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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Should I Buy Smithson Investment Trust?

I am a great fan of Terry Smith and his investment approach. As an investor in his Fundsmith Equity Fund, I have seen annual returns of 21.7% according to ShareScope since I first purchased it in 2014. That fund is a global large cap fund. Terry has now launched a small and mid-cap investment trust based on similar investment principles which is called the Smithson Investment Trust. Subscriptions are being invited here: https://www.smithson.co.uk/

The Fundsmith Equity Fund is an open-ended fund whereas Smithson is a closed-end investment trust so may trade at a premium or a discount to net asset value (NAV). Fundsmith already have another investment trust in their stable – the Fundsmith Emerging Equities Trust (FEET) which was launched in 2014 and had a disappointing initial performance, but it has done better of late. It has consistently traded at a premium to NAV and is now at 1.5%. That is not common for investment trusts and rather shows the confidence investors have in Terry Smith and his team.

Smithson will be following the same investment philosophy as the main Fundsmith fund – namely “Buy good companies, “Don’t overpay” and “Do nothing”, i.e. they will not be active traders and will have a low stock turnover.

The “Owner’s Manual” for Smithson is worth reading. The focus will be on companies with an average market cap of £7 billion, so these are not going to be really small companies. The document argues that small and medium size companies have outperformed larger companies which is probably true in recent times. Hence the investment saying “elephants don’t gallop” originally attributed to Jim Slater.

The Owner’s Manual makes some interesting comments about their preference for companies with intangible assets as opposed to physical ones. To quote: “Intangible assets, on the other hand, are much more difficult to replicate. They are typically not ‘bankable’ in the sense of being able to borrow debt against them and so require more equity and long- term illiquid investment to build them, for which rational investors will demand a high return, all of which is good if this is being attempted by your competitors. And the best thing about investing in listed companies with strong intangible assets is that from time to time the stock market values them as if their high returns will decline in the future, just as other companies’ returns are prone to do.”

They are going to be looking for growth companies, but not extremely fast-growing ones which are often over-priced. They will avoid highly leveraged companies but will look for companies that invest in R&D.

Management charges on Smithson will be 0.9% of the value of the funds managed per annum and there will be no performance fees. This is good news. But it’s somewhat unusual in that it will be based on the market cap of the company, not the normal net asset value. The investment trust form was chosen because it enables the manager to invest in smaller companies without being concerned about liquidity – they won’t need to bail out if investors wish to sell their holding in the trust unlike in open-ended funds which require constant buying and selling.

The portfolio managers will be Simon Barnard and Will Morgan under the supervision of Terry Smith as CIO.

As regards dividends, this is what the prospectus says about dividend policy: “The company’s intention is to look for overall return rather than seeking any particular level of dividend. The Company will comply with the investment trust rules regarding distributable income but does not expect significant income from the shares in which it invests. Any dividends and distributions will be at the discretion of the Board”. So clearly the focus is on capital growth rather than dividends which might be quite small.

One of the key questions is will the shares trade at a discount or not? Small cap investment trusts often do and as the prospectus warns: “A liquid market for the Ordinary Shares may fail to develop”. There is no specific discount control mechanism although the company can buy back shares in the market and there is a provision for a continuation vote if there is a persistently wide discount after 4 years. Smaller company investment trusts often trade at significant discounts but this is more a medium-cap than small-cap trust and Terry Smith’s reputation may result in a premium as with FEET.

If you apply for shares in the IPO you can receive either a paper share certificate, have the shares deposited in a nominee account with Link Market Services Trustees or, if you are already a personal crest member have the shares deposited in your account.

Clearly though there is uncertainty about the future likely performance of the company. I said in a recent blog post that you should never buy in an IPO. To repeat what I said in that “there can be some initial enthusiasm for companies after an IPO that can drive the price higher but the hoopla soon fades”. So personally I think I may wait and see. But I suspect there may be some enthusiasm among retail investors for this offer. Terry Smith now has a lot of fans.

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

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