AssetCo, Patisserie, Stockpiling, Warehouses, Sheds, Brexit and Venezuala

A week ago, an award of damages of £21 million plus interest and costs was made against Grant Thornton for their breach of duty when acting as auditors of AssetCo Plc (ASTO) in 2009/10. See https://www.bailii.org/ew/cases/EWHC/Comm/2019/150.html for the full judgement. I understand Grant Thornton may appeal. These are the key sentences in the judgement: “It is common ground that in those years the senior management team at AssetCo behaved in a way that was fundamentally dishonest. During the audit process management made dishonest statements to GT, provided GT with fabricated and massaged evidence and dishonestly misstated reported profits, and provided GT with flawed and dishonest forecasts and cash flow projections. Outside of the audit process, management were engaged in dishonestly ‘overfunding’ assets (i.e. misleading banks as to the costs of new purchases etc so as to borrow more than was permitted), misappropriating monies, dishonestly under-reporting tax liabilities to HMRC, concluding fraudulent related party transactions and forging and backdating documents. GT accepts that it was negligent in a number of respects as the company’s auditor in failing to detect these matters…”

In 2012, AssetCo (ASTO) was forced to make prior period adjustments for 2010 that wiped more than £235m off its balance sheet. AssetCo was, and still is, an AIM listed company now operating in the fire and emergency services sector.

This is undoubtedly a similar case to Patisserie (CAKE). According to a report by Investors Champion, former Chairman Luke Johnson suggests it “has possible relevance for a claim against Grant Thornton” and he will be pushing the administrators to instigate similar action. Let us hope it does not take as long at ten years and millions of pounds in legal costs which administrators may be reluctant to stand.

According to a report in the FT, manufacturers are stockpiling goods at a record rate in anticipation of supply chain disruption from Brexit. Importers are also stockpiling goods – for example Unilever is storing ice-creams and deodorant such as its Magnum ice-cream bars which are made in Germany and Italy. There is also the increasing demand for warehousing by internet retailers, even for smaller “sheds” to enable them to provide next day or even same day delivery.

Big warehouses are one of the few commercial property sectors that has shown a good return of late and I am already stacked up with two of the leaders in that sector – Segro (SCRO) and Tritax Big Box (BBOX). On the 31st January the Daily Telegraph tipped smaller company Urban Logistics REIT (SHED) for similar reasons and the share price promptly jumped by 7% the next day wiping out the discount to NAV.

There has been much misinformation spread about Nissan’s decision to cancel manufacture of a new car model in the UK. They denied it was anything to do with Brexit. This was to be a diesel-powered model and as they pointed out, sales of diesel vehicles are rapidly declining in the UK. The same problem has also hit JLR (Jaguar-LandRover). One aspect not taken into account in many media stories was that Japan has just concluded a free trade deal with the EU. Japanese car manufacturers no long need to build cars in Europe to avoid punitive tariffs. Where will the new vehicle now be made? Japan of course!

There has been lots of media coverage of the politics of Venezuela and its rampant inflation. A good example of how damaging extreme socialism can be to an economy. Over twenty-five years ago it had a sound economy and I had a business trip scheduled to visit our local distributor there. But at the last minute the trip was cancelled after a number of people were killed in riots over bus fares. I never did make it and I doubt I will ever get there now.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Patisserie – and How to Avoid Disasters

The events at Patisserie (CAKE) have been well covered in both the national media and financial press so I won’t repeat them here. This article will therefore concentrate on how to avoid such companies in the future. The case of Patisserie is very similar to those of Globo in 2015 and Torex Retail in 2007. All three were large AIM companies that went into administration after fraud was discovered. These were not just cases of over-optimistic or misleading financial accounts, but deliberate false accounting. Executives of Torex Retail received jail terms and Globo is still being investigated. Note that such criminal cases take years to come to a conclusion. Both Globo and Patisserie were audited by the same firm (Grant Thornton). Such cases can happen not just in relatively small AIM companies, but also large ones – for example Polly Peck.

Ordinary shareholders received zero from the administration of Torex Retail and Globo and it is very likely it will be the same from Patisserie. The only glimmer of light is that it does look as though a normal sale process is being followed by the administrators and there is at least one enthusiastic bidder for the remaining stores. There is also the prospect of a tax refund from HMRC because it is clear the fraud has been running for some years so Patisserie has been paying tax on imaginary profits. But the bank overdrafts/loans need paying, loans from Luke Johnson need repaying (which incredibly seem to rank ahead of the banks), trade creditors need paying, staff need paying, HMRC needs paying and the administrators will run up the usual enormous bills no doubt so I doubt there will be much, if anything, left after those distributions. There usually is not.

Legal action against the former directors who were culpable in these events by regulatory authorities is highly likely. For example, it is a crime (market abuse) to publish false accounts under the Financial Services and Markets Act so that would be one basis. Investors who invested in the company on the basis of those false accounts should submit a complaint to the Financial Conduct Authority (FCA) and encourage them to take such action.

Are there possible legal actions by investors to recover their losses? Perhaps and I know at least two people who are talking to solicitors about that. But such legal actions are very expensive and depend on a) Identifying defendants with sufficient assets to meet both the claim and legal costs; b) Having sufficient standing to do so. Unfortunately shareholders would probably have to do it via a “derivative action” which means applying to the court to force the administrator to pursue such a claim. Bearing in mind administrations are often relatively short term, and it will take years to conclude regulatory investigations and actions, there might be a problem there.

Who could be targeted? The auditors possibly although they will probably say they were misled by the company directors (bank accounts not disclosed, etc). Luke Johnson perhaps although he clearly denies previous knowledge of the fraud and pursuing him for breach of his responsibilities as a director might be difficult – however he does have the assets having taken well over £20 million out of the company in share sales over the years. Former finance director Chris Marsh sold shares worth £8.42 million in 2018 while former CEO Paul May sold shares worth £14.34 million in that year it is worth noting. They both appear to have been near the centre of the fraud but culpability clearly will need to be proved. They have yet to comment in public on the matter.

Were the share sales by those two executive directors a sign that all was not well at the company? Perhaps but Luke Johnson was not selling in 2018 and these sales were the result of share option exercises from LTIPs which executives often sell, partly to meet tax demands.

So how to avoid such fraudulent companies from damaging your wealth in future? From experience I can offer the following advice, and you will see why Patisserie side-stepped all the warning signs:

  1. Try to invest in directors who you feel you can trust. Luke Johnson had a very public reputation in the investment world which he was no doubt keen to protect. Indeed his actions to try and bail-out the business when the fraud was discovered shows exactly that, although institutional investors who took up the rescue rights issue will be none too happy. His fellow executive directors were a long-established team and hence should have been trustworthy. Make sure you take opportunities to meet the management.
  2. Do the financial analysis. Read the book “The Signs Were There” which I have covered in a previous article – it tells you where to look. For example, do the profits turn into cash? But if the cash on the balance sheet is a lie, as at both Patisserie and Globo, it does not help. Does the company not pay dividends when it could, or make decisions to raise more debt when it does not apparently need it or provide good justification? That was the what crystalised my views on Globo.
  3. Look at who else is investing or commenting on the company, e.g. Chris Boxall of Fundamental Asset Management, a very experienced small cap investor, or Paul Scott of Stockopedia who recently said “Quindell, Globo and Carillion were easy to spot a mile off – indeed we warned investors of all 3 long before they blew up. Patisserie Valerie however, appeared to be a wonderful, cash generative business”. Because I follow what others are saying and pay attention, I never invested in Torex Retail and I did not lose money on Globo despite holding some shares until the end. But Patisserie fooled pretty well everyone.
  4. Research the product or service offering. Some people say they were wary because when they visited the shops, they were not busy and did not like the cakes. That was not my experience after a number of visits to different locations.
  5. Read the IPO prospectus for AIM companies. It tells you a lot more than you can read in the Annual Reports and is legally required under AIM rules to be available on their web site.
  6. Invest in steps and not at the IPO so you can build confidence in the company. Private investors have the advantage of being able to do that. After all it’s unusual for frauds to run for years without being discovered by someone – rarely by auditors though. I first invested in Patisserie in 2017 and built up a small holding in stages following the share price momentum. But this was only limited protection and it appears the fraud had been going on for many years at Patisserie.
  7. Have a diversified portfolio so one company can go bust and it does not undermine your overall returns. If you invest in large cap companies which may be less risky, perhaps 10 to 20 shares are sufficient diversification. Throwing in a few investment trusts or other funds will help as they are intrinsically diversified. But if you are investing in AIM shares you need a lot more. By having a large portfolio of shares in terms of numbers of holdings the damage to my portfolio from the administration has been a loss of 0.9% of my portfolio value. That’s less than the portfolio varies from day to day on some days. I have spoken to a number of investors who bet their houses or life savings on one share, e.g. Northern Rock or the Royal Bank of Scotland rights issue. One at least went bankrupt. Don’t be so daft.
  8. Monitor news flow on a company and unusual share price movements. But at Patisserie there was really nothing unusual until the date the shares were suspended.

I hope the above comments help investors to avoid the dogs and complete frauds of the investment world. Some of these avoidance techniques help you to avoid not just outright frauds but general financial mismanagement by company directors.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

The Signs Were There – Corporate Disasters and How to Avoid Them

This is a review of the recently published book entitled “The Signs Were There” by Tim Steer. It’s worth reading by any investor who invests directly in stock market shares, but particularly by those new to the game. Experienced investors will know about many of the causes of companies collapsing, and how accounts can deceive, from their own past experiences. But it’s best to learn what to look for in other ways.

The book covers many UK examples of corporate disasters – not all of them went bust but many did. It profiles Connaught, NCC Group, Sports Direct, Hewlett-Packard/Autonomy, Cedar Group, iSoft, Utilitywise, Slater & Gordon/Quindell, Mitie, Guardian IT, Tribal Group, Conviviality, Amey, Capita, Carillion, Northern Rock, Cattles, Healthcare Locums, Erinaceous, Findel, AO World and Toshiba; and explains why investors were fooled. I have been involved in a few of those as an investor or trying to help those who were caught out, and have written about some of them in the past to try and educate investors on how to spot the dogs.

The author shows how many of the problems in these companies could have been identified in advance by reading the Annual Reports, or looking at some financial ratios. One comment I saw on the book was that few investors have the time to read Annual Reports – if they don’t they should not be investing in my view. Perhaps one criticism is that the author is an accountant and hence is more used to reading the accounts of companies than the average investor. But that is surely a capability that all investors should acquire. The fact that so many of the above companies had professional fund managers as investors in them, or were acquired by supposedly experienced managers (e.g. Hewlett-Packard/Autonomy) tells you that there is a lack of education on such matters.

Reasons given for disappearing profits are frequently revenue recognition problems, accruals misstated, assets wrongly valued, goodwill unreasonably inflated or not written down, capitalisation of operating costs and unexplainable related party transactions. The author also warns about companies that grow via acquisitions when the acquisitions do not help but enable “exceptional” costs to be buried.

You won’t pick up all the future corporate black holes after reading this book. For example, anyone can be fooled by false accounts where even the cash on the balance sheet simply is not there (e.g. at Globo and Patisserie). Simple frauds can conceal many ills, but most of the examples covered in the book were more down to management incompetence and a desire to present profits rather than losses. As is pointed out, accounting rules permit a lot of interpretation and flexibility which is why published accounts cannot always be relied upon. The book will help you avoid a lot of those errors.

The last chapter covers more general issues about why the “System isn’t working”, i.e. the failings of auditors to identify such problems and what to do about it. The author’s comments on the FRC are similar to those in the recent Kingman review. To quote: “The trouble with the FRC is that, rather like the Keystone Cops, who always arrived late to the scene of a crime, their important investigations often commence some time after the damage has been done”.

One suggestion made is that the FRC could take a proactive role in identifying companies that were at risk. Either by reviewing those shares that were being shorted, or a “specially tailored financial screening tool”. The latter might identify those companies where there was a widening gap between reported profits and cash flows, or other declining financial ratios. That seems an eminently sound idea that should be pursued. A public report of such ratios would be an even better idea.

As the author points out, the amount and quality of published research on companies is declining because of the impact of MIFID rules and market dynamics. So investors need to do more of their own research. This book tells you some of the things to look out for.

I have suggested to ShareSoc that they put this book on their “Recommended Reading List”. Let us hope that it does not get lost like the innumerable cookery books that all cooks who pretend to aspire to be good cooks keep in their libraries but never use. Investors have the same tendency to read numerous books on how to pick stocks but then either forget what they have read or get confused by too many answers. They buy more such books while looking for the one simple answer to their quest for the holy grail of a finding a share on which they can make a fortune. There is of course no one simple answer which is why stock market investment is still an art rather than a science. It is just as important to avoid the real dogs in addition to picking winners if your overall portfolio performance is to be better than average. The book “The Signs Were There” is certainly a book that can contribute to your knowledge of how to avoid the worst investments.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Blue Prism, GB Group, Gooch & Housego, Greggs, IDOX, Pets at Home, Victoria, Brexit and Pre-Pack Administrations

Lots of results and trading statements this morning of interest. Here’s a few brief comments on some of them in alphabetic order (I hold some of these stocks), with the share price movement on the day at 14:00 hours (at the time of writing):

Blue Prism (PRSM) – down 12.3%. This was one of the ultimate go-go technology stocks until mid-September when it started a sharp decline like many other such stocks. It has some very interesting technology to automate business processes which is why everyone wanted to buy the shares. The trading statement had some positive comments about sales and cash flow (without giving any specifics which is annoying), but it also said “The EBITDA loss is expected to be larger than current expectations due to continued investments into the Group’s growth strategy and increased sales commissions arising from the strong fourth quarter”. With rising losses already forecast and no prospect of a profit in sight, the share price predictably fell. This company has a market cap of over £1 billion when revenue in the current year might be £55 million. I have seen technology companies before (e.g. in the dot.com boom era) that managed to grow sales at a terrific rate but with rising losses. Often they never did manage to show they had a profitable business as competition eroded their USP before they got there.

GB Group (GBG) – up 5.0%. Half year results much as expected taking into account the big one-off deal in the previous half year. Like Blue Prism the share price was down by 30% since early September in the technology stock rout. The valuation is now back down to a more sensible level and with revenue growth of 9%, cash up by £14.5 million and a positive outlook statement there seems to be little to be concerned about. The company provides on-line id verification and location services which is clearly a growth area at present and accounts for the consistently high valuation of the company.

Gooch & Housego (GHH) – down 1.8%. The share price fell sharply after the market opened but that seems to be a frequent occurrence after announcements by small technology stocks as a few insiders take the opportunity to sell. But the new chairman bought a few shares today. The shares in the company are also thinly traded which means they tend to be volatile. The preliminary results were slightly better than forecast on an “adjusted” basis although the reported accounts of this company are heavily distorted by the number of exceptional items including a large write-off of goodwill, restructuring costs (including a site closure) and transaction fees on acquisitions. The share price has been declining like other technology stocks and the announcement today about the departure of the CFO, but not until summer 2019, may not help the share price. The company has moved into a net debt position due to heavy investment in property, plant and equipment and an acquisition but it’s still quite lowly geared.

Greggs (GRG) – Up 11.6%. The share price jumped after the company reported sales up 9.0% in the last eight weeks – no particular reason was supplied. Also forecasting profits to be substantially ahead of forecasts. Greggs went through a share price dip in the middle of the year probably due to poor figures after bad weather hit this “food-on-the-go” seller. But it seems junk food is still a growth market if you adapt to sell it in new locations and less on the High Street, and the weather is good – not that Greggs are not into selling healthy options now of course.

IDOX (IDOX) – up 1.6%. A year-end trading update showed declining revenues even ignoring the disposal of the loss-making Digital business which will have a negative impact on the final results. The company is in cost-cutting mood so as to increase profitability and so as to “align the cost base more directly with its re-focused business model”. There was a new Chairman appointed recently with a very relevant industry background. The business should at least report a profit this year unlike last, and the valuation is lowly due to past problems. But investors may be getting impatient for better results.

Pets at Home (PETS) – down 0.1%. Interim results reported good like-for-like growth in both the retail business and the vet practices but a restructuring of the vet business is going to result in very substantial write-downs including cash costs of £27 million. The reason the share price did not fall is probably because of the positive trading figures and a commitment to hold the dividends both for the interim and future final ones. It’s on a prospective yield of 6.5% at present. With a new management team this may be a good share for those who like “value” plays but being in the general retail sector which is a bloodbath for many such stocks does not help.

Treatt (TET) – Up 5%. This manufacturer of flavourings issued very positive final results – revenue up 11% and adjusted earnings up 10%, with positive comments about likely future results in addition. This is one of John Lee’s favourite stocks and no doubt he will have been talking about it in the last couple of days at the Mello London conference. Unfortunately I could not attend that event, which is one reason for this long blog post today.

Victoria (VCP) – up 1.6%. Interim results were generally positive and they look to be on target to make the full year estimates. But Exec Chairman Geoff Wilding probably summed it up well with this comment: “Finally, I am acutely aware that Victoria’s share price is not where I believe it should be given our current trading and prospects. As one of the largest shareholders, you can be assured that I, and the other directors and management, are focused on building the confidence of investors and delivering the financial results expected of Victoria. It is important to remember, together we own a very robust, well-managed, and growing business with over 3,000 employees who manufacture and sell some of the finest flooring in the world. The events of the last couple of months have not distracted management from delivering and for that reason I am highly confident of Victoria’s continued long-term success”. The events he refers to were the growing concerns about the level of debt in the company and the aborted proposal to convert bank debt into a bond. Floor-covering businesses can be somewhat cyclical, as results from the Australian subsidiary in these figures indicate. Investors can get nervous about high debt and what will happen when it is due for repayment. You need a lot of confidence in Geoff Wilding for him to steer through this situation to buy the shares even at the current level.

It is remarkable looking back over these results and the share price performance of the companies over the last few months that share prices seem to have been driven by emotion and trend following even more than usual. Brexit also seems to be making investors nervous and overseas investors particularly so. That explains why the dividend yield on the market overall is at record levels. Current yield is not everything of course as future growth is also important to market valuations which depends on profit growth. But apart from Brexit there are few clouds on the horizon at present.

Brexit. Mrs May is apparently trying to sell her agreed Brexit deal directly to the general public, i.e. over the heads of politicians. But with no unanimity in the Conservative party nobody sees how she can get the Withdrawal Agreement through Parliament even if she manages to persuade the DUP to support it. It’s not easy to see how even a change of leader would help unless they can tweak the Agreement in some aspects to make it acceptable to the hardliners. That might just be possible whatever the EU bureaucrats currently say but otherwise we are headed for a “hard” and abrupt exit in March. Am I worried about such a prospect? Having run a business which exported considerably into Europe before we joined the Common Market, the concerns about the required customs formalities are exaggerated. The port facilities may suffer temporary congestion but it is always remarkable how quickly businesses can adapt to differing circumstances. For those who think we should simply go for a hard Brexit and stop debating what to do there is an on-line Parliamentary petition here: https://petition.parliament.uk/petitions/229963/signatures/new . With the Brexit Withdrawal date set for March 29th 2019, I confidently predict that the matter will be settled by March 28th or soon after, probably based on Theresa May’s Agreement which actually does have many positive aspects. It’s just the few glaring stumbling blocks in the deal that are annoying the Brexiteers.

Incidentally Donald Trump was incorrect in suggesting that the current Agreement would prevent the UK signing a trade deal with the USA. See https://brexitfacts.blog.gov.uk/2018/11/27/response-to-coverage-of-the-uks-ability-to-strike-a-trade-deal-with-the-us-when-we-leave-the-eu/ . There’s just as much fake news from politicians than there is from digital media platforms these days.

Pre-Pack Administrations. There was an interesting article on the subject of Pre-Pack Administrations in the Financial Times yesterday (26/11/2018). I have covered this topic, many times in the past, always negatively. For example on the recent case of Johnston Press – see https://roliscon.blog/2018/11/19/johnston-press-trakm8-and-brexit/ where creditors were dumped and a payment into the pension scheme due in just days time was not made with the result than the Pension Protection Fund is likely to pick up the tab. That not just means pensioners in the Johnston scheme will suffer to some extent, but the costs fall on all other defined benefit schemes so you could be contributing also.

They are not the only losers though. The FT article pointed out that one of the biggest losers are HMRC as it seems some pre-packs are done to simply avoid paying tax due to them. There is now an advisory group called the “Pre-Pack Pool” that was set up to try and stop the abusive use of pre-packs, but it is reported that even when they gave a pre-pack proposal a “red card” many were put through regardless. This looks another case where self-regulation does not work and abuses are likely to continue.

That’s not to say that all administrations could result in a better return to trade creditors and the taxman than zero, but a conventional administration with proper marketing and the sale of a business as a going concern is much more likely to do so. The insolvency regime needs reform to stop pre-packs and provide better alternatives.

Have I got a bee in my bonnet about pre-packs because of suffering from one or more? No, but I know people who have even though they are relatively rare in public companies. But I just hate the duplicity and underhand shenanigans that go along with them.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Johnston Press, TrakM8 and Brexit

Over the weekend, Johnston Press (JPR) was put into administration and immediately sold to a new group of companies controlled by the company’s bondholders. In other words this looks like a typical “pre-pack” administration where a company does not go through a proper administration process with an open sales process but is flogged off to in a fire sale to those who already know the business and see an opportunity to collect a bargain.

Trade creditors will lose their money, shareholders will lose everything and the pension scheme is being dumped – and is likely to need bailing out by the Pension Protection Fund.

One investor in the company who wished to revive the business was Norwegian Mr Ager-Hanssen who on Saturday accused the board of thwarting efforts to turn the group around and a “sham” sales process. He is probably right from my experience of what happens in pre-pack administrations. Pre-pack administrations are an anathema as I have said many times before as they undermine a proper process when a company is in difficulties.

Johnston Press does have some very valuable media titles such as the Scotsman and Yorkshire Post but had managed to accumulate an enormous amount of debt by going on an acquisition spree. It also had a big pension deficit. The company put itself up for sale recently but now states that the offers were insufficient to repay the bonds so the company has concluded the equity is worthless. Or perhaps it was simply an example of where the prospective buyers could see it was cheaper to do it via a pre-pack.

I have never held shares in Johnston Press although I looked at it a few times as a possible “value” play. But high debt is a killer when the market in which a company operates is facing strategic problems. With newspaper circulations dropping, and advertising revenue being impacted by changes to media usage – particularly a move to internet advertising – the company failed to cut its debt rapidly enough while revenue was falling and profits disappeared.

Another disaster area on Friday was AIM-listed Trakm8 (TRAK) whose shares fell by 66% on the day to a new low of 22p. This was after publication of their half-year results and a trading statement. Group revenue fell by 38% and a very large loss was the result. The company provided numerous excuses for this and a very negative short-term outlook. But it suggests the market for the company’s solutions “will be robust in the longer term”. Anyone who believes the latter statement must be an eternal optimist.

I did hold this company’s shares briefly in early 2016 when it was the darling of many private investors and the share price peaked at over 360p but I rapidly became disillusioned with the management. Peculiar acquisitions made subsequently, poor cash flow (rather suggesting profits were a mirage of fancy accounting) and generally over-optimistic statements being issued. Warren Buffett has always emphasised the importance of trust in the management of companies in which he invests, and when I lose trust I sell in short order.

Brexit is a topic one can hardly avoid talking about at present. I gave my personal analysis of the draft withdrawal agreement here (yes I have read it): https://roliscon.blog/2018/11/16/brexit-agreement-is-it-a-fair-deal/ . On reflection it seems to me that Mrs May is attempting to meet the demands of both brexiteers and remainers with a compromise deal that keeps us partly in the EU in many regards. The result is that she has pleased few people – the right wing of her own party, the Labour Party and Jeremy Corbyn who is stirring the pot like mad to gain political advantage, the DUP who May relies on for votes, and many others. Even her cabinet seems split counting only those who remain. The concept of the “chequers” plan might have made some sense, but the detail of the proposed agreement is simply not acceptable to many people. I suggest she needs to reconsider, sooner rather than later.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Patisserie General Meeting – No Excitement But Few Questions Answered Either

I attended the General Meeting of Patisserie Holdings (CAKE) this morning at the ungodly time of 9.00 am – presumably chosen to deter attendance. An announcement earlier from the company will also have deterred attendance as it said no questions on past events would be answered so as not to prejudice investigations by “multiple regulators and authorities”. But there were about 20 shareholders present, including some institutional representatives.

This GM was to approve the second tranche of share placings and I expected it to be voted through which it was on a poll by more than 90% of shareholders. To remind you this company was on the brink of going into administration after the board discovered the accounts were false and the claimed cash on the balance sheet non-existent. In fact it was stated in the meeting that net debt was more like £9.8 million rather than as previously stated. Executive Chairman Luke Johnson kept the company alive by giving it an interest-free loan and arranging an emergency placing. As I said in the meeting, I considered the company had no better alternative to the actions taken having been involved in other similar problem situations before. I think shareholders (including me) are very lucky that Mr Johnson chose to take the steps he did. Mr Johnson reiterated there was no viable alternative several times in the meeting because there was no time to arrange anything else. He indicated later that he had not participated in the placings because he did not want shareholders to think he was acquiring shares cheaply and hence his interest in the company will now be diluted (he’s now down to 28%).

However there were several shareholders who expressed their unhappiness at the turn of events as one might have expected. There was one particularly vociferous shareholder who suggested that shareholders will lose 88% of their value as a result of the placings and that there should have been a rights issue instead. The shareholder said it was immoral, and unfair.

Mr Johnson opened the meeting by thanking shareholders for the messages of support he had received in the recent dark days. The board was doing everything it can to safeguard the company. There was potential fraud and a miss-statement of the accounts. Those errors are likely to have affected previous annual accounts.

He said that regulatory authorities including the SFO were investigating so he could not comment further. He believed it was a business worth saving and he had committed to reduce his other activities (in response to a question later he said he no other roles now).

Chris Boxall from Fundamental Asset Management asked if those supporting the placings had access to more information that others, i.e. other than that publicly disclosed? The answer was no. Comment: they must have faith in Luke Johnson because with so little information available it is very unclear what the future profitability of the business might be and there are big potential liabilities.

In response to other questions he said current trading had not been affected, although two sites had been closed. They are recruiting new staff when asked about management changes.

I tried to ask two questions:

  1. Is it possible the company could become liable to compensate shareholders for the “market abuse” related to the issue of false accounts [on which basis some investors will have purchased shares]? This is surely a similar situation to the case of Tesco where the FCA instructed the company to pay compensation. Shareholders taking up the placing shares might be interested in the answer. Mr Johnson refused to answer the question.
  2. Have you appointed lawyers to pursue claims against the former finance director (Chris Marsh) in respect of the fraud or to recover the value of share bonuses paid to him and the CEO (Paul May) on the basis of the false accounts? Mr Johnson refused to answer that question also.

Note that as this was a General Meeting there was no good reason not to answer those questions as they could not possibly prejudice the investigations by the legal authorities. This is an abuse of company law and I will be making a complaint about it.

What can shareholders do at this point? Not a lot but just await the results of the investigations and possible subsequent actions by the legal authorities. This might take many weeks, months if not years from past experience. The shares will remain suspended for the present. But I suggest shareholders should do the following:

  1. Write to Luke Johnson requesting that the company takes all possible legal steps to recover loses to the company that have resulted from the fraud from those who perpetrated the likely fraud, and in addition take steps to recover the value of shares issued to former and current directors under share option schemes that were based on the false profits that had been declared. In addition the company should examine the role of the auditors as it appears that they may have failed to pick up the accounting errors and failed to check all relevant bank balances and hence there may be a claim against them. Note: it is a lot easier for the company to sue former directors or auditors than it is for shareholders, however much they may wish to forget about it and move on.
  2. Write to the Financial Conduct Authority stating you were induced to invest in the shares of the company based on false accounts and encourage them to pursue legal actions against those at fault accordingly. In addition as this was a case of market abuse (similar to that at Tesco), request that the company be forced to compensate the affected investors accordingly. You should also encourage them and the SFO to move as fast as possible in their investigations as they are not known for speed in such matters.

So that’s a summary of the meeting held on a gloomy wet day in London – which probably matched the mood of the shareholders present. There were members of the press there getting their views no doubt for publication in the media later.

To look on the bright side, as I have an enormously diversified portfolio I found on exiting the meeting that my overall portfolio had risen more that morning than my potential losses on Patisserie simply as the overall market picked up. I may therefore be more sanguine than others. There is a lesson there of sorts for investors, but I also consider myself relatively lucky.

As someone said to me in the meeting, this was a company where there were no warning signs that investors could easily pick up in respect of the accounts. Investors cannot blame themselves for investing in what appeared to be a sound, profitable company from the accounts. Fraudulent accounts can fool even the most experienced investors.

Picture below is of Patisserie café in King’s Cross station take on my way to the General Meeting.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Patisserie Cafe 2018-11-01

Bad News from Crawshaw and ULS, Ideagen AGM, Victoria Doubts and Other News

The real bad news today is that butchers Crawshaw (CRAW) is going into administration, “in order to protect both shareholders and creditors”. They hope the business will be sold as a going concern but it is unusual for shareholders to end up with anything in such circumstances. The shares have been suspended and the last share price was 2p. It actually achieved a share price of 3425p at its peak in 2005. Revenue have been rising of late but losses have been also.

I never invested in the company although I do recall seeing a presentation by the company when it was the hottest stock in the market but I considered it to be a business operating in a market with no barriers to entry and likely to suffer from competition once the supermarkets had woken up to what it was doing. That’s apart from the difficulties all high street retailers have been facing of late. Well that’s one disaster I avoided at least.

Another AIM stock I do hold is ULS Technology (ULS) who operate a conveyance service platform. A trading statement this morning for the first half year said the revenue is expected to be up 3% and underlying profit up 5%, despite a fall of 4% in the number of housing transactions across the UK market. But the sting in the tail was the mention of a slowdown in mortgage approvals which “may well be short lived but is likely to have some impact on the Group’s second half results”. The share price promptly dropped 20% this morning. It’s that kind of market at present – any negative comments promptly cause investors to dump the shares in a thin market.

One piece of good news for the housing market which I failed to mention in my comments on the budget was that the “Help to Buy” scheme is not being curtailed as some expected, but is extended for at least another two years to 2023.

Yesterday I attended the Annual General Meeting of Ideagen (IDEA), another company I hold. It was unexciting with only 4 ordinary shareholders in attendance so I won’t cover it in detail. But boring is certainly good these days.

It was the first AGM chaired by David Hornsby who is now Executive Chairman. One pertinent question from a shareholder was “what keeps the CEO awake at night?”. It transpired that the pound/dollar exchange rate was one of them simply because a lot of their revenue is in dollars (their US market seems to be a high growth area also). I suggested they might want a “hard Brexit” when the pound would collapse and improve their profits greatly. But the board somewhat ducked that issue. Note that this business is moving to a SAAS revenue model from up-front licence fees which may reduce organic growth slightly but increase revenue visibility. The point to bear in mind here is that even on a hard Brexit it is unlikely that trade tariffs would impact software income because there are no “goods” exported on a SAAS model.

Another question asked was about financing new acquisitions which the company does regularly. These are generally purchased for cash, and share placings are done to raise the funds required. Debt target revenue is only one times EBITDA so debt tends to be avoided.

It is worth comparing that with Victoria (VCP) a manufacturer of floor coverings who issued a trading statement on the 29th October which did not impress me or anyone else it seems. Paul Scott did a devasting critique on Stockopedia of the announcement. In summary he questioned the mention of a new debt being raised, although it was said that this would be used to repay existing debt, when there were few other details given. He also questioned the reference to reduction in margins to maintain revenue growth. The share price promptly headed south.

The company issued another RNS this morning in response to the negative speculation to reassure investors about the banking relationships, covenants and credit rating.

I have held a few shares in Victoria since the board bust-up a few years back and attended their last AGM in September when I wrote a report on it here: https://roliscon.blog/2018/09/11/brexit-abcam-victoria-and-the-beaufort-case/ . The share price was already falling due to shorters activities and my report mentioned the high level of debt. The companies target for debt was stated to be “no more than 2.5 to 3 times” at the AGM which is clearly very different to Ideagen’s!

I did have confidence in Geoff Wilding, Executive Chairman, to sort out the original mess in Victoria but the excessive use of debt and a very opaque announcement on the 29th has caused a lot of folks to lose confidence in the company and his leadership. Let us hope he gets through these difficulties. But in the current state of the stock market, the concerns raised are good enough to spook investors. It’s yet another previously high-flying company that has fallen back to earth.

One more company in which I have a miniscule number of shares is Restaurant Group (RTN) which I bought back in 2016 as a value/recovery play. That was a mistake as it’s really gone nowhere since with continuing declines in like-for-like sales. At least I never bought many. Yesterday the company announced the acquisition of the Wagamama restaurant chain, to be financed by a rights issue. The market reacted negatively and the share price fell.

I did sample some of the restaurants in the RTN portfolio but I don’t recall eating in Wagamama’s so it’s difficult to comment on the wisdom of this move. All “casual dining” chains are having difficulties of late as the market changes, although Wagamama is suggested to have more growth potential. The dividend will be rebased and more debt taken on though. With those reservations, the price does not look excessive. However, while they are still trying to get the original business back to strength does it really make much sense to make an acquisition of another chain operating in the same market? Will it not stretch management further? I will await more details but I suspect I may not take up the rights in this case.

One other item of news that slipped through in the budget announcements was the fact that in future Index-linked Saving Certificates from NS&I will be indexed by Consumer Price Index (CPI) rather than the Retail Price Index (RPI). This is likely to reduce the interest paid on them. But it will only affect certificates that come up for renewal as no new issues have been made of late. These certificates are becoming less and less attractive now that deposit interest rates are rising so investors in them should be careful when renewing to consider whether they are still a good buy. I suspect the Chancellor is relying too much on folks inertia.

At least even with the bad news, my portfolio is up significantly today. Is the market about to bounce back? I think it depends on consistent price rises in the USA before the UK market picks up, or a good Brexit deal being announced.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.