CentralNic, Photo-Me and Nationalisations

Firstly lets talk about a couple of companies in which I hold no shares. CentralNic (CNIC) published interim results this morning. This company sells internet domain names and web services. It states that both revenues and adjusted EBITDA have tripled year on year. The share price has not moved at the time of writing.

This company is surely operating in a growth sector but the company’s share price is less than it was 5 years ago. The company has been growing via acquisitions, but the key problem appears to be that the dilution of shareholders from the issue of new shares means that reported earnings and cash flow per share have bounced around a bit but not consistently grown even though revenue has. The reported loss after tax at the half year was £3.3 million and it generated negative cash flow from operations of £1.4 million.

The CEO comments on “these outstanding results” and he is “confident in continuing our trajectory towards joining the ranks of the global leaders in our industry”. But shareholders might prefer that the company simply generates some profits and cash from the capital raised.

PI World interviewed John Lee last week – see https://tinyurl.com/y6z9zwa8 and he is always worth listening to. Lord Lee is a well known private investor and writer on stock market investment. As he has realised some cash from a takeover he is looking at new investments and one he has been considering is Photo-Me (PHTM). Photo-Me has traditionally been an operator of photo booths, but as that market is strategically challenged it has moved into self-service laundry units and launderettes. It has now also acquired a fresh fruit juice vending operation in France. In effect it is focused on several “vending” type operations. A quick look at the financials gives a historic p/e of 12.9 dropping to a forecast 10.6 next year and dividend yield of 8.2%. In other words, it looks very cheap on the normal fundamental ratios.

But on Friday the Investors Chronicle published a “SELL” tip on the company. It suggested returns on capital were falling, that the photo business which still represents a major proportion of revenue was becoming more difficult as passport photos are easy to produce on any smartphone or camera, and the dividend is barely covered.

This is a business that is highly profitable with a good track record but faces some business challenges. This is why the share price has been drifting over the last few years as investors have become nervous about the future. With investors now focusing on “growth” stocks it may remain out of fashion. John Lee is not a follower of fashion though.

The Financial Times ran with a headline story of the Labour Party’s plans to confiscate £300 billion of UK company shares to give them to workers. Over 10 years all companies with more than 250 staff would be required to transfer 10% of their shares to workers over a period of ten years. The article also covered the party’s nationalisation plans including apparently perhaps even travel agents which the article suggests one in four people would support. That of course means most do not, but a Labour Government might not take much notice of the latter. Why travel agents? It appears some people think that the answer to any concerns about the cost of a service and the way it is provided justifies nationalisation. Have they learned nothing from history?

Many companies and investors might simply choose to move their assets from the UK if a Labour Government was elected but the reaction might be to impose capital controls to stop that. In other words, shadow chancellor John McDonnell might put us back into the 1960s – exchange control was not lifted until 1979.

The last time Labour was in power they nationalised Northern Rock and Bradford & Bingley banks. The original shareholders are still very disgruntled and they continue to fight for fair compensation after more than ten years. See this article for the latest on Northern Rock: https://tinyurl.com/yxpvk8sl , or the latest on Bradford & Bingley here: http://www.bbactiongroup.org/News.htm . The fact that the leaders of these campaigns continue to fight after so many years tells you how strongly they feel that their assets were confiscated at less than fair value.

Unfortunately there is a lot of irrationality in the political scene of late which may undermine our financial prosperity unless people come to their senses.

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

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Northern Rock 10 Years After

Both the Times and Financial Times covered the tenth anniversary of the nationalization of Northern Rock today. Dennis Grainger is still fighting to get some compensation for shareholders from the nationalization and says the Government stands to make billions of pounds profit from the bank after paying zero compensation to shareholders. He is undoubtedly right that the Government will turn a good profit on these events, as they always planned to do.

He and others such as Pradeep Chand described in an article in the FT Weekend supplement lost hundreds of thousands of pounds. Was the bank a basket case, or do they have a genuine grievance? The fact that they and other investors are still fighting for compensation ten years later tells you how aggrieved they feel. Mr Grainger hopes to put his case to Theresa May.

Incidentally the shareholders in Bradford and Bingley (B&B), led by David Blundell, are also still fighting a similar case over the nationalization without compensation of that company. The same legislation was used to do so.

As I was involved in the campaign and subsequent legal case, let me give you a few simple facts about the case:

Northern Rock was not balance sheet insolvent, but ran out of cash after a run on the bank by depositors (driven by media scare stories) and their inability to raise more money market funds (nobody was lending to anyone else at the time).

This would normally have caused the Bank of England to step in as “lender of last resort” to provide liquidity but then Governor Mervyn King declined to do so because of the “moral hazard” risk. That was a fatal mistake not likely to have been made by his predecessors.

The then Labour Government subsequently passed legislation to nationalise the bank and ensured there was no independent and fair valuation of the shares by writing the Nationalization Act with wording that ensured an abnormal and artificial valuation process which guaranteed a zero valuation. So the ensuing claims that it was a “fair and independent” valuation are nonsense. The Treasury is reported as repeating that claim in the FT article today.

In reality Labour politicians decided to ensure that two large hedge funds who had invested in the company and were willing to support it should get nothing because they were the kind of people they hated. Smaller shareholders in Northern Rock were not recognized as being of importance.

The nationalization legislation used against Northern Rock and B&B ensures that if the Government has lent any sum of money to a bank, then they can nationalize it without compensation. This made UK banks untouchable by many foreign lenders or investors with dire consequences later for other banks such as RBS. In the case of B&B they even concealed that they had lent it money until much later so as not to scare investors. Incidentally while that legislation is still available to the Government, that is one reason why I won’t be buying shares in UK banks – it increases their risk profile very substantially.

A legal case was pursued to the Supreme Court on the nationalization (a Judicial Review), but they would not overturn the will of Parliament. A claim to the European Court of Human Rights was submitted but they refused to even hear the case which was very unexpected as they had ruled in other nationalization cases that fair compensation should be given.

Those are the key facts and all the other mud that was slung at Northern Rock claiming it was a dubious business by a concerted campaign of disinformation was most unfortunate, and basically inaccurate.

A company that cannot meet its debts when they become due, and is hence cash flow insolvent, can be argued to be worth little. But there was funding available to Northern Rock (it was trading for months after the “run” and before it was nationalized). But salvage law sets a good precedent for what is fair compensation when someone rescues a sinking ship. The same should have applied to a sinking bank.

So in summary, I support the efforts of Dennis Grainger and others to get compensation to the ordinary shareholders out of the profits that have accrued to the Government as a result.

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

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