UK INVESTOR MONEY // SHARES // INTERVIEWS
ISSUE 9 // FEBRUARY 2016
How to make money in a bear market Bitcoin player Coinsilium CEO Interview: Kefi Minerals All that Glisters is not gold
UK Investor Magazine — 1 — February 2016
Intro INSIDE 4 Making Money in a Bear Market Tom Winnifrith 7 Kefi Minerals
Steve Moore
9 All that Glisters is not Gold Tom Winnifrith 12 Coinsilium
Steve Moore
13 Three shares to sell for February Tom Winnifrith 15 Company of the Month: Entu Steve Moore 16 The House View
CONTACT US UK Investor Magazine 91 - 95 Clerkenwell Road London, EC1R 5BX E: info@ukinvestorshow.com W: www.UKInvestorShow.com EDITORIAL Tom Winnifrith Editor
A Message from Tom Winnifrith Welcome to the February edition of the UK Investor show magazine and I suppose that you find us in sombre mood. For months and months our writers have been warning that there are very real problems with the real economy but also that UK equities remain fundamentally overvalued. The ShareProphets website was nicknamed “The Prophets of Doom” by one of our many critics. It causes us no real pleasure to point out that we have been vindicated. But it is clear that we are now in a bear market. That does not mean that you have to lose market on the stockmarket and that is one of the themes of this shorter than usual edition of UK Investor Show Magazine. The shortest issue of the year for the shortest of months. You can still make money from shares but not by buying indiscriminately. This days are gone and are not coming back for a good while. Of course we are also building up to our annual UK Investor Show - our one day conference in London which is on April 30 2016. As ever we have a range of star speakers who simply do not speak at any other event, folks such as the UK’s top small cap fund manager Mark Slater, son of the late and great Jim, Britain’s Buffett Mr Nigel Wray and the Queen of UK tech stocks Vin Murria. And there will also be more than 100 PLC CEOs present manning stands throughout the day and in nearly all cases doing a 20 minute presentation as well. we have some really big name companies attending this year including Optibiotix, Boohoo and Petropavlovsk, a sign that perhaps this show has come of age. We have 25 free investor class tickets for the show to give away this week on a first come first served basis. Just go to www. UKInvestorshow.com and enter the word MAGUKI in the box marked promotional code when booking and we will look forward to seeing you on April 30. Meanwhile we hope that you enjoy this edition of the magazine. Best wishes
Tom Winnifrith Editor
UK Investor Magazine — 2 — February 2016
UK Investor Magazine — 3 — February 2016
Making Money in a Bear Market —Yes you can! By Tom Winnifrith
A
re we in a bear market for shares? There are strict definitions of what constitutes a bear market and according to them yes we are. But to hell with definitions. Look at your own portfolio. Read the papers. Shares have been a dismal investment for a number of months and on balance, if you are honest with yourself, you would agree with me that during the rest of 2016 it is more likely that shares will weaken than they will rise? Fair enough? That is not saying that we are about to suffer an almioghty stockmarket crash on the scale of, say, 2008 or 1929. We might do. There are experts out there predicting sell-offs of 45% to 75%. Having said that, most of the uber bears have been perma bears, that is to say they called the bull market from 2008 wrongly and only now - after recent events - are their scary predictions getting the full oxygen of publicity. The media says - lets ignore six years of getting it utterly wrong, right now these guys sound credible and make for great headlines. Thus I see the Daily Mail trotting out predictions of gloom today from Mr William White who “called the 2008 crash”. Yes he did. He first started predicting it in 2003 and thus missed out on the phenomenal bull run of 2003 to 2008. The broken clock.... A much more plausible bear scenario is just that
equities will either stagnate or head downwards slowly for the rest of the year. There will be some days when shares gain sharply. Friday 12 February was in fact the Footsie’s best day for six months. But overall the trend will be flat to lower. The reasons for this are twofold. Firstly the funny money, high leverage era of 2008 onwards is drawing to a close. In its final days we see the funniest money of all ( negative interest rates). But as the problems caused by funny money, notably excessive leverage and capital misallocation come home to roost then the supply of credit - both debt and equity - for PLCs will dry up. So companies will either see mega dilution or insolvency. Secondly - given all the macro trends we know about - the risks to earnings forecasts have to be on the downside. Yet equities already discount pretty explosive earnings growth. It is not going to happen. Thus equities will either slip back in value to reflect the earnings growth that is on the cards or will stagnate for a few years until earnings have increased enough to justify current valuations. The former is more likely than the latter. So how can you make money in such a market? This was the theme of a couple of talks I gave a few weeks ago in London. The first examined why I remained bearish on share prices. The second examined three ways that you can still make
UK Investor Magazine — 4 — February 2016
money when shares are falling. The most obvious way is by going short. As Friday showed shares can spike sharply even in a bear market and I suspect quite a few bears discovered that shorting is not a one way bet even in a bear market as they got “marginned out”. But if you pick the right stocks, the sort of flakey financial creations or debt laden and creaking edifices that can only flourish in a bull market you should prosper. Finding slam dunk frauds is even better because, as Warren Buffett famously noted, when the tide goes out you then see who is swimming with no trunks. So everyone should have an acount to go short and you can open one today HERE. What should you short? I try to serve up three stocks to sell every month in this publication and Lucian Miers, myself and the team serve up ideas almost daily on ShareProphets but I would suggest that if you are looking for a few stocks to start out with then a couple featured in that talk (Avanti Communications and Slater & Gordon) wont let you - as a bear - down.
high quality shares where there is real protection from asset backing or yield. We bought BP shares the other day at around 332p on results day, a day when the mainstream media was licking its lefty, capitalist hating - lips at numbers which at a headline level were awful. But at an underlying level - at what must be close to the bottom of the oil price cycle - BP was profitable and said it was committed to paying its dividend. The yield was at that point well over 7%. Thank you, we’ll have a bit of that becuase in normal times the yield will fall to 5-6% and so we just sit patiently banking the income and waiting patiently to sell for a perfectly respectable gain. Finally, I noted above that the availability of fresh equity for companies in general will dry up. And that will present an opportunity. If you are prepared to hold your nose the discount brokers will be able to screw less high quality companies by supporting hugely discounted placings and so making a good turn flipping. This comes with risks but I suspect mney will be made this way. Good luck... we live in interesting times.
The second way is just to take the long term view and on truly awful days for the market buy
Hot Stock
ROCKETS SStoc toc ks k s R e a dy to tak e o ff hotstockrockets.com UK Investor Magazine — 5 — February 2016
Kefi Minerals (kefi) An interview with executive chairman, Harry Anagnostaras-Adams
By Steve Moore Steve Moore: KEFI recently updated on development and financing plans for the Tulu Kapi gold project, so first of all can you give us a bit of detail about this project? Harry Anagnostaras-Adams: Tulu Kapi is our flagship gold project, located in Ethiopia, with an attributable 1.72Moz ( JORC 2012) from the initial open pit mine – which is due to commence production in 2017. KEFI Minerals owns 100% of the project, with the Ethiopian government – a very supportive partner – entitled to a 5% freecarried interest. Since acquiring the asset in 2013, we have completely overhauled the project to make it one with soundly-based robust economics and significant growth potential beyond the existing Ore Reserves estimate of 15.4Mt at 2.12g/t gold, containing 1.05Moz. SM: That update represented “refinements” from a 2015 Feasibility Study. Why were refinements needed and what has now changed? HAA: As the Tulu Kapi gold project progresses and we assemble the development funding plan, the figures will need to be reviewed along the way. Since the DFS was published in August, KEFI has appointed project contractors, received reviews from the Independent Technical Consultants to the banks, and selected preferred bankers. So we’ve been taking all the feedback on board and refined the projections accordingly. Since August, we have been able to say that production will be higher than we thought at 980,000 ounces over ten years with an average of 115,000 ounces per year, and that the All-in Sustaining costs will be lower than the DFS at US$742/oz so we’re pleased to have been able to make these refinements. SM: The price of gold is clearly a critical component. What are your current thoughts on the gold market? HAA: The price of gold has been a disappointment, but it is not something that keeps me awake at night. Whilst I think the gold price can go down further, in my opinion it won’t stay down and, in that respect, I am optimistic. Equally, we have a financially robust project that we’ve strengthened to be able to withstand a further decline in the gold price and remain economical. SM: On the company’s current projections, how low can the gold price go before Tulu Kapi would struggle economically?
HAA: We’ve stress-tested Tulu Kapi’s ability to weather lower gold prices and, by our calculations the project is still profitable up even if it falls further, so it’s a very robust project. I am confident we’ve strengthened it enough to withstand a further market downturn. SM: What are the current timescales to production and what next steps should we be looking out for? HAA: The next step is formalising the syndicate for the development and funding of the project. We have just announced that we have selected our preferred bankers, and are on track to finalise the syndicate by June 2016. Front End Engineering and Design is now in an advanced stage and we are looking to complete it as soon as possible. We remain on schedule to start construction at the end of this year and gold production in 2017. SM: How well funded are you currently to achieve these? HAA: As we announced in November, the Ethiopian government has confirmed its intent to invest US$15-20 million in the project via the operating subsidiary, and in December we successfully completed a c. US$4 million fundraising – which, significantly, included support from our major shareholder, Odey, which subscribed for over two-thirds of funds raised. We’ve negotiated nonbinding terms with our preferred bankers for senior secured project loans, and are confident of completing the financing syndicate by the middle of the year. SM: The recent update noted that “the initial funding requirement is estimated at circa $120 million”. Is this realistic, particularly in the current market conditions, for a company of KEFI’s size? HAA: We have formed a syndicate of first class financiers and have all been prudent to explore various avenues to mitigate risk as far as possible. We are confident in the estimates of our advisors and our ability to deliver against these targets. It is also important to note that the funding requirements have come down significantly since we took over the project: junior miners have a bad name for being wasteful with capex, but, on the contrary, we’re minimising capex and keeping costs low. So we’re confident of being able to raise the capital and deliver on the operational side too. SM: Is the management experience and structure all in
UK Investor Magazine — 6 — February 2016
place to lead the company to production? HAA: I have every confidence in Wayne Nicoletto, who has substantial industry experience and is now managing the Tulu Kapi project development at KEFI. The big job at the moment is the syndicate which is being handled by John Leach who is a very experienced and polished finance director. Together, we are now deliberately assembling a key operational team which will lead the company to production. We have a pipeline of people waiting to join the company at the right moment and we have already assembled the project team, a set of contractors and we now have a Chief Operating Officer who is waiting in the wings to be involved. SM: You also operate in Saudi Arabia, what is the project and what are you currently doing there? HAA: We have two key projects in Saudi Arabia: one at Jibal Qutman and one at Hawiah, both of which we operate as part of the Gold & Minerals Ltd Joint Venture, in which we hold a 40% stake. At Jibal Qutman we discovered gold within 12 months of being awarded an exploration licence and discovered a string of smaller deposits, which are easy to mine and recover. It looks like there will be an expanding number of such deposits, which we intend to use to fund further exploration in Saudi Arabia. In Q4 2015 we completed preparation of the Mining Licence Application and supporting technical studies, which is currently being translated into Arabic for submission. Hawiah is a different type of project altogether. Hawiah could potentially turn into a major mine development on a global scale. We received an exploration licence for Hawiah in December 2014 and at the start of 2015 we carried out excavations which showed anomalous gold in most of the 53 trenches excavated. We intend to hold a community consultation in the first part of this year as a prelude to commencing exploratory drilling. SM: Don’t both Ethiopia and Saudi Arabia mean significant political risk? HAA: Ethiopia is a fast-growing country with real GDP growth averaging 10.9% between 2004 and 2014. Far from the political backdrop hindering KEFI’s progress, the Ethiopian government is keen to develop the country’s mining sector and has been highly supportive in a very material way. In November we announced that the Government of Ethiopia intends to invest US$15-20 million in exchange for an equity interest of 20-25% in our subsidiary KEFI Minerals (Ethiopia) Ltd., which owns and operates Tulu Kapi. What is more, the Ethiopian prime minister has formed a committee
under his own office for fast-tracking mining. Tulu Kapi was the only agenda item at its first meeting. As such, Ethiopia actually provides a very favourable political and economic environment for us to operate in, and we have established a strong relationship with the Government. In Saudi Arabia, we are dealing with a government which is intent on diversifying its economy away from dependence on crude oil. In line with this, gold mining has been earmarked as a key area for development. At KEFI, we have been very effective in our dealings with the Government as is shown by the fact that we are the only group to be licensed in recent years through our local partner, Abdul Rahman Saad Al Rashid and Sons (ARTAR). Like in Ethiopia, I think we are in poll position in Saudi Arabia. As such, although Ethiopia and Saudi Arabia are countries which have traditionally been associated with political risk, what we are actually finding is that KEFI is becoming very adept at dealing with governments which are supportive of its goals and, as a result, stand to benefit. Financial Investigative Media Limited, which owns UK Investor Show magazine, owns shares in Kefi Minerals.
UK Investor Magazine — 7 — February 2016
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ukinvestorshow.com UK Investor Magazine — 8 — February 2016
All that Glisters is not Gold By Tom Winnifrith
W
here is Amanda van Dyke to crow in a triumphalist mood when you want her to do just that? For months now she has been calling the bottom on gold and now as it races through $1200 the mining guru appears vindicated.
holes - they need to raise cash just to keep the lights on let alone to get into production. And be cognisant that a number of listed plays are still endeavouring to promote marginal assets which are probably not economic even at $1500 gold let alone at current prices.
Having called gold badly wrong a few years ago I continued to believe in the case for the yellow metal - it is the only currency not debased by the politicians and central bakers by QE and other instruments of funny money. But as gold did nothing but go down I just lost the faith and capitulated. I sense a lot of true believers felt the same way.
If gold continues to rally - as I suspect it will - producers not mired in debt will flourish. As such I’m very happy to own shares in Petropavlovsk whose debt is manageable and falling rapidly. There are quality plays which will enjoy operational gearing and make you real gains in the new era. But all that glisters is not gold.
But do not take it that everything golden will race ahead even if the gold price continues to rally. If equity investors are taking a hit on their wider portfolios there will be a reluctance to plough what cash they have left into any equities even gold related ones.
There are still a number of gold plays that even at higher gold prices are in serious trouble. Don’y buy into the hype and buy indiscriminately.
Moreover a number of the gold plays that are listed have either structural issues (debt) or, for those not yet in production, clear financing
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UK Investor Magazine — 9 — February 2016
Bitcoin player Coinsilium An interview with executive chairman, Cameron Parry
By Steve Moore
Steve Moore: When looking up the company the first thing I read was that “Coinsilium is a Londonbased blockchain technology focused investment and development company”. The first question is thus what on earth is ‘blockchain technology’?
the huge advantages that working with blockchain technology can bring to them. It is trustless, resilient, tamper-proof and transparent.
Cameron Parry: I suspect you, and many of your readers will have heard of bitcoin, the cryptocurrency. This is the first application of blockchain technology which is an immutable decentralised ledger. This ledger chronologically records the transfer of ownership of digital assets; bitcoins (lowercase b) are the digital assets (units of value) whose movements (i.e. transfers of ownerships) are recorded in the Bitcoin Blockchain.
Some big names are looking into it, particularly in the banking sector. For financial institutions such as banks, there are a number of possibilities, as it is used for transferring anything of value over the internet and it does this in a much safer and faster way than other offerings. One very interesting development in this space is R3, a large consortium founded by nine banks including Barclays, Credit Suisse and JP Morgan, and now made up of 42. Its main focus is to pioneer research and development for blockchain’s use in the financial services industry.
When reading about blockchain, you will see that there are many blockchains, however the Bitcoin Blockchain is the most commonly known, and used.
SM: The statement noted in the first question continued that you support early-stage companies in this area. What does this support involve and what makes yourselves qualified to do so?
The cryptocurrency bitcoin was the proof of concept for blockchain technology – it showed what blockchain can do in terms of resilience, and how effective it is. Consequently, institutions, banks, businesses and governments are realizing
CP: For many early-stage companies it is a case of a great idea, and product, but a question of ‘now what?’. More often than not they require funding, something we can help with. But on top of that, they also need support when it comes to the
UK Investor Magazine — 10 — February 2016
corporate side of running a business; something else we can help with. Plus, whilst they may have a great product, technology or idea, sometimes they’re not sure what the ‘2.0’ version looks like, or how they can actually turn that product into something that will offer a real solution to real problems, again this is where we come in. Many companies that have an investment arm, do just that – investment. However, we do more than this. We help to accelerate the investees’ commercial development by providing a combination of financial investment and advisory support to help them achieve their commercial goals. Through this we will be able to generate revenues and capital gains for Coinsilium. The qualification to do this comes from a team of people, driven by the directors, who have a huge amount of experience of building up businesses and raising money. This is key when you look at our backgrounds, specifically, two of our directors Eddy Travia and Hakim Mamoni, who have been doing this work in the bitcoin and blockchain space since 2013. Whereas I, have a background in developing early stage companies and taking them through to IPO. So, together I know we are well-placed to bring Coinsilium and our investee companies to the forefront of the blockchain space. SM: An early move was an 8p per share, £1.64 million, acquisition of Seedco Ventures Ltd. What is this business and what was the rationale for this move? CP: Seedco Ventures Ltd. is the company initially set up by Eddy Travia (CEO of Coinsilium) and Hakim Mamoni (CTO of Coinsilium) in 2013 to invest in and advise early stage bitcoin startups. By 2014 Seedco Ventures Ltd. had invested and been advising six Bitcoin startups located in various parts of the world. The acquisition of Seedco Ventures Ltd. was a cornerstone operation to build Coinsilium as a solid, experienced investor in the nascent blockchain technology industry. Eddy and Hakim have brought their valuable experience and extensive network of contacts with startup founders and blockchain technology innovators which greatly contribute to Coinsilium’s ability to identify investment opportunities which hopefully will become tomorrow’s leaders and successful commercial entities. SM: What does the current Coinsilium investment portfolio look like? CP: As you know we focus on companies that are working with bitcoin and blockchain technology, not just offering solutions but also creating new use-cases. The use-case for blockchain is expanding everyday and we work in a manner that means we are part of that discovery process, and benefit from it. It is worth remembering that we also develop solutions, by working with institutions to discover new use cases as well as solve problems with blockchain. We have a diverse portfolio but the majority of
the companies have blockchain solutions that currently sit very much in the fintech space. Our investee companies range from payment solution providers, to remittance services, to data storage, to a gold investment platform, through to leveraged bitcoin trading accounts. Those who are familiar with bitcoin and blockchain may have seen the considerable media coverage of a company called Factom. Rather than use blockchain for the transfer of specific units of currency, this company uses it to create immutable, tamper-proof ledgers for the transfer and recording of data. Earlier this month, Factom announced a deal with iSoftStone, the technology consulting firm, to roll out a smart city strategy in China. This will see data storage, auditing and verification services made available across several regions of China. One great use case, and a significant one, for blockchain and bitcoin, applies to the unbanked and underbanked. This is an area our investee company Fuzo is heavily involved in. The technology Fuzo offers is able to turn any mobile phone, including non-smart phones like old Nokias, into a blockchain asset wallet. Fuzo users can therefore participate in ecommerce globally and transact locally. It offers this in a safe and secure digital environment. Then there is, of course, SatoshiPay which we discuss later. SM: Recently announced results for the period since incorporation (on 25th September 2014) to 30th June 2015 showed admin expenses of £705k leading to a loss of £699k. Isn’t this a lot for the current stage of the company’s development? CP: The expenses reported in the Interims are in line with a recently listed Company at this stage, as they mostly relate to costs in connection with the listing, which are included within administrative expenses. There is a choice as to whether to net off costs directly attributable to listing against the share premium account or to take them to the Statement of Comprehensive Income. With the exception of commission, the Directors have chosen the latter in this instance. The Company’s ongoing overheads are relatively low and are consistent with similar start-up entities that have been recently listed. These ongoing expenses are also in line with the Company’s projections. SM: Those same results also showed cash of just £45,534. How has this since developed? CP: The Interim Results showed the cash position at 30 June 2015. The Company has since listed on ISDX Growth Market, and has raised net proceeds of £755,000 (after Admission expenses). Management constantly review the Company’s liquidity position, and due to a low cost base, they are confident that the Company has sufficient funds in the short/medium term to meet its targets as set out in the Admission Document.
UK Investor Magazine — 11 — February 2016
SM: From here isn’t it a big leap for you to state that “Coinsilium intends to become a leading financier and adviser in blockchain technologies”?
million downloads last year. Great for the reader and ad-blocker provider, but lost revenues for the online publisher.
As can be seen from the last two answers, Coinsilium is in a considerably stronger and more robust financial position. We have spent two years building the foundation to be a leading player in this sector. We’ve just become the first in the world to IPO a blockchain focused company on a Recognised Investment Exchange and we continue to rapidly grow. So we are on the path to achieving that objective.
In 2014, the number of live websites hit 1 billion, all of these websites will produce content of some kind. That is how large the market is for a company such as SatoshiPay. Given how much we consume online, babyboomers for example are believed to spend 20 hours a week doing so, there is clearly a market for a frictionless payment solution.
SM: You listed on the ISDX Market, which has often been derided for lack of liquidity etc. Why this, instead of for example AIM? CP: We initially looked at AIM but their understanding of blockchain as a tech sector was at a very early stage, whereas, from our first meeting with ISDX their interest and excitement about blockchain was clear and indeed they told us that their parent entity ICAP had been looking into this area for some 12 months before we met. The most important thing for us was to be listed in London as we had been building our credibility and position in the London fintech community and wanted to continue playing our part in its growth. SM: Your most recent announcement was news of you taking the majority of shares available in a capital round by, what you describe as “nanopayments software developer”, SatoshiPay Ltd (€200k for 55% of the round). What is this and what makes you believe in the potential of this investment? CP: SatoshiPay, in which Coinsilium owns a 14.5% stake, brings online publishers a non-intrusive solution to the question of how do you monetise content, without putting off readers? They have a solution, which uses bitcoin and blockchain technology, in a very accessible manner. We are in interesting times when it comes to online content and the question of how publishers capitalise on this without negatively impacting the reader experience. If you consider how we used to consume content – through newspapers or on the television for example – then very often we had paid to benefit from great thought leadership, the efforts of a journalist to bring a story to us or even an interview with an Executive Chairman…Those mediums still exist but predominantly we use websites to inform and educate us. So, what we see now are some major websites trying various ways in which they can monetise their content. For some it is subscription based, such as the Financial Times, for others it is heavily ad-based such as Forbes. The metrics for either of these approaches can show heavy bounce-rates and low conversion rates, i.e. a number of people will quickly leave the site or others just won’t commit to paying the subscription. Another issue is adblockers: ads can be so irritating that ad-blockers have seen a very high adoption rate in recent years with the leading ad-blocker provider hitting 500
So, SatoshiPay offers a two-way payment platform. This platform enables content providers to accept nanopayments (payments that can be as small as a fraction of a cent) using bitcoin and blockchain technology. The process is frictionless; it does not rely on the reader or end user to sign-up to a subscription or any paywall solution the website has chosen. Individual articles can be sold for nanopayments. Those readers who are using ad blockers, can be automatically asked to pay. For content publishers this will offer a major difference compared to those solutions that are currently available to them. The software Meinhard Benn and his team at SatoshiPay have built is very easy to install and offers a great user experience for both reader and publisher – something that has been missing in this market since the beginning. SM: You talk of confidence that SatoshiPay can deliver its software to market “in the near term”. What do you mean by “near-term” here and will further funding be required? CP: At the beginning of February, SatoshiPay announced the launch of its web-based nanopayments platform. Interest in the launch has been present for a while, and the new platform has been well-received in these crucial early days. The company has received great coverage from various news outlets. SatoshiPay will require future funding and we are working closely with them as their corporate adviser to scope their funding requirements as well as the appropriate valuation for their next round. We are hopeful that SatoshiPay will secure further funding in Q2 of this year once they have successfully gathered sufficient data following the launch of their platform. Such data will be instrumental in helping determine their path to market and growth strategy. SatoshiPay has delivered on several key milestones since their seed-round and preliminary discussions are already underway with several parties to scope interest for the next round of funding. Without wanting to give anything away, we are confident that SatoshiPay’s focus is sufficiently differentiated and unique that it will eventually allow for penetration into lucrative verticals outside the realm of just content consumption. Ultimately, we believe SatoshiPay will provide a compelling alternative to the existing models.
UK Investor Magazine — 12 — February 2016
Three Sells for February By Tom Winnifrith
O
h boy am I spoiled for choice with stocks to sell this month. For edition after edition I have warned that those companies that have borrowed too much in the times of easy credit are going to face their day of reckoning. That day of reckoning is, if not here already, not far away and it is now just a matter of for whom the bell tolls and how soon. It never ceases to amaze me how equity investors and companies view debt. In good times companies borrow as much as possible - especially when money is cheap as it has been for the past few years. This is financial engineering but is termed the creation of “efficient balance sheets”. The cash is used either for share buy backs which boost earnings per share - and thus the value of executive share option schemes as stock prices increase. Or it is used to grow the business via acquisitions of either assets or companies. Okay, evidence shows that 70% of acquisitions destroy value for the acquiring company but in the good times who cares, all deals are said to be earnings enhancing. And sometimes the cash is just pissed away on reckless speculation or executive greed. But then the climate changes and companies work out that it may be hard to repay that debt or, worse still, that they may even struggle to service it or to stay within the covenants set by the lenders. At that point equity holders all too often seem to fail to remember that the company is then controlled not by its board but by the lenders who must sanction every decision made. Banks and bondholders are not nice people. Their concern is simple, to ensure that they get back every cent they have handed over plus interest due plus any costs that they can slap on top. And as such if a company finds that its banks are in control the equity is almost invariably toast. The board’s responsibility is to ensure that the company survives and if its choice is survival with shareholders almost entirely or entirely wiped out or insolvency, it must go for the former. Yet in recent months we have seen company after company admit that it is in serious breach of its covenants yet investors in the shares seem in total denial, insisting that there will be a workout which sees their interests protected. There rarely is. Once
you hear the phrase breach of covenants or even a danger of breach of covenants or “strategic review” you must recognise that the game is up.
And in that vein, the most obvious slam dunk sell going is Petroceltic (PCI) at 21p. It owes its banks c$200 million and is almost out of cash. The banks are not pulling the plug yet since they know that most oil company loan defaults right now are seeing lenders get an average of 15 cents in the dollar back. There is a bidder looking at Petroceltic, its largest (29%) shareholder Worldview. But it could offer the banks 20 cents in the dollar and the banks would probably jump. It could then simply pull the plug and get all the assets. Why would it pay a cent for the equity? And such an outcome is the best case scenario for the company. It is perfectly possible that Worldview will just walk in which case its game over.
At the risk of flogging a dead horse LGO Energy (LGO) is also another zero in waiting at 0.22p. It is in breach on its $11 million RBL loan facility with BNP Paribas, is almost out of cash and will simply not be able to meet the revised terms the French banksters demanded in March and onwards. It is just not producing enough oil to repay with oil at anywhere near current prices. The company appointed two US banks to secure a rescue refinancing in the Autumn but that seems to have gone terribly quiet. With a market cap of just £7.4 million it is hard to see how it could raise the £5-6 million it would need to keep the froggies at bay let alone keep the PLC lights on. The French clearly do not wish to pull the plug but at some stage their hand may be forced by LGO’s inability to repay anything or because LGO itself just runs out of cash. This company has a truly dreadful record of value destruction. Just compare its current market cap with the £65 million it has raised from investors since its March 2007 IPO and you will see why no-one in their right mind will bail it out. LGO was not making money at $100 oil. At $30 oil it is toast and the fat lady should be singing by April.
UK Investor Magazine — 13 — February 2016
Away from oil, old favourite Tungsten (TUNG) is also heading towards the point at which it runs out of cash. At this point I hand over to my long term colleague Steve Moore who wrote just last week about the latest trading update from this hopeless enterprise. The company updated the market that “trading in the third quarter was in line with market expectations, and that revenues for the full year to 30 April 2016 are expected to be broadly in line with its previous guidance”. With that guidance – for “revenue of at least £27.5 million” – emphasised as recently as December, the now only “broadly” in line was hardly comforting The company reiterates that it: “… continues to expect EBITDA loss for the full year to 30 April 2016, excluding one-off items, of no more than £15 million (£19 million including one-off items) and free cash at the year-end of at least £8 million, with the monthly cash outflow continuing to improve. The board is confident that Tungsten is on track to achieve breakeven on an EBITDA basis by the end of FY17 and a positive EBITDA for the six-months ending 31 October 2017.” As Charlie Munger reminds, EBITDA is of course ‘bullshit earnings’ with, for example, his business partner, a Mr Warren Buffett, adding that “every dime of depreciation expense we report, however, is a real cost. And that’s true at almost all other companies as well. When Wall Streeters tout EBITDA as a valuation guide, button your wallet”. As such, although the Tungsten update reiterates much the company has previously stated, the December statement that “with the proposed sale
of Tungsten Bank and other initiatives underway, the board is confident that Tungsten will have the cash resources required to meet the leadership team’s break-even target” is not repeated. I questioned this statement previously, noting that there were a lot of ‘if’s’ in researcher Edison’s view that “if Tungsten could increase suppliers on the network, push through significant price increases to buyers and control costs through reengineering its processes, we calculate that breakeven would indeed be possible. It has already received some success with buyer repricing, with 14 buyers renewing contracts in H116 with an average price increase of 70%”. So paid for researcher Edison admitted that the ‘add-on products’ such as spend analytics and invoice financing are where the potential profit is, but that Tungsten’s progress in these seemed to be able to be summed up by its results statement admission that “Tungsten Analytics has now been demonstrated to or trialled by more than 50% of our e-Invoicing buyer customers. In general, the feedback has been positive. However, at the initial pricing levels quoted none agreed to purchase the product”! Back to me: Given the stated bank balances but no note on trade payables - at less than three months H2 cashburn this company needs to refinance urgently. Given its track record only the insane would chuck good money after bad. Probably some lunatic will step up to the plate but at what price? Tungsten may not be a zero but there is mega dilution ahead and that makes it my third sell of the month.
Tom Winnifrith’s
5 model portfolios: Growth Income Gold Recovery Pe n n y S h a r e s
S u b s c r i b e t o d ay
newsletters.advfn.com/tomwinnifrith UK Investor Magazine — 14 — February 2016
company of the month
Entu Group (entu)
A good time to ‘entu’ the fray? By Steve Moore
W
ith brands including Zenith, Penicuik, Weatherseal, Staybrite Solar, Energy Hypermarket, Job Worth Doing and Europlas and listing on AIM at 100p per share in October 2014, shares in home improvements and energy saving & insulation group Entu UK plc (ENTU) were hit by 27p to 65.5p on 1st September 2015. This was on the back of a warning that the market environment was to see the company discontinue its retail solar activities and that, following the developments in solar, “Entu now anticipates that its full year results will be below market expectations”. Noting impact from the solar closure, margin pressure in its Home Improvements business, a reduction of carbon offset funding through energy suppliers and that “as the year progressed, it also became apparent that the group needed to invest further in infrastructure and senior management resource in order to fulfil its obligations as a public company”, the 29th January-announced results showed end profit reduced by £4 million to £2.74 million on revenue of £116.90 million (£99.03 million from continuing operations). Excluding discontinued operations and exceptional items though, earnings per share were little changed at 10.7p – helped by a lower tax charge, equating to 1.9p per share. After particularly tax, a £3.62 million working capital outflow and £2.74 million of dividends paid, cash (net) reduced by £4.33 million to £1.44 million. Current assets were £0.23 million lower at £18.35 million, though total liabilities £0.56 million lower at £19.84 million. A final
dividend
per share
of
2.67p was
recommended – to be paid on 6th May to shareholders on the register on 8th April and taking the total for the year to 5.34p per share. The company added that it “aims to maintain the current level of dividends, and would expect the payment profile to return to a more orthodox split paying one third as an interim dividend and two thirds as a final dividend”. However, it also admits that “it may take us some time to find alternative sources of profit to completely replace those lost through the solar closure… The board currently expects that the results for the year ended 31 October 2016 will be marginally below those reported for the year ended 31 October 2015 for continuing operations”. This sees broker to the company, Zeus Capital, looking for earnings per share of just over 9p for the current year, rising towards 10p next year, and investor despondency has eased somewhat – the shares up from a pre-results 56p to a current 67.5p. However, this still means prospective price/ earnings multiples of sub 7.5x, falling to below 7x, and dividend yield approaching 8%. Of course, there is now certainly some doubt on the delivery of the numbers and the balance sheet is not the strongest - but the valuation looks to already discount further bad news. It doesn’t though look to discount the company’s sense of “increasing consumer confidence as home owners decide to make improvements to their homes” and increasing recognition of energy efficiency further driving adoption. As such, although currently down on the shares in the Income portfolio of our Nifty Fifty offering, we rate them a recovery buy.
UK Investor Magazine — 15 — February 2016
the house view Yes, perhaps you should Panic
T
he investment experts are being trotted out by the mainstream media to blather on about Dad’s Army and to urge us all not to panic. Most of these “experts” work for fund managers or financial services firms ad so to suggest that they are talking their own book is not exactly unfair. And media outlets, such as CNBC, are perma bulls. They exist to encourage us to trade more, to keep buying. They are happy to play their part in the game.
saying that you should panic and sell everything first thing Monday.Au contraire. We have been bearish on equities for two years and so our approach of advising people to bank gains and move out of high risk investments into safe yield and asset plays has been vindicated and has paid off. Having said that it would be foolish to ignore the fact that the world is a more dangerous place both politically and financially than it was a couple of years ago.
But stocks have bee weak for some months now and so before you buy into the “Don’t panic” line it might be worth checking into what the same folks were saying not that long ago. It was very much a hotchpotch of “buy into the dips” (trading), “use this chance to buy cheaply for the long term” (investing), “average down” ( both).
For the earnings growth that is likely over the next 18 months, equity valuations look more generous today than they were 18 months ago even though share prices have retreated. The issue of leverage is now of greater concern and the Central banks funny money strategy is now exposed for the farce it is. The banksters have no more ammunition. We face political and military croses in Syria and the China bubble is bursting. The odds on a new banking crisis shorten by the day.
The worst media offenders are the freebie loving personal finance journalists. As they contemplate their next all expenses paid trip to the Far East how often have they urged us all to take a long term view and buy into Chinese stocks now they are “cheap”. Of course Chinese stocks still trade on scary PE’s and are not cheap now and were not cheap then but never let the facts get in the way of a good freebie. And so now we are told not to panic. We are not
And so while not advising anyone to panic the idea that one should just stick your head in the sand and pretend that there are no risks to ones portfolio and ones wealth seems a little bit crazy to us. The world has changed. The outlook is grimmer. The perma bulls and talking heads must wake up and smell the coffee.
UK Investor Magazine — 16 — February 2016