Mulberry Profit Warning – Better Late Than Never

On Saturday (18/8/2018) I wrote about the damage to suppliers from the pre-pack administration at House of Fraser. One of the companies mentioned was Mulberry Group Plc (MUL) and I queried why they had not issued an RNS announcement indicating the likely impact on their profits. I suggested it could be £2.4 million.

This morning Mulberry issued a profit warning that spelled out the likely figure. There will be a provision of £3 million of “exceptional costs” related to the 21 “concessions” that they operated in House of Fraser stores. That arises from “a review of debtor balances, fixed assets and potential costs that may result from restructuring”.

For the avoidance of doubt, I have never owned the shares, nor bought their products. They do sell some nice handbags at £1,000 plus though. Both the products and the share price are too rich for me. At a prospective p/e of over 50 even before this morning’s profit warning, they must have some loyal followers.

The share price has fallen by 17% this morning at the time of writing. I hope shareholders in Mulberry will complain to the Insolvency Service (part of the BEIS Department – the responsible Minister is Kelly Tolhurst M.P.). The insolvency regime needs major reform.

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

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House of Fraser – The Real Damage from the Pre-Pack and to Mulberry

I have covered the abuse of pre-pack administrations and the case of House of Fraser in two previous blog articles. But now that the initial administrators report has been published the real damage is very clear.

House of Fraser had total debts of £884 million of which trade suppliers were owed £484 million. The latter means goods supplied to the company, and sitting in the stores being sold to customers which will not be paid for by either the administrator or the new owners. The suppliers included big names such as Mulberry, Giorgio Armani, Gucci and Prada plus no doubt a large number of smaller suppliers as is common in the “rag trade”. Some of the latter might well go bust as a result.

Let’s look at luxury products supplier Mulberry which is a UK listed company (TIDM MUL). They are owed £2.4 million when last year their net profits were £6.2 million so the potential hit to their profits is very substantial as the administrator is very unlikely to pay them. What might offset those losses?

They might have “reserved title” on the goods supplied if they wrote their contracts correctly although such claims are typically resisted by administrators. They might also have insured the risk of not being paid by their customers in which case the cost will fall on the insurers. They may also do some kind of compromise deal with new owner Mike Ashley whereby he pays a figure to ensure continuity of supply. But Mulberry have made no public announcement of the likely impact on profits which is surely required sooner or later from a public company. Perhaps they are still trying to figure out the impact or are simply “in denial” about the cost.

Retail concession operators within the House of Fraser stores are also in a difficult position. Stock in the stores is theirs and has been removed in some cases. But past sales will have been put through the House of Fraser till system. The cash may be in a trust account, or it may not.

Retail customers of House of Fraser have also been affected, particularly those who ordered products from the company’s web site. These should have been delivered from warehouse operator XPO Logistics who are owed £30 million and stopped processing orders soon after the administration. Whether the customers will get refunds or will have to claim against their credit card suppliers is not currently clear.

The House of Fraser web site is currently unusable so they will be missing a lot of potential orders. The site simply says “We’re currently working hard to make some improvements to the website” which is a misleading euphemism for “systems needing to be totally rebuilt with a new supply chain”.

You can see from the above that although a pre-pack administration appears a simple way for a business to continue while jobs are protected, in reality it is far from simple and enormously damaging to a wide range of people and companies. The bankers and lenders to the company are first in line for any payout as “secured” creditors but typically all other creditors get nothing in such cases. It seems unlikely that it will be any different here.

In conclusion, you can see from the above, and the impact on the pension fund of the company covered in a previous article, that pre-pack administrations are only simple solutions for insolvency practitioners and bankers. For everyone else they are a nightmare. The disruption they cause creates much wider impacts and justifies looking for a better solution to the problems of companies that are losing money and running out of cash.

THE INSOLVENCY REGIME NEEDS REFORM. THERE ARE BETTER SOLUTIONS TO THE HANDLING OF INSOLVENT BUSINESSES.

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

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RIT Capital Partners, Foresight 4 VCT and Sepsis

RIT Capital Partners (RCP) is an investment trust that recently issued its interim report. As one of my longer standing holdings, first purchased in 2003 although I have reduced my holding of late, I read the report with interest. RCP has been a long-standing favourite of private investors having traditionally taken a somewhat defensive investment approach. But the portfolio is now most peculiar. It contains 8.8% of “quoted equities” but many of them are held as “swaps”, 27.7% in “long-only funds”, 19.7% in hedge funds and 0.6% in derivatives. There is 9.1% in direct private investments, 13.2% in private investment funds, 23.1% in “absolute return and credit funds”, 3.0% in “real assets” (which includes gold, silver, corn and soyabean futures) and 2.0% in Government bonds (with more swaps in there also). This is certainly an unusual portfolio to say the least.

Personally when I invest in a fund or an investment trust, I prefer them to invest directly – not pass the buck to some other fund manager. This trust has effectively become a “fund of funds” of late with a large proportion of its investments placed into other funds. Otherwise it appears to be hedging against armageddon.

The Chairman of the company is long-standing Lord Rothschild who is aged 82. When I have attended the AGM of this company I have never been very impressed by the way he handled the meeting or the responses to questions.

The total return net asset value performance in the half year was 3.2%, but 6.2% on share price. The current share price discount to NAV is actually at a premium of 6.8% according to the AIC and the dividend yield is 1.6%. Over ten years the total return (NAV) has been 103% when sector performance was 135%. So it’s not exactly been a great performer. I sold the remainder of my holding after reading the interim report.

Foresight 4 VCT

Another investment trust but of a very different nature is Foresight 4 VCT (FTF) which is of course a venture capital trust. It recently issued its Annual Report for the AGM due on the 11th October. I may attend it although my holding is very small.

The Annual Report does make interesting reading although it fails to mention a past complaint by some shareholders about the over-statement of reserves in the years 2013-2015 which resulted in an illegal dividend allegedly being paid. The auditor, KPMG, who still audits this company make no comment on this and neither do the directors in the Annual Report. But the Audit Committee report does mention that the company has received a letter from the FRC questioning the accounting policy for performance related incentive fees. The company has responded. Both issues are likely to be the subject of questions at the AGM no doubt.

This company has two very large holdings in its portfolio – Datapath and Ixaris. I have been very dubious about the valuations put on the latter company by this and other VCTs as I know quite a lot about the business. I used to be a director and still have a direct holding. This is particularly so after the disclosure by the Ixaris Chairman of the latest business challenges at the recent Oxford Technology VCT meeting.

I will be voting against the reappointment of KPMG as auditors at this company, against the sole director who is standing for re-election (is it not recommended that all directors of fully listed companies stand for re-election?), and against approval of the Report & Accounts.

But FTF did raise some more money this year and is investing in what appear to be interesting companies. One of their new investments has been in Mologic which is a medical diagnostic company. What sparked by particular interest was their product for rapid diagnosis of sepsis which I only narrowly survived a few years ago. Up to 50% of people who develop sepsis die from multiple organ failure, even though it can be treated with antibiotics. It is often misdiagnosed or treatment commenced too late, so a rapid diagnostic tool will be of great use.

Dr Hadiza Bawa-Garba was convicted of gross negligence manslaughter over the death of six-year-old Jack Adcock from sepsis but subsequently challenged being struck of the medical register. She won the latter legal case this week after a big campaign by doctors and a major crowdfunding exercise. Bearing in mind the other contributory factors, and the difficulty in spotting sepsis I consider the original conviction a gross miscarriage of justice. You can feel just slightly under the weather and next minute you are unconscious and in the intensive care unit as I know very well. Jack Adcock had other medical conditions that will not have helped.

There are 44,000 deaths from sepsis every year in the UK, and children are particularly at risk. It appears that cases of sepsis are rapidly rising although that might be due to better diagnosis. Even surviving it can mean life changing injuries. See https://sepsistrust.org/ for more information or if you wish to support a charity that is raising awareness of this deadly disease.

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

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House of Fraser Pre-Pack – More Details Disclosed

The Financial Times disclosed more details of the pre-pack administration of House of Fraser this morning which I previously commented on here: https://roliscon.blog/2018/08/12/house-of-fraser-pre-pack-is-it-such-a-great-deal/

The FT makes it clear that there was at least one other serious bidder for the company who was willing to purchase the business as a “going concern”. That bidder was Philip Day. How much he was willing to pay is not totally clear, but EY, the administrators are quoted as saying “For the avoidance of doubt, this was the only available offer to save the business, and in comparison to the alternatives represented by far the best recovery for the creditors of House of Fraser”.

The first part of that statement conflicts directly with the other information obtained by the FT. My conclusion is simply that the administrators preferred one bidder rather than another, probably at the behest of the secured lenders (i.e. the banks). There can be a number of reasons for doing so but in essence it’s very typical of what happens with pre-packs where the rush to complete the deal prejudices obtaining the best outcome other than for the secured creditors. So stuff the pensioners, stuff the trade creditors who have supplied goods they won’t now be paid for, stuff the property owners and stuff everyone else so long as the banks get paid.

The administrators can always claim in such circumstances that other offers were not available because very few bidders are likely to make an offer without some information about the business they may be buying and they may need time to put in place the funding required. At least some minimal due diligence is essential. But the administrator can delay or hold back information to thwart other bidders than their favourite candidate. So they can claim that there was only one firm offer on the table when the business was placed into administration.

This is a corruption of the administration process when there should be open marketing and time allowed for reasonable offers to be made so as to obtain the best solution for all stakeholders.

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

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House of Fraser Pre-Pack – Is It Such a Great Deal?

The acquisition of House of Fraser by Sports Direct is a typical “pre-pack” administration. In administration one minute, sold the next. The national media promptly welcomed it as the rescue of everyone’s favourite department store, the protection of 17,000 jobs and just what is needed to help save Britain’s High Streets.

Mike Ashley of Sports Direct trumpeted this as a great deal. All the stores and stock were purchased for £90 million when gross assets were £946 million and the company made a profit last year of £14.7 million – more on the financial numbers below. He plans to turn House of Fraser into the “Harrods of the High Street”.

But is it such a great deal? I have written many times in the past about the iniquities of pre-pack administrations. How creditors and shareholders are dumped, and pension schemes likewise. The administrators save themselves the hassle of winding up the business or looking for a buyer of the business as a “going concern” while collecting large fees for little work. I think the insolvency regime should be reformed.

The figure of £946 million of gross assets given by Sports Direct is from the last published accounts of the parent company House of Fraser (UK & Ireland) Ltd for the year ending January 2017, which is the last set of accounts filed at Companies House. The truth is that the company had net assets of £111 million with trade creditors of £365 million and long-term borrowings of £284 million. Debts including short terms borrowings probably grew substantially since then. Although Mr Ashley is paying the administrators £90 million for the assets, it would appear that both the trade creditors and the lenders will be very substantially out of pocket.

That’s not to mention the property companies who are the store landlords who face a default on their leases. Mr Ashley is unlikely to want to keep half the stores, so many of the jobs will be lost and he will no doubt want to renegotiate the leases on other stores downwards. So any property companies you may have invested may be damaged.

The company will have got shot of its defined pension schemes (approximately 10,000 members) which will be taken on by the Pension Protection Fund. That’s a public body that is funded by a levy on all pension schemes, so basically someone else will be paying if there is any shortfall. Although the pension scheme may be in surplus at this time, in such circumstances pensioners usually face a substantial cut in their future income as there will be no more contributions from the company.

Now House of Fraser might have been a retailing basket case with excessive debt, but surely a more equitable solution was possible? Indeed the Mail on Sunday today called it a “Fix” because there was an alternative offer on the table from retail billionaire Philip Day who allegedly offered £100 million for the company including taking on the pension obligations. The Mail suggested that the bankers and bondholders forced acceptance of the Ashley proposal in their interests. This is not unusual in pre-packs.

Sir Vince Cable suggested an investigation by the BEIS Department is required followed by reform of the pre-pack system. I agree with him. There are better solutions to how to deal with companies that run out of cash or become insolvent due to excessive debt which could protect the interests of trade creditors, employees and pensioners.

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

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Charles Stanley Direct Increase Platform Charges

Stockbroker Charles Stanley Direct are increasing their platform charges. Their platform fee will rise from 0.25% per annum to 0.35% per annum. That might sound a large increase but in practice many clients will not pay any more. The overall annual cap of £240 per annum remains on those holding shares rather than funds and even that disappears if you trade once per month. On funds the charge of 0.35% reduces on larger portfolios to as low as zero on those over £2 million. Transaction charges remain at £11.50 per trade on shares and zero on funds.

That’s a brief summary of the new charges, but as with any platform you need to work out exactly what you will pay based on the composition of your investments, the size of your portfolio and the frequency you trade.

It would appear that these changes will mainly impact the smaller investor and Charles Stanley put the reason for the change down to the need to maintain investment in the platform when they face complex and evolving changes. Mention is made of the need for more cyber security but all brokers have been hit by increasing regulation and the requirement to change their systems as a result.

As we saw from the results from The Share Centre last week, who reported a statutory loss of £280k for the half year, it’s not easy to make money in the “platform” business at present. Charles Stanley Direct lost money in the last full year also, although the rest of Charles Stanley made a profit. Only Hargreaves Lansdown, the gorilla in the market place, seem to be making real profits on their capital invested although it will be interesting to see the financial figures from A.J.Bell Youinvest if they go public soon as forecast.

Part of the problem is the exceptionally low interest rates brokers obtain on their holdings of client cash from which historically stockbrokers made a large proportion of their profits. Bank of England base rate increases will assist but they have been waiting a long time for that to improve and rates are not rising rapidly.

As I said before in my comments on the recent FRC Report on the Platforms Market, “informed investors can no doubt finesse their way through the complexities of the pricing structure and service levels of different platform operators. I can only encourage you to do so and if an operator increases their charges to your disadvantage then MOVE!”.

Incidentally my submission to the FRC on their Report is now present on my web site here: https://www.roliscon.com/Investment-Platforms-Market-Study.pdf

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

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Shareholder Voting and Financial Times Generosity

Anyone using an on-line investment platform will be aware that your shares are normally held in a nominee account (i.e. you do not own them, your broker does – you are only the “beneficial owner”). ShareSoc has long campaigned for reform of this system because it usually results in you not being able to vote your shares at General Meetings, and you are unlikely to be sent information such as Annual Reports. You are effectively disenfranchised and the lack of voting by private shareholders undermines good corporate governance. Platforms can enable you to vote by submitting proxy votes on your behalf, but many do not offer this facility.

Last week the Association of Investment Companies (AIC) published some information that helps you to get a vote. They showed which platforms provide such voting facilities. See https://www.theaic.co.uk/aic/news/press-releases/aic-releases-information-to-help-shareholders-vote-on-platforms for the details. Note though that some may permit it but often without providing an easy to use system of voting.

Ian Sayers of the AIC had this to say: “We need all platforms to offer a simple, online solution that means that shareholders get the information they need on resolutions affecting the company and can exercise their democratic rights at a click of a button. In the meantime, investors should consider whether and how they can vote their shares as part of their decision over which platform to use.”

One can only agree with his sentiment on this. The solution is to reform the laws and regulations in this area, and ideally have all shareholders on the share register of companies. But in the meantime, it’s worth reviewing the AIC list when choosing a platform to use.

Another item of news last week was a report from Reuters that a group of Financial Times journalists have complained about the pay of their CEO John Ridding. He earned £2.55 million pounds in 2017. The group led by an NUJ representative have written to their colleagues around the world saying the pay was absurdly high and that he should give some of it back to lowly paid staff.

Comment: Pay is escalating all over in the business world and this is just another example of outrageous pay inflation among senior management. The journalists’ initiative is to be applauded. As a daily reader of the Financial Times, I also have concerns that the CEO is not doing a great job either than might justify these gazillions. In the last couple of years, since the acquisition of the FT by Nikkei, the content of the paper has substantially changed.

It still publishes very good in-depth analyses of financial issues – for example, the review of accounting and audit standards headlined “Setting Flawed Standards” on Thursday which is well worth reading. But it has taken a very pro-EU and pro-Remainer political stance with numerous articles and published letters with a highly political slant. At the weekends we have to suffer from ex-sports journalist Simon Kuper’s views on that subject. He may know a lot about football but his views on UK politics and those who support Brexit seem very ill-informed.

Coverage of hard news on companies is also now very patchy, with more on the politics of foreign nations and on social issues. The FT needs to get back to reporting on financial matters and cut back on the political polemics.

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

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