Arron Banks on Leave.EU, Smithson and Patisserie

The Andrew Marr interview of Arron Banks was all good knock-about stuff but there was no knock-out blow inflicted. Andrew Marr was interviewing Arron Banks about his £8 million funding of the Leave.EU campaign. The Electoral Commission have recently asked the National Crime Agency (NCA) to investigate the matter as they apparently do not believe his story about the source of the funding. The suggestion has been made that the funding came from Russian sources or from a company registered in the Isle of Man (Rock Holdings) which would not have been permitted under electoral law.

You can watch the full interview here: https://order-order.com/2018/11/04/arron-banks-marr-interview-full/

Mr Banks made it clear that the money came from Rock Services Ltd and strenuously denied it came from other sources. Andrew Marr suggested Rock Services was a “shell” company and that neither that company nor Mr Banks had sufficient financial resources to cover the £8 million in funding.

It is of course a simple matter to look at the accounts of Rock Services Ltd at Companies House (it’s free to do so – go here: https://beta.companieshouse.gov.uk/search?q=rock+services+ltd ).

Rock Services Ltd hardly looks like a “shell” company which is normally used to describe a company with no revenue and no assets apart from possibly some cash. Rock Services had Turnover of £50 million for the year ending December 2017 but little in the way of profits or net assets. But it did have fixed assets of over £1 million. This is hardly a “shell” company in the normal usage of the word. The “Strategic Report” says the company’s “principal business activity is that of performing a recharge function for services for the Group and other related parties”. The profit of the company is generated from service charges added to costs and salary recharges.

Aaron Banks has been running motor insurance companies for many years and is involved in a group of companies which includes Rock Services, Rock Holdings and UK registered Eldon Insurance. I vaguely recall he was involved in a company called Brightside I held shares in from 2012/2014 which was publicly listed before being taken over. The accounts of Eldon Insurance can also be read at Companies House and indicate revenue of £77 million and profits of £1.8 million in 2017. Another substantial company in the Group is Southern Rock Insurance which is based in Gibraltar. You can see a complete list of group companies and their transactions through Rock Services Ltd on page 15 of their accounts.

In summary the allegation that Mr Banks or his UK companies did not have the financial resources to make the donation to Leave.EU is not reasonable, and Andrew Marr and his researchers should have looked into the background more before making the allegations he made.

As Mr Banks said in the interview, other donations were made to the remain campaign from subsidiaries of foreign companies. Why were they not being investigated? It certainly looks like a witch-hunt to me. It would seem to be more about politics than election regulation.

Note that Companies House is an invaluable source of information on companies and their directors. All investors should be familiar with it. It can be useful in other ways – for example I recently obtained a bid from a company to provide web site development work. That was done from the email address of a company that was different to that from which they suggested would do the billing. When I looked the former company up at Companies House it had actually changed name a couple of years ago and under its latest name had got appallingly bad references on the internet. Needless to say I decided not to do business with them.

Smithson Investment Trust (SSON) is now trading at a remarkable premium to net asset value of 7.4% according to the AIC after its recent IPO. Bearing in the mind the state of the market and the fact that it can hardly have yet invested the money raised (one might call it a “shell” company), it would seem investors are putting a high premium on the name of Terry Smith and his involvement in this trust. There must be investors out there who are purchasing shares at that premium to maintain this “discount” but that seems very unwise to me when most investment trusts have historically traded at a discount. The reason for this is quite simple – investment trusts incur costs in management and administration which reduces the yield and returns on the underlying shares they hold. Investors can always buy the underlying shares directly to avoid those costs. In the recent bull market and recognition of late of the merits of investment trusts, some have been trading at small premiums but a premium of 7.4% when the company has no track record and will be mainly holding cash seems somewhat unreasonable.

As I said when reviewing the IPO, it may be best to wait and see what transpires for this trust.

Patisserie (CAKE) and the recent General Meeting have been covered in several previous blog posts. I have previously mentioned that I was not happy that Luke Johnson did not answer my questions – he ruled them out along with a lot of others. When can a Chairman refuse to answer questions in a General Meeting? It was always judged to be matter of common law that questions should be answered but that has now actually been put into a Regulation.

I have written to Mr Johnson and my letter includes these paragraphs:

  1. As regards the conduct of the General Meeting, I suggest you not only handled it badly as Chairman but that refusing to answer my questions was a breach of The Companies (Shareholders’ Rights) Regulations 2009. There are valid grounds on which you can refuse to answer questions at General Meetings but the reason you gave for not answering mine (refusal to answer any questions that might prejudice the investigations) was not a valid one.
  2. Holding a meeting a 9.00 am is also not good practice. This note published by ShareSoc (and partly written by me) gives guidance on how to run general meetings, and includes references to the law on the subject: https://www.sharesoc.org/How_To_Run_General_Meetings.pdf

If you study the aforementioned regulations, you will see that the directors can refuse to answer questions that would require disclosure of confidential information or “if it is undesirable in the interests of the company or the good order of the meeting that the question be answered”. That may be quite broad but it hardly covers the questions I posed and the answers to my questions would certainly not have prejudiced any investigations.

I have therefore asked him to answer the questions in my letter. He may have other things on his mind, but all company directors should be aware of the law, or take legal advice when required.

Shareholders should not allow directors to ignore their responsibility to answer reasonable questions.

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.

Earthport Accounts, City of London IT and Patisserie

Earthport (EPO) is the latest AIM company to report that its past accounts are not all they should have been. Following a review by the new CEO and CFO, it seems there have been errors in reporting of forward foreign exchange transactions. This will result in fair value adjustments and a reduction of £6.3 million to £16.6 million in the net assets of the group at June 2017. Likewise adjustments are required to previous years. Reported earnings are also reduced although there is no cash impact.

This is a payments business which has been consistently loss making despite growing revenue. The former Chairman and CEO (who was still on the board as a non-exec director) have departed “with immediate effect”. This is surely yet another case of audit failure. Who were the auditors? Answer: RSM. But it’s worth reading their audit report in the 2017 Annual Report where they highlight some problems in the same area.

I do not currently hold shares in Earthport and this latest news is hardly likely to inspire confidence in the company from investors. After many years, the company has not proved it has a business model that can generate any profits.

Pressure of business meant I missed attending the City of London Investment Trust (CTY) Annual General Meeting on the same day as the Patisserie General Meeting. This is one of my most boring holdings as it’s mainly invested in large cap UK companies. But no problem in not attending the AGM in person because there is a recording of it available here: https://www.janushenderson.com/ukpi/content/trustslive?o_cc=c3926 . That even includes the question/answer session which was omitted in a previous year. If you watched it while it was taking place you could also submit questions. This approach is to be highly commended.

The interesting comment I noted from fund manager Job Curtis was that they had recently put more money into the market and were gearing up. He clearly perceives there are value opportunities in the market after recent declines. Others seem to agree with him because the market is now picking up.

Just one postscript on the Patisserie (CAKE) General Meeting. Lombard in the FT (Matthew Vincent) questioned this morning whether placings were the only option. He suggests the company could have delayed and done a rights issue. This is basically the same issue that was raised at the Meeting by some shareholders. But it’s very unrealistic to suggest that was a viable option. In reality I think the appetite for a rights issue would have been very low because of the lack of financial information on the current position of the company. I certainly would not even have participated in the placing! Undertaking a rights issue when there was great uncertainty about the level of support would hardly have been recommended by any advisors. In addition it would have taken a lot longer to do that than it took to do the first placing. Time is of the essence in the circumstances the company faced and looking for bankers to fill the delay hardly looks realistic to me either.

I suggest Luke Johnson took the only reasonable steps available and he should be thanked for saving the business. Shareholders should be very glad that the company did not get stuffed through a pre-pack administration which is what I rather expected would happen, in which case they would have lost everything.

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

Yu Group Crashes, Patisserie Holdings LTIPs and Audit Quality

The latest example of defective accounts in small cap companies is Yu Group (YU.) who announced this morning that accrued income had not been recognised correctly, that trade debtors need impairing and gross margins will not be as expected. The result will be a £10 million reduction in profitability when compared with current market expectations so there will be a loss for the current financial year. The shares are down over 80% at the time of writing.

Yu Group are a utility supplier to SMEs and listed on AIM in 2016. It would seem likely that these problems go back into past years. The auditors are KPMG.

The latest announcement from Patisserie Holdings (CAKE), after a note published in the FT yesterday on directors’ share options and their exercising is a clarification of the LTIPs. It ends by saying that “The Company, as part of the on-going investigation, is seeking to understand why the grant of options relating to 2015 and 2016 have not been appropriately disclosed and accounted for in its financial statements”. So that looks like another bit of bad news as one might expect now that everyone is looking very carefully at the past reporting by this company. But this is surely another matter that should have been picked up in the last audit.

It’s not just small companies that have audit problems. BHS and Carillion are recent examples of large companies where the reported accounts were suspect. How to improve the quality of audits? One big issue in my view is the fact that audits are often priced as low as possible to get the business. Companies tender for audit services and they are likely to pick the lowest cost bid, thereby relying on regulations to ensure that the standard is acceptable. Most company directors believe their internal systems are good and their staff trustworthy, so why should they spend a lot of money on an independent review of same? Meanwhile audit firms use audits as a loss-leader to build a client relationship that enables them to obtain much more lucrative consultancy work.

One change that would improve matters would be to ban audit firms from taking on non-audit work from the same client.

Another improvement would be to have someone else than the directors appoint the auditors. It has been suggested that an independent body be set up to do that, but perhaps the best solution is to have shareholders select and appoint the auditors via a shareholder committee. Shareholders have the most interest in seeing accurate accounts published and shareholder committees have many other advantages, as has been advocated by ShareSoc of late.

Regulation only ensures adherence to high standards if the penalties for getting anything wrong are severe. But that is not the case at present. Very few cases of defective accounts ever result in the auditors being severely penalised because they have numerous possible excuses for not discovering what was wrong. The Financial Reporting Council (FRC) needs to get tougher and be less dominated by the audit profession.

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.

Brexit Prevarication, The Company, Sarbanes-Oxley and Patisserie Holdings (CAKE)

Prevarication definitions: delaying giving someone an answer, or avoiding telling the whole truth. Theresa May’s suggestion for an extension of the Brexit transition period surely smacks of prevarication and all sides of the Brexit debate saw it for what it was. The result is some furious back-peddling by the Prime Minister. Putting off decisions usually does not make them any easier. It is not at all clear what the PM’s strategy is here. Was she perhaps hoping to put off Brexit negotiations until after the next election when she might have a bigger majority and will not have to rely on the DUP? As the EU has been saying, she needs to spell out what arrangements the UK wants and preferably ones that are likely to be acceptable to the EU – otherwise gear up now for a hard Brexit.

One of the problems with a hard Brexit would be the likely tariff barriers to both exports and imports. The economy might quickly adapt to those but it was interesting reading a book named “The Company” by John Micklethwait and Adrian Wooldridge – I am doing some research on the way joint stock companies developed to see how we got to where we are, which the book covers well. One interesting paragraph covers what happened after the first world war when protectionism rose and the US and UK introduced tariff barriers on certain goods. That is why Ford and GM set up car plants in the UK which was a strategy to get around those barriers. So if we have a hard Brexit, we might see the same response – UK companies will set up European subsidiaries and vice-versa. Smart businessmen are experts at getting around political problems!

The book “The Company” is highly recommended as an easy read on the development of companies, but it is not very complimentary about the amateur UK management in comparison with the professional managers of big US, German, Japanese, etc, companies. Competent and well-trained professional management seems to be a lot more important than particular legal or corporate governance structures.

Another section of the book covers the debacles of Enron and Worldcom which were massive frauds hidden by defective auditing (which also caused the collapse of Anderson) after which a new Act was passed in the USA – the Sarbanes-Oxley Act. This required not just rotation of audit partners, but to quote from the book: “The law also requires CEOs and chief financial officers to certify the accuracy of their financial reports, and it creates a new crime of securities fraud, making it punishable by up to twenty-five years in jail”. It also enabled claw-backs of executive compensation for misconduct.

Although there has been some criticism of Sarbanes-Oxley in the USA for adding onerous obligations on companies, and hence adding to costs, perhaps that was a result of the way it was implemented that was over-zealous. But surely it is this kind of legislation that is required in the UK if we are to clean up the financial reporting and auditing of companies after so many recent failures. Making the publishing of false accounts a criminal offence with severe penalties would be a good starting point.

One such recent example is of course the small company Patisserie Holdings. There was an interesting article in Shares Magazine this week where the Editor pointed out that the case was similar to that of Tesco. In 2017 the Financial Conduct Authority (FCA) forced that company to compensate certain shareholders for publishing false accounts on which basis they had invested. See https://www.fca.org.uk/publication/final-notices/tesco-2017.pdf for the FCA Notice on the matter. This decision was based on the fact that it was considered to be market abuse to make false announcements, and hence a false market was created. Although Patisserie is an AIM company, it is probably covered by the same market abuse regulations. So this issue might be a question for the General Meeting of Patisserie on the 1st November. Will Patisserie need to provide for such financial compensation before the FCA forces them to, which could be substantial if the alleged financial fraud had been going on for many months? The answer might not just interest past investors but those who are purchasing shares in the placings.

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.

Fishing Republic, Pattiserie and Smithson Trust

Fishing Republic (FISH) shares have been suspended and it looks like it’s run out of money with folks unwilling to finance it further. A new CEO was about to join but now is not. I have never held shares in this company so I just had a quick look at the history of its listing on the AIM market.

It listed in 2015 with an initial market cap of £2.7 million – yes it always was a small business. The share price rose as high as 46p as it went for growth, but was 5.22p when suspended. The last interim results looked terrible – loss of £2.5 million on revenue of £3.4 million. The company suggested its problems were down to competitive pressures and tough market conditions, but it looks to me more a simple case of mismanagement. Was there really a big market for fishing tackle where fishing enthusiasts would pay good money for such kit in any case?

This is probably going to be just the latest poor-quality business, or ones with unrealistic ambitions, to disappear from the AIM market which has been shrinking. It’s now down to 937 companies when it was nearly 1,700 in 2007. That near halving in the number of companies has probably improved the overall quality of the market with an emphasis on larger companies now. That’s probably good for investors.

Hindsight always makes the problems look obvious of course. In the case of Patisserie Holdings (CAKE) I have seen it said that the cakes were boring, the shops often empty and it seemed odd that they could make good profits in such a competitive sector. The first two I discounted because that was not my experience of visiting their cafes (I always try to sample the wares of companies I invest in). As regards the latter issue, we await more information, but Whitbread have just flogged off their Costa coffee chain for an enterprise value of £3.9 billion, representing a multiple of 16.4 times FY18 EBITDA. That’s a rich price for a similar business in a competitive sector with no obvious barriers to entry is it not?

Shareholders in Patisserie Holdings can attend the General Meeting at 9.0 am on the 1st November to approve the second share placing, and ask some questions. That’s a very inconvenient time for many shareholders and is certainly not “best practice”.

The UK stock market seems to have stabilised somewhat after recovery in the US. It’s always worth having a quick look at the S&P 500 to see how it is trending if you wish to know where the UK market is going to go. This should bode well for the launch of the Smithson Investment Trust which raised its fund-raising limit and will be the biggest ever UK investment trust launch at £822 million. Dealings will commence on the 19th October, but best to wait and see how it performs longer-term in my view. There’s obviously some short-term enthusiasm for another fund from the Terry Smith stable regardless of having no track record.

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 – Hidden Overdrafts but Where’s the Other £18 Million?

The Sunday Times ran some articles on Patisserie Holdings (CAKE) today including an interview with Chairman Luke Johnson. It seems the one big hole in the accounts was hidden overdrafts with Barclays and HSBC totaling £9.7 million. But where’s the rest of the £28 million that was claimed to be held as cash in the interim balance sheet?

Mr Johnson is quoted as saying “There was criticism that I was stretched too thin – fair criticism”. He has promised to reduce his commitments and will even stop writing his column for the Sunday Times.

There is currently speculation about the value of the company and what the share price might be when listing is restored. It’s not difficult to work out what the earnings might be from Mr Johnson past comments about current trading, but there will be one enormous write-down likely in the Annual figures which may well be reported late with previous years restated. The big unknown is what else is unknown. Also existing shareholders may sell in droves as once investors lose confidence in management, they often dump their shares as a way of forgetting the trauma. It might take a long time, even years, to restore confidence in the company and it’s very unlikely to trade on a p/e of 25 which is what it was at before the suspension.

Forecasting likely earnings and hence the share price in future is a mug’s game at this point in time so I will not even attempt to do so. Any new investors keen to pick up the stock will simply be speculating. Those who already hold the stock will need to consider carefully whether they want to wait long enough for a possible recovery.

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.