Small Cap Value Report (28 Oct 2015) - GBO, UTW, POS

28th Oct '15 by Paul Scott

35 comments 24853 reads

Good morning!

Globo (LON:GBO)

Shares suspended.

(I hold a short position in this share)

Update - I wouldn't normally comment on a share where I hold a short position, but seeing as this one is suspended, probably for some time to come, then it's an exception.

Today's update doesn't really say a lot, other than;

The company has reported the situation to the police in the UK, Greece, and Cyprus
The FCA is investigating the situation
Shares remain suspended

What everyone really wants to know, is whether there's any cash left? It should be possible to ascertain that within 24 hours, just by contacting the various banks where deposits and loans were held. So I don't understand the delay on this point.

Personally I'd be surprised if there is much cash remaining, if any, but time will tell.

My archive on Globo - I thought it would be interesting to recap on the history of this situation, and see what warning signs were known, and when. Therefore, I collated all my own posts on Globo here on Stockopedia over the last 3 years into one, easy-to-read 29-page document, which you can read in Google Docs here, should you wish.

What is striking, is how obvious (to me anyway) the warning signs were. Bear in mind also, that I'm not given to false negatives - i.e. historically when I've warned about dodgy accounts, I've been right in pretty much every case.

Another interesting aspect, is how there was an intense bear raid in Oct 2013, which ultimately came to nothing, and the company managed to continue for another 2 years before the fraud was finally exposed by QCM using evidence obtained from scrutinising Globo's supposed distributors, and interviewing former employees.

I think it's very important that private investors learn the lessons from this case. It's depressing to see how the same people on bulletin boards seem to turn up at all the dodgy companies, stridently shouting down any criticism of a company, and then losing their shirts when it all goes wrong.

At some point, when time permits, I'm going to create a new scoring system to identify companies which are highly likely to be frauds or semi-frauds - i.e. to formalise what I already do in my head to spot these situations early.

Utilitywise (LON:UTW)

Share price: 180.5p
No. shares: 76.6m
Market cap: £138.3m

(at the time of…

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Fangorn

28th Oct '15

"At some point, when time permits, I'm going to create a new scoring system to identify companies which are highly likely to be frauds or semi-frauds - i.e. to formalise what I already do in my head to spot these situations early"

Superb idea.

Can't say I followed Globo that closely.Went to a presentation a while back(2013?) and just couldn't see how it was going to go anywhere.

tend to avoid most AIM stocks, similarly Chinese, or Russian, or any that strangely list here rather than on their own native markets.

The list is endless of AIM scams that's for sure.But that seemingly has extended to FTSE250 companies recently.

Tend to stick to blue chips mostly,with significant leaning to US stocks - only occasionally dabble in the "Gamblers AIM market" ,and then only to lose my shirt! :)

robinleggate

A bargepole list like you suggest is a great idea, though difficult to incorporate into Stockopedia's rankings, as they are all objective numbers and a bargepole rating has to be somewhat subjective. But if were available to view on Stockopedia, I for one, would follow it closely.
Thanks

ed_miller

My pleasure FREng - investing is easier when we help each other out. There is always so much research to do. Obviously, UTW is on my bargepole list! When Paul formalises his method for avoiding possibly fraudulent companies it will certainly help us PIs out.

Regards,
Ed

TMFMayn

UTW

I don't buy the dividend argument.

During the three full years since the float, UTW has produced after-tax earnings of £25.5m. All of that - £26.3m - was absorbed into working capital. So I would argue the dividends of £6.6m (and acquisitions of £16m) of those same three years were funded by UTW's new shares, which raised £5m, and its net new loans, of £16.2m.

For a bit of further research, one example of a business declaring rising dividends while hiding accounting irregularities was Healthcare Locums. It raised its divvy from 2p to 5p for 2009, while the results the next year owned up to the inevitable.

Anyway, it's clear to me UTW has aggressive accounting and at the very best it is simply a bad business with awful cash flow economics. I can't see any reason why a sensible investor would go near it.

lifford86

?What a fascinating bull/bear discussion on Utilitywise (LON:UTW).

Adding my thoughts to the discussion:
- Regarding the recognition of revenue, from an accounting perspective what they are doing is understandable. The work they do to earn commission is done on day 1 and as such one can argue that they therefore recognise all revenue at that point, since afterwards they have no work left to do.

- The difficulty lies in how they estimate what they should recognise in the absence of a payment for the full amount on day 1. It seems that actually they don't seem to be over bullish in that respect. Looking at their prior year adjustment narrative, they state that:
"The commissions are calculated based on expected energy usage by the business customer at agreed commission rates with the energy supplier. Where the actual energy usage by the business customer differs to that calculated at the date the contract goes live, an adjustment is made to revenue once the actual data is known; this is referred to as the consumption variance. The Group has historically estimated the fair value of revenue recognised at 85% of the expected full commission at the go-live date"
For the non-accountants out there that is basically saying that they work out commission based on what they THINK the usage and energy costs will be for the life of the contract; but then reduce that by 15% to take into account low users, drops in prices, etc.
Obviously that leaves a large amount of scope for over-recognition, however they go on to say that on reviewing contracts which matured in the year just gone, "the overall consumption variance rate for this population of contracts was 15%, consistent with our revenue recognition policy". So it sounds as if the more recent contracts have been valued pretty much bang on.
The prior year adjustment seems to have been a balls up in not noticing that their contracts were longer than 2 years (hence provisions were released prior to the contract ending) and older contracts having a larger variability. I can understand an error in the "consumption variance" rate as they call it, however the length of contract point seems a bit of a schoolboy error.

- I'm slightly confused about the 80:20 statement they made in regards to the accrued revenue that they have received. This seems to suggest that for that particular energy supplier they get 80% of the commission value up front and then the final 20% is based on actual usage at the end of the contract.
If this was the case for all customers/suppliers then it would be logical to assume that there wouldn't be much accrued revenue. However it does state that this was only the case for renewals, so maybe it's just limited to that?

- On the flip slide they have just reduced their accrued revenue by 13% in one go; in addition their top 3 energy suppliers account for 50% of the revenue (and so logically you could apply that same assumption to the accrued revenue). So potentially if they get similar terms from the two other big suppliers we could be looking at another couple of big cash receipt.

- I would be intrigued to see what they had to offer the energy suppliers to get that payment though

- Their cash outflow is worrying, but as Paul says they pay a dividend and it has been increased this year - not exactly a sign of a lack of confidence

- Finally as mentioned earlier, they have Woodford on board and he has apparently been through the numbers. Whilst I don't think you can rely on that by itself (any more than an audited set of accounts), it does add some level of reassurance.

I'm long, however see this as a short term trade rather than a buy and forget. In fact reading the thread I'm more buy and keep a careful eye on at this point.

baby92

29th Oct '15

GBO Situation

Paul, I would like to say a big thank you.
Thanks to your very logical comments on this board and the sound advice of “listening to the bear case” it became obvious that something was definitely not right at GBO.
I have been an investor with Globo for several years picking up a large proportion in the early days at 18p. I initially viewed the shares as very high risk and speculative, slowly increasing my position to over £30k with a very good margin of profit as a safety net.
Have to say, I was never comfortable with the Greek connection and not happy with the way this was supposedly engineered out of the business. I promptly reduced my holding (50%) on the emergence of the Greek crisis.
Financial reporting was always a problem and the issue with the auditor BDO in March 2014, prompting a written response by BDO to Companies House, did indeed suggest they had stumbled onto something untoward.
Your last analysis of the accounts and the totally illogical requirement for a Bond Issue finally closed the door on GBO for me. I sold the remainder of my holding.
In hindsight, I was definitely wearing “bull glasses” for too long. Thankfully, with your assistance, I managed to remove them ………………………… just in time.
Keep up the good work!

Cisk

Jane, couldn't agree more. I think history has told us that the more column inches a stock generates in this (and other) boards, from a wide number of people, with valid questions on the business model and / or accounting policies, why bother with it?

There's no smoke without fire. And plenty of other stocks out there to invest in, who don't have questionable accounting policies, or slightly dubious business models.

Ramridge

Yes, I agree Cisk & Jane. I think what is keeping this stock's price up is the Neil Woodford factor.
But then no one is infaillible. If Warren Buffett can get it wrong occasionally so could Neil W.

Hi Ram, I don't follow Woodford; some friends have his funds (like the new health one) but it goes against my principles to pay over the odds - i.e. above net asset value. The guy is obviously smart but it's the herds of investors that blindly follow him that push up demand for his funds and make them expensive. Anyway apologies for the off topic ;-)

shanklin100

Hi lifford86

"- Regarding the recognition of revenue, from an accounting perspective what they are doing is understandable. The work they do to earn commission is done on day 1 and as such one can argue that they therefore recognise all revenue at that point, since afterwards they have no work left to do."

Surely the deal itself generates zero income and it is completely inappropriate to start guestimating what commission may be generated in due course and putting that through the accounts.

AIUI its energy usage which generates commission, so more prudent wouldbe to recognise this commission income as and when it occurs in the real world. In addition I think it would be highly informative, in a note to the accounts, to show UTW's estimates of how much income they expect to achieve on existing deals, sub-divided by FY and whatever else they feel appropriate, but this should not be going through to the BS or anything else that reflects current financials.

This is not to comment on the investment case here, just on their accounting policy.

rhomboid1

What might be useful is to look at how a real "utility"company treats the other side of this transaction , ie.if both sides of the transaction are treating it in a similar non contradictory manner then that would be reassuring to Utilitywise shareholders? Obviously the amounts involved are critical to UTW and immaterial to the Utility company but the comparison would be interesting, equally the costs impacts are spread radically differently as well but ...? Might be worth digging into if I were contemplating buying the share.

Hi shanklin100,

If you think of other commission business I imagine that they do something similar to what UTW do. Take a recruiter for example I imagine they would recognise the full amount up front despite the candidate probably having to be in the role for say 3 months - 1 year.
Or an online comparison website like Moneysupermarket. Their accounting treatment for commissions is "Brokerage commissions are recognised at the point of completion of the transaction with the customer" ie similar to UTW.

Taking the alternative view to the extreme, that would mean recognising no revenue until the contract between customer & energy company matures. If that was the case then the company would be significantly loss making for several years and then make massive profits.

It sounds as if we both agree that the issue here is the company's view of the overall revenue which they expect to receive over the contract - we are just coming from different viewpoints. You are saying that they can't accurately measure it and so shouldn't recognise it until they know for sure; I am saying that some degree of estimate is necessary and that if they can prove that it is normally correct (ie by historical standards) then it is probably the best they can do in the situation.

As always with accounting policies there is typically no black or white answer, just shades of grey. It's ultimately down to what people feel comfortable with (investors, Company Directors and Auditors) - obviously this will vary person to person

cig

Maybe the metric of the shade of grey could be mean time between recognition and collection. For the other businesses you cite, it's probably a few weeks (money supermarket) to a few months (recruiters) but for Utilitywise (LON:UTW) it will be 1/2 of mean contract duration which I guess may be years.

rhomboid1's point is also quite interesting: it seems unlikely the utilities account for this as a liability, so at the aggregate economy level you've got an accounting discrepancy: someone has assets for which nobody has a matching liability.

30th Oct '15

FWIW Paul has sold UTW

https://twitter.com/paulypilot/status/659762846855...

lucien2k

31st Oct '15

Spotted this today:
http://www.thisismoney.co.uk/money/markets/article-3297477/Scandal-hit-Globo-teetering-brink-main-lender-Barclays-warns-company-default-loan-agreements.html

I would assume that means there is no cash (as Paul said).

jjis

FWIW - Citywire reported that Legal & General were writing off their £2m stake on which they said: " he did not expect to receive back any of his £2 million stake, fearing the company would be placed into liquidation, with potential lawsuits possibly eating up any remaining cash.

Paul Scott

Hi,

Yes, as a post-script, I listened to the more bearish views here, slept on it, and decided that I couldn't make up my mind on Utilitywise (LON:UTW) - I can see merit in the bull case, but I can also see merit in the bear case. Hence my position is now neutral on the stock, and accordingly I don't want to hold shares where I feel neutral, so closed my long position in the share last week at 195p.

For the moment I'll keep it on the watchlist, and think about it some more. My general view is, when in doubt, sell out, which is what I've done.

Please can I reinforce the fact that I NEVER give recommendations here, so really what I do with mine & our clients' money, is neither here nor there. But it's very unusual for me to change my mind on a stock so quickly, and so soon after writing an article saying that I was bullish. So in this particular case, am happy to flag up that I've changed my mind (as previously posted on Twitter).

Regards, Paul.

milind

Hello I am a beginner in this but have simple question on UTW . My apologies if its too basic -I am just trying to understand and not trying to suggest anything else.. Someone more knowledgeable in accounting can help/comment.--
In Cash flow statement UTW have claimed that there is a negative impact on cash flow of 5108945 ( Due to trade payables) . But if you take difference in Trade Payables in balance sheet ( Year 2015/Year 2014) effect is only 1 Million. ( both current/Non current)
These numbers match in year 2013 and 2014 but not 2014 and 2015.
If my observation is correct then where is this 4M of difference in cash to be adjusted -In profit?

carmensfella

1st Nov '15

With regards to Globo....

Just in case any of you reading this have been affected by the Globo announcements last week
I think it is critical that those of you invested in Globo get a really strong and large group of shareholders together for a campaign and have it backed and endorsed by a shareholder organisation and ShareSoc are trying to help in this area so this is a good starting point..

http://www.sharesoc.org/globo.html

Personally I do not like to see resignations by directors and nomads just at the point when all the hard work needs to be done to help investors and shareholders to understand and hopefully recover something from the situation.

Why have the non executive director and company secretary resigned ?

What are the AIM team at the LSE planning to do for investors as it is very unlikely a replacement nomad will be found and delisting looks inevitable ?

Is an EGM needed to add shareholder action/campaign representation to the board of Globo ?

What will the larger institutional investors do in this situation ?

ShareSoc will certainly try to get as many answers as possible through official sources so do add your name and join the campaign.

http://www.sharesoc.org/globo.html

gus 1065

15th Dec '15

Interesting to note that ahead of today's AGM Utilitywise (LON:UTW) has put out a separate RNS stating that another major supplier has agreed to amend their contract terms in a manner similar to that discussed by Paul above and that this is one of several similar ongoing discussions. It is not clear from the RNS whether this gives rise to the immediate acceleration of an outstanding A/c receivable.

Also, I have heard through the grapevine that the sharp fall in the Utilitywise share price last week may have been the result of a recently maturing SAYE share scheme within the company that provided a broad spread of windfall shares to a wide group of employees that may have elected to sell their small holdings to raise cash for Christmas etc.. I can't independently verify this but it sounds plausible. It looks as though most of the fall has been clawed back although we are still well down from the time of Paul's commentary in October.

Gus.

Small Cap Value Report (28 Oct 2015) - GBO, UTW, POS

Globo (LON:GBO)

Utilitywise (LON:UTW)

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Paul Scott

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