Small Cap Value Report (7 Nov 2016) - RCN, SEPU
Good afternoon!
The US Presidential Election is now imminent - it's tomorrow, 8 Nov 2016. Who knows what the outcome will be? Mrs Clinton seems to have had a late boost from the FBI saying that it has found no evidence of criminal wrongdoing in her use of a private email server.
What worries me is that the public in America seem to be so thoroughly cheesed off with conventional politics, that we could see an upset. That's exactly what happened with Brexit here, with the polls being very wrong [EDIT: See comments section below, where it seems the Brexit polls were closer than I recalled!].
For that reason I'm keeping my hedges on (a put option on the S&P 500) just in case. It will probably expire worthless, but it does at least insure me against a plunge in the markets from a surprise outcome in the election.
Also, we're increasingly in a world of post-facts politics. I.e. the facts no longer seem to matter to voters. People seem to vote on a purely emotional level, and ignore facts which don't fit their preconceptions. Maybe this has always been the case? However I think the internet & social media are changing things for the worse - just reinforcing existing prejudices in people, and ignoring inconvenient truths. I fear for the future of democracy - with candidates that would have been laughed out of the room in the past, now being taken seriously.
The trouble with small caps, is that it's difficult & expensive to move in and out over short term worries. Hence why, occasionally, I think a bit of hedging can be useful. Although, not being an expert on that type of thing, I can end up hedging using the wrong instrument. E.g. with Brexit, I initially shorted the FTSE 100, only to subsequently realise that was a mistake. FTSE 100 stocks have earnings mostly in dollars, so those shares actually went up, after the initial plunge. The better hedging trade then would have been to short sterling.
I think there's been a bit of a buyers' strike in the UK market in recent days - as I mentioned last week, lots of shares have been selling off for no particular reason of late. I think it's partly because buyers are holding off because of the US election. Another reason is that the post-Brexit rally has just gone on too long, and taken some share prices up well above a sensible valuation. So a correction was inevitable.
On to today's company results & trading updates.
Redcentric (LON:RCN)
Share price: 60.9p (down 59% today)
No. shares: 147.2m
Market cap: £89.6m
Accounting misstatements - a dramatic title for an RNS, and a dramatic collapse in the share price today, so the news must be really bad.
It sounds like the CFO has been cooking the books;
The Company has served notice on its CFO, Tim Coleman, and placed him on garden leave with immediate effect. Mr. Coleman resigned with immediate effect as a Director of the Company on 6 November 2016. The Board anticipates making an external interim appointment of a replacement CFO.
This is because misstated balances have been uncovered on the balance sheet;
...an internal review by the Company's audit committee in relation to the interim results for the six months ended 30 September 2016 has discovered misstated accounting balances in the Group's balance sheet.
The accounting irregularities seem to have been going on for some time;
The Board has commenced a forensic review of the Group's current and historic balance sheets which will delay publication of its interim results (originally scheduled for 14 November). The work to date has identified that audited accounts for previous years are likely to need to be restated, resulting in some write down in historic profits.
Current indications are that all issues relate to prior periods.
New business sales and recognition of those sales into revenue over the six months ended 30 September 2016 have been in line with management's expectations.
From this, it sounds as if the accounting irregularities possibly relate to revenue recognition - i.e. that revenues (and hence profits) may have been overstated?
The way double-entry bookkeeping works, is that if you overstate profit, then you've pushed through too many credit entries into the P&L. There has to therefore be a corresponding debit on the balance sheet - which is either overstated assets, or understated liabilities.
Understated net debt - worryingly, the balance sheet side of the problem has surfaced in net debt being higher than previously disclosed;
The net debt guidance announced in the pre-close trading update is now believed to be unreliable. [PS: this announcement on 29 Sep 2016}
The Board now believes net debt at the half year was approximately £30 million.
The Board also believes that the underlying net debt position at 31 March 2016 was materially higher than as reported and thus the business has reduced its underlying net debt in the six months to 30 September 2016.
It isn't helping matters that today's announcement is as clear as mud. I now have to check back to the last accounts, to see that net debt was disclosed as at 31 Mar 2016 of £25.3m. By a process of deduction, the company is now saying that the real figure was over £30m.
I don't understand how this got past the auditors. If you look at the announcement on 16 June 2016, which was the audited accounts for y/e 31 Mar 2016. Audits are supposed to verify balance sheet items - and one of the easiest to verify is the net cash/debt position. They should just write to the bank to ask for confirmation of the balances in all bank & loan accounts. They should also review the bank statements either side of the year end, to check for large & unusual transactions. This is pretty basic stuff, so I think the auditors, PWC, have some explaining to do.
At the moment, the total impact of the corrections needed is to reduce NAV by c.£10m;
The Board believes from the information available to date that the impact of correcting these cumulative historic accounting misstatements would result in a need to reduce net assets by at least £10 million.
How significant is that?
Looking back at the most recently reported (incorrect) accounts, NAV was £97.5m at 31 Mar 2016. However, that included £92.3m in intangibles, giving us only £5.2m NTAV. Given that we are now told this was overstated by c.£10m, then the real NTAV was about negative -£4.8m.
There's no freehold property on the balance sheet either, which would have acted as a cushion to this bad news. So overall, I think the balance sheet looks rather weak, and the attitude of the bank to this situation will of course be critical.
The last set of accounts do however show a strong underlying level of cash generation. We now know that some of that was falsified, but if the total scope of the falsification was £10m, over several years, then it doesn't sound too bad in the context of adjusted EBITDA of £25,8m last year.
If the real adj. EBITDA figure was say £20m, then that means this situation looks survivable. Net debt of £30m now would be 1.5x EBITDA, which normally a bank would be happy with.
My opinion - I think this looks survivable, and hence the 60% share price fall today might be overdone, perhaps? The 89p share price fall, multiplied by 147.2m shares in issue, means that the market has knocked off £131m from the company's valuation today. Yet the RNS says that the company currently believes the balance sheet is overstated by about £10m. So this could be a case of the market throwing out the baby with the bathwater?
On the other hand, this could be tip of the iceberg. What if more accounting irregularities are discovered? Also, was the CFO stealing money from the company, or was this an orchestrated over-statement of the accounts with no direct personal benefit gained by him? We don't know yet.
In my experience, if it's theft, then it's usually one or possibly two people working alone. However, if it's a deliberate overstatement of accounts, then that often involves several of the most senior people at the company colluding.
Therefore, I suspect maybe the market is taking a dim view of this situation, in the expectation that there could be more bad news to come?
It would have made a terrific trade this morning, if you managed to buy on the low point of 40p, as it's up almost 50% since then. On balance I think I'll steer clear of this particular falling knife. It is tempting however, as the core business looks good, and the extent of the accounting misstatement looks relatively modest, based on what we currently know. This sell-off could have been overdone, if things stabilise with the company & if its bankers are supportive.
I forgot to mention above, that no particular guidance is given on the bank covenants, other than this mention;
The accounting adjustments arising will result in a recalculation of the banking financial covenants, which will take some time to complete.
Again, I'm not really sure why this is a time-consuming thing to do. It should be fairly easy and quick to recalculate the correct net debt position. Then strip out the dodgy items from EBITDA, and publish the result. Mind you, the bank might well want third-party verification of the covenant calculations, from a big firm of accountants, to give them comfort. So maybe that's the cause of the delay?
Sepura (LON:SEPU)
Share price: 23.13p (up 25% today)
No. shares: 370.1m
Market cap: £85.6m
(at the time of writing, I hold a long position in this share)
Possible offer - this announcement popped up on my phone, just as I was relaxing with a pint of Helles organic lager, in The Lord Clyde on Friday evening. It certainly put a broad smile on my face, and what a great way to start the weekend!
I picked up some shares in this maker of special radios for the emergency services, after an excellent broker note came through from Liberum a few weeks ago, making it very clear that the company was up for sale, and to expect a takeover bid.
Normally I wouldn't have touched it, as the company's finances look stretched, and it had already told the market that the bank covenants might be breached in Mar 2017. So not a good share for a safe portfolio, but an interesting one to have a bit of a punt on. Everyone likes an occasional punt, no matter what they say.
This is the main bit of the announcement after the market closed on Friday;
Further to the recent share price movement, the Board of Sepura (LON: SEPU) confirms that it is in preliminary talks with Hytera Communications Corporation Limited ("Hytera") regarding a possible offer for the entire issued and to be issued share capital of the Company.
Hytera has confirmed to the Board of Sepura that any offer, if made, is likely to be solely in cash. There can be no certainty that any offer will be made, nor as to the terms of any such offer.
The usual disclaimers are made about it being preliminary talks, etc. However, it strikes me that by naming the potential bidder, and that any bid is likely to be solely in cash, then the approach sounds fairly serious.
Hytera seems to have been founded in 1993, and is a Chinese company. I'm not sure where to find information on Chinese companies, but it is listed on a US website as having a market cap of c.$3.2bn, so it looks a substantial company. I can't find any accounts for it. If anyone else can find the relevant info, please post it below in the comments. In particular, how much cash has the company got? Getting cash out of China is tricky I believe, so they would need official authorisation for a cash bid for Sepura.
An article in the Sunday Times apparently stated that a cash bid of at least 25p was likely. It could get interesting if other parties enter the fray. This is why I'm sitting tight, rather than cashing in today.
Sepura does have a lot of debt, but I did a spreadsheet to see what the post-fundraising net debt position looks like, and it wasn't too bad actually. However, there was still a considerable amount of debt. Unfortunately, I can't find that spreadsheet, which is a nuisance, it might be on my computer back in Hove?
My opinion - this is a punt of course, and the danger in takeover situations is that any announcement saying the talks are off would crash the share price. Therefore the dilemma is whether to run the position, or to bank the profits. Or a mixture of the two?
Personally I think Sepura looks a very worthwhile business, which has run into some temporary difficulties, which would make an attractive target for a larger company to acquire whilst its share price is depressed. Therefore I am minded to run with this one, and have decided not to bank any profit yet. It is high risk though, and not the usual type of thing that I'd go for.
(work in progress)
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46 comments
Paul, Sepura (LON:SEPU) seem to be building a good forward pipeline of orders and contracts. Examples:
http://www.securitynewsdesk.com/public-safety-sector-shows-trust-sepura-significant-astrid-contract/
http://www.wireless-mag.com/News/41432/ccw-2016-sepura-secures-tetra-contracts-in-latin-america.aspx
http://www.wireless-mag.com/News/41764/sepura-closes-us34m-new-york-city-transit-tetra-radio-contract.aspx
http://www.businessweekly.co.uk/news/hi-tech/sepura-strikes-gold-canadian-contract
http://www.digitallook.com/news/aim-bulletin/sepura-shares-rise-on-major-contract-win--1745394.html
The NYC order is the big one, of course, but the breadth of these awards seems to confirm that their technology and products are fine. I also see that Liberum Capital have been buying:
http://www.investegate.co.uk/liberum-capital-ltd/sepu/form-8-5--ept-ri-/201611250904061749Q/?fe=1&utm_source=FE%20Investegate%20Alerts&utm_medium=Email&utm_content=Announcement%20Alert%20Mail&utm_campaign=Liberum%20Capital%20Ltd%20Alert
You may well be right on this punt.
Fingers crossed!
Edit: These awards are presumably priced in US$, CAN$ or EUR so they ought now to be very profitable orders.
Hi Sharw,
appreciate your relply, thanks. Perhaps I sould think about subscribing to level 2. However,, due to work commitments I am not in a position to view the markets comings and goings on a constant basis throughout the day. I feel, like most here I guess, that we private investors often feel we are investing with one arm tied behind our back and playing to someonelses rules. Up until very recently my trading had been pretty successful regardless and it is only in the last few weeks I have taken a hit. Happens to all of us. Hopefully things will pick up again but taking a knock always hurts to some extent or other.
Regards
CM
Paul Scott, it is you that has introduced politics to this forum with your long drawn out comments on BREXIT, Donald Trump, opinion polls and the state of democracy etc.
For the sake of clarity, my earlier post was not in support of Duterte or police states (which The Philippines is not) but just an example of how it seems that there is a worldwide disenchantment with the ruling elites and a movement towards the less politically correct alternatives.
Incidentally, regarding your comments on Trump "Putting aside the dreadful, divisive things Trump has said in this campaign." It reminds me of a blog I read recently written by one Mr P. Scott. It seemed the writer participated in a march or rally organised by a group calling itself "Hope not Hate" but to his dismay he found that the only hatred he witnessed was coming from his fellow participants. On that occasion, the writer had the decency to admit it.
If people want to discuss the merits or not of a police state, please can you take it somewhere else?
This is a completely inappropriate forum for that kind of thing.
This forum is about small caps & related topics.
Many thanks, Paul.
Hi Blissgull,
Despite the killings, people tell me that The Philippines is now safer than it has ever been. People are no longer afraid to walk on the streets of Manila. Corruption has been at least partly reduced, and literally hundreds of thousands of drug users have surrendered and taken up treatment programmes. The prisons are now so full that inmates have to take it in turns to find a space to lie down sleep.
I lived in Central America for a while. In the days of the blessed Somoza clan, Nicaragua was a byword for 'public safety'......you could leave a briefcase visible in the back of your unlocked car and know it would be there when you came back, or get blind drunk in a bar with a wallet full of dollars without consequence.
The reason was simple : people caught behaving anti-socially were taken to the police station - once. The second time, they just disappeared (allegedly fed to the crocodiles in Lake Managua).
Be careful what you wish for - or approve of.
Singapore, now, that's another story....;->
ATB
Interesting RNS this morning that specialist TMT merchant bank MXC Capital (LON:MXCP) took a 5% stake in Redcentric (LON:RCN) yesterday with options/warrants to take this holding to 10.5%.
http://www.investegate.co.uk/mxc-capital-limited--mxcp-/rns/purchase-of-redcentric-shares/201611080700125523O/
Where angels fear to tread and all that.
Gus.
Good evening Paul. Thanks for your continuing hard work and the time you put in here.
Just a repeat of a question I asked on Friday evening Paul. I don't expect you to answer all questions on here so if you are too busy or tired, no worries.
I have noticed with a number of shares that there can be a huge number of trades made during the day but when looked at in more detail they can be made up of what I would call very small parcels of shares lumped together at exactly the same time (to the second) at very low value. By themselves they just wouldn't make sense. They are generally "A" trades. There may be as many as 8, 9 or 10 trades made for say less than 100 shares a piece. These trades tend to have a disproptionate affect on the share price movement. Have you any views as to what may be happening in these instances?, could it be an indication of shorting?, what would be the likely purpose of such trades?.
I am sure others would be interested in your views and your knowledge to help ;us improve our trading. If anyone else has a view or knowledge I would greatly appreciate any response.
Regards and thanks
CM
A trades are automatic trades i.e. directly on the exchange order book, as opposed to a trade agrees say with a market maker (RSP) which I think shows as N or O (not sure the difference - does anyone else know?) The "market price" normally means the best bid and offer on the order book (the price an RSP gives you may be better or worse depending on several factors). It is the bigger/more professional traders who do A trades, and I would imagine also the market makers themselves when they need to square their positions. If all the share offered at the best price are bought then the market price will therefore move to the next available price on the order book. This is only possible with an A trade, The reason there are often a lot in small size is I think a function of the way the order book works. If say the lowest price at which shares are offered is 100p and lots of small packets of shares have been offered for sale by different people (or the same person) at that price, and then someone buys a large number of shares at that price.this would show as separate A trades, as each packet of shares sold will count as a separate trade. You can also put partially hidden ("iceberg") orders on the exchange. This means that only after each tranche of shares is bought the next tranche is shown. If someone say offered 10,000 shares at 100p broken into tranches of 2000, and someone put in an order for 10,000 shares at 100p, it would show as 5 trades of 2000. (Although what you are describing of trades of less than 100 shares doesn't really tie in with this.) It may also be algorithmic trading being done where someone who wants to buy will have his order automatically split into small sizes by a broker, although I am not sure how likely it is that several order would be submitted at the same second.
Thanks for the reply Dgold. I can see some logic in what you say. But is there some reason why such trades can have such a dramactic effect on a share price, particularly on the downside?. Still can't get my head around it completely. One of my investments has been hit hard by what appears to be these very small sales despite the latest trading update being largely positive. I was looking to see if I could identify a problem which I may be able to avoid in other investments by having some pre warning of what may be about to happen.
I can only guess that the share has poor liquidity, thus making it sensitive to even small sales. It sounds like someone is offloading a large stake in a company with poor liquidity and doing it with some kind of algorithmic program in an attempt to reduce the effect on the price. Maybe check the RNSs to see if there has been a declared change in % ownership. Of course that won't tell you if they intend to sell more or stop. There may be an argument that if you see a similar thing happening in another poor liquidity share and it is affecting the share price that this could again indicate a risk of further falls to come if the same seller intends to sell a large stake. But again you can't know that for sure.
Catstycam -
If you have not done so it is a good idea to have a look at level 2 even if, like me, you don't trade frequently enough to justify a subscription thereto.
I think most of the small trades you describe are computer-generated. If, for example, there are 10 orders to buy, each for 50 shares at 10p and you arrive wishing to to sell 500 shares at 10p then that will take those out and appear as 10 trades all within the second.
There is a useful demo here: https://www.youtube.com/watch?v=mzbCA8kl-Xc
and talk here: www.youtube.com/watch?v=y9FIIuxNj0o
Spot on shine66. At least I hope so. People all around the world seem to have had enough of their out of touch elitist politicians. Unfortunately in the UK that disenchantment was diverted into the utterly useless UKIP.
I hope Trump wins as despite his wealth he seems far more in touch with the ordinary people than does Clinton.
But if you want to see a really great example of a people who wanted to overthrow their elitist leaders then take a look at the recently elected president of The Philippines. I was out there when Rodrigo Duterte was swept to power with massive popular support. His election poster was a fist coming towards you with the words DUTERTE - My President, across it. When I asked Filipinos why they supported him the most common answer was "Because he will kill all the criminals."
While he was mayor of Davao City his anti-drugs campaign saw thousands of vigilante-style killings of alleged drug dealers and other criminals. During his presidential campaign he promised to kill 100,000 criminals and feed their bodies to the fish in Manila Bay. Since his election at least 1,000 alleged drug dealers have been killed by the police while they resisted arrest. Speculation in the Philippines media is that many police were involved in the sale of drugs and are eliminating anyone who might be able to incriminate them. Several thousand people have been killed by vigilante gangs and their bodies left on the streets with placards stating their alleged crimes. Duterte of course denies any involvement.
Despite the killings, people tell me that The Philippines is now safer than it has ever been. People are no longer afraid to walk on the streets of Manila. Corruption has been at least partly reduced, and literally hundreds of thousands of drug users have surrendered and taken up treatment programmes. The prisons are now so full that inmates have to take it in turns to find a space to lie down sleep.
The media in the Philippines (controlled by the rich elite) hates Duterte, but most of the people love him.
Two weeks ago I'd been on the verge of buying both Sepura and Redcentric but had left them on my very short watch-list. Sepura had screwed up recently when it made a very expensive and ineffective acquisition and is now in massive trouble if it doesn't find a buyer. Wish I'd known about the Liberium note saying it was actively looking, and I was kicking myself at not buying at 15p.
But it's swings and roundabouts and on the other hand I had a close shave with Redcentric and was instead happy to get a (very) few at 47.5p this morning, which at the mo helps to counteract the slide of nearly all my other holdings this last week, but I can see it going back down tomorrow. Paul's assessment is reassuring, though, it seems a viable business. Having said that the Redcentric margins have always been very low (or else it's been loss-making) a factor which usually puts me right off but lately they've shown some reasonable growth and they have a new COO - who maybe is the reason the dodgy accounting has come to light. PWC, like most of the big auditors, offer very little reassurance (for a great deal of money).
I was also attracted by Redcentric's off-site server offering which replaces in-house hardware and cabling with a web interface. Having had a look at our on-site server room recently (and attempting to figure out how to do some port-switching) I could see why companies want what they have to sell.
"Also, we're increasingly in a world of post-facts politics. I.e. the facts no longer seem to matter to voters. People seem to vote on a purely emotional level, and ignore facts which don't fit their preconceptions."
The 'post-fact' idea seems to put the blame on the voters but I think it's more a case that electorates are fed up of being lied to and manipulated by our politicians. We are in an era of 'post-lies' scepticism.
I note that the CFO of Redcentric did not hold any shares only share options, was paid over 310000 last year and the auditors over 100000...is there any way of getting money back from the auditors?
Recent movements in Redcentric share price suggest some trading on inside knowledge. If so, very very frustrating for private investors who can only work with information which is in the market. And of course nothing will (can?) be done about it.
agree with you there was a steady drip of sales and drop in price in the last few months....insider dealing.
Yes , thank you Mr Blair & A Campbell , so much spin and untruths now adopted by all to the point where it is almost impossible to obtain the truth behind an 'item' particularly from 'The Web'. The top politicians in Europe are very upset that the British Public finally sussed what they were up to with their so called ' European Market' which was actually much more political intergration , behind which even our own politicians colluded. There has always been some frigging with Company Accounts , see Terry Smith for background, but this too has become more prevalent and it has only been my following of Pauls educative articles that I have been somewhat protected. Thank you Paul ,,,,do please continue.
After hours RNS from CloudTag Inc (LON:CTAG) .
http://www.investegate.co.uk/cloudtag-inc---ctag-/rns/fundraising-and-update/201611071637105377O/
Absolutely hilarious: "CloudTag is pleased to report that it has recently received an indicative, non-binding purchase order from SC for the Company's first product (the Cloudtag Track). This order, which is subject, inter alia, to manufacturing and a delivery date being agreed would, if finalised, have a value of £880,000 and would represent 20% of SC's total order commitment of $5.2 million for 2016."
(Disclosure: Short CloudTag Inc (LON:CTAG) )
Re the BHS scandal
Yes, I would agree with Paul that people should read the past BHS accounts. But they should equally read the House of Commons BHS Report which can be found here . The conclusions reached by the committee are pretty damning. No question that Green presents the unacceptable face of capitalism we can do without. The text of the conclusions is short and it is reproduced below.
"
Conclusions
168. The evidence we have received over the course of this inquiry has at times resembled
a circular firing squad. Witnesses appeared to harbour the misconception that they
could be absolved from responsibility by blaming others. The worst example was Sir
Philip Green, despite his protestations to the contrary. Sir Philip adopted a scattergun
approach, liberally firing blame to all angles except his own, though he began his
evidence by saying he would do the opposite. The truth is that a large proportion of
those who have got rich or richer off the back of BHS are to blame. Sir Philip Green,
Dominic Chappell and their respective directors, advisers and hangers-on are all
culpable. The tragedy is that those who have lost out are the ordinary employees and
pensioners. This is the unacceptable face of capitalism.
169. The sale of BHS did not have to proceed as it did. The potential checks, however,
proved to be inadequate. Regulatory concerns were circumvented. Advisers were
heavily incentivised to progress the deal. Dominic Chappell, his friends and associates
were enticed by the personal rewards on offer without having to take any of the personal
risks. The Taveta group, run as a personal fiefdom by a single dominant individual,
failed to provide a semblance of independent oversight or challenge.
170. Sir Philip Green drove the deal forward. He sought to sell a chain that had become
a financial millstone and threatened his reputation. He knew that Dominic Chappell
was a wholly unsuitable purchaser but overlooked or made good each of Chappell’s
shortcomings and proceeded with a rushed sale regardless.
171. Dominic Chappell was out of his depth. He was over-optimistic to the point of
arrogance. He failed to recruit a retail expert despite his own lack of experience; failed to
secure funding on commercial terms; failed to address BHS’s property leases in a timely
way; and failed to address the company’s long-term underperformance. Mr Chappell
has referred to the rewards for risk that are the foundations of entrepreneurship, but
he was taking no risks. The rewards that he took, on the other hand, were lavish. In
putting his ‘home team’ first, he and his fellow directors were personally enriched as
BHS failed around them. In effect, he had his hands in the till. His description of £2.6
million that he personally took, in addition to an outstanding £1.5 million family
loan, as “a drip in the ocean” is an insult to the employees and pensioners of BHS that
he let down.
172. The Green family benefited significantly from BHS. In his early years of ownership,
Sir Philip cut costs, sold assets and paid substantial dividends offshore to the ultimate
benefit of his wife. He failed, however, to invest sufficiently in stores or reinvent the
business to beat the prevailing high street competition. We found little evidence to
support the reputation for retail business acumen for which he received his knighthood.
173. It is true these are private companies holding Green family money. BHS, however,
was a major employer and the sponsor of a large and ailing pension fund. Arcadia,
another Green company, is in a similar position. Sir Philip gave insufficient priority to
the BHS pension scheme over an extended period. His failure to resolve its problems by
now has contributed substantially to the demise of BHS. Sir Philip owes it to the BHS
pensioners to find a resolution urgently. This will undoubtedly require him to make a
large financial contribution. He has a moral duty to act, a duty which he acknowledges.
We still do not doubt that Sir Philip has heartfelt affection for BHS. To an extent it
created him; it could also bring him down.
"
Hi Ramridge,
Having watched a number of those MPs committee proceedings before, the questioning from MPs is often amazingly naive. I get the impression that not many of them have much real world business experience, and didn't seem to have done any proper research before the hearings. I reckon a group of us could have done a better job interrogating the various participants in the BHS debacle. It seemed to me mainly grandstanding by the MPs, who wanted to get some media airtime in attacking easy targets.
As with other commentators, the MPs have simply ignored the chronology of things - that Green did well from BHS in the good years, like many business owners. It was much later on that the business failed, because it just slipped behind the competition, and we had a massive recession.
You could argue that BHS was just a format whose time had run out. I don't think anyone could have saved it, there was just no point in it existing any more. Newer competitors such as Primark, Matalan, New Look, and numerous others, plus online, just slowly eroded its market share. Womens fashion is unbelievably competitive.
Green's other High Street companies have done much better, and are still going of course. He took big dividends out of those companies too, but there hasn't been any problem because mainly Top Shop is just a much better business than BHS, so it has survived.
Also note that Green's UK companies seem to pay full UK Corporation Tax. They don't have to of course. He could have easily done what private equity does, and load them up with debt to reduce the tax charge to nil. I've not heard anyone else make this point. Instead people ignore it, and just call him a tax dodger because he pays dividends to his wife in Monaco. I would argue that his tax dodging is not as bad as private equity firms' tax dodging, because at least the UK Govt is still getting the Corporation Tax. The extra tax on divis would be lost to any overseas shareholder, not just Green.
You could say the same about Alan Sugar - he also paid himself handsomely in the good years, only to see some of his companies ultimately fail. That's the same for practically all businesses - in the very long term, practically all businesses fail. So should dividends be repaid by shareholders many years after they were paid, for every company that fails?
Where I think the MPs are right to focus though, is on the very bad decision by Green to sell BHS for £1 to the numpty Chappell. That was a crazy thing to do. Although he might have got the idea from BMW's disposal of Rover to the Phoenix Consortium in 2000 - i.e. give away a problematic, loss-making company for nothing, with a large dowry, so that the new owner can run it for a few years before it inevitably goes bust. By which time the passage of time means that the original owner is sufficiently distanced from the business failure to avoid getting the blame.
Maybe if Green had given BHS a bigger dowry and sold it to someone who knew what they were doing, then it might have lasted a couple of years longer, and hence no longer been a problem for him?
Overall, Green's main mistake was the £1 disposal of BHS to Chappell. That was shabby, and pretty stupid. Prior to that, he genuinely doesn't seem to have actually done anything wrong.
I wonder what the situation with BHS pension scheme would have been if Green had simply put it into Administration, rather than trying to find some patsy to buy it & take responsibility for its eventual failure? If Green had just said, look, BHS isn't viable any more, I'm going to have to put it into Administration, then paradoxically he might have ended up in a much better situation, and avoided all this recrimination.
An interesting situation. Remember too, that of course MPs want to heap as much blame as they can in Green, to divert attention away from the truth that Govt policy to lower interest rates to near-zero is what has actually caused a large part of the pension fund deficit problems which many companies are struggling with. So the maximum pressure they can put on Green, the more likely it is that he'll cough up some money to help the pension scheme. With probably a backroom deal whereby if he puts in the required amount, he gets to keep his knighthood!!
Regards, Paul.
Good discussion again. I had to google negative goodwill, I'd not come across that before. (BHS balance sheet)
What a tragedy Sepura (LON:SEPU) is, a once good company overextending itself with a big takeover, only to collapse and be taken over itself. Destruction of shareholder value, and loss of what was a good, but modest company to an overseas owner. The only positives is that thanks to Paul's warnings I managed to get out at a good profit when it was only half way down, at 125p in April. Puts todays 20% jump in a different context, doesn't it?
Could this be the day before it all happened—the most important country in the world, the one that influences everything, the one that we once said when it sneezes we all catch a cold is about to vote for a President that very few have faith in—no matter which side wins!!! And they all carry guns!! Legally.
There is no doubt that the election has been undermined by the actions of the FBI so no matter who wins the loser can call foul and a lot of people will be upset. And they all have guns.
The respect for government has gone, the respect for law and order has gone, the respect of each other is going and they all have guns.
If it were a film you would be on the edge of your seat would you not?
Does anyone have an idea why Fairpoint (LON:FRP) keeps losing value? It's down another 11% today and looks like a bargain - what am I missing? Thanks to anyone with an idea.
I am interested to know if there is any news with Fairpoint (LON:FRP) as well. This one got clobbered at lunchtime today on no news. I am inclined to think that maybe an institution is unloading? If anyone has any thoughts, please feel free to comment.
I have no idea. But I too have noticed Fairpoint (LON:FRP) sliding for some time with no obvious cause.
The big institutional holders are Miton, Hargreave Hale, Ashcourt Rowan, Henderson and Invesco. Hargreave Hale have been selling over the last few months.
If it is insiders selling, then the most obvious trigger would be the closure of the IVA/debt management business costing more than expected - or problems in the recently acquired legal business.
There's no real confidence in the company atm, so any seller will just drive the price down. And the price going down so steadily will deter any potential buyer.
"And the price going down so steadily will deter any potential buyer."
This sounds like Alice in Wonderland investing!
Be greedy when others are fearful, and fearful when others are greedy (to quote the Sage of Omaha).
That is unless you think 'Mr Market' is at all times reasoned & impartial?!
Look at the graph.
Knives falling unexpectedly are particularly dangerous.
Experience has taught too many that a sharp fall in the price of a small company often indicates something going very wrong behind the scenes.
And, so far, any potential buyer being fearful has simply garnered a lower price.
Thank you for the excellent explanation of Redcentric's mis-statement of accounts. Someone, somewhere, is clearly culpable, and both the auditors and the former-CFO have some explaining to do. What role can one expect the FCA to play here? And are institutional shareholders, inter alia, likely to press criminal charges if it appears that fraud has been committed?
The RCN news looks particularly bad when you consider that the CEO and MXC the linked shareholders with members on the board had been selling throughout the Summer...Mmmm
Additionally have management been earning bonuses based on those overstated accounts and will they be paying them back. Sacking an FD is rarely enough IMO as investors have lost hundreds of millions in situations like this over the years.
Post fact politics !!!!
LOL
Is that the new remoaner argument?
Is that the new remoaner argument?
Clearly not, because personally I'm very happy with the Brexit vote! (even though I wobbled in the last week, and voted Remain - which I now regret - I wish I'd stuck with my instincts & voted out).
My point is that, on many issues, I'm seeing people just ignore reality. For example the BHS stuff - if people actually do their own research, and follow through the 15 years of accounts from BHS, you discover that Green actually did nothing wrong, up until the point where he sold it for £1 to Chappell - which was clearly a very stupid thing to have done.
Yet you wouldn't believe the amount of abuse I've had from people who don't like to hear facts which disprove what they want to believe. Hence the "post-facts" term. I blame social media for this, and it reinforces my view that most of the public are totally clueless on most issues. People just tend to latch onto whatever argument supports their existing prejudices, and very few people bother to do their own, original research. I think this is desperately sad, and very dangerous for democracy.
Paul.
Suggest you look at how those dividends were financed
which mirror the private equity method of loading the entity up with debt whilst milking the profits
So I guess in a roundabout way you've argued your post fact era point well !!!
;)
Flackwell,
I spent a whole weekend studying 15 sets of annual accounts from BHS, so I do actually know what I'm talking about on this issue! I wouldn't write about it otherwise. Have you studied all those 15 years' accounts? I doubt it very much, because if you had studied the BHS accounts, you would find that the divis were paid out of distributable reserves, from accumulated profits - which is perfectly legit. BHS was a soundly profitable business under Green's period of ownership until the 2008 financial crash. It took on some debt, but nothing untoward relative to the amount of profit it was generating at the time.
The last divis were paid in 2004, and the business was in good shape financially until 2008. It was the financial crash which turned it loss-making, and created the problem with the pension fund, which was actually in a small accounting surplus in 2008.
What people such as yourself are failing to understand, is that in 2004 Green (or anyone else) could not possibly have been expected to anticipated the events of 2008 onwards. All people are doing is combining 15 years' of events into one single pot, ignoring the chronology of things, and simply blaming Green for the end point. When actually, anyone with any sense could see that BHS was a doomed format, and if anything Green's involvement probably kept it going for years longer than would otherwise have been the case.
Going back to my original point - people want to hate Green, because he's obnoxious, greedy, flamboyant, etc. So they change reality to what they want to believe, by selecting some facts, then creating a revised interpretation of those facts, which actually bears little resemblance to the truth as it happened.
Green's certainly no saint, but it irritates me the way the facts have been twisted so much to create a largely false view of him as the villain of the situation. We should be able to make an intelligent, and non-emotional review of the facts, and arrive at a balanced overall view, which is what I try to do.
Paul.
Taveta Investments Ltd (the owner of BHS - itself controlled by the Greens) 29/08/08 and 29/08/09 accounts indicate NEGATIVE net assets of £403m and £363m respectively
And you conclude that's Ok ?
Legally maybe, but the clear signs were there
Indeed you yourself say "actually, anyone with any sense could see that BHS was a doomed format" so perhaps not only a pension issue but a long term trading issue were there for all to see.
Flackwell,
Ah I see why the confusion has arisen - you're looking at the wrong company.
The BHS group accounts are this company: BHS Group Ltd, co. no. 03858895
Taveta is not relevant, as that includes the Arcadia companies. All that matters for the sake of discussing BHS, is the BHS Group Ltd accounts.
Here is the BHS Group Ltd balance sheet in Mar 2008, just before the financial crisis began.
You can see that the pension fund was in a small surplus of £2.4m, about 4 years after Green had paid his last dividend.
The NAV was healthy, at £160.2m, and you can see that there's only modest debt in the company.
So you can see that all the nonsense about Green having plundered the company, simply doesn't stack up, if you look at the right company, which is BHS Group Ltd.
Taveta Investments is the holding company, and that's still going of course. It had to ditch BHS recently, because it had become a black hole for losses by last year. Remember also that when BHS did go bust, I'm pretty sure Green's companies were the biggest creditors, so any money they had stripped out from management charges, etc, didn't actually get paid in cash by the looks of it.
I strongly encourage anyone with a view on this issue, to review the BHS Group Ltd accounts from 2001 to 2015, and I think you'll be very surprised how the numbers look very different to how they are portrayed by the media.
Paul.
Paul
I agree with your bhs analysis but Sir Philip did sell off a commercial premises cheaply to I think his son in law from memory, he may have only made 2 million or so on it but why do it, I think is this kind of action coupled with his choice of buyer that put him in the firing line1
Hi Paul, you don't have to agree with everything said in this documentary to take something meaningful away... http://www.bbc.co.uk/iplayer/episode/p04b183c/adam-curtis-hypernormalisation.
"Adam Curtis explains how, at a time of confusing and inexplicable world events, politicians and the people they represent have retreated in to a damaging over-simplified version of what is happening."
Phillip Green is being made the Gaddafi of the situation - a media pantomime villian of dubious guilt.
We've all been here before.. The auditors then claim they only audit the numbers they are told about and,,,,it's then a matter for the poor sod of an accountant who may have been out of his depth.
Hilary will probably win
Excellent trading updates (and price movements :-) ) for KWS and EKF for any followers...
Yes, the KWS update was a nice start to my Monday morning. I haven't come across EKF before, will have to take a look.
Sorry to be a pedant, Paul, but the polls weren't wrong on Brexit. Quite a few were, in fact, spot on. Most commentators and bookies did not think it would happen despite the polls. P.S Enjoy your updates very much.
I stand by my original comments - most of the polls on Brexit were wrong. Sure, there was the odd one that predicted a Brexit victory, but I was talking about the consensus, which I clearly recall as consistently predicting a Remain victory, throughout the campaign.
Also, the betting odds were overwhelmingly in favour of a Remain vote throughout. I remember it well - even after the Sunderland vote was announced (showing a huge swing towards Brexit, compared with what the BBC expected), I was still able to get a bet on Brexit at ridiculously favourable odds of about 6:1 - the easiest £8k I've ever made (it took about 30 minutes for the betting odds to belatedly move towards a Brexit result) - so it was well worth staying up all night, and remaining sober!
Regards, Paul.
For those who still value some fact based analysis, this is a thorough review of the Brexit opinion polling.
http://ukpollingreport.co.uk/blog/archives/9738
Hi John,
Interesting article, thanks. A lot of the article is trying to work out why so many polls got it wrong, whilst acknowledging that some got it right.
I found this interesting chart in the Economist, which shows the polls being closer than I recall, and that it was neck & neck right at the end.
So perhaps my recollection is being influenced by the betting odds being so firmly in favour of Remain throughout, rather than the polls?
This article is interesting about the betting odds - saying that they were not trying to predict the outcome, but that the odds simply reflect the weight of money by punters betting on the outcome.
Overall though, to go back to my point about post-fact politics, the most important thing is to revise your opinion once facts are presented which show that you're wrong.
So in this case, I'm happy to revise my opinion - it appears that the polls were a lot closer than I recall. The reason I was wrong on this point, is because I was basing my recollection more on the betting odds, than the polls, I think.
Interesting discussion, thanks for posting.
Regards, Paul.
It was neck and neck at the end Paul but the thing to remember is that the exit polls showed a remain result, which is probably why the odds remained as they did longer than you might have expected. I believe there was a shy brexit vote, people who would vote brexit but not own up to it when asked. The same thing happened at the last election exit polls gave the government a lead but not a majority, as soon as I heard that I said to my wife, they will underestimate conservative support, I bet they'll get a majority. I suspect that there's a hidden Trump vote, the question is how big and where ? I certainly wouldn't be counting my chickens if I were hilary, even if the fbi announcement gives here a bit of a bounce.
cheers K