Burford Capital, Goals Soccer Centres, Carillion, and Why Numbers Are Not Important

To follow on from my previous comments this morning on Burford Capital (BUR), this is a typical “shorting” attack where the shorter (Muddy Waters) and their supporters make a lot of allegations which investors are unable to verify in any useful time frame. I certainly questioned the accounting approach used by Burford and other litigation finance firms as I commented on it back in June, but disentangling the factual accusations in the Muddy Waters dossier from innuendo and comment is not easy.

It is surely wrong for anyone to make such allegations and publicize them with the objective of making money from shorting the stock without first asking the company concerned to verify that what they are alleging is true – at least as far as the facts they report are concerned rather than just their opinions.

The company may threaten legal action for libel where misleading or inaccurate information is published but in practice such law suits take so long to conclude, with major practical problems of pursuing those who are resident overseas while actually worsening the reputational damage rather than improve it that few companies take that route.

This is an area of financial regulation that does need reform. In the meantime the damage to Burford is probably likely to persist for many months if it ever recovers.

What is the real moral of this story so far as investors are concerned? Simply that trusting the financial accounts of companies when picking investments is a very poor approach. This was reinforced by more news about the accounting problems at Goals Soccer Centres (GOAL) which I also commented on previously. Apparently a report to the board by forensic accountants suggests that the former CEO corroborated with the former CFO to create fictitious documents including invoices (see FT report on 3/8/2019). Clearly the audits over some years failed to pick up the problems. In addition it looks like the demise of Carillion is going to be the subject of a legal action against their former auditors (KPMG) by the official receivers. Financial accounts, even of large companies such as Carillion, simply cannot be trusted it seems.

This is not just about poor audits though. The flexibility in IFRS as regards recognition of future revenues is one of the major issues that is the cause of concerns about the accounts of Burford, as it was with Quindell – another case where some investors lost a lot of money because they believed the profit statements.

This seems an opportune moment to mention a new book which is in the process of being published. It’s called “Business Perspective Investing” with a subtitle of “Why Financial Numbers Are Not Important When Picking Shares”. It’s written by me and it argues that financial ratios are not the most important aspects to look at when selecting shares for investment. Heresy you may say, but I hope to convince you otherwise. More information on the book is available here: https://www.roliscon.com/business-perspective-investing.html

There are some principles explained in that book that helped me to avoid investing in Burford, in Quindell, in Carillion, in Silverdell and many of the other businesses with dubious accounts or ones that were simple frauds. These are often companies that appear to be very profitable and hence generate high investor enthusiasm among the inexperienced or gullible. It may not be a totally foolproof system but it does mean you can avoid most of the dogs.

With so many public companies available for investment why take risks where the accounts may be suspect or the management untrustworthy? One criticism of Neil Woodford is that his second biggest investment in his Equity Income Fund was in Burford. If you look at his other investments in that and his Patient Capital Trust fund they look to be big bets on risky propositions. He might argue that investment returns are gained by taking on risk which is the conventional mantra of investment professionals. But that is way too simplistic. Risks of some kinds such as dubious accounts are to be avoided. It’s the management of risk that is important and size positioning. The news on Burford is going to make it very difficult for Woodford’s reputation as a fund manager to survive this latest news.

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

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Goals Soccer Centres, Renishaw, Economic Forecasts, Politics and Portfolio Transfers

It’s Friday in August, the markets and the pound are falling, the Conservative Party have lost a bye-election meaning their majority in Parliament is vanishing, and the Governor of the Bank of England has forecast a shrinking economy as a result of Brexit. It’s gloom all around which explains the falling UK stock market today. But Mark Carney is only forecasting a 33% chance of a contraction in the UK economy in the first quarter of 2020, which means that there is a 67% chance it won’t and even then for only a short period of time. That’s assuming you have any confidence in Bank of England forecasts which are notoriously unreliable. The media are not exactly reporting matters in an unbiased way. Those who support Brexit are unlikely to be worried by such forecasts and they would probably accept a temporary disruption to the economy. Remaining or leaving the EU was never a primarily economic decision so far as Brexiteers were concerned – it’s about democracy and who makes our laws.

But there is certainly bad news for investors in Goals Soccer Centres (GOAL) who have reported that the defects in their accounting go back to at least 2010. The 2018 audit has had to be suspended, there is no time frame for producing the accounts and therefore the company is going to be delisted from AIM. This looks to be another example of defective audits – the past auditors were KPMG and BDO.

I have complained about the length of time it takes to switch portfolios between investment platforms in the past. The good news today is that I finally completed one. This latest one I have done has taken from the 23rd May to the 31st July, i.e. 70 days. And that’s one where it was a transfer of holdings in a personal crest account with Charles Stanley, after they raised their charges on such accounts, to another personal crest account with another provider which was already in existance. That should have been very simple as there were no fund holdings in the account – just all direct holdings on the register.

It is really quite unreasonable that account transfers should take so long and require so much effort, including numerous emails and letters to get it completed. It’s anti-competitive to allow such delays to continue.

Well at least that’s one simplification of my portfolios. I also sold out from Renishaw (RSW) yesterday after disappointing final results – revenue down 7% and below forecasts mainly as a result of alleged economic conditions in the Asia Pacific region. The share price is down another 5% this morning at the time of writing. This may be a fundamentally sound business with good products in essence but clearly investors like me are losing confidence that the company can justify its high p/e rating when growth is going into reverse.

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

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Another Accounting Scandal – Goals Soccer Centres

Yet another problem in accounting has been revealed at Goals Soccer Centres (GOAL). This morning they disclosed in a trading update the discovery of “certain accounting errors” and are reviewing their accounting practices. As a result, the board now expects full year results to be below expectations and publication of the 2018 results has been delayed.

The even worse news is that they have breached their banking covenants so are having to have one of those difficult conversations with their bankers. The share price has fallen 30% this morning (at the time of writing).

Goals is an operator of soccer pitches which listed on AIM as long ago as 2004. Revenue has been flat for the last few years and profits variable. Net debt approximates to revenue which is never a good sign. The company changed auditors from KPMG to BDO in June 2018 and in July 2018 the CFO resigned from the board “with immediate effect” to join his family business but continued in his role as CFO. A new “interim” CFO was not appointed until the 15th January 2019.

After this “own goal”, the company suggests it “will take a more prudent approach” in future. But it reinforces the need to reform the accounting and auditing professions because we are very likely to be told that this issue extends back for more than one year.

Note: I have never held shares in this company despite the fact there was some enthusiasm for it among investors at one time. The share price peaked at 425p in late 2007 but it’s been steadily downhill since. It’s now 38p. I was always doubtful whether there was any real money to be made enabling amateurs to play soccer.

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

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