UK INVESTOR MONEY // SHARES // INTERVIEWS
ISSUE 5 // OCTOBER 2015
Calling the bottom on mining by Amanda van Dyke
Turning the Tesco supertanker
by Chris Bailey
Three shares to buy, now
by Zak Mir
George Osborne Chases the Dragon? A Bad China Trip UK Investor Magazine — 1 — October 2015
Intro
INSIDE 3 Sam Antar at Gold & Bears 4 Glencore is the Lehman Brothers moment for mining stocks Amanda van Dyke 6 CEO interview Randall “Randy” Conally Zak Mir 9 Avation – Soaring with Eagles Barry Gibb & Andy Senga 11 Tesco: the super tanker starts to turn Chris Bailey 12 Company of the Month: Universe Group Steve Moore 13 AIM Awards Dinner – a sickening spectacle Tom Winnifrith 13 George Osborne – Chasing the Dragon? Tom Winnifrith 17 Sickly Dr Copper Ben Turney 19 Three shares to buy for October Zak Mir 22 Three shares to sell for October Tom Winnifrith 24 Panic city at Glencore Chris Bailey 25 The House View: Not raising interest rates is criminal
CONTACT US UK Investor Magazine 91 - 95 Clerkenwell Road London, EC1R 5BX E: info@ukinvestorshow.com W: www.UKInvestorShow.com EDITORIAL Tom Winnifrith
A Message from Tom Winnifrith Apologies for a slightly tardy October issue of UK Investor Magazine. It is all my fault. Sometimes the best laid plans of mice and men and even financial journalists are thrown to the winds by unexpected events. And the past few days have seen a flurry of such events including the receipt of letters from lawyers acting for not one but two distinct complete and utter scumbags. Such is life. Once again there should be something for everyone in this issue. There are buy ideas from Zak Mir, the lads at Beaufort Securities, Steve Moore and Chris Bailey. My favourite piece comes from Amanda van Dyke and I suggest you look at the way she contrasts tech stock valuations and mining stock valuations. The stockmarket is cyclical. There was a time when tech stocks that were profitable traded at a discount to cash (2003) and they stayed unloved for a while as mining stocks went through the roof. Yes mining shares can go up as well as down. Today the roles are reversed. It is the folly of man that folks are always inclined to believe that “it will be different this time.” It won’t be. At some stage mining stocks will go into a bull market once again and tech stocks will flop. There never is a new paradigm, a super cycle that conquers basic economics. Life just does not work like that. That is not to say that we should dump all tech and fill our boots with mining stocks expecting massive movements tomorrow. I tend to agree with Amanda that we are probably bumping along the bottom for mining and that there are signs of encouragement such as the bid for Aquarius Platinum. But the reality is that we may bump along the bottom for a while. We shall see. Personally I have bought my first shares in a mining company for more than four years last week. I am starting to nibble Away from the magazine we are—as a team—starting to gear up for the Gold, Bears & Traders show on November 28 2015 in London. See the page opposite for how to grab a free ticket. It will be a cracking show given the all-star speaker line-up and I promise you that in the sessions that I am involved in – on the bear’s side – there will be a stack of fireworks. Lawyers of London be warned!
Editor
I very much hope to see you on November 28, enjoy the magazine. Best wishes Tom Winnifrith Bristol UK Investor Magazine — 2 — October 2015
Sam Antar at Gold & Bears – this man is insane amazing S am Antar is the latest big name speaker for the Gold & Bears how on November 28. And he is king of the fraudsters. Well, he was.
Between the late 1960s and the mid-eighties Sam acted as FD of the family firm systematically engaging in fraud all the way. At its height Crazy Eddies was the darling of Wall Street as Sam used every trick in the book to keep the show on the road. In the end the fraud could not be sustained and Sam opted to cooperate with the Feds. The rest of the family went to prison and Sam decided to make amends. He is now one of America’s most feared fraudbusters. He is fearless and if anyone can spot cooked books it is he. He is also incredibly funny as anyone who follows him on twitter will know. Sam tells the whole story of Crazy Eddie’s rise and fall on his blog whitecollarfraud.com and anyone investing in shares must read that story
as it alerts you to Red Flags you might otherwise not spot. It gives a guide to Sam’s style – very direct and very funny. And now UK investors can for the first time hear from the man himself as a keynote participant at the Gold and Bears show on 28 November. We have 25 free tickets to give away to readers of this publication to hear Sam, Jim Mellon, Evil Knievil, Amanda Van Dyke, Lucian Miers, Aussie bear John Hempton and many other leading speakers in London in less than two months’ time. To get your free ticket, go to www. goldandbears.com and enter the promotional code UKIMGB when ordering an investor class ticket. See you at the show.
UK Investor Magazine — 3 — October 2015
Glencore is the Lehman Brothers moment for mining stocks – now is the time to buy By Amanda van Dyke
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uy low sell high. Buy when there is blood on the streets. We all know the rules, but what stops us?
We don’t know what low is, how do you know when you are at the bottom? Commodity prices are at multi year lows. The US commodity index hasn’t been this low in real terms since 1956. Mining companies are trading at discounts to cash. Glencore was the mining markets Lehman brothers, this was the resounding call of the bottom. And they also said something else, they like much of the mining market right now is oversold. The pendulum has swung past the mean.
last week saying that all mines that didn’t make a profit at $45/tonne were being closed down. Gold miners have been high grading (only mining the richest seams) for 3 years, and have mostly all maximized what they can do. Any more sustained decreases in commodity prices will lead to mine closures, seriously interrupting the global supply demand balance, which will lead to shortages and higher prices.
Since 1987 there have been 4 bear markets in junior mining, including the one we are in. The average duration of a bear cycle in junior mining is 45 months, and the average decline is 75%. The current duration of this bear market is 54 months, and the current decline is 76%. Does that mean this one is over? Of course not, but it is a serious indication that we are likely near the end and very close to the bottom. So why should you invest now? Because since 1987 there have been 4 bull markets in junior mining as well, and the average duration was 49 months, and the average increase was 218.5%. If that isn’t compelling I don’t know what is. There is a limit to your downside risk right now. Arguably mining is trading on the lowest P/E ratios of any other sector. 3-4x, compared to a market average of 10x, and tech shares at 16-18x. Mining companies cannot make oodles of money in a low commodity market, but the average all in cost of production right now, is about what all the commodity prices area at. You can keep a mine open for a little while losing money, but you cannot long term. Vale one of the largest iron or miners in the world came out
To be very clear, we could be at the bottom for a while. We need a catalyst to go up from here, and right now that catalyst is not evident. But what is evident is that the consensus is the bottom is in. Investors are in a supremely good position to do the analysis required to separate the good mining companies, and by good I mean good assets and good management, a surprisingly rare combination. There are some great companies out there, with commercial assets that can be put into commercial production even at these prices, where investment dollars, will go directly into creating shareholder value. You have the time to do your homework and seriously analyse which mining companies are of good value and are poised to do well when the market does turn, and the market does always turn eventually. Come see the companies at gold bears and traders on November 28, and we will also give you the tools to make your own determinations manda van Dyke is the organizer of Gold, Bears A & Traders in London on November 28. To get a free ticket to the show go to www.goldandbears. com and use the promotional code UKIMGB when booking an investor class ticket
UK Investor Magazine — 4 — October 2015
UK Investor Magazine — 5 — October 2015
ceo interview
Randall “Randy” Connally By Zak Mir Zak Mir: Northcote Energy (NCT), yet another small cap oil & gas opportunity. What do you think makes you different from the rest of the pack? Randy Connally: I think it is the scale of opportunity we’re going after and the way we’re going about doing it. Mexico’s getting ready to undergo a massive oil boom. An analogy I like to use is what happened in the Bakken and how that impacted North Dakota and South Dakota over the last 10 to 15 years. That’s not a historically strong oilproducing state in the US. So when the Bakken really took off they didn’t have enough of anything. Certainly one way to play the Bakken was to go in and get yourselves some good leases and drill a lot of oil. But I know a lot of people Zak, that have made millions and tens of millions of dollars in very mundane businesses. When that boom took off and it started sucking tens Zak of billions of dollars of investment capital in from the oil industry, there weren’t enough services. There weren’t enough places for workers. There weren’t enough restaurants, there weren’t enough fracking companies. So, literally anybody that got in on the early stages of that boom, and organised some businesses to fulfil the basic need resulting from the explosion and capital being spent in and around North Dakota, made enormous amounts of money. We’re using that as an analogue for what we think is going to happen in Mexico over the next 10 years. Mexico has a base level oil industry, because they obviously produce oil and gas. But compared with the level of activity – I mean I’ve seen forecasts from major brokerage firms, comments from CEOs of multinational companies, people are expecting hundreds of millions of capital to get invested into the Mexican energy sector over the next decade. There are increased requirements in terms of those oilfilled services. Everything from owning and producing oil leases to providing the drilling rigs, to the logistics of getting crews and supporting major operations. It is all about drilling oil wells and developing oil filters and exercising logistics, especially in a country that’s less developed than say the US. ZM: I have heard of the opportunity in Mexico, well before speaking to you. How come you are going to get in their first? Presumably the likes of BP, Shell and Exxon are all going to be there. How is Northcote Energy is going to get the low
hanging fruit? RC: So, let me give you a sense of what our strategy is. On the E&P side we’re going to be looking at projects that are going to be below their radar screen. I mean there’s no question if a project’s going to require a billion dollars of capital expenditure, offshore Gulf of Mexico, that’s going to be BP or Shell or Exxon. No question about it. Having said that it doesn’t mean that the best properties in Mexico are going to be reserved for those companies. One of the things you have to understand, and this is one of the things that made me decide we needed to throw all in to Mexico: I went down three years ago with our Mexican executive vice president of business development, Abraham Achar. On one of my early trips, we went down and we sat down with several senators and congressmen in Mexico, who were involved in the committee drafting the legislation. Do you know what they told me Zak? They Mir said, ‘One of the things we most admire about Texas, is the dynamic nature of its energy industry. There’s competition for workers, there’s innovation. The way the industry is structured, creates a dynamic state economy and a robust market with good, high-paying jobs. We want to develop a middle class in Mexico, we know to do that we need not only to have our resources developed. We need to foster and create a dynamic industry in Mexico. We are designing the energy reform to allow small and medium-sized entrepreneurial companies to compete. If we just wanted more production we would divide all our leases up between Exxon, Shell and BP and call it a day. That’s not what we want, we want a dynamic entrepreneurial environment.” So the Mexicans are creating a playing field in which small companies who get their first, who bother to learn their way around and to develop local relationships, they’re creating a playing field in which a lot of success can be had. And so we’ve invested the time, I’ve been looking for this for years. You know, frankly as many as ten years ago I was starting to look for Mexico to open up. It’s been a bit of a waiting game, it’s finally happened. Because – it’s the old adage, the early bird gets the worm. I’ve been looking for the worm for a long time, I see him, I’m going to pounce on him. ZM: But in terms of the opportunity itself, what tends to hurt private investors more often than not is the lack of experience of the management of exploration companies, as opposed to what is in the ground, or the volatility in the sector.
UK Investor Magazine — 6 — October 2015
GOLD BEARS &T R A D E R S
Star speakers from the world of commodities and investment including Zak Mir,Zak Amanda van Dyke, Mellon, Evil Mir, Amanda vanJim Dyke, Knievil and Tom Willem Middelkoop andWinnifrith Tom Winnifrith.
Meet and chat to gold and commodities companies, their CEOs and Chairmen. Tickets half price for limited time. 28 November 2015 QEII Conference Centre, Westminster, London goldandbears.com UK Investor Magazine — 7 — October 2015
Whether a management team knows what it is doing can be the deciding factor as to whether the business succeeds or not. You have more than 100 years of experience in the business between you. Presumably that is what is going to help you in Mexico. How key is management in oil exploration from your point of view?
operate there because Mexico City is only a two hour flight from Dallas. So, the opportunity though is so huge, what I had to decide in the case of Mexico, MX Oil is a strong horse in the race. I mean it is a strong horse. But I’d rather have multiple horses in the race, than just one.
ZM: I am just looking at your presentation, 150 RC: Absolutely it is. This is one of the things we like billion barrels, and all sorts of big numbers are in about Mexico – and it would be understandable if you there. This seems to be a totally new opportunity were cynical if I told you I in Mexico. At the moment was going to Africa, for the Northcote is a small cap following reasons. But a lot company. Are we looking of the reserves, in Mexico’s at multiple up side in Gulf Coast: Texas and terms of valuations and Louisiana are Gulf Coast, what can happen? And there’s a lot of similarity what is the timeframe between what we’re looking there? at down there and what RC: You know, certainly we look at north of the there are many examples of border. Between myself and a small company planting Kevin Green and the other a really high quality members of our staff, we do large asset somewhere in have decades of experience the world, and seeing a on the Gulf Coast of the US. Randy Connally dramatic rerate in its share And we have not announced price in a short period of it yet but we’re making some key additions to our team time. That’s one of the reasons why we decided to to even further enhance our management experience throw our hat in the ring. We have a number of other in Mexico. businesses on the oil field service side, that are going ZM: The obvious question to ask is one related to to be nice, profitable steady growers. But they’re not the oil price and what you are doing. How much going to have potential to call them massive rerates is that a factor – positive or negative? Is it less by many multiples of our share price. I feel good about of a negative than it was before? How does that what MX Oil is doing but what happened that made work at the moment? us decide we had to drop our hat in this race is that a gentleman named Chris Newport who I know from RC: I consider it a huge positive and here’s why. CEB, he’s part of the Corsair Petroleum team, which First of all let me say this, even for the most marginal is the company partnered with CEB in Indonesia. He companies that by industry terms are considered expressed interest in looking at Mexico. small, medium-sized, that have some substantially more financial resources than Northcote. I think that if I had him come over, meet Abraham Achar, sit in oil prices were not low, and many US companies were Mexico, meet our partners. Come on an exploratory not struggling with overleveraged balance sheets, trip. On returning from that Chris was very there would be far more companies trying to stake out encouraged, both by the oil and gas potential as well as the turf that we’re looking to stakeout for Northcote. the strength of our political and business relationships. So I consider it a huge, huge break that prices are He agreed to come on board, he’s managing this low. I think the energy reform’s taken off a little bit concession performance, which I consider a huge coup slow in Mexico, in large part because of the current because 1) he brings a lot of the technical competence of price environment. I consider that it is a break for us Corsair to the table, 2) he has some relationships with because it will let us get positioned ahead of bigger, engineers that have worked on the Pennex Reserves, better capitalised, players, who have come down and and 3) while not in Mexico Chris has been involved in try to stake out some of the territory we’re looking at. many concession and bid processes all over the world; Africa, South East Asia, Australia. So he brings a huge ZM: The other point that clued up observers amount of sophistication in terms of international oil will note is that you have equity interests in a deals to the table. So Chris is leading our efforts in private investor favourite, MX Oil (MXO), and Mexico and is part of the management team in this CEB Resources (CEB), both of whom I have also bid ring. interviewed. Is it not easier to be an investor in companies that you like, especially with your ZM: Just to finish off here. This looks very experience? This, rather than actually getting promising, private investors are already your hands dirty on the ground in far flung interested. But what is the potential timeframe places? in terms of at least the initial part of the upside potential coming through? RC: You know it certainly is. I mean in the case of CEB for instance, you know Indonesia, I would be shot RC: Well certainly in Mexico we’re already in the if we ever looked at actually directly doing anything process. We’ve already got business skill and we’ll start in Indonesia. That part of the world, they have generating sustainable cash flow from our mediation decades and really hundreds of years between them plan this fall. At the same time we’re starting to with experience there. The only way for us to play realise this fall. December 15th is the award day for that is alongside them. So you’re 100 per cent correct. concessions. So you know, I’m very, very hopeful that Now in Mexico keep in mind, with MX Oil we played we may have a nice Mexican Christmas present for an enormous role. In some ways it’s easier for me to shareholders. UK Investor Magazine — 8 — October 2015
Avation – Soaring with Eagles By Barry Gibb and Andy Senga Research Analysts, Beaufort Securities
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on’t get confused. Aircraft leasing is actually a relatively simple, long-term growth business capable of rewarding investors with exceptional, high visibility returns.
Risks can be wholly mitigated by fixing fleet lease rates on highly liquid assets against cost of debt which, in turn, offers a natural hedge against interest rate and currency exposure. Barriers for new entrants are structurally high due to lengthy aircraft delivery schedules and the need for access to big ticket financing, while industry dynamics remain consistently strong. World passenger traffic is doubling roughly every 15 years, not surprisingly with activity levels being strongest in Asia Pacific, which just happens to be the regional focus of sector minnow, Avation plc (AVAP). Having demonstrated an average yield of 13.1% on its lease book, Avation has now established its own global medium term note program (for funding tranches up to US$500m) to power expansion of its current operating fleet of 31 aircraft. With eight more deliveries due this financial year plus options on a further 22 available 2017 and beyond, the Group’s lowly forward multiple presently appears to owe more to the general shakeout that has affected the wider basket of Asia-exposed equities than it does to fundamentals. Avation is one of Beaufort Securities’ preferred selection for medium-term growth and income. Positioned for Growth in the World of Aircraft Leasing • Aircraft leasing is a long-term growth industry - Between 1981 and 2013, global leased fleet aircraft demonstrated an 8.1% CAGR. Presently, 40% of the world’s commercial fleet is leased; this is expected to rise to 50% by 2020. • Highly visible future cash flows – Avation receives
contracted revenues from long-term leases with major airline groups. Its secured loan terms are matched to underlying leases, with newly purchased aircraft placed with airlines up to twelve months before delivery. • Industry leading yield – Within an established and highly competitive global market, Avation achieved a calendar 2015 lease yield of 13.1% (compared with an estimated industry average of 12.7%), despite having a relatively young fleet at 5.3 years and a weighted average remaining lease term of 6.5 years. • Positioned for growth – Asia is the world’s fastest growing market for aircraft leasing. The Group has eight aircraft ordered remaining for delivery before end of financial year 2016. Importantly, this includes favourable pricing and delivery positions with the ATR72, which has by far the largest backlog of all commercial turboprops along with a strong residual value. • Headquartered in Singapore and focused on Asia– This allows Avation to benefit from a governmentawarded low tax concessions, which are expected to be available beyond the scheduled 2019 review period.
Avation plc - Commercial Passenger Aircraft Leasing Specialist Avation plc is a specialist commercial passenger aircraft leasing company managing a fleet of aircraft which it leases to airlines. Its fleet includes Airbus A320 family aircraft as well as Fokker 100s and ATR 72s across the world. It has eight major customers include Virgin Australia, Thomas Cook, Flybe, Air France and Fiji Airways on four different continents. Avation’s fleet is diverse, comprising
UK Investor Magazine — 9 — October 2015
young ATR aircraft and other aircraft such as Airbus A321 and A320 along with a small investment in older aircraft, comprising a fleet that will grow to 41 in the short-term spread amongst 5 different types. Avation targets growth as well as continual fleet renewal and financial management to ensure the retention of asset values and maximisation of earnings.
Annual Returns in excess of 13% Avation aims to generate growth in its fleet and build shareholder value by focussing on 2 sectors being a) new turbo-prop regional aircraft, principally the popular fuel efficient ATR 72-600 model and b) new and second-hand narrow body jets in particular the popular Airbus A320/A321 family and Boeing 737NG aircraft. Owning different types of aircraft provides a benefit in terms of diversification of market and residual value risk. The Group finances the acquisition of new aircraft using internally generated cash flows and a mixture of senior and unsecured debt finance. Debt is re-financed on older aircraft when there is an opportunity to reduce overall cost of debt funding and also to release equity for acquiring new aircraft. The Board applies prudent f i n a n c i a l management principles to manage risk when acquiring aircraft by seeking to match lease and financing duration, using mostly fixed interest rate debt and amortising debt aggressively over lease periods. As the fleet grows, the Group will also seek to diversify the customer base as part of the overall credit risk
management policy. Avation’s operational fleet of 31 aircraft has a weighted average age of 5.3 years, which is likely to reduce as the Group adds new aircraft and disposes of old aircraft, and average remaining lease term of 6.5 years. Traffic routes across regions in 2014 were split by Asia/Pacific region (76%) and Europe (24%). Such a degree of customer concentration
potentially exposes the Group to customer default risk, although we note this remains low across the global industry. Moreover, if an airline is forced to restructure at the corporate level, it is rarely seen to rejects its aircraft leases during the restructuring process because it has to keep flying to stay in business. On this note, AVAP has deliberately focused on jurisdictions that enable it to enforce its rights to repossess aircraft in the event of a lease default to keep its customers focused on maintaining their current portfolio. Beaufort considers, Virgin Australia Regional Airlines’ (‘VARA’) ownership by Virgin Australia, as well as the parent’s role in the Australian air travel market and its strong equity backing, provide AVAP additional protection against possible default. The
strength of Avation’s business models makes it one of Beaufort’s preferred recommendations for medium-term growth and income.
For a more complete examination of the industry fundamentals, together with forward estimates, please refer following link for the full research note published by Beaufort on Avation Plc: http://www.beaufortsecurities.com/avation-c-2-p-302 At Beaufort Securities we offer a bespoke advisory service. Our people are dedicated to the markets day in and day out for one reason and one reason only - to help our clients profit. To discuss your strategies with a broker, please call us on 020 7382 8384. Beaufort Securities Ltd is authorised and regulated by the Financial Conduct Authority, registered number 155104 and is a member of The London Stock Exchange and ISDX.
UK Investor Magazine — 10 — October 2015
Tesco: the super tanker starts to turn By Chris Bailey Financial Orbit
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hich of the following do you believe is more important as a guide to Tesco’s (TSCO) corporate well-being?
(1) The 55% fall in H1 overall group profitability year-on-year; (2) The observation that despite ‘challenging’ market conditions the company was still confident of hitting the corporate metrics they outlined earlier in the year; (3) A soft focus slide of a carefully chosen member of Tesco’s staff with the slogan ‘Serving Britain’s shoppers a little better every day’ Historically my writings for ShareProphets are boringly repetitive with much focus being quantitatively placed on earnings and (free) cash flow plus dividend policy. On such metrics Tesco’s continues to look like a ‘hope’ investment. Extrapolating the company’s first half profit of just over £350 million puts the share on an EV/ebit multiple in the x40s whilst free cash might be able to fund a 2-3% dividend yield – if there was a dividend anymore. Qualitatively there was less of the optimism that surrounded the recent Sainsbury’s (SBRY) update where profits were edged up slightly ahead of expectations because aspirational middle class shoppers were starting to commit more of their weekly basket of food shopping expenditures to the retailer rather than those pesky discount retailers. Tesco’s like-for-like sales did improve overall but are still down 1% in the UK. Hardly a sign of real strength.
No. The most encouraging sign from today’s numbers from the UK’s largest supermarket is that it has gone into full-on cuddly mode. There is little doubt short-term profitability could be helped if Tesco re-adopted the hard driving culture of a few years when – for quite a long period of time – it bulldozed the opposition. Today’s world is a bit different and just as Ryanair (RYA) to great corporate success has tempered its bald low cost focused message by copying some EasyJet (EZJ) initiatives, today’s presentation from Tesco’s provides statements like: ‘No one tries harder for customers’ ‘We treat people how we like to be treated’ ‘We believe every little help can make a big difference’ Of course much of this is corporate guff. But such customer facing initiatives, supplier handholding and charity/health drives is taking a good part of the ethos of a Marks & Spencer’s (MKS) or a Sainsbury’s and then trying to mould it with the Tesco’s advantages of scale, broad catchment of customer and nationwide location, hence giving customers fewer and fewer reasons to defect elsewhere. The super tanker is turning. At the prevailing share price it may surprise some readers to know that Tesco’s shares are actually up year-to-date. The initiatives and comments in the October 7th interims highlight why 2016 will be another up year for the shares.
Chris Bailey is the founder & editor of www.financialorbit.com and a speaker at www.goldandbears.com UK Investor Magazine — 11 — October 2015
company of the month
Universe Group (UNG) Universe Group – an out of this world investment?
By Steve Moore
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aving joined the group that May, September 2011 saw Universe (UNG) Chairman Robert Goddard announcing a loss and “a fresh view to be taken of the company’s capabilities and how best to deploy them”. A new CEO joining with Goddard was followed in September 2013 by current CEO Jeremy Lewis – and the shares have risen from 2.25p on Goddard’s appointment and 4.75p on Lewis’ to a current 9.25p… The company, with its HTEC trading division, is a developer and supplier of point of sale, payment and on-line loyalty systems, with customers now including Morrisons, Walmart, Exxon, Valero, MRH, Budgens, Londis, Costcutter and MFG. Just announced results for the first half of the 2015 calendar year showed a pre-tax profit of £0.30 million on revenue of £8.83 million, generating earnings per share of 0.11p, up from a corresponding 2014 period 0.09p. Despite a £0.23 million acquisition, net cash was increased by £0.13 million to £0.37 million. House broker to the company, finnCap, described the numbers as “in line with our fullyear expectations” – these being for Universe to deliver earnings per share a few percent higher than last year’s 0.71p – and noted “operationally, there was strong progress on multiple fronts: a refresh of HTEC’s new loyalty product; the integration of Spedinorcon Ltd (retail software); and the continued installation of HTEC’s new outdoor payment terminal”. Universe itself commented that “there is good visibility of the projects to be completed in the second half and, reflecting this, we believe Universe remains on track to report a satisfactory outcome for the year”. Looking further ahead, the company notes that its customers continue to operate in highly competitive markets in which its products’ ability to record sales efficiently, enable effective re-ordering and management of supply lines, process payments securely and enable the targeting of customers with appropriate incentives are particularly valuable.
CEO Jeremy Lewis share of 0.80p for next year, concluding that “we reiterate our 12p target, equivalent to an undemanding 7.5x FY15 EV/EBITDA”. This was also a target price we considered reasonable when recommending the shares at a 7.5p offer price on the Nifty Fifty website early this year. They have since risen to a current 9.25p, but we continue to consider there more to come here and the shares remain in the Nifty Fifty portfolio.
Non-executive Chairman Robert Goddard is a chartered engineer, with previous experience including being on the executive board of Burmah Castrol and a variety of advisory and turnaround assignments. CEO Jeremy Lewis is a chartered accountant with investment banking experience of M&A and equity capital markets in both the US and Europe and extensive experience in technology-based companies in areas including mobile networks, digital media and software.
FinnCap is currently looking for earnings per UK Investor Magazine — 12 — October 2015
AIM Awards Dinner – a sickening spectacle and you are paying By Tom Winnifrith
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n 8th October 1300 lawyers, accountants, PRs, Nomads and brokers servicing the AIM market and a good sprinkling of AIM CEOS and FDs will gather at the annual AIM awards dinner in London to celebrate 20 years of what is deemed the World’s growth market. Tosh. Since its launch 20 years ago the AIM Index (dividends included) has lost just under 20% in value. The FTSE Small cap has gained almost 250%. Institutions now shun this casino so those losses have been inflicted almost entirely on private investors. Less than 5% of the companies on AIM actually generate sufficient free cashflow to pay a dividend. Hence nearly all companies on the casino must perennially pass the hat around to keep going. The directors of those companies attending
will be paying £200 for a ticket plus travel and accommodation and it will be their shareholders picking up the tab. Most of the seats are booked by the parasite advisers who will between them sting an average AIM Company for £150,000 a year. And with those fees they can easily afford to book a table for £2000. But remember it is not these parasites earning six figure salaries who pay themselves, it is their firms who levy stiff fees on PLCs which fund those costs via yet another equity placing. In short, it is you, the retail investor, who is paying for 1300 crony capitalists to dress up in black tie and wine and dine until the small hours. In light of the dismal returns AIM investors have made do you not find this truly nauseating? I do.
UK Investor Magazine — 13 — October 2015
George Osborne – Chasing the Dragon? By Tom Winnifrith
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o this is not a reference to our good chancellor’s interesting past. We were all young once. But it is not a bad headline is it? My reference is to the Chancellor’s quite ludicrous proposal that Chinese stocks should be tradeable in London and vice versa. I have rather wondered what Osborne has been smoking for a while. First there was his job destroying plans for a National Living Wage. Now he has a new Commission to improve road and rail chaired by some fellow who was until the other day in the Labour Party. What next? A scheme to ensure that the State controls the commanding heights of the economy? Vote Tory get Old Labour. It appears all to be part of a plan to capture the “centre ground”. Whatever. But it is the China shares proposal that is most ludicrous. On ShareProphets we have chronicled the performance of Chinese shares listed on AIM and as the table shows it has been truly catastrophic. The average IPO to today loss is now more than 50% (and that excludes more than a dozen stocks that went pop before last year). Strip out the top two and bottom two and the average loss is almost 80%. Now China supporters will say that only the most fraudulent and low grade enterprises from the PRC list on the AIM Casino. And it
would be churlish not to concede that the AIM portfolio does indeed contain almost entirely dire enterprises. However the incidence of fraud amongst Chinese companies listed on markets across the globe is also notably higher than for domestic issues. The Chinese economy seems to be going ex-growth with the chickens from the monumental capital misallocation of 2008-2013 now coming home to roost. Sophisticated and institutional investors can already gain exposure to Chinese equities directly. All of us can – if we want exposure – do so via specialist Investment Trusts run by folks with some on the ground knowledge. But exposing Joe Public to individual Chinese equities is surely a backward step. Has not Joe suffered enough already with this Government encouraging him to invest in AIM by offering new tax breaks? It will be the unsophisticated investor that falls for the worst frauds from China. As a libertarian I suppose I should accept that if a fool wishes to be parted with his money why should the Sate stop him. But that does not mean that the State should actually make that process easier.
UK Investor Magazine — 14 — October 2015
The Filthy Forty The Sunday Times recently flagged up the shocking record of Chinese AIM stocks. But it highlighted only two of the most obvious frauds. We cover all of the China stocks that were listed on AIM on June 1 2014 or that have listed since and the record is truly dire. Only 25 are still trading. 11 have been booted off and 5 are on death row awaiting expulsion following the loss of their Nomad. The returns from this portfolio of doom now average MINUS 50.125%. But actually it is worse. There are only three winners now. All Asia Asset at +517%, Vmoto at +10% and Hutchison China Meditech at +545%. The two big winners skew the data so removing them and 2 of the many -100% companies gives an average loss on the portfolio of 79.64%. Yet the LSE insists that there is no problem with China companies on AIM and wants more to join. And as we describe on page 13 it is not just the LSE that is chasing the dragon but our beloved Chancellor of the Exchequer Mr George Osborne. What are these people smoking? Turn the page for the Filthy Forty.
Hot Stock
ROCKETS Stoc S toc k s R e a dy to tak e o ff hotstockrockets.com UK Investor Magazine — 15 — October 2015
The Filthy Forty List Date
Company
Sector
IPO Price (p)
31/07 (p)
02-Jul-04
RCG HLDGS LTD (RCG)
Electronic & Electrical Equipment
cancelled - 08/07/2014 “best interests”
17-Dec-04
ALPHA RETURNS GRP PLC (ARGP)
Support Services
2,125
0.85
03-Aug-05
ASIAN CITRUS HLDGS (ACHL)
Food Producers
11.2
8.5
16-Dec-05
UNIVISION ENGINEERING (UVEL)
Electronic & Electrical Equipment 3
06-Feb-06
BODISEN BIOTECH INC (BODI)
Chemicals
19-May-06
HUTCHISON CHINA MEDITECH (HCM) Pharmaceuticals & Biotechnology 275
23-Jun-06
GEONG INTERNATIONAL (GNG) Software suspended - 30/09/2015 accounts not published & NOMAD resignation
26-Jun-06
ARC CAPITAL HLDGS LTD (ARCH)
Equity Investment
31-Jul-06
TINCI HOLDINGS (TNCI)
Industrial Engineering cancelled - 23/01/2015 “best interests”
05-Oct-06
ASIAN GROWTH PROPERTIES (AGP) Real Estate Investment & Services 36.75
13.5
23-Oct-06
LED INTL HLDGS LTD (LED)
Electronic & Electrical Equipment 1,000
34
14-Dec-06
TAIHUA PLC (TAIH)
Pharmaceuticals & Biotechnology 10
2.125
21-Dec-06
WALCOM GROUP LTD (WALG)
Food Producers
35
0.875
14-Feb-07
HAIKE CHEMICAL GROUP LTD (HAIK) Oil & Gas Producers
79.8
7.5
10-Dec-07
CHINA FOOD COMPANY PLC (CFC)
Food Producers cancelled - 29/12/2014 accounts not published
30-Sep-08
SORBIC INTL PLC (SORB)
Food Producers cancelled - 16/06/2015 NOMAD resignation
14-Dec-09
ORIGO PARTNERS PLC (OPP)
General Financial
50
2.575
09-Jun-10
NORTHWEST INVESTMENT GROUP (NWIG) General Financial
2.5
0.6
06-Sep-10
ASIA CERAMICS HLDGS PLC (ACHP)
66
12-Oct-10
GLOBAL LOCK SAFETY(INTL)GRP (GLOK) Support Services cancelled - 01/04/2015 NOMAD resignation
01-Apr-11
EASTBRIDGE INVESTMENTS PLC (EBIV)Industrial Engineering
24
0.6
23-May-11
CHINA NEW ENERGY LTD (CNEL)
7
0.715
01-Aug-11
CHINA AFRICA RESOURCES PLC (CAF) Mining
40
4.75
31-Aug-11
MONEYSWAP PLC (SWAP)
General Financial
5
0.925
02-Apr-12
AUHUA CLEAN ENERGY PLC (ACE)
Alternative Energy
40
2.925
05-Apr-12
NAIBU GLOBAL INTL CO LTD (NBU)
Personal Goods
22-Jun-12
GLOBAL MARKET GROUP LTD (GMC) Media
20-Aug-12
CHINA CHAINTEK UNITED CO LTD (CTEK) Industrial Transportation suspended - 11/09/2015 NOMAD resignation
09-Nov-12
VMOTO LTD (VMT)
Leisure Goods
19-Dec-12
GREEN CHINA HLDGS (GCH)
General Retailers
24-Dec-12
CAMKIDS GROUP PLC (CAMK)
Personal Goods
02-May-13
ALL ASIA ASSET CAP LTD (AAA)
General Financial
16-Oct-13
CHINA RERUN CHEMICAL GROUP LTD (CHRR) Chemicals
07-Nov-13
GOWIN NEW ENERGY GRP LTD (GWIN) Household Goods
09-Dec-13
JQW PLC (JQW)
General Retailers
70
5.25
14-Jul-14
JIASEN INTL HLDGS LTD (JSI)
Household Goods
82
6.25
01-Aug-14
GTS CHEMICAL HLDGS PLC (GTS) Chemicals
36
04-Dec-14
PCG ENTERTAINMENT PLC (PCGE)
Travel & Leisure
6
03-Feb-15
AQUATIC FOODS GROUP PLC (AFG)
Food Producers
70
10-Mar-15
GATE VENTURES PLC (GATE)
Investment Instruments
0.625
cancelled - 29/12/2014 accounts not published
1775
suspended - 15/09/2015 NOMAD resignation
General Retailers
Alternative Energy
39
cancelled - 22/06/2015 NOMAD resignation cancelled - 24/09/2015 NOMAD resignation
13
14.25
cancelled - 18/06/2014 “best interests” suspended - 29/09/2015 NOMAD resignation
3
18.5
10 6
cancelled 30/03/2015 NOMAD resignation, now on ISDX
UK Investor Magazine — 16 — October 2015
56.5 2.125 33
cancelled - 23/07/2015 NOMAD resignation
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ukinvestorshow.com UK Investor Magazine — 17 — October 2015
What does the sickly Dr Copper tell us about global growth? By Ben Turney
I
n last month’s magazine I questioned whether this summer’s weakness in stocks was a crash or a correction.
I concluded by saying, “previous stock market pullbacks suggest there will be at least four weeks of skittish, volatile trading”. This is almost exactly what happened over the course of September. As we now enter October, volatility has increased and markets have taken a fresh dive, led by collapsing mining stocks. Of this latter embattled group, none have been worse hit than the copper miners, but is this a portent of worse to come? Traditionally “Dr Copper” has been regarded as a benchmark for the health of global growth. The widespread application of this metal across industry, commerce and construction makes its price an obvious gauge of economic activity. The logic is unpretentious. The more demand there is for copper, the healthier conditions should be. Or at least so the theory went. The advent of Quantitative Easing and other “unconventional” monetary policies over recent years have distorted both the markets for copper and equities. Today prices are driven as much by financial innovation as by underlying fundamentals. The chart below was produced earlier this summer, courtesy of Zerohedge.com:
SOURCE: http://www.zerohedge.com/news/2015-07-23/commoditycarnage-continues-copper-crashes-6-year-lows
It paints a pretty stark picture of the breakdown between the movement of the price of copper and the movement of equity prices since the Federal Reserve announced its QE3 programme. As equities went on a supercharged bull run, the price of copper went into almost terminal decline. As with one of my other favourite indicators of genuine global growth, the Baltic Dry Index, the lacklustre performance of coppers price have told a very different story to the one global stock markets have given since late 2012. At some point there will have to be a reckoning. The disconnect between stock price performance and genuine global activity cannot go on forever. However, critics of monetary policy have been saying the same for years, without the dreaded crash ever materialising. Even so, the underlying fear that all is not well with the world’s economy has resurfaced over the last couple of months, as equities abruptly halted their seemingly irrepressible march higher. Many commentators are now pointing to copper’s weakness as a sign of much worse to come, but how reliable is this analysis? From a technical perspective things look pretty bleak for copper. At the time of publication, the metal had just fallen below a crucial level of longterm support. The chart below shows copper’s 200-month moving average (200MMA) price. According to Bloomberg, this psychologically important technical indicator has supported copper on a closing basis every month, since the Chinese-led commodity super-cycle began in January 2004: Turn to next page
UK Investor Magazine — 18 — October 2015
Similar events elsewhere have caused panic selling, as borrowers sold assets to raise funds to cover losses and lenders called in loans or liquidated the secured assets of those who could not repay. Thanks to the opaque nature of China’s shadow banking system, we don’t yet know how far reaching SOURCE: http://www.bloomberg.com/news/articles/2015-09-29/copper-flirting-with-key-long-term-support-intothe effects of the month-end-analysis Yuan devaluation on copper stockpiles have been. However, the recent By the time this article is published we will collapse in the metal’s price does not look know whether or not the price of copper closed like a coincidence. As circumstantial as the below its 200MMA at the end of September. If evidence might be, it nevertheless points to a this happens it could further damage sentiment lot of supply suddenly hitting the market at the and apply yet more downward pressure on prices. Given the influence financial trading same time Chinese asset prices imploded. has over the copper market, such an event could be a catalyst for further selling, as speculators rush to conclude that Chinese growth is dead. Despite this, it is unclear whether or not such a price move might act as a reliable red flag warning that the bull market is over and we are now in a bear market.
One of the big problems with using the price of copper as an economic barometer today concerns Chinese stockpiling of the metal. Although China accounts for roughly 40% of global copper demand, it is unclear how much is stockpiled in the country as a result of what is known as a “carry trade”. A carry trade is a form of international financial transaction in which a party borrows money in one country with a lower interest rate to reinvest it in another country with a higher rate of interest. This is meant to be a “guaranteed” form of making money, but as with all such schemes there are inevitable risks, which are often underappreciated. In the case of the Chinese copper carry trade, people in China would borrow foreign currency from domestic banks to reinvest in their local economy, using copper as the asset to secure the loans. This worked fantastically well for a period of time, but the People Bank of China’s recent decision to devalue the Yuan pulled the rug from under this get rich quick scheme in spectacular fashion. Suddenly Chinese borrowers, who had secured loans against their copper stockpiles, found the value of their local investments plummeted.
On 29 September copper closed at a six and a half year low of $4,995 a tonne. Glencore’s (GLEN) 31% drop the day before made the headlines, but it wasn’t alone. Kaz Minerals (KAZ) suffered a similar fate the previous week and Anglo American (AAL) took a hard hit as well. Wider weakness in stock markets was partially blamed on the damage these sudden share price drops did to sentiment, but this could prove to be relatively short lived. Although there is a global glut in the supply of copper, with some countries (such as Mongolia and Peru) ramping up production in a desperate bid to balance their national budgets, copper’s recent sharp decline was most likely driven by the unwinding of the Chinese copper carry trade. This certainly isn’t good news for the outlook for copper, but it might not be as bad for equity markets in general. So long as funny money continues to work its alchemy, there remains plenty to be bullish about. The crucial event this month will be the Federal Open Market Committee’s (FOMC) next policy meeting on 27-28 October. The FOMC baulked at raising US interest rates in September. It might do so again this month, but even if it does push through the United States’ first interest rate increase in nearly a decade, it will only be by a marginal amount. Historically low interest rates look set to remain with us for some time to come. Even if Dr Copper remains poorly for a prolonged period, this could be the medicine that provides stocks with a cure from his cold.
UK Investor Magazine — 19 — October 2015
Zak Mir’s three shares to buy for October By Zak Mir
Ashley House (ASH): 2015 Price Channel Heading For 23p
O
ne of the “joys” of charting the small caps space is to discover new companies that private investors are enthusiastic about, and want to win. Clearly, most of these situations will not be the ten baggers than most in the market are dreaming of, but the attempt to such financial nirvana (or not) can be the real challenge. In the case of Ashley House it can be seen how the big recovery signal here came as long ago as June with the reclamation of the 200 day moving average then near 7p and now at 6.39p. In fact, this event was flagged as long ago as March with the positive divergence line in the RSI window – a feature which was all the more important given the way that the oscillator had served up a rebound from close to the ultra oversold 0/100 zone. What has been of particular note over the course of the summer is the way that the technicals have become
more solid, with bounces off the February support line in the RSI window, as well as the 50 day moving average, currently at 8.52p, and just above the floor of a rising trend channel which can be drawn on the daily chart from as long ago as April at its support line. As far as where shares of Ashley House may be headed over the next couple of months is concerned, we are projecting it towards an October resistance line projection, one which is currently pointing at 23p – a destination which could be hit as soon as the end of November. In the meantime any weakness towards the floor of the rising trend channel is regarded as a buy opportunity, with only a weekly close below 8p even beginning to delay the upside scenario. Nevertheless, given the way that all the near term moving averages are now rising, including the 200 day line, the prospect of a failed break the upside here is diminishing by the day. Roxi Petroleum (RXP): 20p 2015 Year End Target
UK Investor Magazine — 20 — October 2015
R
oxi Petroleum feels as if it is a blast from the past, even though, looking at the daily chart the best of the price action here was not actually than long ago. Of course, since the big 2014 rally there has been a lot of water passing under the bridge, most notably the Crude Oil price more than halving. However, this situation commends itself, not only on a charting basis as we shall see, but more subtle reasons. The reason for this intriguing comment is the expectation / hope that the stock could be a leveraged play on the
upside for the underlying commodity, much as in the way that mining stocks were a leading indicator on both the upside at the end of the 2000’s and on the downside for the time since – as witnessed by the fall and fall of Glencore over the past 4 years. Getting back to Roxi Petroleum on a charting basis, and it can be seen that the overall pattern here is that of progress within a wide rising trend channel, one which has been in place since July last year. The floor of the channel currently runs at 8p, with the lower lows since July backed by an
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UK Investor Magazine — 21 — October 2015
ultra strong looking bullish divergence line which has been multi tested. On this basis one would be happy to call the stock up to an initial target for October at 11.99p – the present level of the 200 day moving average. A weekly close back above this key technical feature could lead Roxi Petroleum back to the top of the 2014 price channel at 20p as a 2015 year end target. Strat Aero (AERO): Return To 200 Day Line Zone Above 8p
I
t would be pleasant to suggest that the technicals for drones group Strat Aero have been leading the way in terms of the recovery seen to end September, but really the situation only really took off with the fundamentals and positive news here. Nevertheless, if one jobs backwards on the daily chart – there is actually some merit in doing so in this instance – it can be seen that the lower lows made by the stock since the beginning of July, were met by bullish divergence in the RSI window.
respect, a point backed by the way that even in the wake of the selling climax dive to below 4p just before the big turnaround was delivered, the RSI rebounded from very oversold levels towards 20/100, something which was a great leading indicator on recovery. In fact, even though there has already been a sharp bounce, accompanied by a gap to the upside through the 10 day and 20 day moving averages just under 5p, we can still look forward to a further squeeze. This is said in the wake of the clearance of the 50 day moving average at 5.28p, as well as the monthly close back above the initial September resistance at 5.2p. Therefore the message at the moment is that provided there is no end of day close back below 5.2p one would assume decent progression within a broadening triangle formation which can be drawn on the daily chart from as long ago as January. The top of this formation as its resistance line at 8p – just below the 200 day moving average at 8.85p, and this makes for the 1-2 months (or less) technical target at Strat Aero.
Indeed, there was quite a robust basing in this
Have you been fleeced by snake oil salesman the “stockmarket trainer” Darren Winters? Tom Winnifrith has taken up the cases of two customers of this appalling charlatan from whom Winters’ is trying to extort cash with legal threats.You can read about Mr xx and Ms L Here and HERE. Tom is helping them fight their cases. For that Winters has threatened Tom with an injunction and libel proceedings. Tom has said “see you in Court bitchez” and will fight this one to the bitter end. Have you been fleeced by Winters, WIN Investing or Wealth Management Training Ltd? If so can you contact Tom on tomat49@gmail.com as he would be keen to hear from you as he fights this to the bitter end. UK Investor Magazine — 22 — October 2015
Three stocks to sell in October By Tom Winnifrith
O
ctober is of course a month when we get stockmarket crashes. It is not every year but it seems to be a month when we can get great spills. But my selections of stocks to sell this month are not predicated on the idea that we will get a major market upset. I am not making such a big call although I remain of the view that UK equities remain pretty fully valued. I am a natural bear but I see no reason to revise my view that the outlook for corporate earnings – and the clear macro risks to those earnings – does not justify current multiples. When suggesting that stocks are overvalued and should be sold, a standard response from holders is that “you do not understand the industry, business model, metrics of a new paradigm, etc, etc etc.” Maybe they are correct. I must admit that I would struggle to deliver two minutes without hesitation, deviation or repetition on many of the tech plays on AIM. Call it being an old man. I shall leave that sort of thing to the younger generation. But what I do understand are balance sheets and cashflow statements. If a company burned x in the most recent six months the odds are that it will burn something close to x in the six months that follow. Companies – even smaller quoted companies are not nimble fighter aircraft that can turn on a sixpence in terms of financial performance. Life is just not like that. So if cash (minus trade payables + trade receivables
is anywhere close to x ( or worse still less than x) then it is pretty much certain that the company will have to do a placing and in the current climate that will be at a huge discount even if successful and thus the shares are a slam dunk sell. It really is that easy. And that brings me to my three sells for October. I start with an easy one – LGO Energy (LGO) at 0.9p to sell. Oh for the days when this was Leni Gas & Oil and the shares were 6p and
being ramped to high heaven on promises of jam tomorrow by Big Dave Lenigas. The new ramper in chief executive Neil Ritson is not in the same league. LGO raised £1 million at 0.9p the other day. That it raised so little and at such a vast discount to the pre placing price of 1.15p tells you that this is no longer an institutional play (if indeed it ever was). It is a true penny stock
UK Investor Magazine — 23 — October 2015
for mug punters. And to the mugs I say that this will not be the last placing. LGO sent £4.5 million to money heaven in the first half of calendar 2015 and at the half year had cash minus trade payables + trade payables of just £4 million. In addition it had long term liabilities of £9 million and since then oil prices have fallen as has output. It has a peculiar loan facility which it could draw down on for another £8 million but it works in a way such that at current oil prices it is cashflow hara-kiri to utilise it and poor Mr Ritson has admitted as much. Even with this placing LGO will have only c £0.5-1 million true net current assets at the year-end at best and it will still have nearly all of that debt. And it will still be
burning cash. Thus another placing is a slam dunk certainty. The price of LGO confetti issues over the past year has been lower each time and the next placing won’t buck that trend as LGO needs to raise more than £1 million.
Tom Winnifrith’s
5 mo de l por tf oli o s : Growth Income Gold Recovery Penny Shares
S u b s c r i b e t o d ay
newsletters.advfn.com/tomwinnifrith UK Investor Magazine — 24 — October 2015
Shall we say £4 million at 0.4p? Whatever the maths LGO is a slam dunk sell. In the same sector I now turn to Northern Petroleum (NOP). I was a bull of this stock for a long time but admitted the error of my ways some two years ago at 33.5p. The shares are now 3p to sell valuing the company at c£3 million. At the half calendar year cash minus short term liabilities plus trade receivables were just $2 million. The cashburn in H1 was a stonking $9 million. Now a good stack of that won’t be repeated but a good bit will be. The company’s hapless CEO Keith Bush has wandered around like a headless chicken doing paid for video interviews to suck in private investors talking of opportunities created by the low oil price for M&A and cutting contractor costs, blah de blah de blah. But in the current climate there can be no debt funding for M&A and Northern needs to issue paper fast just to keep the PLC lights on let alone to actually do anything. The writing is very much on the wall and I am afraid that my target price here is not a lot more than 0p. Finally I return to an old favourite from the tech space where the cash position is now critical – Wandisco (WAND). Its shares are 90% down from all-time highs at 115p to sell but after a string of (lack of ) profits warnings this year it is understandable why no-one is rushing to buy the shares. The half calendar year numbers were dreadful. In the first six months of 2015 Wandisco spunked $13.421 million away – that was cash heading straight for money heaven. I would note that trade receivables which have actually been billed for as opposed to accrued and are due within one year are less than short term trade payables and at the half year cash
stood at $15.2 million. The company boasts of a “currently unused $10 million HSBC facility” but that is not an overdraft it is a facility which can only be used to provide working capital against specific projects. Therefore, by the year end net cash will be pretty much gone and that when the auditors come to sign off 2015 accounts next March or April - if Wandisco is still solvent at that stage -there is not a cat in hell’s chance of this company getting its accounts through without qualification. The company itself states: At this stage in the company’s growth we are experiencing variability in quarterly sales bookings, and expect that to continue as we progress through a period of rapid change in our operations and in the Big Data market. Nevertheless, with a compelling new Big Data product, increasing engagement of high-quality partners, and a well-established ALM product, we expect to build momentum through the rest of this year. Ends So it thinks it is heading the right way but – not surprisingly given the multiple downgrades this year for forecast sales – it admits there is sod all visibility on pipeline. These days the company is valued at c£33 million. For a company rapidly pissing away its remaining cash, which keeps missing forecast and which MUST do an equity placement within six months and which is light years away from free cash generation (if indeed it lasts that long) that valuation is a joke The shares are a sell as we await the next bailout placing (the last one was at 185p). The next one will be at well under a quid.
UK Investor Magazine — 25 — October 2015
Panic city at Glencore = mining sector opportunities By Chris Bailey Financial Orbit
L
et’s review recent events at the self-styled mining giant Glencore (GLEN). A month or so ago Glencore management gave a pretty clear view in its post results conference call that the balance sheet was strong enough not to raise money. Nine days ago bullied by panicky ‘key stakeholders’ (i.e. big institutional shareholders) the company announced a surprise range of initiatives as I noted here to strengthen their balance sheet. On the accompanying conference call the management noted cost cuts, mine mothballing and disposals were all way preferable to an equity money raising but that – once again – they would be sounding out the company’s ‘key stakeholders’ to gauge their views. Over the last day one of the conclusions of those discussions has become apparent as Glencore has announced a major money raising with a 9.99% increase in share capital worth £1.6billion issued at a price of 125p. In a fully subscribed deal, Glencore’s top managers bought about 22% of the issue with head honcho Ivan Glasenberg personally spending a cool £138million. Despite the mining slump he can afford it. I applaud Glencore management’s personal commitment. It could have saved itself a lot of money and shareholder angst by avoiding a couple of (in hindsight) badly timed deals with Xstrata just prior to the mining bubble bursting but hindsight is easy. No, the key insight here is the huge panic status exhibited by those oh-so-long-term ‘key stakeholders’. I have noted before that it is debt that kills equity with the warning signs being supplied by a (lack of) free cash flow generation. Interestingly Glencore has always generated pretty healthy free cash flow levels. I would even go so far to say that it didn’t actually need to raise the monies announced today: cost cuts, mine mothballing and some simplification-led
disposals would have been enough. Another disclosure yesterday was the monthly sentiment survey by a well-known investment bank. It is possible I may have historically been a little disparaging about the investment banking community in the past but this research is actually always worth looking at – mainly because you find the main biases in the report and do the opposite. As always in investments if it is consensus then it is largely priced in: the trick is to know in the first place what consensus is. Anything remotely smacking of mining, commodities and the emerging markets was universally hated in the survey…a view which has – if anything – deepened over the last couple of months. And yet despite ‘professional’ fund managers steering clear of the sector and holding underweight positions compared to their benchmarks the highest new entry on risky ‘crowded trades’ that could go wrong was being short of mining stocks. When I read such lunatic thinking – underweight mining sector positioning yet an acknowledgement that such a view carries huge risks and that mining stocks generally are cheap – I see huge opportunity. Such a ‘double underweight’ view in my experience leads to sector outperformance over the next year. Throw in the Glencore panic stations equity money raising and market events are telling you selectively you can make money in mining shares. At the links above I give my views on a couple of larger cap names I like and Tom W has noted the potential of selected smaller cap mining sector opportunities too. You will probably make money on Glencore shares from here over the next year but I would stick with those that have not blotted their copybook. The most important decision you should make however is to acknowledge the panic shown by the ‘professionals’ and buying selectively in the mining space.
Chris Bailey is the founder & editor of www.financialorbit.com and a speaker at www.goldandbears.com UK Investor Magazine — 26 — October 2015
the house view
Not raising interest rates is criminal I
ncredibly Weak jobs numbers in the US and some mixed economic data in the UK seem to suggest that the chances of an increase in base rates during 2015 are diminishing rapidly.
Indeed there are – normally – sensible folk talking about interest rate cuts in 2016 and so the timeframe for monetary tightening seems to be ever extending. This is surely insane. We are happy to accept that QE, almost five years of ultra -ow base rates and ongoing G o v e r n m e n t profligacy and deficit funding have failed to create a real sustainable recovery on either side of the Atlantic. Corporations have used low rates to gear up and engage in financial engineering via share buybacks or to engage in executive empire building with over-priced M&A deals. But capital investment has been slashed. The jobs created in the West have generally been in the State sector or have been low paid and insecure jobs in the private sector. But who cares? We all feel wealthier because QE has created asset bubbles in bonds, equities and above all real estate in the metropolitan centres. This
is
unsustainable.
In such an economy debt builds up at all levels, State, Plc. and personal. There is no chance of these debts being repaid the only question is
when they will be erased by default. Meanwhile the uplift in asset values overwhelmingly benefits a small portion of society. The poor, the old on fixed incomes and the young who cannot afford to accumulate assets so high are property rental costs and who will have to pick up State debt in years to come have been screwed. Debt funded asset bubbles will not last forever. They cannot. There is tangible anger on both side of the pond and the inequalities that current bastardised Keynesian policies have created. A dramatic fall in house prices would, for instance, be good for the economy. It would see rents fall and thus allow young people to save for a better future. And if that process was triggered by a rate rise that would help the elderly on fixed incomes. The current policies only postpone the day when the bubbles burst. They encourage further speculation and leveraging up by PLC bosses, action which create neither jobs nor shareholder value. The bigger the bubble the more pain is felt when it bursts. We suggest that responsible Central Banks – that may be an oxymoron – would burst it now and should do so with material and immediate increases in interest rates.
UK Investor Magazine — 27 — October 2015
UK Investor Magazine — 28 — October 2015
UK Investor Magazine — 29 — October 2015