeks ago. They're a company I'd looked at before; for background reading, check out my both my first post in June and my more recent in October. In the sense that I was considering investing, then, it's been quite a fortuitous escape; the book publisher posted a dire announcement last week with their preliminary take on full-year figures. That stood in stark contrast to Bloomsbury's strong trading statement on the 16th - with turnover there up 20%.  Brief 'highlights' for QUPP:

- UK book trade has continued to be challenging... sales in the final quarter were lower than expected, due in part to continuing issues within the book trade which led retailers to adopt very conservative ordering policies and a lower than expected upturn in digital sales over the Christmas period...

- ...the Directors expect the Company to make a significant trading loss for the financial year.

- The Company is in constructive discussions, which are on-going, with its bankers, Barclays regarding the terms of its facility...

Contrast that to the October results, which had revenues up 10% and operating profits slightly down on ongoing investment. Slightly down, I should note, meaning £0.5m of operating profit in that half; so to swing to a full-year 'significant loss' is rather alarming. There's scant detail in the RNS which is particularly concerning in combination with the note that the group is in 'constructive discussions' with its bankers. Investors seem to took it with as much surprise as I did - the share price has now halved, and the group is now trading at a discount to tangible book value. A discount to tangible book value for a media company with intellectual property is an unusual situation, and an interesting one. It offers an immediately obvious value-realisation factor; the possibility of a bigger competitor coming and snapping  up them, their back catalogue and their pre-payed authors (all for a significant discount), cutting out a bunch of the admin costs and going on their merry way.

As for reasoning for this abrupt change in fortunes, I don't really have much. There are only two things I can think of. Firstly, they did note in the previous results that "The Company has in place a substantial Revolving Credit Facility with Barclays and expects to utilise part of this facility during the second half of the year." - a sign that significant investment was incoming and one I should have paid more attention to. They invested in their New York team, after all, something else which I talked about as being a notable risk. Secondly, and possibly more importantly, I recall them saying that they were withdrawing from the Independent Alliance to "set up [their] own sales force with dedicated teams for both the UK and export markets". The Independent Alliance is a group of small publishers working together to compete more effectively in a world, particularly in the UK, dominated by large publishers. Withdrawing was surely a risk. Perhaps costs have significantly increased as a result, or sales are disrupted.

The bottom line, though, is that I just don't know. We don't have much information, which is probably why the share price has tanked. The annual report, hopefully, will shed some light on the situation. For now it's an interesting assets play - surely the business is worth more than its market cap to an acquirer - but with problems I have no way of quantifying.