Conviviality – More Bad News, and IQE

I commented on the profit warning from Conviviality (CVR) on the 9th of March and the dangers of share tipping. Today the news is even worse. They have overlooked a payment of £30 million to HMRC due at the end of the month, so their cash flow forecast is blown asunder. They will breach their banking covenants unless some short-term funding is obtained to fill the hole. Meanwhile the shares have been suspended, and the dividend that was due to be paid on Friday has been cancelled.

I hope my previous comments dissuaded some investors from picking up these “bargain-basement” shares, but not all it seems. One of the punters was Stockopedia commentator Paul Scott. To quote his latest comment on it: “What can I say? It’s total incompetence”. It seems he was persuaded that the situation regarding banking covenants was OK after reading a positive broker note. But it seems likely the broker was relying on what the company told them.

I think there is one thing to remember when investing in companies and that is always to ask the question “do you trust the management”. Any announcements by companies should be always doubted unless the management have built up a track record of delivering on their promises and giving you the unvarnished truth. Regrettably, comments from brokers and other company promoters are never trustworthy in the modern financial world. When folks are being paid to say the right thing, or are financially motivated to do so, then whatever they say is likely to be dubious, or not the whole truth.

I have not commented on events at IQE before (I have never held the shares because it’s a sector I don’t like). But there was an interesting article by the Editor of Techninvest on the subject in the last edition (this is a publication focused on small cap technology companies and always worth reading). He commented negatively on shorting efforts by two companies while they published analyses of IQE’s accounts – effectively saying they were dubious. The company then issued a strong rebuttal and the shares bounced back. The shorters did not it seems consult IQE management before publishing, a pretty basic journalistic principle, particularly if you are going to publish negative allegations. The editor of Techinvest suggests scepticism should be exercised “given the vested interests involved”. I completely agree. One of the dangers of the modern internet is that folks can publish damaging stories with impunity, to their financial advantage. The Government and regulatory authorities surely need to tackle this issue sooner or later.

Whether the claims about the accounts of IQE have any basis in fact I would not like to comment upon. It would only stimulate more debate to no purpose when the real truth may be unknowable at this time. Investors should consider my comment above. Do you trust the management?

Roger Lawson (Twitter: )

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