Profit Warnings at XP Power and Ted Baker, plus Mercia Placing

A number of profit warnings this morning. The most interesting to me was at XP Power (XPP) although I do not hold it. It was interesting because as a former IT Manager it is a good example of how to screw up a business by poor IT management.

In this case their problem is an implementation of a new SAP Enterprise Resource Planning (ERP) system. The announcement this morning says that some short-term disruption to shipments “will result in revenues and adjusted profits before tax for 2019 being below current market consensus”. However they say the outlook for 2020 is unchanged. The fact that this may be only a temporary situation and that investors look ahead is no doubt why the share price has not fallen but has actually risen slightly at the time of writing.

As I said in my recently published book: “Many businesses fail, or perform badly, because their internal systems and operations are defective. Reliable and effective IT systems are enormously important in the modern world….”. It is something that investors do need to look at and when a company says it is implementing a new ERP system you need to be wary. Just look at the costs of a failure of new IT systems at Abcam for example.

Ted Baker (TED) issued another profit warning (I do not hold it). The share price has dropped another 15%. They report that “trading over November and the Black Friday period was below expectations, with lower than anticipated margins and sell through”. They anticipate that difficult trading conditions will continue. This looks like another casualty of the problems on the High Street, but even their e-commerce sales fell slightly. That result is even after more promotional activity which has cut margins. The dividend has been suspended and costs are being cut.

It’s worth commenting on the placing by Mercia Asset Management (MERC) to partly fund the acquisition of NVM Private Equity and for other purposes. Mercia invests in smaller unlisted companies, in other words it’s a private equity investor. I do not hold the shares although I did invest alongside them in an EIS company back in 2013. It was a start-up fintech business which is now moribund so both they and I have written it off, but I don’t hold that against them. It just proves how risky such investments can be and hence the difficulty of valuing the investments they hold. This kind of investment company deserves to trade at a substantial discount to their claimed NAV in my view (as do most VCTs which are similar companies).

NVM manage the Northern VCTs (NVT and NTV) which I do hold so I have an interest thereby in the acquisition. I have no objection to that acquisition and it certainly looks a sensible strategic move for Mercia as it will grow their assets under management very considerably and provide a much more stable source of income. However, the placing to fund this acquisition, which as usual private investors were not able to participate in, was done at a 23% discount to the pre-announcement share price. This kind of large discount does not give me confidence in the management that minority shareholders will not get screwed again in the future.

This placing also received severe criticism from Simon Thompson in Investors Chronicle. He has previously tipped the shares partly on the basis that there was value here because of the high discount to NAV. Well he is now disillusioned because the placing was at a discount of 40% to NAV, with a large dilution of existing shareholders! He recommends voting against the placing at a General Meeting on the 20th December and I cannot disagree with him.

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

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