AB Dynamics Placing, and Metro Bank Troubles

AB Dynamics (ABDP) announced a placing to raise £5 million this morning. The money will be used to finance potential acquisitions, add production capacity and meet working capital requirements. This company provides vehicle testing systems and has been rapidly expanding recently. The share price has also been rising like a rocket in the last few weeks and on fundamentals the company is now very highly rated – prospective p/e for the current year is 47. So perhaps the company just saw this as a good opportunity to raise some money.

The new shares are being placed at 2200p though which is a discount of 13% to the share price last Friday. However although this is being done via a placing to institutional investors there is also an “open offer” for those such as private shareholders who cannot participate in the placing. This is the way to do such things and as a holder of the shares I will probably take up the open offer just so as to avoid dilution, although I don’t consider the price as particularly attractive. The share price dipped first thing this morning on the news but has subsequently recovered most of that fall.

Metro Bank (MTRO) has been in trouble since the start of the year when it disclosed it had wrongly risk-weighted some of its loans which meant its capital ratio was wrong. Metro is one of the so-called “challenger banks” that aim to tackle the dominance of the big high-street banks in the UK. The company did a placing to raise another £350 million last week to shore up its balance sheet.

But depositors have been spooked by the news and apparently there were queues of customers withdrawing money from branches in West London recently. Is this another run on a bank, as happened at Northern Rock? Where a falling share price and collapsing confidence in the bank caused depositors to panic? The FT ran an editorial saying it was not similar but it looks very much so to me. Although the Financial Services Compensation Scheme (FSCS) now protects deposits up to £85,000 that will not help many retail customers and the delays in obtaining compensation will encourage depositors to move all of part of their funds elsewhere and promptly. Corporate clients have no such protection anyway. When confidence in a bank is lost, even if it is technically solvent, depositors don’t hang around.

Here’s a good quote from eminent Victorian author Walter Bagehot: “Every banker knows that if he has to prove he is worthy of credit…in fact his credit has gone” (in another letter in the FT today).

From my experience of trying to open an account with Metro Bank recently, I have doubts about the quality of this business anyway. I gave up in the end. Needless to say I don’t hold shares in Metro. But all banks are becoming exceedingly difficult to deal with. My long-standing (over 50 years) bank recently made me visit a branch to prove who I was. There was a letter complaining about the service from banks in the FT on the 15th May. It suggested that “something has gone badly wrong” with frontline bank service. I had similar problems with a business account at HSBC who proved impossible to talk to other than by visiting one of their branches – and even then they were unable to resolve difficulties. It is extremely annoying that banks are becoming paranoid about KYC and security checks so that they won’t even talk to you on the telephone about simple queries.

If any readers can recommend a bank who acts more reasonably and sensibly, let me know.

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

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Metro Bank, Improving Accounts, Patisserie, Telford Homes and GoCompare

The latest example of a public company publishing misleading accounts is Metro Bank (MTRO). Both the FCA and PRA (the bank regulator) are looking into the “misclassification” of some loans which resulted in the bank overstating its regulatory capital. The result was that it has had to do an equity share issuance to bolster its capital.

There was a very good letter to the FT today on the subject of improving accounting and audits from Tim Sutton. He suggested the US Sarbanes-Oxley Act had improved the standards in the USA enormously so that revision of financial statements has been declining. To quote: “Section 404 requires management to assess and report annually on the effectiveness of the company’s internal control structure and procedures. In addition, the company’s external auditors must attest to the effectiveness of those controls”. As he points out that might have prevented the fraud at Patisserie (CAKE), and no doubt avoided the issues at Metro and other companies. It sounds an eminently good idea. I realise Sarbanes-Oxley did receive some criticism in the USA after it was first introduced due to the extra costs it imposed, but if that is the only way to ensure reliable accounts, I suggest it is worth paying. It was perhaps over-complicated in implementation in the USA but some of the key features are worth copying.

This morning Telford Homes (TEF) published a trading statement which was mostly bad news and the shares fell over 15%. This is a London focused housing developer which I used to hold but I got nervous some months ago about the housing market in the capital. You can read my acerbic comments made in last October here: https://roliscon.blog/2018/10/10/black-hole-in-patisserie-holdings-audit-review-telford-homes-and-brexit/

The latest announcement says that “the London sales market remains subdued”. Sales are being achieved but at a slower rate and margins are under pressure due to increased incentives and discounts. So they are putting an increased focus on “build-to-rent”. Other bad news is that contracts are being delayed on larger projects, partly due to planning delays. The result will be profit before tax for FY2020 will be significantly below FY2019.

Another announcement this morning was the preliminary results from GoCompare (GOCO). This is a price comparison web service, particularly focused on car insurance, but also covering utilities and other products. It is of course fronted by Italian opera singer Gio Compario in TV advertisements which I certainly prefer to the Moneysupermarket ones.

It was particularly interesting watching the results presentation – probably available as a recording on their web site. Results were much as forecast, with only a slight increase in revenue but a 20% increase in adjusted earnings. This is due to optimisation of marketing. You can see that these kinds of companies have to spend an enormous amount on marketing to catch customers when they are thinking of switching suppliers. GOCO spent £80 million on marketing last year, down from £89 million) to achieve revenue of £152 million.

They have made acquisitions to diversify revenue and this has led to an increase in debt, but the interesting news was about a new subscription service called WEFLIP. This automatically switches your energy supplier, among a panel of agreed suppliers, if you can potentially save £50. This will enable them to retain customers, with the suppliers paying the subscription fee. They plan to spend £10 million on marketing this in the coming year and have already done a “soft” launch to ensure the product and market are OK. Clearly though, this might be perceived as a bit of a gamble.

The market was unimpressed and the shares have fallen by another 5% today after a long decline in recent months. It’s now on a prospective p/e of less than 9 and yield of about 3%. I remain a holder at those levels.

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

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