Small Cap Value Report (Tue 7 May 2019) - Financial Archaeology, PURP, KAPE, BEG, TET, SCE, DIS, KOOV

Tuesday, May 07 2019 by
77

Good morning! 

Lots of announcements to look at today - since most of them are just trading updates, I will keep my comments briefer than usual.



Financial Archaeology

In among today's trading updates, I noticed that the Financial Reporting Council has delayed its complaint procedure in relation to a financial executive at Autonomy (AU), the British software business acquired by HP. He is currently facing trials in the US.

What's remarkable about this is that the alleged misdeeds took place up to and including 2011.

How can it take eight years for the authorities to investigate these matters? A rhetorical question.

Short-seller Jim Chanos described Autonomy as "one of his absolute favourite shorts" back in 2012, and admitted that he was crushed by HP's acquisition of it for £7.4 billion, causing its share price to surge by 78%. He went on to make some money shorting HP. 

(Autonomy was a "roll-up" of software businesses which made heavy use of merger accounting - something to keep in mind.)

Even though Chanos lost money on the trade, he deserves credit for spotting the story in real time, along with some other short-sellers. He described the funny business as "hard to miss, if you just looked at the accounts".

Indeed, a few brave sell-side analysts were public about their concerns, too. Paul Morland at Peel Hunt published a note with the headline "Accounting Red Flags" in June 2009. Ten years ago next month!

By contrast, the regulators are still bumbling along nearly a decade later, trying to figure out what happened.

We might also consider the famous case of Quindell (now Watchstone (LON:WTG) ), where the man at the heart of the story has within the last year threatened to put a new company on a major stock exchange.

As far as I know, the Serious Fraud Office is still investigating events at Quindell from around 2011-2013. At least…

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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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Purplebricks Group plc is a United Kingdom-based company engaged in the business of estate agency. The Company operates through the division of providing services relating to the sale of properties. The Company uses technology in the process of selling, buying or letting of properties. The Company operates in the United Kingdom. more »

LSE Price
98.6p
Change
-0.4%
Mkt Cap (£m)
303.3
P/E (fwd)
n/a
Yield (fwd)
n/a

Kape Technologies PLC, formerly Crossrider plc, is a United Kingdom-based online distribution and digital product company. The Company operates through three segments: App Distribution, Media, and Web Apps and License. Through the App Distribution segment, the Company offers Reimage, a computer repair software; DriverAgent, a driver repair software; CyberGhost, a virtual private network solution, and associated services. The Company’s Media division provides media and advertising technology services that include media buying, ad agency services, and ad serving technologies. It offers Ajillion, a mobile ad server and exchange; Definiti Media, an advertisement network, and crossmob, a mobile marketing application. Through the Web Apps and License division, the Company licenses web apps monetization platform and associated technologies. more »

LSE Price
86.5p
Change
 
Mkt Cap (£m)
124.6
P/E (fwd)
13.9
Yield (fwd)
n/a

Begbies Traynor Group plc is a business recovery and property services consultancy. The Company's segments include insolvency and restructuring, and property. It provides services from a network of the United Kingdom locations through two operating divisions: Begbies Traynor and Eddisons. Begbies Traynor is an independent business recovery practice that handles corporate appointments, serving the mid-market and smaller companies. It provides insolvency, restructuring and consultancy services to businesses, their professional advisors and financial institutions. Eddisons is a national firm of chartered surveyors, delivering transactional and advisory services to owners and occupiers of commercial property, investors and financial institutions. It provides professional services, such as business rescue options, advisory options, forensic accounting and investigations, corporate and commercial finance, personal insolvency solutions and services to banking, legal and accounting sectors. more »

LSE Price
76p
Change
0.7%
Mkt Cap (£m)
86.5
P/E (fwd)
13.8
Yield (fwd)
3.7



  Is LON:PURP fundamentally strong or weak? Find out More »


31 Comments on this Article show/hide all

newstart 7th May 12 of 31
1

While it is interesting to have comments about the TESLA saga, I find it strange that this is given priority over reporting on the smaller companies.


I must stress that I really enjoy the daily inputs from Paul and Graham and have been an avid reader of them for many years.   

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FREng 7th May 13 of 31
19

Graham writes:

Their extraordinary slowness is why regulators are sometimes referred to as financial archaeologists - they study things in the distant past, not the present day.
Another metaphor that I quite like is that they are pathologists. Instead of being the policeman who turns up at the scene of a crime and shoots the bad guy, they prefer to turn up later, look at the dead bodies and figure out the cause of death. They don't want to be held responsible for the collapse of a company, so they will nearly always let it collapse on its own first.


I recall an insolvency partner in Deloitte & Touche explaining to me that his role is to come on to the battlefield when the battle is over and bayonet the wounded.



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JonBirdy 7th May 14 of 31
38

I find Graham’s and Paul’s intros to their articles really interesting and welcome observations that are not simply focussed on the UK’s Small Cap space. For me, it helps to paint a broader picture.

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ambrosia 7th May 15 of 31
4

given how much the markets are down today and the general gloom following Trumps tweets, its a wonder purple bricks has only fallen 4%

No offence to any holders but its pretty bad news and i'd have expected it to tank 10% or more

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hawkipa 7th May 16 of 31
9

Graham, your introduction today on Financial Archeology is a fascinating read. Thank you!

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andyfwwrench 7th May 17 of 31
1

Purplebricks (LON:PURP) still has the vast Woodford overhang to unwind. Canada property market is collapsing. As we see from internet retailers vast marketing spend is required to generate business. There will be no new buyers from growth investors, as the growth thesis has been proven false. No reason to think that the price will do anything other than drift downwards.

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LongValue 7th May 18 of 31
3

Interesting that Graham mentioned Jim Chanos. The latter is adamant that the US fracking industry is essentially loss-making. Why? Well, it commonly uses full cost accounting methods. The costs are capitalised and then subjected to depreciation. There also appears to be serious issues in regard to the calculation of break-even points. If he is correct, it has huge implications for the oil industry which, contrary to popular mythology, is very far from dead. And, of course, there are lots of under-researched oilers on the AIM market.

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Graham Neary 7th May 19 of 31

In reply to post #474106

Hi gary, I think Easter did making a difference although I can't quantify that. I'd like to chat to Don @ Distil to get a deeper understanding of the ebbs and flows of sales. Thanks for the suggestion anyway. G

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Graham Neary 7th May 20 of 31
1

In reply to post #474151

Thanks - it's funny that the fellow at Jupiter Fund Management (LON:JUP) has shorted 1/3 of SMT's shares and SMT itself!

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Graham Neary 7th May 21 of 31

In reply to post #474236

Cheers Paul!

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gary3980 7th May 22 of 31

Thanks Graham, thanks for the write up. It would be interesting if you could get Don on your podcast show (I'm not sure if that's what you meant, or a chat offline). I also hold with a long term view - main hope is the Redleg brand taking off, though operating in a very competitive space.

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Gromley 7th May 23 of 31
2

In reply to post #474216

given how much the markets are down today and the general gloom following Trumps tweets, its a wonder purple bricks has only fallen 4%

No offence to any holders but its pretty bad news and i'd have expected it to tank 10% or more

I'm not sure I agree with you here.

I have had a small short on Purplebricks (LON:PURP) for some time (Without checking back, I think it was from c. £4) and if anything today's announcement makes me consider whether I should close it.

The idea that they were flushing away cash on dubious loss-making international expansion made the short continue to look attractive. If they are exiting this, then the short case is reduced to the simple case that they are overvalued for their earnings (the UK business is apparently profitable) - overvaluation is in my view insufficient to make a short justifiable.

However, there is probably just enough here for the moment to keep me short.

Canada is performing inline "The Board has a strong belief in the future opportunities in this market." Reads to me that future profits are still based on hope rather than evidence.

USA "the board has materially cut investment in marketing and other overheads to reduce expenditure to sustainable levels and begun a strategic review." That sounds jumbled to me, without the investment in marketing they cannot succeed, so are they just refusing to bite the bullet and close down the US operations yet? Unless perhaps they are looking to take the decision State by State which perhaps might make some sense - although as i'm unconvinced that the business model is strong even in the UK this would still give me some encouragement to stay short.

For now I will stay short and review the final results in July, the cash costs of closing Oz and stalling the USA (& perhaps by then deciding to close it) might well be enough to cause further gloom, even though I suspect it is a rational business decision.



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pka 7th May 24 of 31
1

In reply to post #474291

Hi Graham,

Scottish Mortgage Trust has an excellent 5-year performance record of +175% (compared with +6% for Jupiter Absolute Return). So by shorting Tesla's shares, you are taking the opposite view to a very successful fund manager. Of course, you might be proved right.

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knighty 8th May 25 of 31
1

HI Graham
As a previous sufferer in Quindell I saw that you say that Quindell was bought out ( I assume you mean by Slater and Gordon) but do you know the current situation with Quindell. Are the Serious Fraud Office taking action against the dear old Rob Terry ( I have just discovered that they took action in 2013 and action is ongoing)?
Thanks
John Knight

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Graham Ford 8th May 26 of 31
2

I think Graham and James Anderson can both be right about Tesla.

Anderson is taking a very long term view. At least ten years and possibly more like 15 or more for some stocks. The SMT investment philosophy is very much that of patient capital.

Graham’s short is, I would think, more about what might happen to the share price in the near term. So, if it is a poor short term investment but a good long term investment then both could turn out to be right.

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ambrosia 8th May 27 of 31

In reply to post #474346

kind of what I meant. you just put it better than me. i expected a bigger fall but it felt like something was holding it up


that said it did end up 12% down afterall

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phoenixnight 8th May 28 of 31
3

In reply to post #474411

Hi John (post 25)

I know this may seem incredible given the length of time involved, but investigations into Quindell are still on-going by the SFO. Meanwhile, as you say, Rob Terry has set up again with some familiar faces from his previous ventures in insurance and....Quob Park wine anyone? Yours for a whopping £100 a bottle (a discount of 50% on the anticipated selling price of £200).

https://www.quobpark-vineyard.com/shop/sparkling-wine/quob-park-classic-cuvee-rose/

Caveat emptor. That applies to shares as much as wine.

I think I will stick to Blue Nun. And when the time to comes to float his latest venture (as it inevitably will), I think I will pass on that too.

PK

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pka 8th May 29 of 31
3

In reply to post #474476


The con man's description of his wine is beyond parody:

"Blend: The blend of Chardonnay and Pinot Noir.
Tasting Notes: A beautiful, vivid wild strawberry pink with a hue of red onion skin on the rim.
Nose: A whiff of magnolia blossom followed stridently by perfumed wild-strawberry compote with a hint of buttered white sourdough toast.
Palate: Rich mouth-filling flavours of strawberry balanced by zingy tart cranberry and pithy Amalfi lemon notes. The texture is creamy with a clean, crisp, yeasty finish.
Ageing: Ready to drink in 2020."

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mrosbiston 8th May 30 of 31
1

In reply to post #474346

nice short. Agree with your timeline - seems to be some kitchen sinking going on, perhaps a bit more from any incoming CEO - potential to turnaround in 2020

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laurie 9th May 31 of 31
2

Kape Technologies (LON:KAPE) For those who might be unaware, Teddy Sagi is the majority shareholder. He has an interesting past which includes jail time, fraud and having a listed company he controlled buy other -arguably worthless- companies he owned personally. There was quite a bit of trouble concerning this during his time at Playtech. [He is no longer involved with Playtech.] A Google search provides other accusations. I have no position in KAPE.


From the FT, 2015:
Following this purchase Unikmind is interested in 103,500,002 Ordinary Shares, which represents 69.71 per cent. (now 71.9%) of the entire issued share capital of the Company. The entire shareholding of Unikmind is held by a trust, the sole beneficiary of which is Teddy Sagi.

https://markets.ft.com/data/announce/full?dockey=1323-12289915-6F0VCR6JQ32PD9PPPE2IBCCJPV

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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