UK INVESTOR MONEY // SHARES // INTERVIEWS
ISSUE 7 // DECEMBER 2015
The Zak Mir interview
Shell king ADAM REYNOLDS
What
will Father Christmas be putting in the stockings of the writers of ShareProphets? Seven shares to buy for Christmas Chris Bailey admits he’s a chav
UK Investor Magazine — 1 — December 2015
Intro
INSIDE 3 Three Long-Term Speculative Buys Harry Stevenson 6 Discount store spending confessional Chris Bailey 7 Company of the Month: InterQuest Steve Moore
A Message from Tom Winnifrith
8 Buy React Hot Stock Rockets
Sod the Frankincense and Myrrh, it is gold that is starting to interest me
9 Obtala Resources
2,000 years ago there was still a roaring trade in Frankincense and Myrrh. It was not just the wise men who brought the two commodities from North Africa and the Arabian gulf to Israel and beyond—there was a roaring trade. I shall not bore you with 20 trivial facts about these two commodities, suffice to say that the market is not that big anymore. Cynics might say that gold is heading the same way.
12 Three shares to buy for November
Zak Mir
15 What will Father Christmas be bringing the ShareProphets writers this Christmas? Tom Winnifrith 17 CEO interview Adam Reynolds
Zak Mir
20 Three Stocks to sell for the season of goodwill Tom Winnifrith 22 The House View Tom Winnifrith
CONTACT US UK Investor Magazine 91 - 95 Clerkenwell Road London, EC1R 5BX E: info@ukinvestorshow.com W: www.UKInvestorShow.com EDITORIAL Tom Winnifrith Editor
We humans are truly goldfish like. Things move in cycles. Gold enjoys bull market and bear markets. At the end of every bear market it is written off as a barbarous relic and then a bull market starts again. The last bear market was marked at the end by Gordon Brown selling most of the UK’s gold so that he culd buy nice new shiny Euros. It might help us all gauge when this bear market is going to end if Mr Brown could give us his views on gold now. If gold is down gold stocks fare even worse. They are geared plays on gold and this bear market has been one of the most savage in memory for gold stocks. I was struck at the recent Gold, Bears & Traders show by the absolute aversion to most gold stocks shown by most investors. Almost without exception most delegates would rather have drunk warm ebola than buy gold shares. It rather reminded me of the first investor show I organised back in 2003. The FTSE 100 had plunged to 3,500. All the speakers (bar Nigel Wray and Mark Slater) warned that it was heading much lower (1500 was one call from chartist John Piper) even though stocks with perfectly safe dividends were by then yielding 9%. The audience applauded the bears. The next week Mark Slater bought shares aggressively. That show almost to the day marked the bottom of that bear market. I am not saying gold stocks will fly or that we are at the bottom but I sense we may be very close. For what it is worth, since the show we have added to our holdings of gold shares. On that note, I wish you and your families a very merry Christmas and a prosperous New Year. Best wishes Tom Winnifrith PS New Year Resolution 1—book a seat at www.UKInvestorshow. com on April 30 - almost 80 PLCs already booked plus a star studded speaker line up. UK Investor Magazine — 2 — December 2015
UK Investor Magazine — 3 — December 2015
Three Long-Term Speculative Buys in the Resources Sectors Mindful of the negativity in these sectors we believe the recent updates give encouragement
By Harry Stevenson
Research Analyst, Beaufort Securities to form a strategic alliance with local drilling company Alpha Drilling, which would supply two exploration drill rigs for Armadale’s extensive Kisenge licence area. Additional metallurgical testwork is currently underway to further optimise the previously announced two-phase processing routes for gold recovery, results of which are expected shortly. Once completed the additional metallurgical testwork will be incorporated into the DFS, which is expected to be completed by year end.
Armadale Capital
A
(ACP 4.75p) Speculative Buy
rmadale Capital, the investment company focused on natural resource projects in Africa, announced t an update in late November on the ongoing development and expansion of its Mpokoto gold project in the Democratic Republic of the Congo. Armadale is targeting 25,000oz of gold per annum over an initial nine year life of mine which is on track to commence production in H1 2016 at an average cash cost of US$647/oz. An extensive soil sampling programme over the past three months has identified a number of new gold anomalies indicating possible strike extensions to known mineralisation. Further drilling is planned for 2016 to test the oxidised portion of Mpokoto ore body as well as deeper exploration around drill hole 64 which intercepted higher grades in a mafic host rock. Armadale also announced that it intends
Armadale continues to technically de-risk the Mpokoto gold project as it progresses towards production in H1 2016. We look forward to the completion of the DFS by year-end which should have a positive impact on the already robust economics of the project. We are encouraged with the potential strategic partnership with a local drilling company which will allow Armadale access to two drill rigs for continued exploration of its recently identified additional drill targets. As such, this could potentially add additional gold resources to the existing 678,000oz. We maintain a Speculative Buy on the stock. Beaufort Securities acts as corporate broker to Armadale Capital plc
I
Parkmead Group (PMG 61p) Speculative Buy
n late November, Parkmead Group announced its preliminary results for the year ended 30th June 2015. Revenues fell to £18.6m from £24.7m in 2014. Pre-tax loss stood at £30.8m as compared to a pre-tax profit of £1.0m in 2014. Total assets and cash balance at the end of period stood at £105.6m (30th June 2014: £127.4m) and £41.1m (2014: £46.3m) respectively. On the operational front, the company achieved first commercial
UK Investor Magazine — 4 — December 2015
Palm Kernel Cake. The production follows pilot testing of the Kernel Crushing Plant (KCP). The company recently reported 29,137 tonnes of crude palm oil (CPO) production at Ayenouan palm oil project in Côte d’Ivoire. DekelOil plans to increase the production at the KCP to its installed capacity of 60t/day in the coming eight weeks.
gas production at the Diever West gas field in the Netherlands. The Diever-2 discovery well was flow tested at 29 million cubic feet per day. The company won nine new oil and gas licences in the UKCS 28th Licensing Round, covering 12 offshore blocks. Parkmead entered into a Heads of Agreement outlining the structure of a joint development of the Perth, Dolphin and Lowlander fields. The company holds 2P reserves of 26.1 million barrels of oil equivalent as of 30th June 2015. The year 2015 has been difficult for energy companies and Parkmead was no exception. The company’s performance was hurt by prevailing low oil pricing environment. However, Parkmead continued to improve operationally and it won a series of new licences during the period. The company now holds a new gas field at Diever West, which is likely to enhance the gas production and improve cash flows. The 28th Round of awards proved successful for Parkmead and it now possesses a total of 12 offshore blocks in the UK. These blocks would add to the company’s present solid asset base of oil and gas and are expected to improve the exploration prospects along with development of its main Perth-Dolphin-Lowlander oil hub. In addition, the company plans to take advantage of its technical expertise in these regions as it has previously worked with considerable success in the Southern Gas Basin with gas discoveries at Platypus and Pharos. Parkmead plans to look for additional acquisition opportunities to maintain its market in the challenging oil sector. We maintain a Speculative Buy rating on the stock.
DekelOil Public (DKL, 1.15p) Buy
A
t the end of November DekelOil Public announced that it has started commercial production and sales of Palm Kernel Oil and
This news is an important milestone in DekelOil’s growth story. As the company commenced production at the Ayenouan palm oil project in line with the schedule, its sales and profit margins are set to expand. DekelOil holds 51% stake in this project, which has a capacity of 70,000 tons of CPO. Additionally, DekelOil possesses a nursery with a capacity of 1 million seedlings per year. Furthermore, the company delivered solid performance for the latest quarter offsetting the difficult CPO pricing environment. The company’s CPO production in the first nine months of 2015 was more than double of the total production reported in the fiscal year 2014. DekelOil benefitted
from an upgrade of logistics ensuring timely supply of feedstock, thereby enhancing overall efficiency. The company plans to continue with its planting programme in the Ayenouan region and start operations at the second project based out in Guitry. We believe DekelOil’s earnings growth is likely to accelerate going forward given its substantial resources and prospective plans. Therefore, we maintain a Buy rating on the stock. Beaufort Securities acts as corporate broker to DekelOil Public plc
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 — 5 — December 2015
Discount store spending confessional… but avoid Poundland shares By Chris Bailey Financial Orbit
D
ear readers…time for another confession. I may have over the last few months enjoyed shopping at my local 99p Store snaffling a bargain or ten (£9.91 worth!) of relatively neardate cereal, biscuits and chocolate not to mention various household goods. Of course my retail spending patterns are just following a trend that has been established for a few years now of greater sales by discounters in general much to the chagrin of the big four large established UK supermarkets. Everyone loves a bargain after all. And it appears that I am not alone in having a preference for a trip to my local 99p Store as the sector behemoth Poundland (PLND) made a takeover approach for the company which finally – last week – was cleared by the Competition and Markets Authority (CMA). Today Poundland has announced a £50 million placing to help fund this acquisition which offers the usual post-deal potential of better sourcing, synergies and other cost-cutting rationales. Such are the opportunities from taking out one of your competitors. I have written about Poundland before, most recently here where I concluded that fading loom band sales and generally higher competition from the big four supermarkets meant that the shares did not attract me anymore. Today I have a stronger view: sell/avoid/even short Poundland shares. The announcement of a placing often pushes a share down but there is so much more going on here. The first red flag was the announcement in the middle of an ‘inline’ trading statement update that like-for-like sales had turned negative, store opening costs were higher than expected, profits were going to be second half weighted (and lower during the first half than last year) and – most damningly of all – ‘99p Stores’ financial position
has weakened somewhat since our original due diligence’. Oh dear. Of course the number of new stores being opened by Poundland continues to rise but the old saying of sales are vanity, profit is sanity comes to mind (actually cash flow generation is sanity but you get my drift) and putting all those factors noted above together tells you one thing: competition is increasing in the discount store zone. Should this be any surprise? Take a look at the CMA’s near 80 page report on the Poundland/99p Store deal and one aspect becomes very clear: the deal was cleared because the CMA are comfortable that it will not have any materially derogatory impact on trading. My favourite fact from the report was that over 50% of 99p Store shops and over 40% of Poundland shops were within half a mile of a Tesco (TSCO) store. The proportion an akin distance from an Asda was only a little less. Oh dear #2. Earlier in the week retail industry statistics showed that both Tesco and Asda are still seeing declining sales as they continue their battle to win back customers. Want to guess one way they will be doing that? Price. The big supermarkets got themselves in such a state by taking their eye off the ball on a number of fronts. New management there won’t make the same mistake. That’s not good news for stores like Poundland in trying to gain an even greater share of everyone’s spending habits. I may have been a recent convert but am I going to be spending more at the margin at my local 99p Store? I doubt it. And I certainly will not be buying any Poundland shares. My view: sell/avoid/even short. The shares aren’t going down to a Pound but they are going lower from here.
Chris Bailey is the founder & editor of www.financialorbit.com UK Investor Magazine — 6 — December 2015
company of the month
InterQuest (ITQ)
InterQuest Group – still on a mission to deliver value for shareholders
By Steve Moore
H
aving recovered from sub 40p, shares in InterQuest Group (ITQ) reached more than 130p in early October 2014 – this following results CEO Mark Braund noted were benefitting from the company focusing on specialist niche recruitment services in areas such as analytics and digital technology, “providing some of the market’s most in-demand skill sets”. Then on 21st October the company announced that it was “launching a review of options open to the company to maximise value for shareholders including a potential sale of the company”… Before the end of December it then updated that it had held discussions with a number of interested parties, but “the outcome of these is that the board does not believe that a sale of the company at this time would achieve maximum value for shareholders in the medium term, having regard to the opportunities, growth potential and inherent value of the company. Therefore, InterQuest today announces that the board has decided to terminate the formal sale process with immediate effect”. Despite adding that “the performance of the company continues to be strong”, this saw the shares slip back below 100p and they have not been helped this year by a July announcement of the resignation of Mark Braund (although he is to remain on the board as a Non-Executive director) and August announcement of the resignation of CFO Michael Joyce (“to take up a role at a private business”). However, interim results announced in September saw Chairman Gary Ashworth emphasise a further improved financial performance and that “we enter the second half of 2015 with positive momentum, positioned well to capitalise on the opportunities in the second half of the year and beyond”. Then in November the company announced agreements for Chris Eldridge to become CEO (from 2nd May 2016) and David Bygrave to become CFO (from 1st December 2015). It also updated that “since the group’s interim results announcement on 8 September 2015, trading has continued to be strong and in line with management expectations”,
with Gary Ashworth considering that “InterQuest is now better placed than at any time in recent years and expects to benefit from its specialisation in its high growth niche markets where it enjoys market leadership”. Despite this, the shares have recently slipped further back - to around 80p. However, I consider that the noted trading puts the company on course to deliver 2015 earnings per share of 11p+ and further improvement to a balance sheet which looks well manageable (net debt reduced to £6.9 million, equating to just over 19p per current share, at the half year stage, current assets over total liabilities increasing to £1.6 million). As such, despite the shares not having performed as hoped, we remain positive on them on our ‘Nifty Fifty’ service – continuing to consider them a value Recovery portfolio buy. Steve Moore co-edits the Nifty Fifty website with Tom Winnifrith
Chairman Gary Ashworth is the founder of, and largest shareholder in, the company. A Fellow and past president of the Institute of Employment Consultants and having worked in recruitment since 1980, he previously founded Abacus Recruitment, which was floated on AIM in 1995 and successfully sold to Carlisle Holdings in 1998. Recently appointed Chief Financial Officer David Bygrave is a Chartered Accountant and spent nine years with PwC as well as having experience of CFO roles within the technology sector. He has most recently been the CFO of financial technology group Caplin, from 2010 until its sale earlier this year. CEO-designate Chris Eldridge has over 20 years’ experience in the recruitment sector and for the past 10 has been the Global Head of the Technology Practice at fellow recruitment consultancy PSD.
UK Investor Magazine — 7 — December 2015
Buy React (REAT) at a 1.75p Offer Says HotStockRockets
T
he modus operandi of company rescuer Adam Reynolds is to seize control of AIM listed dogs that are on their knees, raise a bit of cash and then reverse a good business into it. With Optibiotix (OPTI), and Premaitha (NIPT) Reynolds has delivered fireworks and everyone loves him. Tiny React (REAT) has delivered no fireworks since its RTO in August but that is set to change. React was formerly known as Verdes (VMP) and was a serial dog under various management teams over ten years. It was everything that made AIM the joke it is today. But in August Reynolds raised £1.75 million at 1.75p and reversed in the React business. Reynolds is not on the board but he is a consultant and you back the man. He is THE man. REACT is a specialist cleaner capable of dealing with diverse and extreme cleaning problems requiring special equipment or clothing. This is a regulated sector with real barriers to entry. Last year it made profits of £281,000 on sales of £1.55 million and it is delivering steady organic growth. You may say that it sounds dull compared to Reynolds biotech ventures and yes it is. But it is growing and with a mammoth cash pile behind it you would expect strong organic growth to be complemented by bolt-ons. Verdes raised £1.75 million in a massively oversubscribed placing. Folks were scaled back by 5075% such was the demand. There was also a small open offer so that existing Verdes shareholders could get a slice of the action and not surprisingly that was well taken up. So net cash post the RTO was c£2 million. The market cap at a 1.75p offer today is £4.7 million with the REACT business being bought for £1.56 million in shares. We believe that in the current year, organic growth will see PTP of £350-400,000.
the ex-cash PE is c.7. However the business will generate cash and has a significant war chest. Supporters reckon that profits would well double within a couple of years with the company still sitting on a cash pile of close to seven figures. That would be an ex-cash PE of less than 5. Reynolds won’t sit on the REACT board but as a major shareholder is bound to take a keen interest. The Reynolds presence, the balance sheet, the growth being delivered and potential surely merit a PE of at least 10. And that implies a target price of 3.4p. One other factor to note is that the free float will be very small. Most new investors are EIS investors, which gives massive incentives to hold for 3 years. The vendors are all locked in as is major investor Helium. The effective free float is c.15% and that means these shares could move fast if there is any news. The Trade: buy at 1.75p and at up to 2p – a bit of good news could see a Santa rally causing these shares to double.
Excerpted from The Eight Shares To Buy for the Santa Rally. You can get your own copy, with seven more investing ideas, by visiting www.ShareProphets.com/guides
So on a proforma basis, on a c.20% tax charge UK Investor Magazine — 8 — December 2015
Obtala Resources Limited DEVELOPING THE AGRICULTURE AND TIMBER ECONOMY IN AFRICA
Overview
price Current share 8.25p Shares in issue 263m Market cap £21.7m Market AIM Ticker OBT ZAI Corporate Finance Nomad Website: www.obtalaresources.com
Current share price as at 10 November 2015
Obtala Resources Limited actively invests in and is developing a fully vertically integrated business solution. The Group is working towards building an integrated production and trading platform with an emphasis on agriculture, food production and processing. In the most simple of terms this is the “Farm to Fork” model which allows us to plant a seed and produce a finished marketable branded product. The initial geographic focus is within Sub-Saharan Africa with our projects currently operational in Tanzania and Mozambique. In addition, Obtala has also built up a substantial portfolio of natural forest hardwood timber concessions in Mozambique where it operates a sustainable business model.
Recent Announcements 06 Nov
Agriculture Update
15 Oct
Proposed Listing of Forestry Division
29 Sept Half Yearly Report 01 Sept Membership of the Social Stock Exchange 11 Aug
Directorate Change
Directors
Farming & Processing Integrated “Seed to Fork” business model with both local and export markets for horticulture and dried fruit and vegetables.
Frank Scolaro - (Chairman) Kevin Milne – (Dep. Chairman)
Simon Rollason - (MD) Philippe Cohen - (CFO) Emma Priestley – (Exec. Director)
Jean du Lac (NED)
Initial focus in Tanzania with dual track business model;
Miles Pelham (NED)
1. High margin horticultural business 2. High margin, high revenue business for dried fruit and vegetables
Contact Details 1 Berkeley Street London W1J 8DJ Tel: +44 207 099 1940 Fax: +44 207 016 9100
October 2015
We have 530 Ha under long lease agreements with GLOBALG.A.P certification awarded in July 2015 and a tax free Export Processing Zone (EPZ) certificate has been awarded to the project. BRC Global Standards accreditation is in progress on factory (expected imminently). Dar es Salaam Port and international airport, geographically easy to Located 230 km from air freight fresh veg to Europe, Middle East and Regional. Focus on horticulture with up to 4 crops per year per individual hectare. To date 17,000 mango saplings planted late 2014/early 2015. UK Investor Magazine — 9 — December 2015
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Obtala Resources Limited
DEVELOPING THE TIMBER, AGRICULTURE & RETAIL ECONOMY IN AFRICA
Branded Products – Mama Jo’s
We are developing and building a branded product range for sale to retail and wholesale markets. This is the end product of ‘seed to fork’ strategy to fully maximise returns Timber We are one of the largest concession holders in Northern Mozambique. Concessions are native forest (non-plantation) with high value, low density hardwood species exhibiting multi-product potential currently in active harvesting. Immediate plan is to list the forestry division in a separately quoted company during the first quarter of 2016. Reasons for the listing are: ¾ Visibility on the value of the division, ¾ Improve ability to add specialist management to drive the business plan, ¾ Raise awareness of the assets within the forestry sector and capital markets, and ¾ Ability to raise funds from highly specialist investors that may want to invest in forestry only. Independently valued at £93.4m (15% discount rate) - June 2014 Based on NPV cash flow over 270,000 Ha in three Provinces ¾ 10 year projection (concessions are held for 50 years) ¾ Average annual production of sawn timber is expected to be 23,580m3 (60% of the annual permitted cut) New additional 35k Ha block independently valued at £8.6m (15% discount rate) - June 2015
October 2015 November 2012
UK Investor Magazine — 10 — December 2015
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ukinvestorshow.com UK Investor Magazine — 11 — December 2015
Zak Mir’s three shares to buy for December By Zak Mir
Aminex (AEX): Bowleven Salvation Targets 3p Initially
I
n terms of resources companies, whether mining or oil & gas, one very often feels that it is a case of once (or perhaps a dozen times) bitten, twice shy, as far as the recent history of such companies on the stock market. This is especially the case with reference to the juniors on the market capitalisation scale. The message should of course be that we take each company on its own merits, even if very often investors / the market is not quite so charitable. Unfortunately, over much of the past couple of years it has been a case of us having to find the company which is the exception which proves the rule, rather than getting any easy ride – as in the late 2000’s or early 2010’s. The present position at Aminex perhaps indicates how one really needs to find only the most robust of situations in order to stand a chance of being immune to overall market or sector trends. Here the latest newsflow is that the company’s
new Tanzania gas partner, the former private investor favourite Bowleven (BLVN) is to inject as much as $28m into Aminex for its a 25% interest in the Kiliwani North Development Licence, and a 50% stake in the Ruvuma production-sharing agreement asset. This will of course significantly impact the financial position and the prospects of the £33m market cap company. Perhaps most importantly, even in a cynical market this should mean that Aminex is one of the more defensive plays should commodities prices continue to fall, and one of the favoured longs if they start to bottom out. From a technical perspective we have the stock trading in a 2 year triangle consolidation, one which has its boundaries at 1.7p support and 2.10p resistance. While buying down to 1.70p support appeals, it may be a break of the 2013 resistance line at 2.10p on a weekly close which delivers a return to the logical target of 3p plus at last year’s resistance. Infastrata (INFA): Return To Late 2014 6p Zone
F
avouring a company on the basis of its name may not inspire too much confidence. But it should be noted that ever since I discovered the company the shares
UK Investor Magazine — 12 — December 2015
have arrested their decline, and subsequently started to rebound. Given current stock market conditions we are aware that the share price is not everything. Therefore, it is important to delve a little deeper both in to the fundamentals as well as the technicals. The recent newsflow has been dominated by the way that at the end of the summer the Petroleum exploration and gas storage company said one of the participants providing funding for the
Woodburn Forst-1 well in Northern Ireland had backed out of the project. Not surprisingly this led to the share price tumbling, with the result on a charting basis being a gap down through the 2p level to new lows for the year. The weaker of the bulls may have decided to exit the stock at that point, but the impression currently is that the shakeout was a final flush out and that could be bought into. This point has been backed up by the improved
Get your free copy of Zak Mir’s new ebook, out today, The Ten Shares You Must Buy for now for Christmas 2015 by clicking here.
UK Investor Magazine — 13 — December 2015
newsflow over the past few months, with the recovery of the 50 day moving average now at 2.35p underlining the concept. Helping out was the announcement in November of the sale of its exploration assets, and then the completion of the Islandmagee Programme. The finalisation of the programme hints that InfraStrata can now accelerate the process to full construction – backed by it being an EU Project of Common Interest. Perhaps just as important as we end 2015 is the way that we are looking at a recovery situation which has come off the back of an extended bear run, with the worst news factored in. The charting target of 6p to take us back to where the shares were in December 2014 does not appear to be a big ask over the next 2-3 months. Ironveld (IRON): 8p Target
T
Project Progress Suggests
o quote Ironveld’s own words from the summer of 2015, the company has made “solid progress” over the near term, and this along with the last test for support for the stock under 4p suggests that we have what could be a decent combination of a technical and fundamental recovery on our hands. Indeed, the only real issue left after this is to discuss the aspect which is the most difficult – whether iron ore and the mining sector have finally reached a positive turning point. Of course, the key here may actually be that if the company is strong enough to
provide a healthy investment opportunity even if the malaise in its sector continues? Judging by the newsflow it is apparent that since the summer the company has offered something of a revival. This point was underlined in August with both funding and construction elements gathering momentum. The progress continued with the confirmation of funding at the beginning of October to its vanadium and titanium project in Limpopo Province, South Africa. Ironveld added that it was confident all the remaining funding requirements would be completed by the end of 2015. Given this state of affair, now at the beginning of December, we see the share price of Ironveld finally start to push up off the lows under 4p – a typically understated response in the present environment to what would / should ordinarily be regarded as something of a triumph. This is especially so given the run up to the construction of a 15 megawatt smelter and the beginning production of high-purity iron, vanadium and titanium slag by-products next year. From a charting perspective one would now be looking to a progression within a broadening triangle with its resistance line currently pointing at the post autumn 2014 highs above 8p. This would appear to be perfectly achievable, especially while there is no break back below the former August 4.38p support. The timeframe on the upside argument is as soon as the next 2-3 months.
UK Investor Magazine — 14 — December 2015
What will Father Christmas be bringing the ShareProphets writers this Christmas? By Tom Winnifrith
A
ll of the ShareProphets team have been good boys or girls in 2015. And so late on Christmas Eve if they hear heavy footsteps on the roof they should not fear that it is Brokerman Dan returning to his former profession, but instead that their reward for a year of virtue is on the way. But what have the team asked Santa for this year? We start with ZAK MIR. He moved from the Evil Empire to the Rebel Alliance in spring and thus should be lauded above all as a repenting sinner. Zak scribbled Father Christmas a quick note. Sadly the old boy could not understand a word that Zak wrote such are the chartist’s problems with basic English. We have however helped out Santa with a translation and so Zak now writes: I want the STB Signal Indicator (a snip at £499). Daytrading and swing trading are very much the north face of the Eiger in terms of attempting to make a living out of the financial markets over the short term. Given that perhaps we are faced with what is a mission impossible in terms of a trading elevating themselves to the right mindset, and effectively having nerves of steel, in addition to never tiring, a helping hand is what most in the game would gratefully appreciate. One such example comes in the form of the STB Signal Indicator, developed by one of the chosen few clients of mine when I was a broker in the 1990’s, Ian Foster. The USP for this MT4 compatible software as opposed to the myriad products already on the market is that this is a box of tricks identifies the start of a new trend – not missing any major one, and perhaps of most importance remain in a buy / sell mode while the price action dictates. This allows you to run a profit in a stock, commodity, currency or index for as long as possible, probably longer than
most trigger happy traders would do on a human basis. Next up was AMANDA VAN DYKE. Maybe she has not been such a good girl after all because despite repeated requests she failed to tell Santa what she wanted in her stocking. So we shall just assume that the mining guru wants more gold as once again she is predicting a major recovery in gold prices in 2016. Just as she did in 2015. MYSELF? That is simple. I’d like to open my stocking on Christmas morning and find a letter from the Serious Fraud Office. “Dear Mr Winnifrith we will be conducting dawn raids at a series of addresses acrioss Southern England on December 26 (tomorrow). Among those being raided as part of our Quindell arrests is Mr Robert Simon Terry. In graitude for your sterling work in exposing this fraud you are the only journalist being tipped off about Mt Terry’s arrest on 257 charges of fraud and if you would like to bring a camera we look forward to seeing you at 6 AM at Quob Park tomorrow” This would be a double win. Not only to I get to see and photo Terry bering led off in cuffs but I get to dodge Boxing Day with the mother-inlaw as well. It would be a perfect Christmas gift. Please, please Santa. Pizza Hardman DARREN ATWATER is a bit of a lefty so probably does not believe in Christmas but lefties love free handouts so he wrote to Santa: Santa is either running a socialist paradise or an elf-slave sweatshop hellhole up at the North Pole,
UK Investor Magazine — 15 — December 2015
I’d like to see greater transparancy in the working conditions of the people who make our consumer goods whether in the frozen north or in China. The great spirit of Winter could also bring us a Robin Hood Tax, in which a tiny fraction of each share, bond, commodity, unit trust, mutual fund, or derivative trade is charged a tiny fee, releasing billions to the treasury and relieving the burden of income tax on us all. For that matter, I’d like to see a campaign to bring fibre Internet to every single home and business on this island. Not merely to the local cabinet, like happens now for those lucky enough to live in a fibre area. Real, fast, wide Internet will transform the lives of millions and create untold billions of wealth that is stunted by ancient and outmoded wires. MALCOLM STACEY does however believe in Christmas as well as the fabled Money Tree. His note to Santa My first gift only costs a few quid. It’s the January 2nd edition of the Financial Times. But I want it on Christmas Day so I can make a killing on the Stock Exchange. Or a Tardis, if a future FT ain’t possible. As this splendid site is always telling me I search for the Money Tree, I could ask for that. Except that it is already in my front room, festooned with tinsel, fairy lights and chocolate coins. So I’ve told Santa I’m dreaming of a white Christmas. And when that gives out, I’ll start on the red. I’ve also wished that Tom would not work so hard in 2016. He looks a bit peaky to me. This may sound like a bit of creeping up to the boss. But if his ticker gives out, so will the Shareprophets juggernaut. And then we will all start losing big money again on future AIM failures. I’m also asked for sizeable oil finds to be made in the Falklands. Or, more realistically, that pigs could fly. I don’t need to ask for the oil price to go up, it will, anyway. Nor for UK bank shares to surge. It’s already highly likely. I’ve asked for a load of books, too. They are all called Share Attack. Because I love and admire the clever author. I’ll hand them out to all those irritating relatives who keep saying ‘I’m going to get going in shares, tomorrow’ but who never do. So a Merry Christmas to you. All presents to Stacey Towers, Tenby, Pembrokeshire. Rather more in the Bah Humbug tradition is LUCIAN MIERS. When he wakes up in his east End tower block on Christmas morning the Bard of the Boleyn is clear as to what he wants. Bah Humbug Miers writes: I would like Santa to arrange for Donald Brydon the new Chairman of the London Stock
Exchange to make it clear, as did his predecessor Chris Gibson Smith, that he is aware that he is accountable to more than the group’s shareholders in his capacity as the figurehead of an important British Institution. In this regard I would like him to allow any UK citizen who so chooses to attend, free and unfettered access to future AGMs. I would also like him to publicly apologize for the disgraceful events at this year’s AGM, which resembled some kind of plenum in a vile totalitarian third world country, where boot faced thugs on the door refused access to bona fide shareholders. I would also like Doctor Gibson Smith who presided over this ghastly event to send, at his personal expense, a bottle vintage Pol Roger Champagne (Winston Churchill’s favorite brand) to every shareholder who was refused entry this year with a note of sincere apology attached for this most unBritish spectacle which would have had the great man turning in his grave. And in an equally charitable vein the Deputy Sheriff of AIM, NIGEL SOMERVILLE opines All I want for Christmas is my two front teeth….well, not mine but some teeth for AIM Regulation. So many scandals and not a censure in sight: what of all the Nomad resignations leading to the expulsion of eleven of the ShareProphets AIM-China Filthy Forty from the Casino in just this year alone? Surely AIM Regulation has something to say on what was going on with these companies? A CEO in jail? Cash disappearing or never existing in the first place? Another CEO running off with the company assets? Surely these would all be grounds for public censures to be issued to the offending CEOs? Thus far AIM Regulation has been seen to do absolutely nothing about the ongoing AIM-China scandal. This year alone, the total IPO value of the companies to leave the world’s most successful growth market is in excess of £550 million. Yet AIM Regulation has nothing to say on the matter. With a good number of the remaining AIM-China plays trading on joke PEs of less than one, a whopping discount to net cash, even sillier discounts to net assets and yet (apparently) they are profitable, cash-generative and growing! It is clear that the market has completely lost faith in what those companies are saying - and, by extension, the regulation. Is that not the biggest indictment? It seems that no-one wanted something simple like booze, coke or hookers. How unseasonal. However miserable we may all sound, we do hope that Santa brings you what you want and that you enjoy a wonderful Christmas.
UK Investor Magazine — 16 — December 2015
THE ZAK MIR interview Adam Reynolds - the shellmeister By Zak Mir Zak Mir: The AIM market has been described by some people as a casino. In addition, if you remember the conditions with QE and the stock market as a whole stagnating, it’s become a very difficult area for private investors. But they still make up 40% of the people who invest in this market. Is this an area which you find particularly attractive or is it just a coincidence that you are one of the best known people operating in this market? Adam Reynolds: Thanks for that, Zak. I do find it interesting because where I specialise in is rescuing technically bankrupt quoted Zak entities and you’re going to find more of those here than you are on the main market, just by the nature of the way those companies have listed and usually by the nature of the businesses. So for me it’s a great opportunity. ZM: So other people’s failure is your opportunity? AR: Yes, very much so because when a company fails often there’s a list of creditors and usually the creditors are the professionals and the professionals are the ones that resign early on because they know they’re not going to get paid and that really is my opportunity. What I’m looking for is a quoted entity with the ability to put new funding in and then to find something very attractive to reverse into it. But at the same time to try and give shareholders who’ve usually lost 99% of their funds, the opportunity to come in to an open offer on the same terms and the same price that I’m getting involved in. ZM: This is a strange situation though because if you’re able to do this – how come other people aren’t following the approach – one that’s obviously succeeded for you? AR: I think twofold really, Zak. The first one is that often other entrepreneurs find it either too small or they’re too lazy or they don’t understand the template. But to answer that question why aren’t other people doing it, well I think probably other people – some of the larger entrepreneurs probably find the area too small. It’s the ability to actually create the template to be able to
restructure these shells, take the risk, put the funds in and then to find the right reversal situation which is the area that I concentrate on. I’ve got some tremendous contacts, people who are brighter than I am who offer me opportunities which – yes I have the ability to fund. So I have the ability to find the right management to go and run it. It does surprise me why more people aren’t doing it. I mean some people have tried it and failed which again I find surprising. I mean all these deals, they have to be priced to go, you can’t be greedy, you can’t take out too much for yourself Mir and to me the most important thing is obviously to make money. But also to try and get money back for shareholders who have lost usually everything and to enhance you reputation; you’re only as good as your last transaction. Yes, you could take a much bigger slice of it but what’s the point? I’d rather keep on doing interesting and exciting transactions. ‘ZM: I think there are a couple of points there. The first point is that obviously it’s just like asking Andy Murray, “Why are you a better tennis player than other people?” You’ve either got the talent or you haven’t. The second point is perhaps that the sectors that you’re involved in offer the best risk-reward as far as recovery, especially in the current climate, would that be fair to say? AR: I think very much the latter – I mean whether I’m better at doing this than anybody else I don’t know. But I think certainly the latter. It’s the most exciting sector to be in. I could be a specialist in the resources sector and quite honestly I wouldn’t have had any successes for the last three years. So I think I am fortunate with the timing that that (life science / biotech sector is a great sector to be in. There is a lot of money there from institutions and from high net worth individuals and there’s a very big talent pool as well, especially within the UK. Another thing is that I’ve been fortunate to have worked with and been very close to people like David Evans who probably is in my opinion one of the life science gurus in the UK. ZM: Right, and the other point which I remember from
UK Investor Magazine — 17 — December 2015
a presentation I attended – that we both attended a few days ago, was that you said you are mean. Is that something which is also quite important?
what I’ve invested in is something that I think will have a substantial uplift even from these levels. I am a great believer in it and I’m backing it myself. I’m backing the management and I’d rather take a long term view than a short term view. Sometimes you get businesses that are not necessarily once in a lifetime, but quite rare to come across. This is Blue Sky I agree and we need good fortune going forward. But we’ve got a great management team and we’re in the right place at the right time. What Optibiotix are doing with the micro biome will be very big in 2016, I think it’ll be huge in 2017.
AR: As far as expenses and running costs to the business are concerned, the reason why so many of these companies go bust or nearly go bust is because the Directors are just taking out far too much money and they live too much of a lavish lifestyle in their marble towers. I’m mean, I’m tight. I’d rather incentivise people through options and for making capital, rather than giving them huge great salaries and just pay a proportion back to the taxman. There’s a balance and there has to be a balance. If you’re taking shareholders’ money you have to look after it and that’s what a lot of people forget. I think a lot of people live off a gravy train. I try and do the best for shareholders all Adam Reynolds the way through. ZM: Clearly the lifestyle situation is not what you espouse. Perhaps maybe after you’ve done your work, you can reap the rewards at that point? AR: Where I’m lucky is that I’ve got two or three very, very good private companies that actually provide a very nice lifestyle for me. I have been in the corporate finance world and a principal investor probably for the last 15 years. So for me it’s not about trying to get £100,000 out of this business and £100,000 out of that. No, I’m not interested. I’d rather have a big stake, hopefully reverse the right company and fund it as I go through and make the capital that way round. I’d much rather make capital than income. ZM: I think something that I did – I was speaking to somebody quite recently about the life sciences, biotech, fintech type of area, and one of the issues is that it’s not like normal investing. There you may be looking at a widget company which is making £1 million this year, £2 million the next year etc. and it just goes in a steady flow. Here you do have a lot of Blue Sky type opportunities and for instance taking Optibiotix – that is still Blue Sky by anybody’s standards. Even though there’s been a lot of decent progress there, it is still a Blue Sky situation, if that’s not a pejorative word. So people are going in largely because of the Adam Reynolds brand. Is that something that you think is a fair thing to do? Or are there better reasons for being involved in companies like that, before the revenues come in? AR: I think cutting edge technology and for instance, Optibiotix will not be Blue Sky for very much longer. We are commercialising and we will – I believe be profitable within two years. So there is a bit of a brand there but what I’ve done and
ZM: One of the problems private investors exhibit on the AIM market is that they’re very impatient and they can’t wait until the end of next year or the year after for the result. This is a piece of string question but what is a reasonable timeframe for a business to go from – I don’t know say where New World Oil and Gas is now, to achieving the result? Is there a typical correct timeframe to build up a business?
AR: I think you’re right, I think the timeframe is short for private investors. A lot of them get very twitchy with share price movement. I look at share prices every day but I try and divorce myself from that. I know what our aims are and what we’re trying to achieve over a period of time. I think that with something like Optibiotix or something like Premaitha one’s got to take a three year view. We’re building businesses that are potentially very, very big. They’re not UK businesses, we hope that they’ll become global businesses, that’s the key and I think that everybody should try and be a little bit more patient. Everybody’s just looking for the uptick, double your money or anything. What I’d suggest to some investors is you get your costs out and then you just try and run your profits – because I am there for the long term. ZM: The other point is I suppose with your knowledge and skills, you could be somebody who was basically a fund manager. I’ve interviewed Gervais Williams from Miton Group several times and he has a very cool head. In a way it’s almost his mentality which seems to be the winning formula there. Just being able to isolate yourself from the noise in the market. Have you ever been tempted to switch professions? AR: No, I really enjoy what I do. ZM: Do a Neil Woodford maybe, because obviously Neil Woodford - people just sort of storm in there looking to ride on his coattails. AR: Yes, I think it’s the reputation. I’m very, very happy with what I do, I really enjoy what I do. I’m not responsible really to anybody apart from
UK Investor Magazine — 18 — December 2015
the shareholders. I don’t have tens of millions or hundreds of millions of funds with quarterly performance figures. Mine is more of a longer term view. I think going back to the original point of the question, “Why are some fund managers very good? And what do they do?” They try and take the emotion out of it. I’m the same, I try and take the emotion out of what I’m investing in and that is the key. But investors become quite emotional, you know the share price falls 5% or 10% and it’s the end of the world, they think it’s a disaster. It might not be, it might be a liquidity problem in the market. I mean when I was away in Africa Premaitha fell. But they’re now back to higher than they were before they started falling. It wasn’t anything – there was no issue with the company, it was a seller who had to sell, that was emotion. The market was driving it down and other people were selling on the back of a the back of a liquidity driven issue. I think you have to take the emotion out; take the emotion out of investing which is the key.
ZM: Right so basically you built up a decent reputation, a decent collection of companies. People should – even with that track record - be cautious about following you blindly. They should look at the the propositions that you’re coming up with on a case by case basis and not just say, “I’m just blindly going to do it”. Presumably that creates pressure for you as well?
ZM: Then there’s no fun if there’s no emotion but that’s a separate point!
AR: To make sure that Premaitha and Optibiotix do remarkably well, grow them, grow them quite aggressively. Also to create – I’ve already found another very interesting little shell which I’m just trying to conclude in the next four to six weeks which is a very interesting acquisition. I think that will be an absolute winner as well.
AR: I just think you can see things slightly differently if you are being as objective as you possibly can, rather than being subjective. I think a lot of investment at the moment is a bit subjective and I just try and take the emotion out of it.
AR: Yes it does and I want people to look at it, I want people to criticise it. I want some of the fund managers to be critical because it’s better to have all eyes on something than just have a set of eyes. Some of the guys I invest alongside are very bright individuals and they’ve done very well for themselves and I’d rather them also have a close look and be critical. And I think external investors should be critical because that’s what’s important and that’s what I want to hear because I may have missed something. None of us are perfect, we all make mistakes – I need criticism. ZM: Right just one last thing, 2016 what are your main priorities?
Hot Stock
ROCKETS SStoc toc ks k s R e a dy to tak e o ff hotstockrockets.com UK Investor Magazine — 19 — December 2015
Three Stocks to sell for the season of goodwill By Tom Winnifrith
E
ven a miserable fellow such as myself has noticed that it is the season of goodwill. Heck I have even purchased Christmas presents for my entire family, including the sisters to whom I do not speak more than once a year, and less if I can help it. You cannot say that I have not got into the Yuletide spirit. But... that should not stop me from making certain folks unhappy by flagging up three stocks to sell. And boy, am I spoiled for choice. Overall, UK equity valuations look full. There is no shortage of overvalued stocks out there to have a pop at. The only problem is that it is perfectly possible that in a few months such stocks will simply be even more overvalued relative to fundamentals. Such is the way of a market driven by funny money. So what are the obvious targets for we bears, as we look forward to 2016. I lump them into three broad categories: 1. The outright frauds. Of course even shorting a fraud is not a slam dunk. The fraud Quindell would have been a zero but for the stupidity of the Colonial poltroons at Slater and Gordon. A company buying a fraud is usally a zero too and Slater & Gordon most certainly is. 2. Those companies that are running out of cash where the business model is either totally unproven (Wandisco), a proven failure (Phorm) or has been derailed by macro events (take your pick of any oil stock but Mosman Oil & Gas will do for now) 3. Those companies drowning in debt where the lenders are clearly anxious and which are not generating cash (Avanti Communications). Incidentally Slater & Gordon also fits into this category. With interest rates likely to rise very soon it is the third category which seems most topical. Of course companies may have locked in their debt at fixed rates - for instance by issuing bonds - but if rates increase and they have to refinance that process will become more costly if indeed it is possible at all. And so let’s kick off with Avanti Communications
(AVN) a company run by the most bombastic indivual in the United Kingdomn, a Mr David Williams. Mr Williams happily admits that when starting his company he fanbricated demonstrations of its technology to potential investors. The satellite company has missed almost every performance target it has set. In this regard it deserves a medal for consistency. This past week I have been urging Mr Williams to answer the question of whether Avanti generates any revenues from the evil murders ISIS as an end customer. The bombast declines to answer. I have also asked the Financial Reporting Council (FRC) to have a butcher’s at the June 2015 Again the bombast has made no comment. But these are not the real issues. The real issue is cash. Or rather, lack of it. Avanti is burning around $10 million a month whatever it says about EBITDA and normalised EBITDA. By next summer it will be out of cash and left with a massive debt pile of c$600 million. Williams has raised equity and debt time and time again but if the monetary climate chills, years and years of non-delivery might finally come back to bite him on the bottom. A highly dilutive debt for equity swap is the best case scenario. Shareholder wipeout is equally as likely. At 171p this is the first sell of the month. Next up is Kurdistan based oil producer Gulf Keystone (GKP) at 18p. This company is drowning in debt and its two classes of bonds now yield 17% and 21% respectively. That tells you all that you need to know. In a best case scenario the company is paid all the money it is owed in which case it can clear circa half of its bonds as they become repayable in 2017 but it will not be generating positive operational
UK Investor Magazine — 20 — December 2015
cashflows before interest and has zero chance of paying out on the rest of the debt. In a worst case scenario Gulf does not get all the money that it is owed in which case it defaults on its bonds in 2016. The only way out for this company is a mammoth debt for equity swap. Now if the bonds are priced to take a haircut ( they trade at c60 cents and c40 cents in the dollar respectively) that means that shareholders will be diluted to hell. Frankly if they get anything at all that would be a result. Either way the shares are a sure fire sell at 18p with a target price of very close to zero. Finally we have Wandisco (WAND)which has a debt facility of $10 million which it is allowed to use only as working capital on certain projects. But what happen if it has drawn down against that facility but runs out of cash. As Wandisco misses all of its operational targets with an Avanti like consistency it is a prodgious burner of cash.
By my calculations the company will be out of cash by January 2016 if it is not using the facility - which HSBC was insane enough to provide. If it is dipping into that facility the cash might last a couple of months longer but is it not possible that HSBC might be getting rather jittery at this point and start to make noises about pulling the rug? Certainly there is more chance of me shagging Cheryl Cole than there is of Wandisco getting its calendar 2015 accounts signed off without major qualification, if indeed it is still solvent when the auditors go in. Those who backed the last placing at 375p in January 2015 will - I suspect - not be keen to average down with the shares at 80p today. The next bailout placing will be - at best - mega dilutive and - at worst - just unbrokeable given Wandisco’s dire record in which case the shares are toast. This is meant to be the season of goodwill to all men. But there are exceptions... To anyone not involved in the management of the companies mentioned above I wish you a Merry Christmas and a prosperous New Year.
Tom Winnifrith’s
5 mo de l por tf ol i o s : Growth Income Gold Recovery Penny Shares
S u b s c r i b e t o day
newsletters.advfn.com/tomwinnifrith UK Investor Magazine — 21 — December 2015
the house view The House View: The Great day of rate rises is almost upon us...bring it on!
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e have long held the view that cheap and easy money has created, both in the US and in the UK, mammoth asset bubbles in equities, bonds and most especially in residential real estate. The Central Banks and politicians are terrified of the consequences of these bubbles bursting, for bubbles never deflate gently, they always burst violently.And as such they have adopted policies which merely caused the bubbles to become ever greater. As ever, those within bubbles do not believe that they are in bubbles because it will be “different this time.” The average London residence now costs almost ten times the average London wage. That is way above long term norms and is clearly insane. How can anyone without significant equity hope to repay the debt taken on to build such a home unless interest rates stay at almost zero forever and they are able to live on thin air? Such prices are obviously crackers yet pundits talking their own book - and politicians keen to suck up to the “home owning democracy” wheel out all sorts of reasons why it IS different this time and why the insane is perfectly rational. And such talk encourages more people to make reckless geared investments predicated on the assumption that the bubble will carry on growing - the creation of highly leveraged buy to let portfolios, for instance. Or, in the world of equities, corporates borrowing vast sums merely to buy back their own - vastly overpriced - stock, not to reinvest in creating real shareholder value.
But the party is almost over. It now seems certain that US base rates wil be increased within weeks. UK base rates will follow suit. Capitalism is about creative destruction and as one rate rise is followed by another so that process will begin. Some of the over-borrowed corporates will go bust and their assets will be bought on the cheap from the banks. Others corporates will be forced into fire-sales. Banks and equity holders will lose money but the prudent and those who have invested in the prudent will be rewarded. Proper companies will emerge from the carnage as the “financial creations” bite the dust. In the property market those who have foolishly overpaid or who thought that a leveraged buyto let portfolio was a low risk alternative to work will be ruined and disillusioned. There is no alternative to hard work if you want to make money. Otherwise we’d all be taking the easy approach. But if housing becomes more affordable as prices crash that will allow younger people to get on the ladder without State or parental subsidiy. It will create the conditions for greater labour mobility which is a good thing for the economy. Low house prices are actually good for the economy, though they might make middle England a little cross with our leaders in Westminster. We wish base rates had been hiked a long time ago. That pricess of creatibe destruction would have been less painful than it will be now. But it has to happen some time so bring it on!
UK Investor Magazine — 22 — December 2015