Bath/Head Office & Unquoted Equity Team:
London Office & Quoted Equity Team:
Edinburgh Office & European Quoted Equity Team:
The Financial Ironmonger Blog No 13/2018

The Financial Ironmonger Blog No 13/2018

Every week our guest blogger, David Oakes of Mosaic Money Management (aka The Financial Ironmonger), shares with us his take on some of the major UK and overseas macro and political events that shaped the previous week.

Please be reminded the value of investments, and the income from them, may fall or rise. The views expressed in this article are those of the author at the date of publication and not necessarily those of Chelverton Asset Management Limited or Mosaic Money Management. The contents of this article are not intended as investment or tax advice and will not be updated after publication unless otherwise stated.

–THE FINANCIAL IRONMONGER BLOG NO 13/2018–

It has not been a great week for Facebook following allegations that it sold data to others such as Cambridge Analytica who then used it in political campaigns. The founder Mark Zuckerberg has been summoned to appear before the Senate, and the House of Commons, although he has declined the later.

The business model is quite simple and consists of keeping users glued to their screens, harvesting lots of data about their behaviour and then flogging the results to advertisers seeking to target certain groups. Globally, it has an audience of 2.1bn people, although the numbers in America peaked last June.

No doubt some will have deleted their accounts in the light of the recent revelations, but the real threat comes from the regulators threatening tougher data protection laws, digital taxes and potentially antitrust cases. It could end up as a regulated utility, hardly what growth investors are looking for. Not surprisingly, the shares are down some 25% from their peak at the beginning of February but it still commands a market cap of $460bn compared with net assets of only $14bn.

Such capital light models are fine when they are working, but if any of the three strands to its model is disrupted, then you have to question what value there is.

There are not many quoted companies in this neck of the woods, so it has been peculiarly fascinating to watch the collapse of Conviviality. The company is the largest supplier of alcoholic drinks in the UK, servicing 25,000 hotels, bars and restaurants, and has some 700 high street franchised shops. Floated at 100p in 2013, the company expanded rapidly with the shares peeking out at 423p last October at which point the chief executive had a shareholding worth some £12mn.

Shares in companies involved in hospitality and retail of whatever sort have fallen out of favour such that at the beginning of March, they had retreated to 300p. Shortly thereafter, an announcement was made that profits would be 20% less than forecast due to an “arithmetic mistake” in the finance department, and that margins had softened in the first two months of the year.

At the best of times, these are heroically thin, so this news destroyed the share price, falling to 100p, which is where the story started. The Finance Director, newly appointed last October thought he had spotted a bargain, and bought shares causing them to blip to 120p, as other investors followed his lead. Just another casualty of the high street, you might think, until 5 days later, the company announced that it had found a £30mn tax bill, due at the end of March, which, basically, it could not pay.

An attempt was made to raise £125mn, not only to pay the tax, but also accumulated debt, by way of a placing at 5p a share, which would have wiped out existing shareholders, including the chief executive who fell on her sword. Given that adjusted Ebitda earnings were in the range of £55mn, the tax bill was a big hit, and called in to question whether the company had any grip on its true financial position.

Clearly, the institutional investors approached to support the rescue did not think so, and thus the shares are likely to be worth less than a discarded till receipt from one of their off-licences. Any equity investment comes with risk, but the accountants and analysts failed to see any of the above coming. Perhaps the place to look was in the local shop. Franchise holders had been commenting on social media that they were having to get stock for their shops from other wholesalers, such as Booker and Costco, indicating that group credit lines had maxed out. Maybe the lesson is to pay particular attention to companies that exhibit rapid turnover growth, 500% in five years, in this case.

Such a large cog in any wheel is likely to have value, and this is not one that will be disrupted by the internet, so it will be interesting to see how it pans out, not least for the 2,500 employees, many of whom are based in Crewe, where alternative employment is not that easy to find. But for the shareholders, the glass is not only empty, but broken.

–MORE ABOUT OUR GUEST BLOGGER, DAVID OAKES–

David joined Manchester stockbroker Henry Cooke, Lumsden in 1977 and after becoming a member of the London Stock Exchange in 1984 held a number of senior positions within the firm including Managing Director of the in-house fund management company and member of the Executive Committee.

After senior appointments at Cazenove Fund Management and latterly Mercater Capital Management, David joined Mosaic Money Management in 2013. He has successfully managed private client and fund portfolios for over thirty years and has particular expertise in providing a multi manager service to his loyal client base.

The Financial Ironmonger is a hat-tip to Ironmonger Lane, the location of Chelverton’s London office.