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 )

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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 )

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Patisserie Rescue Bid and Closing Accounts

It looks like Luke Johnson’s reputation will not be totally trashed after all after he announced a way for the company to be rescued today. It is proposed to do a placing at a heavily discounted share price of 50p (last price before suspension was 429p). This will raise £15 million from the issue of 30 million shares. The current shares in issue are 104 million so that implies substantial dilution although I have seen worse.

It will take some time to organise the placing as it requires a General Meeting to authorise the full number of shares required. In the meantime Mr Johnson is to loan the company an immediate £10 million on a three year term and interest free (that is generous is it not). In addition he will provide a further immediate bridging loan of £10 million which will be repaid out of the placing.

The directors estimate the current revenue run rate at £120 million per annum with EBITDA of £12 million although that is clearly based on only an initial review so is subject to doubt.

Apart from the usual problem that most placings are not open to private investors, this looks a good deal and much better than the likely alternatives. If this is pulled off, it seems my small holding in the company won’t be totally worthless after all.

There has been much hand wringing among financial commentators about the fact that the fraud was not obvious from the accounts of the company. That’s assuming the cash was not stolen in the last few months which seems unlikely although at this point in time we do not know. But false accounting is often not obvious. It could be many months before we find out what the source of the problem was, and whether the auditors fell down on the job or not, but it’s good to hear that the company’s finance director, Chris Marsh, was arrested by the police. It looks like prompt action by the regulatory authorities is being taken which is often not the case.

Recently I had a call from Cornhill who I am registered with for placings. They wanted to go through a long conversation to confirm my KYC details even though I had only given them very comprehensive information eighteen months ago and I was happy to confirm that nothing had changed. After a lot of pointless debate, I told them to close the account (and the linked account with Jarvis – total cash held £1,600 and no shares). This they refused to do initially unless I provided more evidence of who I was and the bank account I wanted the money sent to (which was the one already known to them). I had to threaten then with a complaint to the FCA and the Financial Ombudsman for wasting my time before they eventually backed down.

This is compliance gone mad. It’s difficult enough to open an account now, but it should not be that difficult to close one.

Anyway I might be missing out on any placing for Patisserie as a result but I feel life is too short to waste time on tedious KYC checks.

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

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CAKE (Patisserie), Foresight 4 VCT AGM, Payment Companies and Dunelm

More bad news from Patisserie Holdings (CAKE) today – well at least you can’t say the directors are not keeping you informed about their dire situation which is not always the case in such circumstances.

Yesterday the company announced that its major operating company had received a winding-up petition from HMRC, of which the directors had only recently become aware. Today the company said after further investigation the board has reached the conclusion that without an “immediate injection of capital, the Directors are of the view that there is no scope for the business to continue trading in its current form”.

The directors could possibly try to do a quick placing at a deep discount no doubt, borrow a pile of cash at extortionate rates or they could put it into administration. The big risk is that Exec Chairman Luke Johnson will put it through a pre-pack administration. I hope he does not because that won’t do his reputation any good at all. He needs to try and engineer some sensible solution if his reputation in the financial world is to remain intact. That is particularly so after he wrote an article for the Times in September on “a beginner’s guide to tried and tested swindles” suggesting how you can spot them. Clearly he was not taking his own advice. Whatever happens, the outlook for existing shareholders does not look good.

As another commentator said, the Treasury should not reduce the generous tax reliefs on AIM companies because they need to realise that it is a risky market.

But there was some good news on cake yesterday when the Supreme Court decided after all in an appeal from the lower courts that a cakemaker can refuse to bake cakes where the proposed wording in the icing is objectionable to them. A victory for common sense and liberty.

Today I attended the Annual General Meeting of Foresight 4 VCT (FTF). There is one advantage to owning VCT shares. They barely move when the stock market is otherwise in panic mode. They are one of the few “counter-cyclical” investments to public companies as they invest in private equity. There are some disadvantages of course. Illiquidity in the shares, and often disappointing long-term performance as in Foresight 4. But it may be improving.

I won’t cover the meeting in detail but there were a couple of interesting items in fund manager Russell Healey’s presentation. He mentioned they are still having problems with long delays on HMRC pre-approval of new qualifying investments – can still delay deals for a few months it seems. More representations are being made on this.

He also covered the performance of their top few investments. Datapath, the largest, was valued down because EBITDA fell but revenue is still growing and the fall in profits arose from more product development costs. Ixaris, the second largest, is growing strongly (I knew this because I have a direct holding in it and had just read the December 2017 accounts they filed at Companies House). From my recollection that’s the first year they have made a profit since founding 16 years ago. Russell couldn’t remember how many funding rounds the company had launched – was it 6 or 7, and me neither. That’s venture capital in early stage companies for you – you have to be very patient.

However, in response to a question from VCT shareholder Tim Grattan it was disclosed that VISA are tightening up on the rules regarding pre-payment cards. This might affect a significant part of Ixaris’s business. I suspect it will also affect many other pre-payment card offerings by payment companies, some of whom are listed. Particularly those that are using them to enable payments into gaming companies which Visa does not like.

It was another bad day in the market today, although Dunelm (DNLM) picked up after a very positive trading statement with good like-for-like figures. They are moving aggressively into on-line sales but their physical stores also seem to be producing positive figures so perhaps big retail sheds are still viable. They are not in the High Street of course.

While the market is gyrating I am doing the usual in such circumstances having been through past crashes. Will the market continue to go down, or bounce back up? Nobody knows. So I tend to follow the trend. But I also clear out the duds from my portfolio when the market declines – at least that way I can realise some capital gains losses and reinvest the cash in other shares that are now cheaper. I also look carefully at those stocks that seem to be wildly over-valued on fundamentals – those I sell. But those that suddenly have become cheap on fundamentals I buy, or buy more of. In essence I am not of the “hide under the sheets” mentality in the circumstances of a market rout as some are. But neither do I panic and dump shares wholesale. This looks like a short-term market correction to me at present, after shares (particularly in the USA) became adrift from fundamentals and ended up looking very expensive. But we shall no doubt see whether that is so in the new few days or weeks.

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

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Revenue Recognition, Patisserie Valerie, Utilitywise and Cryptocurrencies

Revenue recognition is a hot topic at present as folks have come to realise that this is a frequent cause of company accounts misrepresenting the true state of the business. Quindell and Blancco are two examples and I cover Utilitywise below. But first let me report on the Annual General Meeting of Patisserie Valerie (TIDM:CAKE) which I attended this morning (as a shareholder of course).

The company operates a chain of cake+coffee shops under the company name but they also have several other brands. However they seem to be concentrating on the Patisserie Valerie one in terms of new openings. This is a typical “retail roll-out” story where they just open more outlets – fixed costs do not increase in proportion so profits grow rapidly. They plan to open about another 20 stores per year at present. The company is run by Executive Chairman Luke Johnson who owns 38% of the company.

Having read the Annual Report I asked a question on revenue recognition because on page 16 it says “revenue recognition has been identified by the audit team as a significant risk”. Perhaps the auditors are now hedging their bets by putting that in all company reports but I found it rather surprising bearing in mind that I expected most customers would be paying cash in the cafes. Indeed the CFO indicated 80% of revenue is in cash. They do issue promotional vouchers but these are not recognised as revenue until used. However they do have some wholesale customers and franchise deals with companies such as Sainsbury where payments are delayed. This explains why they have significant trade accounts receivable at £12.3 million on revenue of £114 million. So I don’t think revenue recognition is likely to be an issue in this company.

Otherwise the AGM was fairly routine and we did get some cake at the end. There were about a dozen shareholders present in the City at one of their outlets. Luke Johnson is not a greatly impressive figure physically (first time I had met him) but answered questions openly. He noted profits were up 19% at £16.4 million. He said they opened 20 new stores and all were immediately profitable. Net cash was £25 million at the year end so they are well positioned for acquisitions if they arise, he noted. A couple of interesting questions from shareholders were:

  1. Is there any difficulty in attracting staff, particularly in London and the South-East. Answer: probably as hard as it has ever been, but they expect a lot of foreign staff to stay in the UK after Brexit and many are non-EU citizens anyway.
  2. Media have reported a possible acquisition of Gails, a similar chain (and partly owned by Luke Johnson I believe). Answer: cannot comment.

In summary, Patisserie Valerie is riding on the popularity of cake and coffee of late, but they are differentiated slightly from common coffee shops. They are also vertically integrated which keeps costs of the cakes low and as a result have good profit margins. Defending that position could be tricky but the business seems to be well managed.

Utilitywise (UTW), a reseller of utility power contracts, has had its shares suspended after failing to file accounts within the timescale required by the AIM market rules. To quote from the company’s announcement: “This delay is due to the volume of work still required to be completed by the Company and its auditor to cater for the proposed change in the Company’s revenue recognition policy, as announced on 17 January 2018. This work includes amendments to the Company’s financial reporting systems in order to analyse energy contract data in accordance with that new policy, alongside associated work by the Company’s auditor, for the audit of its results for FY17 to be completed.”

Now I don’t currently hold this company’s shares but I did briefly from December 2013 to July 2014. The more I learned about the way revenue and profits from contracts entered into that covered future periods were recognised, the more concerned I became. Revenue was still reportedly growing rapidly in 2014 but I sold at about 260p. The share price recently was near 40p.

In my book, revenue and the associated profits from long-term contracts should not be recognised until the cash comes in. But that’s not the way accountants like to handle matters at present. Part of the difficulty lies in costs expended in the short term to obtain or develop the contracts so matching costs with revenue, a basic accounting principle, is a problem.

Lastly I think it is worth mentioning cryptocurrencies, initial coin offerings, bitcoin and blockchain technology. These are all hot subjects that I do not think I have covered before which is probably a gross omission.

Blockchain technology is interesting. It’s basically an “open ledger” which might have many applications, although whether it is really any good for really high volume transaction processing seems to be in doubt. Many banks and other financial institutions seem to be looking at it but it is not altogether clear why they need it (are not existing systems and software adequate enough? Perhaps they are just a bit archaic?). It may be lower cost and simplify development but it potentially has great weaknesses.

For example, Coincheck, the “Leading Bitcoin and Cryptocurrency Exchange in Asia” as they style themselves, recently suffered a hack that meant $500 million has disappeared into the hands of the perpetrators. They have promised to reimburse affected customers but it seems highly unlikely that they have the financial backing to do so.

This is not the first such time this has happened. Another case was that of MtGox which became bankrupt after a similar fraud. So it seems bitcoin systems are not as secure as one might have hoped.

One reason internet fraudsters like payments in Bitcoins is allegedly because they cannot be traced. So does that mean there is no audit trail so one cannot trace where the funds come from and where they go to? This is a major defect in any transaction system which suggests to me that Bitcoins and other similar currencies based on blockchain technology should be promptly regulated by all countries as soon as possible. There may be a need to have a “virtual” currency not controlled by any one Government, but unless it is secure with proper audit trails on its movement, it is not fit for purpose.

The Financial Conduct Authority (FCA) should be looking at this area and pronto before the wide boys of the financial world exploit gullible folks and fraudsters take advantage of its defects.

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

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