Bad News from Crawshaw and ULS, Ideagen AGM, Victoria Doubts and Other News

The real bad news today is that butchers Crawshaw (CRAW) is going into administration, “in order to protect both shareholders and creditors”. They hope the business will be sold as a going concern but it is unusual for shareholders to end up with anything in such circumstances. The shares have been suspended and the last share price was 2p. It actually achieved a share price of 3425p at its peak in 2005. Revenue have been rising of late but losses have been also.

I never invested in the company although I do recall seeing a presentation by the company when it was the hottest stock in the market but I considered it to be a business operating in a market with no barriers to entry and likely to suffer from competition once the supermarkets had woken up to what it was doing. That’s apart from the difficulties all high street retailers have been facing of late. Well that’s one disaster I avoided at least.

Another AIM stock I do hold is ULS Technology (ULS) who operate a conveyance service platform. A trading statement this morning for the first half year said the revenue is expected to be up 3% and underlying profit up 5%, despite a fall of 4% in the number of housing transactions across the UK market. But the sting in the tail was the mention of a slowdown in mortgage approvals which “may well be short lived but is likely to have some impact on the Group’s second half results”. The share price promptly dropped 20% this morning. It’s that kind of market at present – any negative comments promptly cause investors to dump the shares in a thin market.

One piece of good news for the housing market which I failed to mention in my comments on the budget was that the “Help to Buy” scheme is not being curtailed as some expected, but is extended for at least another two years to 2023.

Yesterday I attended the Annual General Meeting of Ideagen (IDEA), another company I hold. It was unexciting with only 4 ordinary shareholders in attendance so I won’t cover it in detail. But boring is certainly good these days.

It was the first AGM chaired by David Hornsby who is now Executive Chairman. One pertinent question from a shareholder was “what keeps the CEO awake at night?”. It transpired that the pound/dollar exchange rate was one of them simply because a lot of their revenue is in dollars (their US market seems to be a high growth area also). I suggested they might want a “hard Brexit” when the pound would collapse and improve their profits greatly. But the board somewhat ducked that issue. Note that this business is moving to a SAAS revenue model from up-front licence fees which may reduce organic growth slightly but increase revenue visibility. The point to bear in mind here is that even on a hard Brexit it is unlikely that trade tariffs would impact software income because there are no “goods” exported on a SAAS model.

Another question asked was about financing new acquisitions which the company does regularly. These are generally purchased for cash, and share placings are done to raise the funds required. Debt target revenue is only one times EBITDA so debt tends to be avoided.

It is worth comparing that with Victoria (VCP) a manufacturer of floor coverings who issued a trading statement on the 29th October which did not impress me or anyone else it seems. Paul Scott did a devasting critique on Stockopedia of the announcement. In summary he questioned the mention of a new debt being raised, although it was said that this would be used to repay existing debt, when there were few other details given. He also questioned the reference to reduction in margins to maintain revenue growth. The share price promptly headed south.

The company issued another RNS this morning in response to the negative speculation to reassure investors about the banking relationships, covenants and credit rating.

I have held a few shares in Victoria since the board bust-up a few years back and attended their last AGM in September when I wrote a report on it here: https://roliscon.blog/2018/09/11/brexit-abcam-victoria-and-the-beaufort-case/ . The share price was already falling due to shorters activities and my report mentioned the high level of debt. The companies target for debt was stated to be “no more than 2.5 to 3 times” at the AGM which is clearly very different to Ideagen’s!

I did have confidence in Geoff Wilding, Executive Chairman, to sort out the original mess in Victoria but the excessive use of debt and a very opaque announcement on the 29th has caused a lot of folks to lose confidence in the company and his leadership. Let us hope he gets through these difficulties. But in the current state of the stock market, the concerns raised are good enough to spook investors. It’s yet another previously high-flying company that has fallen back to earth.

One more company in which I have a miniscule number of shares is Restaurant Group (RTN) which I bought back in 2016 as a value/recovery play. That was a mistake as it’s really gone nowhere since with continuing declines in like-for-like sales. At least I never bought many. Yesterday the company announced the acquisition of the Wagamama restaurant chain, to be financed by a rights issue. The market reacted negatively and the share price fell.

I did sample some of the restaurants in the RTN portfolio but I don’t recall eating in Wagamama’s so it’s difficult to comment on the wisdom of this move. All “casual dining” chains are having difficulties of late as the market changes, although Wagamama is suggested to have more growth potential. The dividend will be rebased and more debt taken on though. With those reservations, the price does not look excessive. However, while they are still trying to get the original business back to strength does it really make much sense to make an acquisition of another chain operating in the same market? Will it not stretch management further? I will await more details but I suspect I may not take up the rights in this case.

One other item of news that slipped through in the budget announcements was the fact that in future Index-linked Saving Certificates from NS&I will be indexed by Consumer Price Index (CPI) rather than the Retail Price Index (RPI). This is likely to reduce the interest paid on them. But it will only affect certificates that come up for renewal as no new issues have been made of late. These certificates are becoming less and less attractive now that deposit interest rates are rising so investors in them should be careful when renewing to consider whether they are still a good buy. I suspect the Chancellor is relying too much on folks inertia.

At least even with the bad news, my portfolio is up significantly today. Is the market about to bounce back? I think it depends on consistent price rises in the USA before the UK market picks up, or a good Brexit deal being announced.

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

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ULS Technology, Keystone Law and Collusion on IPO Pricing

Yesterday I attended an interim results presentation by ULS Technology (ULS). They have been listed on AIM for a couple of years and have grown both from organic increases in revenue and from acquisitions which is often a good formula. They operate in the legal conveyancing and estate agency market where volumes have not been great of late – it seems house prices have made it difficult for folks to move plus changes to stamp duty and buy-to-let taxes have deterred transactions. But they seem to be prospering regardless.

I first became interested in this company, and acquired some shares, when I noticed that Geoff Wicks have become a director. He has also just been made Chairman. Geoff used to be CEO of Group NBT which was one of my most successful technology investments and he did a great job of sorting out and then growing a failing dotcom business.

I did perhaps amuse the CEO of ULS, Ben Thompson, by noting that I don’t really like companies with unmemorable three letter acronym names (ULS, NBT for example). Investors can never recall what they do. ULS used to be called United Legal Services but needed a new “umbrella” name so came up quickly with ULS. Should have used a branding consultancy I suggest. Unless you are a really big company, like IBM or BAE, establishing name recognition for such “brands” is hard work.

So ULS it is for the present, but understanding what they do and how they make money is not necessarily easy. Attending the seminar helped with understanding that. In summary, ULS aim to make house moving easier by making conveyancing easier, quicker and lower costs. They use web technology to support that. So if you are looking for a conveyancing solicitor they can help, and they have partnerships with other businesses in the house buying space such as mortgage brokers/lenders so that their service is offered when required. For example, Lloyds Bank is one of their largest partners. In addition they have a specialist comparison web site for when you are looking for an estate agent (includes price and performance comparisons).

For the conveyancing service they get paid by solicitors to which customers are referred, who pay 5 days after the legal completion with a fixed fee (does not vary with house price cost). The customer saves on paperwork such as filling out multiple forms. The customer introducers are many small mortgage brokers, large financial networks and others such as Moneysupermarket.com and Home Owners Alliance. They do seem to have some competitors but these are generally smaller in size and have nowhere near the same size of “panel” containing solicitors to which referrals are sent. The market generally for conveyancing services is still very old fashioned and dominated by “cottage industry” firms. ULS have only 2.6% of the conveyancing market but have a desire to become much larger. It certainly seems a market that is ripe for technical disruption.

Estateagent4me.com is their estate agency comparison site where you can search for agents and select on the basis of: the Fees they will charge; Average time to sell a property like yours; How close they might get to achieving an asking price; and How successful they are at selling similar homes. I asked whether they had received any legal threats from Purplebricks who apparently were not happy at all about some reviews that were published on their service, but it seems they have not.

The company expects to grow by: 1) Organic growth; 2) M&A (already done some of those); 3) Future new product development. They are not rushing to move outside the UK although there might be opportunities there. In essence they seem to be aiming for a conservative, profitable growth strategy which is often the kind of company I like, rather than betting the farm on a very rapid expansion as per Purplebricks. Return on capital is what matters, not empire building at huge cost.

There were a number of good questions from the audience of private investors (organised by Walbrook) but I’ll only cover one that arose. The accounts show a very low “current ratio” because the current liabilities, particularly the “Trade and other payables” figure is high at £7.8 million. This does include two earn-out payments due from past acquisitions of £5.2 million and taking those out makes the ratio look more reasonable. It would seem they do have a credit facility lined up to cover those payments, but this will add to the gearing of the company of course, at least temporarily even if operating cash flow is positive as it appears to be. They may wish to raise more equity also I suspect, particularly if other acquisitions are contemplated.

Also yesterday a legal firm named Keystone Law Group Plc listed on AIM. I think this is only the second of two commercial legal firms to list (Gateley Holdings, GTLY, was the first). Keystone promptly went to a premium over the listing price. I’ll have to read the IPO Prospectus which is available on the company’s web site under AIM Rule 26. Keystone are different to many law firms in that most of their solicitors are effectively freelances and they only get paid when the client pays (yes they are part of the new “gig” economy). The prospectus should make interesting reading as I have been a client of theirs in a libel action I have been pursuing of late which you should hear more about very soon. But buying shares in new IPOs is generally something to avoid.

Meanwhile the Financial Conduct Authority (FCA) FCA has accused fund managements of colluding on IPOs. The regulator alleges Artemis, Newton, River and Mercantile and Hargreave Hale shared the prices they were willing to pay for shares. This story should run and run as it attacks the informal nature of conversations in the City of London about deals under consideration. But colluding on pricing is a breach of competition law as anyone in business should surely know.

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

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