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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Lehman Collapse, Labour’s Employment Plans, Audit Reform Ideas and Oxford Biomedica

There was a highly amusing article in today’s FT by their journalist John Gapper explaining how he caused the financial crisis in 2008 by encouraging Hank Paulson, US Treasury Secretary, to resist the temptation to rescue Lehman Brothers. So now we know the culprit. Even more amusing was the report on the previous day that the administrators (PWC) of the UK subsidiary of Lehman expect to be left with a surplus of £5 billion. All the creditors are being paid in full.

Why did Lehman UK go bust then? They simply ran out of cash, i.e. they were cash flow insolvent at the time and could not settle payments of £3bn due on the day after their US parent collapsed. Just like Northern Rock where the assets were always more than the liabilities as also has been subsequently proven to be the case.

Perhaps it’s less amusing to some of the creditors of Lehman UK because many sold their claims at very large discounts to third parties rather than wait. Those that held on have been paid not just their debts but interest as well. So the moral is “don’t panic”.

Lehman’s administration is in some ways similar to the recent Beaufort case. Both done under special administration rules and requiring court hearings to sort out the mess. PWC were administrators for both and for Lehman’s are likely to collect fees of £1billion while employing 500 staff on the project. It may yet take another 10 ten years to finally wind up. Extraordinary events and extraordinary sums of money involved.

An editorial in the FT today supported reform of employment legislation as advocated by Labour’s John McDonnell recently. He proposed tackling the insecurity of the gig economy by giving normal employment rights to workers. I must say I agree with the FT editor and Mr McDonnell in that I consider that workers do have some rights that should be protected and the pendulum has swung too far towards a laissez-faire environment. This plays into the hands of socialists and those who wish to cause social unrest. Even the Archbishop of Canterbury suggested the gig economy was a “reincarnation of an ancient evil” and that it meant many companies don’t pay a living wage so employees rely on state welfare payments. A flexible workforce may give the country and some companies a competitive advantage but it takes away the security and dignity of employment if taken to extremes. The Conservative Government needs to tackle this problem if they wish to be certain of getting re-elected. If you have views on this debate, please add your comments to this blog.

Mr McDonnell also promoted the idea of paying a proportion of a company’s profits to employees – effectively giving them a share in the dividends paid out. That may be more controversial, particularly among shareholders. But I do not see that is daft either so long as it is not taken to extremes. After all some companies have done that already. For example I believe Boots the Chemists paid staff a bonus out of profits even when a public company.

Another revolutionary idea came from audit firm Grant Thornton. They suggest audit contracts should be awarded by a public body rather than by companies. This they propose would improve audit standards and potentially break the hold of the big four audit firms. I can see a few practical problems with this. What happens if companies don’t judge the quality of the work adequate. Could they veto reappointment for next year? Will companies be happy to pay the fees when they have no control over them. I don’t think nationalisation of the audit profession is a good idea in essence and there are better solutions to the recent audit problems that we have seen. But one Grant Thornton suggestion is worth taking up – namely that auditors should not be able to bid for advisory or consultancy work at the same company to which they provide audit services.

Oxford Biomedica (OXB) issued their interim results this morning (I hold the stock). They made a profit of £11.9 million on an EBITDA basis. OXB are in the gene/cell therapy market. What interests me is that there are some companies in that market, at the real cutting edge of biotechnology with revolutionary treatments for many diseases, that are suddenly making money or are about to do so. That’s often after years of losses. Horizon Discovery (HZD) which I also hold is another example. Investors Chronicle recently did a survey of similar such companies if you wish to research these businesses. It is clear that the long-hailed potential of cell and gene therapy is finally coming to fruition. I look forward with anticipation to having all my defective genes fixed but I suspect there will be other priorities in the short term particularly as the treatments can be enormously expensive at present.

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

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