Abcam (ABC) published their Interim Results this morning (4/3/2019). The share price promptly dropped 20% although it has recovered half of that at the time of writing. What was the reason for the price drop? A major profit warning, totally unexpected results or other issues? None that I could see. Before giving you my analysis, you may care to read what I said about the company after attending their last AGM – see https://roliscon.blog/2018/11/07/persimmon-departure-abcam-agm-and-over-boarding/ .
I expressed concerns about the cost and delays to the major Oracle ERP system which they are building to replace legacy systems. Clearly over budget and running late. I was also not impressed by the failure to answer questions by the Chairman.
The latest results did not seem exceptional to me – the IT project is still bogged down it seems with financial and procurement modules only “on-track for implementation in Summer 2019” but that’s hardly surprising. There is one more major module to do after that. Revenue growth was 10.8% which is better than they achieved for the whole of last year but slightly less than forecast for the full year.
Perhaps the major concern for investors was the decline in net margins although gross margins were up. Clearly administrative expenses are up, partly as the result of a move of their headquarters to a new site in Cambridge and product development costs have apparently increased.
One amusement was that it was mentioned that they are opening a new distribution facility in Holland to avoid any disruption post Brexit. This generated a question in the on-line analyst presentation (which you can see a recording of on their web site) on the cost, and the answer mentioned the new “HQ”. That was rapidly corrected to “Logistics Centre”, but the costs were not indicated as being of significance.
Another negative was the mention of a new banking facility of £200 million when they don’t seem to be particularly short of cash. This might be used for “future corporate transactions” and it was made clear they are looking for acquisitions.
A further issue is no doubt the typical bad habit of referring to “adjusted figures”. What does that mean? Here is what it says: “Adjusted figures exclude systems and process improvement costs, costs associated with the new Group headquarters, amortisation of acquired intangibles, the tax effect of adjusting items, and in respect of the six months ended 31 December 2017, one-off tax arising from new US tax legislation”. It sounds like there is a lot thrown in there that might be dubious.
One only has to look at the cash flow figures to see what is happening. Overall cash decreased by £7.8 million after £11.9 million spent on acquisitions. Purchases of “property, plant & equipment” and “intangible assets” almost doubled. Clearly costs have been ramped up as part of the aggressive growth strategy pursued by CEO Alan Hirzel since he joined. That required a major rebuild of internal systems and facilities which is proving costly.
The shares are still highly rated after this hiccup which looked somewhat of an over-reaction to me, but we seem to be in one of those markets where the share prices of companies can collapse on the hint of possible problems even though overall market trends are up. Investors are nervous.
Another company that has suffered sharp share price declines in recent weeks has been Superdry (SDRY), a retailing and brand company. Last Friday the company announced the requisition of a General Meeting to appoint two new directors, including founder Julian Dunkerton who left the board last year. He and another founder, James Holder, are clearly unhappy with recent events which includes more than one profit warning and a 65% drop in the share price. Between them the founders hold almost 30% of the shares and it looks like this is shaping up for a big proxy battle. The company has rebuffed any return of Mr Dunkerton or the appointment of an experienced independent non-executive director suggested by the founders.
Such a prompt rebuff with the likely costs that will be involved in a proxy battle as a result never seems a good idea to me. It tends to destroy any chance of an amicable resolution.
I may write more on this situation after obtaining more information on the key issues which seem to be other than the difficulties faced lately by many clothing retailers.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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