UK Investor Magazine January 2016

UK INVESTOR MONEY // SHARES // INTERVIEWS

The Zak Mir interview

Zafar Karim, CEO Legendary Investments

79 share tips for

UK Investor Magazine — 1 — January 2016

ISSUE 8 // JANUARY 2015

New Years’ Resolutions for us all

Intro INSIDE 4 Tip of the year

Chris Bailey

5 Company of the Month: Avesco Group

Steve Moore 7 Three shares to buy for January

Zak Mir

10 New Years’s financial resolutions Tom Winnifrith 12 CEO interview Zafar Karim

Zak Mir

15 Seventy one share tips for 2016 from our readers Tom Winnifrith 17 Three shares to sell for January Tom Winnifrith 19 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 (again somewhat belated) January edition of UK Investor Show Magazine. Once again, I hope we have something for everyone. 79 share tips are at the heart of the magazine—surely there is something in there for you? Throw in the interviews and company profiles plus our new year financial resolutions and we hope that you enjoy the read.

As ever, three of the share tips are sells from myself. As a bear, the start of the year has been pretty easy with stockmarkets around the globe suffering pretty severe falls. It was in fact the worst opening week of the trading year in stockmarket history. Does this mean that the rest of the year will be a bloodbath too? No. In his Telegraph column, Tom Stevenson of Fidelity, a former colleague of mine from years ago at the Chronic Investor, stated that a bad opening week is no guide to what follows. Sometimes markets end the year up despite the first week sell off, sometimes they end down. It is a toin coss if history is a guide. Which of course it is not.

The issue is whether equities—with the FTSE 100 at just under 6,000—offer good value right now? Readers of this magazine and of www.ShareProphets.com will know that I have been consistently bearish for a couple of years. It is not that I have been predicting a major crash—except in China where my warnings have come good in spades - but just that I found it hard to see upside in equities as valuations looked to me to be pretty full.

I still find myself thinking that way. Given the problems in China and Euroland, the cratering of oil and metals prices, and the weakness of real economic growth—as opposed to debt funded asset bubbles—in the US and UK I cannot see corporate earnings growth in 2016 being anything like strong enough to justify the PE multiples currently on offer. Rising interest rates will put a squeeze on those corporate that are over-leveraged and the consequent flight to safety will make it harder for small caps seeking refinancing to get money on decent terms if at all.

There is talk of how some investors will look to buy into yield but when one looks at the higher yielding FTSE 100 plays (banks, oils and miners) you really have to ask how safe are their dividends. I would argue that most are very much i danger and that the real forward yield on the FTSE 100 is not much at all - perhaps just over 2%. I cannt see - as base rates rise - that this is terribly appealing.

And so that makes me remain bearish. That is not to say that there is not value out there and I am looking at a number of stocks to tip on the “down days” but this , at best, a stock pickers market. The case for maintaining or increasing ones cash weighting is a pretty strong one to me.

On that happy note, I wish you all the best for 2016 Best wishes UKTom Investor Magazine — 2 — January 2016 Winnifrith

UK Investor Magazine — 3 — January 2016

Chris Bailey’s share tip of the year: Buy DS Smith

By Chris Bailey Financial Orbit

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nless you want to stop the conversation dead one tip for a smooth running social gathering event is never to mention corrugated board or packaging. Nevertheless in the ever more consumer convenience world we all live in such products become intimately aligned with ecommerce and retailer brand differentiator trends and that’s why corrugated board and packaging are growing faster than underlying GDP. And the best way to access these theme on the UK stock market? DS Smith (SMDS) is an unsexy sounding company name but over the last few years its management have transformed a UK centred paper producer into a pan-European corrugated board packaging giant.

Yes DS Smith is a throwback to a recently less prevalent business maxim: using your strong free cash flow to do sensibly priced deals which further improves your free cash flow helping you to do more sensibly priced deals…and so on. DS Smith has got as far east as Turkey now with its most recent deal and are building a pretty impressive pan-European network.

Given its profitability growth has been built on what can only be described as a shabby European economy (‘challenging’ as the DS Smith management described it) in recent years, the recent announcement of an extension of European Central Bank quantitative easing measures can only be a positive. I would not quite go as far as to describe the company as a ‘Europe play’ but any modest signs of a European economic recovery can only be good news.

Time for a few numbers. Driven by strong price-mix (i.e. pricing power) for their products, DS Smith’s last set of numbers showed a 7% free cash flow yield of which just over 3% was paid out as a dividend – a pretty good level of shareholder compensation for a company with growth prospects. More importantly this cash flow helps to either fund acquisitions or pay down debt.

With around a 1.9 times net debt to ebitda ratio the company does hold more debt than many others I own but that’s a strong level of recent acquisition opportunities for you. I expect a quieter 2016 on the M&A front and that aforementioned cash flow generation to eat into the net debt line.

If any institutional investors are concerned about the debt line then they will not be in a year’s time which can only be good for the share price.

As for the valuation of the shares a low teens EV/ebit multiple strikes me as ungenerous and a continuing roll-out of the business plan should lead to a higher rating over time – and this is what helps push the share from a little below 400p to one deep into the 400s over the next year.

Criticisms?

Some noted the recent costs associated with shutting down a 250 year old UK paper mill and restructuring some of its northern European interests hit reported profitability but I think this is missing the wood for the trees and should be regarded as a one-off closure type expenditure. In short future prospects look good and the share price does not fully reflect these.

To read Chris Bailey’s other share tip of the year click HERE

Chris Bailey is the founder & editor of www.financialorbit.com UK Investor Magazine — 4 — January 2016

company of the month

Avesco Group (AVS) A success for us so far, but still some way to go?

By Steve Moore

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n last month’s edition of the magazine I wrote on a company which would become my first share tip for 2016, InterQuest Group (ITQ). I now profile what is my other ShareProphets tip for 2016, Avesco Group (AVS).

Avesco is an international media services group generating revenue from three segments; • ‘Creative Technology’ - a supplier of specialist audio-visual services and equipment to the live events, broadcast and entertainment industries; • ‘Full Service’ - a supplier of equipment, full technical support and creative expertise operating from five locations across the UK through the brand mclcreate; and • ‘Broadcast Services’ - a supplier of broadcast equipment and television studio facilities through the brands Presteigne and the Wembley-located Fountain Studios.

The stock is a long-standing constituent of our Nifty Fifty Income portfolio – added there at an effective 110p in October 2013, with us then noting strong balance sheet backing, clear business – and thus likely valuation – recovery upside potential and an attractive dividend yield.

This has proven so and the company’s last announced results - for its half year ended 31st March 2015 - showed a pre-tax profit of £4.62 million on revenue of £65.97 million, generating earnings per share of 13.3p, up from a corresponding prior year period 9.3p. This was despite the revenue representing just a 0.9% increase as a result of scaled down restructured businesses and the lack of any major events in the period (corresponding prior year period: Winter Olympics).

The balance sheet showed a net debt position of £25.06 million, though net current assets of £4.70 million and tangible non-current assets over noncurrent liabilities of £29.48 million (£62.69 million v. £33.21 million) and the company added that “we are again increasing the interim dividend, this time to 2.0p per share (2014: 1.5p per share)” and that “as a result of the improved outlook and trading, the full year results are again likely to exceed the board’s prior expectations”.

I thus also reckon that earnings per share forecasts of around 17p for the company’s now current year could prove highly conservative – and there is an 8p per share dividend forecast (currently a more than 3.5% yield) to boot.

The company has only just announced results

from a “record breaking year for the group” to 30 September 2015. Adjusted pre-tax profit was up from a prior year £4.96 million to £5.71 million on revenue 5.8% higher at £133.67 million. This helped net debt to be reduced by £3.98 million to £17.46 million, whilst year-end net current assets were £5.15 million (+£4.95 million), non-current liabilities £29.93 million (£0.44 million reduced) and non-current tangible assets £58.99 million (-£3.19 million). A full-year dividend per share of 5p (currently circa £0.95 million) is proposed to be paid on 6th April to shareholders on the register at the close of 11th March, taking the total for the year up to 7p, from a prior year 6p.

The company also announced that it has exchanged contracts for a £16 million sale of the freehold land and buildings at the studios, entering into a lease back at a nominal rent for up to five years, terminable by either party on not less than six months’ notice and with expiry no earlier than the end of 2016. It is noted that “after tax and other costs the sale is expected to result in a net profit of approximately £6m and net cash generation of some £13m”. So goodbye debt.

The current financial year has started well, with Creative Technology performing strongly in both Europe and the US and there are now forecasts for pre-tax profit to increase above £6.5 million, generating earnings per share of around 21p (in terms of tax, the year just reported having benefitted from prior losses and other allowances) and a dividend per share of 8p. The shares are now 236p (putting Tom and I c120% up on our original tip on our Nifty Fifty website) but still have some way to go.

Steve Moore co-edits the Nifty Fifty website with Tom Winnifrith Chairman Richard Murray founded Avesco and floated it in 1984. He retains 5,181,211 shares in the company (27.16%).

Finance Director John Christmas is an experienced FD who joined the company in 2004 as Finance Director and joined the board in 2007.

Graham Andrews has more than 30 years experience in the live events industry, including establishing the ‘Creative Technology’ business.

David Crump also has more than 30 years experience in the live events industry and was part of the team that founded the ‘Creative Technology’ business.

UK Investor Magazine — 5 — January 2016

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Zak Mir’s three shares to buy for January

By Zak Mir On the daily chart over the past year it can be seen only too well how we have had to endure a

Circassian (CIR): A Biotech Prospect For Those Allergic To Bear Markets

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onsidering the way that 2016 has not exactly got off to a dream start for the stock market, with China a particular concern, it seems wise to be exceptionally fussy with regard to share buying opportunities of any kind. At the very least, it appears that to go with the same flow this year of 2015 where the best performers tended to be in the tech area, notably biotech and for some, FinTech.

With Circassian we are looking at the biotech area, with this company particularly focused on asthma management products.

These include ailments such as cat, house dust mite, grass and ragweed allergies. Clearly, allergies are a large potential market, and, like many comparable companies this one does not need to get it right across the board in order to win big.

rather choppy ride, although the shares have been trading no worse than the range between 260p and 320p in general.

The attraction from a technical perspective at the start of 2016 is that we appear to be in the run up to a golden cross buy signal between the 50 day and 200 day moving averages. The usual pattern is for the strongest part in the technical cycle to occur in the run up to such crosses, something which would allow us to suggest that while there is no end of day close back below the 200 day moving average at 296p, the upside here over the next 1 to 2 months could be as great as a November resistance line projection from 2014 at 380p.

Parity Group (PTY): Deliver A 25p Target

A

Cost Savings Could

s it was implied in my first stock offering for January, Circassian (CIR) I feel most comfortable looking at the new economy given the likely trials and tribulations that 2016 would appear to have on offer for traditional old economy sectors, especially as they grapple deflation.

UK Investor Magazine — 7 — January 2016

This means that the second choice is a tech company based on IT services. Parity Group is focused both on developing so called “installation experiences” in this area as well as sourcing IT professionals for companies.

This is now the type of area which well established and in many cases well entrenched on the fundamental and hence hopefully going forward, the profits front. The driver

in this respect should be the professional IT staff sourcing, which looks to be a direction in which the company could really thrive over the next year, a point underlined by the half year report in September and the promise to be “cash generative” by the end of the year.

This is said in particular after the latest update from the group which highlighted

Get your free copy of Zak Mir’s newly republished ebook, out today, The 49 Golden Rules of Making Money using Technical Analysis by clicking here.

UK Investor Magazine — 8 — January 2016

the prospect of £1 million in savings being delivered, something which should take the group on to reverse last year’s £0.89 million loss before tax. But it is in fact the technical situation on the daily chart which really fires the imagination here given the way that November saw the shares clear both the 50 day and 200 day moving averages, now at 9p and 10.5p respectively. The idea now is that while there is no break back below the 200 day line / the floor of a wide rising trend channel from early 2014, we could see Parity Group shares move to the top of this feature as high as 25p over the next 3 to 4 months.

However, even on this issue the group’s move to convert its debt from US dollars to the local currency looks as though it is paying off. This is key as despite the company apparently doing everything right in terms of improving profits via joint ventures and deals / disposals, the strength of the Zambian Kwacha has led to losses of $20million. If this currency issue can be addressed it is clear that from a fundamental perspective on Zambeef would be seriously re-rated in a positive way.

The question is whether the market can bid up the stock in anticipation of this – which it looks as though it is starting to do?

Zambeef Products (ZAM): Esoteric Growth Play

Nevertheless, as with most of stocks I have highlighted this month, it is the technical aspect which is the most satisfactory. Here on the daily chart of the past year and a half it can be seen that since the beginning of December the 50 day moving average at 7.02p has been recovered. The message at the moment being that provided there is no end of day close back below it, one would imagine that a return to the main 2015 resistance at 15p plus could be seen over the next 1 to 2 months. Indeed, only sustain price action back below last year’s floor at 5p would really undermined the recovery argument here.

A

beef supplier in Zambia may sound like a rather wildcard choice for success on the UK stock market to start 2016, but of course given how quirky the investment world has become in a time of ultra low interest rates and modest economic growth, one really has to try to cover all bases in terms of what may outperform sticking money under the mattress. In fact, Zambeef is now 22 year-old company, and was able to boast quite rapid growth in the 2000s. This growth looks like it is still well on track, with perhaps the only real negative being the issue of exchange rate volatility/losses.

UK Investor Magazine — 9 — January 2016

New Year Financial Resolutions

By Tom Winnifrith

I

give up on trying to quit smoking or eat five fresh vegetables for breakfast or drink only when there is a Z in the month or whatever this idiot Government thinks that the Nanny State should tell us to do. Instead I offer up a few new year financial resolutions which I shall try to follow and you may chose to follow or not.

1. My pension is a shocker in that—aged 48—it is almost non existent. In seven years time I can cash in the whole pot and blow it on coke and hookers and blonde Swedish nurses. Ooops, I meant to say use it prudently to enjoy a comfortable retirement. You are encouraged by the tax system to make contributions and the State will not be giving you much in the form of handouts when you retire. As such resolution one is to make more contributions this coming year than I did last time. Beg, borrow or steal (from the Mrs) this is my number one target.

2. Ensure that the Mrs uses EIS. As a higher rate taxpayer she is barking mad if she does not do so. In the last tax year she made one investment which seems to have done jolly well. I accept that this is high risk stuff but on the basis that her maximum loss is c50% and the gain from her first EIS foray has been a multi-bagger we actively seek out another investment for her.

3. Clear debt. I am cautious in UK equities and as such do I reckon that they will match long term returns of 7% this year? No. On the other

hand retiring debt gives you a guaranteed return. The mortgage of the Mrs and a mortgage of the ex for which I am responsible cost 4% per annum but given that you’d have to pay tax on returns on any other investment you should gross that up when making comparisons. Where else am I going to get a guaranteed 5%+ return on my cash. And when interest rates rise—as they will in 2016—that return increases. And so this is a year for paying down debt.

4. Try not to be so short termist. My biggest investment mistake of the past three years was not a bad investment but selling shares in a good investment too quickly. We sold a few Optibiotix just after Adam Reynolds moved in at a 100% profit. We thought we were smart. I think we gained £4,000. Looking at the share price today we have lost £40,000 as a result. Try to show patience, is resolution number 4.

5. Do not get bored or complacent and overtrade. 2015 was a great year for our share portfolio. Thankfully we have a good broker who warns me all the time if he thinks we are investing in too much. And I listen. The temptation to think that you just cant go wrong or just to buy some shares because you are bored is always there. Resolution number five is to buy fewer shares in 2016. If anything we should be reducing the number of holdings we have.

That’s it for resolutions have a happy New Year.

UK Investor Magazine — 10 — January 2016

THE ZAK MIR interview Zafar Karim, CEO Legendary Investments

By Zak Mir Zak Mir: Legendary Investments is seeking winning opportunities in growth companies, mainly on AIM. Tell us what gives you an edge over the private investor trying to do exactly the same thing?

business and they’ve really got to be ambitious and be thinking, living, breathing their business. They’ve got to have the skills and the knowledge to make it go forward and they’ve got to have experience and track record to be able to do this. The second two Zafir Karim: One of the first items are less important than the advantages we have over the passion as the most important thing private investor, and this applies is whether the business is their life.. to essentially all money managers, However, they must also be in the fund managers, venture capitalists, right sector. People have different private equity investors et cetera, is views on what sectors are the right that we do this full-time. So, while sectors. It depends on what you’re the private investor might have looking for. What we look for is a full-time day job and then look asymmetric returns, that is a small at companies in the evenings or outlay for a potentially very large weekends, we put a lot more time return. To achieve that you’ve got Zak Mir and effort into this. Also, we have a to invest in sectors which are growing lot more resources at our disposal in on a long-term basis, or companies in special terms of information sources, contacts, et cetera. situations.

The second thing is that, because people know we are looking to invest, they actually come to So, we always look at tech companies, we look us. We get to interview management and see the at energy companies, we even look at resource inner workings of businesses before we invest and, companies, even though I know resource companies again, there are few private investors that get the are not in fashion at the moment. Technology can opportunity to do that. The third edge we have is be Biotech, it can be FinTech, it can be your normal that there are opportunities which private investors IT tech but the sector is important. Finally, we look find far more difficult to access. Specifically I’m at the business plan. Now, I’ve never come across talking about companies which aren’t listed. a business plan which has panned out exactly as Investing on the private markets can generate very stated but the business plan gives an idea into how high returns. If you are a public market investor, the management think, their level of detail, what you don’t have access to these opportunities. they consider and what they don’t consider, which is quite an important indicator as to whether they I think the final and most important advantage is might have any success or not. Of course this goes that, because of Legendary’s proactive investment back to management being the most important style, we don’t just invest, we get involved in the thing. Good management is necessary, but it’s not companies. Anything from being a board member sufficient. to being an adviser to just being a sounding board.

What this allows us to do is not just invest but ZM: Talking of management, what is your own influence, monitor, even, in some cases channel, management and investment experience, and how the direction of the investment. So, we have a appropriate is it to the current deflationary low economic much better chance of managing the risk and growth environment? promoting success.

ZF: I started in the very early 90s in the Liar’s ZM: Very often, the quality of the management can be the Poker years at Salomon Brothers. I did a lot of difference between success and failure, as well as the sole M&A work, restructurings and some privatisations. motivation for some investors buying into a company. I spent several years at Rothschild, again, as an What is your view on the merit of such an approach? adviser, M&A privatisations, restructuring, equity and debt in emerging and developed markets ZF: I think the quality of the management is key. and that gave me a very sound grounding in both It is, in my view, the most important thing but it finance and what makes businesses work and what certainly is not the sole thing. I would not invest into makes them not work. It also gave me a grounding a company if the only thing that I liked was quality in where the opportunities for return lie, whether of the management. You see, the management it’s in the combination of a business, whether it’s has got to be passionate and intense about their in restructuring, whether it’s in looking at a capital UK Investor Magazine — 11 — January 2016

structure et cetera. I had an adviser’s mindset. Later on in my career at the banks, I realised I wanted to be a principal and I had to switch into a principal m i n d s e t , which is very different from an adviser’s m i n d s e t .

Investing off my own balance sheet into companies and actually getting involved in helping them be successful.

This was how I got involved in Earthport back in 2004 and, as part of that, I helped replace management and the company went from single digit millions to I think it was about £80 million market cap in about three years.

So, whether it’s low growth, deflationary or high growth or, indeed, negative growth, there’s a part of our strategy which will fit .

Restructurings or disruptive companies have an inbuilt catalyst for growth, and if we get it right, we have a multibagger.

In essence, I don’t think the environment, affects our strategy too much. It might affect the type of investment being made, the market sector we enter, but not the core strategy.

ZM: Isn’t it easier just to focus on the trendy sectors of the moment and Zafar Karim forget the rest? The FinTech, Biotech, Tech companies, which could be in the multibagger category?

Then I had to help replace management again because Earthport went back to single digit millions ZF: Yes and no. I think the answer to this lies in simply because the key management person fell the word ‘trendy’. Trendy implies a momentum ill. This time I got involved day to day. I garnered and one can make a lot of money by following the a lot of hands-on experience of actually managing herd as in jumping onto something that’s going the company. I left the company when it was back up and following the trend. In terms of what we in the £100 million or so market cap. I think it’s do, FinTech and Biotech certainly fall into that. In quite rare to find someone who’s been an adviser any case, we always look at technology companies, with world-class institutions who’s been a principal whether they be FinTech or Biotech. FinTech is investing their own money and who has hands-on primarily driven by IT tech. We always look at tech management experience as well. Coming onto the because we believe technology drives economies current environment, low growth, deflationary, forward and if you pick the right technologies and whatever you may wish to call it, I actually think it’s, the right companies within those technologies, in these kinds of environments, that some of the then you can have a multibagger. So, yes, you best opportunities exist. We look for asymmetric could just follow the herd but I think if you just returns. What that means is we don’t look at mature follow those, then you’ll be missing out on other companies where you may have a steady cash flow, opportunities. Other opportunities include those we look at things where if they go right, we’ll make in restructuring. If you see a company, which for many times our money but if they go wrong, we’ll some clearly defined reasons has fallen by the probably lose our albeit small investment. That is wayside and is quickly fixable, then you should invest, regardless of the sector, or you risk missing asymmetric return, or a multibagger. out.

The key is we invest a small amount with the And, of course, there’s the out of fashion sectors. possibility of a large upside. In a low growth or deflationary environment, you are going to come Everybody’s running from resources at the across companies which need restructuring. If moment but one has to take a view. Are resources you get the restructuring right, you can have going to continue to be used? Of course they a multibagger on your hands. You also get are, and their use is going to increase over time companies which innovate, in low or high growth because populations are growing and economies environments, of course. If the innovations are are growing. The fact is that resources are on properly commercialised and manage to gain a their back at the moment, but the real question large market share, then you get a multibagger. is whether they have reached the bottom? Now, I UK Investor Magazine — 12 — January 2016

don’t think anyone can time the bottom precisely but if you get in at or near the bottom, then you will make a large return. The real question is have we reached the bottom of the resource super cycle or haven’t we? There are different views on this.

So, I don’t think you can ignore any sector. At any time, you may be missing an opportunity but, of course, any investment has got to align with your investment strategy.

ZM: With any investment company there can be lots of noise regarding the newsflow – deals and possible deals coming through. This can be off-putting to investors because they like to know what the real theme is. What is the main focus at Legendary Investments at the moment?

ZK: With Legendary currently our main focus is concentrating our efforts on some of our key investments because they are going extremely well. Let me pick what’s probably our most high profile investment and, indeed, the one that’s generated the largest return thus far with the largest amount of value: Virtualstock. So, just what does Virtualstock do? Basically, it allows data to flow between any network of systems in a scalable and rapid manner. That may sound like marketing but what it actually means is that Virtualstock does away with integration. That integration market is a US$300 billion to US$500 billion market. The Virtualstock team have come up with a solution which essentially allows any systems to connect to each other without the need for integration. The first applications of this have been in the retail sector. So, for example, Office Depot has been a client for many years. Office Depot is a US $17

billion turnover company. Tesco is probably the highest profile Virtualstock client in the retail sector, with over £70 billion turnover.

What Virtualstock has allowed these companies to do is to connect disparate systems primarily between their suppliers and their own systems to allow them to present and manage product ranges in a far more efficient and effective manner. But that’s just in retail. I said earlier on that Virtualstock is not about just retail, it’s about doing away with integration. So, Virtualstock have moved into the health sector where their first client is Guy’s and St Thomas’ Trust. Guy’s and St Thomas’ have a spend of something like £1.3 billion, £1.4billion a year and the reason Guy’s and St Thomas’ Trust is using Virtualstock is because Virtualstock’s systems allow them to improve the efficiency of their supply chain and increase interconnectivity between their systems. We announced a little while back that Robert Knott joined Virtualstock. He was attracted to Virtualstock because he saw the difference that the Virtualstock systems were making to Guy’s and St Thomas’ Trust. The opportunity with Virtualstock is so large that it is more exciting at Virtualstock. He was a director of procurement at the NHS. The fact that Virtualstock is able to attract people like Robert Knott underlines the importance of having the right management at each stage of development of a company. Virtualstock five years ago was a very small company, now it has a world class product and world-class clients. It’s attracting world-class management which can take it to the

Hot Stock

ROCKETS SStoc toc ks k s R e a dy to tak e o ff hotstockrockets.com UK Investor Magazine — 13 — January 2016

next step. Andrew Mills, the CEO, who also joined late last year used to run a division of Samsung where he took sales from a US$1 billion to US$4 billion in a year. The fact that Virtualstock is able to attract such high caliber people who have held senior positions in large organisations indicates the point on the curve that Virtualstock is at. It points to the possibilities in front of it. So, we’re focusing a helping take Virtualstock to the next level. I’m hopeful that their will be news certainly within the next six, if not the next three months.

The other ones that we are looking at in some detail include Bosques. We’ve been involved in Bosques for some five years and it focuses on second generation biofuel plants. When we got involved, these weren’t particularly in fashion; hence, my reference to when do you get into something that’s on its back like resources, but now climate change is on everybody’s lips and governments are actually doing something about it. At Bosques, we’ve developed plants that allow production of biodiesel in a non-food competing way. Only one per cent of diesel at the moment comes from renewable sources so there is enormous room for growth. If we manage to penetrate just a small amount of the market with Bosques, Bosques could become very valuable. Again, an asymmetric return.

ZM: Finally, we are at the beginning of 2016. Winding forward 12 months, where to you expect Legendary Investments to be by the end of the year?

ZK: Firstly, I would hope that the core of our

work, which is helping our investee companies, yields results. What does that mean? It means that our net asset value rises substantially from where it is at the moment. Maybe in that, we’ll make some realisations meaning that we’ll sell some stakes in some companies that have done well and invest in new companies. We’re always looking at new companies. Since 2011, when I took over Legendary, we’ve looked at some 400 investments but made only ten. The second thing I would hope is that as well as the net asset value rising substantially, the share price reflects that rise. Currently, the share price doesn’t reflect the net asset value which is £4.3 million, or about 0.18p per share. Even that net asset value is historic to the extent that it’s based on our interim results to the end of September. There’s been quite a lot of progress in some of the companies since then, not least Virtualstock. They hired Rob Knott, and that in itself says something.

What we have a lot of influence over is our proactive strategy and that should feed into the net asset value. What we have less influence over is the share price but the market always catches up. Sometimes, it undervalues, as in our case; sometimes it catches up and sometimes it overvalues. The market is forward looking and so what I’d really like to see is the share price reflecting not just the net asset value of the company but the expectations of the company, expectations based on where the company is now, what it’s achieved over the last few years and where it might go.

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 — 14 — January 2016

71 share tips for 2016 from our readers - a buy and a sell each writes Tom Winnifrith

J

ust for fun we are running a ShareProphets readers tips of the year competition for 2016. A buy and a sell each and the person with the best overall showing wins supper with me in early 2017. The entries are below. Buys are in white, sells are in grey.

You will see a few names appear over and over again. InternetQ seems a popular sell, for instance. Our readers are naturally smarter than your average investor and the wisdom of crowds might just be telling you something. This is not “phone a friend” but “ask the audience.”

We will be providing a league table once a quarter on ShareProphets and announcing a grand winner around January 1 2017. Watch this space READER NAME

COMPANY

PRICE

Daniel Victor

Eco City Vehicles

2.75

Colin

boohoo.com

37.25

Alcira16247

Aviva

516.25

Colin

Avanti Communications

170

Alcira16247

TalkTalk

217.25

Steve

Mirada plc

Trakm8

363.5

Steve

Xcite Energy

Simple Moving Avarice

Chris Standing

New World Oil & Gas

0.09

Motive Television

0.021

Chris Standing

African Potash

1.65

Simple Moving Avarice

Antondec

Amur Minerals

7.875

Poohbear

New World Oil & Gas

0.09

Antondec

Lonmin

83

Poohbear

Gulf Keystone Petroleum

15.375

Steven

SKIL Ports & Logistics

56

Francis

Softcat

342.375

Steven

Tungsten Corp

Francis

Purplebricks

95

Duck and Dive

DDD Group

2

Inve$tor

Hague & London Oil

7.375

Duck and Dive

Sports Direct

576.5

Inve$tor

Gulf Keystone Petroleum

15.375

Eshaitan

Fox Marble

14.75

Ady

Monitise

3.05

Eshaitan

88 Energy

0.425

Ady

Imaginatik

4

Shaun

Ithaca Energy

28.5

Phil

Optibiotix Health

90.5

Shaun

WANdisco

81

Phil

Sports Direct

576.5

Jason

ImmuPharma

31

Csjcs

Jubilee Platinum

3.4

Jason

Gulf Keystone Petroleum

15.375

Smudgedan

Fastnet Equity

Smudgedan

Eckoh

Steve Sutton

Publishing Technology

Steve Sutton

blinkx

Addick

Bacanora Minerals

Addick

Monitise

2.95

Craig

Cyan Holdings

0.18

Craig

PeerTV

1.875

Mr E Munny

North Midland Construction

118

Mr E Munny

Parallel Media

9.5

Naeem

Armadale Capital

3.25

Naeem

Cyan Holdings

0.15

Daniel Victor

Titon Holdings

99.5

6 15

36.625

Csjcs

Lonmin

83

2.7

Mammy Yoko

Premaitha Health

18.5

50.125

Mammy Yoko

InternetQ

63.5

130

Bobbychariot

WorldPay

307.5

16.75

Bobbychariot

Pantheon Resources

153.25

William Simpson

Proxama

1.4

William Simpson

ZincOx Resources

0.725

Hutch

Sirius Minerals

15

Hutch

Xcite Energy

15

Elrico

FastForward Innovations

17.5

Elrico

Avanti Communications

170

Handybrownone

Futura Medical

29.25

Handybrownone

PeerTV

1.875

75

UK Investor Magazine — 15 — January 2016

Alan Dorling

Armadale Capital

3.25

Bear

Motif Bio

44.75

Alan Dorling

Mulberry

941

Bear

Rare Earth Minerals

0.725

Phil Baker

Minoan

8.25

Bearfacts

Premaitha Health

18.5

Phil Baker

InternetQ

63.5

Bearfacts

Purplebricks

95

Chad_John

Inspired Energy

14

Modsa

Cambria Automobiles

81.5

Chad_John

Jiasen

5.125

Modsa

Inspirit Energy

0.4

James

InterQuest

87

Backwoodsman

Pantheon Resources

154.75

James

Motive Television

0.021

Backwoodsman

Genel Energy

169.625

David M

Lonmin

84

Stulloch12

AFC Energy

23.5

David M

InternetQ

63.5

Stulloch12

Sirius Petroleum

0.25

Testpack3

Sound Energy

18.5

Skivers

Bahamas Petroleum

2.35

Testpack3

Gulf Keystone Petroleum

15.375

Skivers

Avanti Communications

170

Chris

Premaitha Health

18.5

Nick2020

RedT Energy

8.125

Chris

Motive Television

0.021

Nick2020

Motive Television

0.021

Pierre

Glenwick

0.183

Ozi

European Metals

9.5

Pierre

Avanti Communications

170

Ozi

WANdisco

81

Eyeguy

Premier African Minerals

0.425

Geoff

Mobile Streams

8.75

Eyeguy

InternetQ

63.5

Geoff

Gulf Keystone Petroleum

15.375

Sand

Jubilee Platinum

3.4

Hoggness

RedT Energy

8.125

Sand

Mulberry

941

Hoggness

InternetQ

63.5

Lee Rhodes

Highway Capital

14.5

David2001

Proxama

1.4

Lee Rhodes

TalkTalk

217.25

David2001

Avanti Communications

170

Warun Boofit

SacOil

1.325

Warun Boofit

AfriAg

0.16

Roger

Wolf Minerals

9.25

Drunken Sailor

Petropavlovsk

6.56

Roger

Sula Iron & Gold

0.25

Drunken Sailor

Watchstone

315

Craig M

Regency Mines

0.6

Steveg

Venn Life Sciences

22

Craig M

UK Oil & Gas Investments

1.325

Steveg

Fevertree Drinks

597.25

Keith

Hayward Tyler

93.5

Amateur Optimist

Nighthawk Energy

1.275

Keith

Powerhouse Energy

0.675 5.925

Pantheon Resources

153.25

Christopher Foster

Active Energy

Amateur Optimist

Qasem

Serica Energy

8.35

Mav

Rio Tinto

1980

Mav

InternetQ

63.5

Niall

Redx Pharma

68.5

John

Petropavlovsk

6.56

Turbograndad

cash

0

John

Majestic Wine

299.875

Morphine

Jubilee Platinum

3.4

Phil J

Litebulb Group

5.25

Morphine

Berkeley Energia

26.5

Phil J

Cyan Holdings

0.15

David Russell

Volution

191.125

Paul

Fastnet Equity

2.7

Terry H

Photo-Me International

151.875

Paul

Pantheon Resources

153.25

Filthy Lucre

Slater & Gordon

Ahk 786

Oracle Coalfields

2.375

Filthy Lucre

Lonmin

83

Ahk 786

Watchstone

315

Shareprofits2

Proxama

1.4

Andy

Auhua Clean Energy

2

Sidam

Deltex Medical

4.5

Andy

AfriAg

0.16

Scampi

Independent Resources

0.725

Steve Y

Ascent Resources

1.05

Steve Y

Gulf Keystone Petroleum

15.375

Scampi

Motive Television

0.021

Bernieboy

Zoltav Resources

28

Justcurious

Obtala Resources

6.5

Bernieboy

Motive Television

0.021

Justcurious

Avanti Communications

170

John

Quadrise Fuels

16.125

Lister

Sirius Minerals

15

John

LGO Energy

0.26

Lister

Pathfinder Minerals

0.8

UK Investor Magazine — 16 — January 2016

Three Sells for January

By Tom Winnifrith

S

hucks. Daniel Stewart is not only suspended but now looks set to be chucked off the AIM Casino as another Nomad has quit on it. It will probably go bust soon after and I lament this greatly since this company meant that I never had to think about one third of this column, it just wrote itself. But the soon to be late lamented broker and financial adviser to frauds such as Quindell and Naibu as well as to the odd kosher business, will not be the only casualty of 2016 Indeed, whilst 2015 saw a good number of casualties on AIM, 2016 will see far more. In 2015 the main reason that companies left AIM was not that they went bust - although a good few did just that. It was because their Nomad resigned and AIM let it be known that no other Nomad should take them on. This was AIM’s way of getting rid of outright frauds (Camkids and a host of other China stocks) or companies that were just an embarrassment and not investment grade material such as Rangers FC or Sefton Resources. In a few cases the Nomad quit because the money was about to run out and so the humiliation of administration came after the listing - and a need for an RNS - was an issue.

There will be more of these sort of departures in 2016. AIM is all too aware that it has suffered a PR disaster with its lamentable failure of regulation. And so expect the silent assassinations of the uninvestable and of the frauds to continue. However what will also happen is that as monetary policy tightens the cost of raising capital (i.e the dilution required) and indeed the ability to raise capital at all for small speculative or just rotten ventures will become ever harder. Investors will head for safety and thus those AIM companies that run out of cash and need a refinancing will either see mega-dilution or total wipeout. It will be a bonfire of the vanity businesses.

In that vein the first sell is a company that needs

a constant stream of IPOs on AIM (forget it) and secondary fund raises to keep going - WH Ireland (WHI) which at 90p is capitalised at £22 million. This company is dogged by scandal.

At one level, management failings a couple of years ago will soon see it landed with a very hefty fine by the FCA, it has already admitted as much. And meanwhile it has already had to cough up £185,000 to an Essex pensioner Mr Bagot who as a discretionary client was stuffed into a range of wholly inappropriate shares, mostly penny shares, often corporate clients.

The FCA should really force an Arrows review of WH Ireland’s other discretionary clients (the company has c£770 million under management) as we all know that poor Mr Bagot was not an isolated example of this sort of fleecing. There has got to be a good chance that other Mr Bagots will emerge and the cost of this could in due course exceed the seven figure fine that the FCA will be handing out shortly.

The company reported a small operating profit in the first half of the calendar year and will do the same in H2. But the first half saw a material cash outflow and I do not expect much cash generation in H2. And cash is the issue - at June 30 it stood at £5.9 million. However that is not free cash. As a regulated business WH Ireland must hold cash as regulatory capital equivalent to three months fixed costs and so I would expect that net free cash is really not very much at all. Thus a combination of the FCA fine, any more Mr Bagots and a downturn in trading leading to reverse operational gearing - financial services firms have high fixed costs in the form of staff - would almost certainly lead to a balance sheet crisis.

A company operating in a horrid climate and with WH Ireland’s regulatory and reputational baggage is going to find any equity based refinancing painful in the extreme and that makes its shares a clear sell.

For what it is worth it us hard to see any of the quoted corporate finance and broking firms as a terribly attractive investment but with the impending demise of Daniel Stewart,

UK Investor Magazine — 17 — January 2016

WH Ireland moves into pole position as the next one to drop.

From the City to another ailing industry: oil. It is hard to believe that Bent now trades at just $31 a barrel. Of course it will not stay at that price forever. I am in little doubt that in 12 months time it will be trading at a materially higher level but where it goes between now and then is anyone’s guess. But I would expect that the oil price during the first six months of 2016 will average well under $45 and for some players that will be enough to say “goodnight charlie”.

If you are dead in the short term it really does not matter where you are going to be in the long term because there will be no long term.

It is irrelevant.

I have been calling the oil sector lower for three years and also predicting that the number of listed oil companies in London would fall sharply. That process is well underway with some going bust (Afren and Kea), some being delisted (Sefton) and others reinventing them selves as non oil companies (Fastnet). In the latter months of 2015 there was a very real sense that many of the smaller players were just hanging on by their fingertips. Another six months and for such companies the game is up.

Frankly there are so many oil companies who are at death’s door that it is a bit like shooting fish in a barrel. In this column I have already highlighted why shares in Gulf Keystone (GKP), LGO Energy (LGO), Northern Petroleum (NOP) and Mosman Oil & Gas (MSMN) should tumble and all four have cratered as predicted.

For the avoidance of doubt all four remain as sells with 0p a plausible target in every single case.

But you want a couple of new selling ideas?

An obvious target is IGAS which is drowning in debt and at 15p is capitalised at c£46 million.

According to its last numbers, the interims to 30 September 2015, Igas reported net debt (which it defined as borrowings less cash) of £64 million. That is more than four times its first half revenue. In other words even if Igas had zero costs it would take two years of repeating H1 sales (unlikely with the oil price way below its average selling price after hedging) it would take two years to clear its debts).

Meanwhile the company reported a loss of £19 million in the first half even before taking

currency movements which took the loss to £24 million. Looking at the cashflow statement in the interims, we see that whilst the company generated cash of £25 million, this was after £30 million had come in from the disposal of assets. If we adjust for that the implied underlying cashflow was minus £5 million for the six months, and the oil price has still been falling.

It takes no great feat of analysis to work out that if bonds secured over the assets of the company are trading below par value by a thumping 40% the bond markets are pricing in as a certainty that Igas will be unable to meet its commitments. As the bonds rank ahead of the equity in the queue, if Igas can’t pay its bonds, there would be nothing left for the shareholders. With a maturity date of March 2018 ( two years away) how on earth can IGAS hope to repay the $144 million of the 10% bonds in circulation.

We are told that Igas had net debt of £64 million at H1 – call that about $100 million.

In other words, over the next 27 months Igas has to find $100 million from somewhere in order to pay off the bonds at maturity. Now it could borrow more, or roll over the debt to some extent. But at what cost? The market price of its secured bonds on the Oslo Bourse implies 16% a year in interest alone. Add in the capital position and you are around 30% a year.

Meanwhile the remaining cash is being whittled away by at least $1 million a month.

It looks grim and IGAS is a slam dunk sell.

As is Iofina (IOF) which is not quite an oil company but in the same sort of space - its wells produce Iodine. But not cash. The company has debt of c$20 million and - I reckon - just a few million dollars of cash.

And it continues to burn cash. At 11.375p the company is capitalised at £14 million but the only way out of its predicament is a massive debt for equity swap which would see existing investors almost wiped out.

Even then, since it would not be generating cash what would it be worth? Sweet FA. I have been bearish on this stock all the way down from 180p. There is not far to go. Target price 0.1p. I am being generous.

UK Investor Magazine — 18 — January 2016

the house view Yes: UK Interest rates can go up, must go up and will go up

T

he Americans have taken the lead with a small, 0.25%, increase in base rates and in a normal world we would expect the UK to follow suit. We face the same issues, niotably a real estate bubble that is out of control and so need the same medicine. Yet the doves argue that a falling stockmarket and problems in China mean that the medicine can be deferred until 2017 or avoided altogether.

China, as we have long argued, is facing the inevitable consequences of its own debt created credit bubble unwinding or, rather, collapsing. That story has yet to play out fully and will clearly dampen global - and thus UK economic growth. But the UK economy will still grow during 2016, although not as strongly, we suspect, as some folks think.

As for the stockmarket we shall see what happens. But whilst some in the City regard themselves as being at the Centre of the universe the stockmarket is only one part of the UK economy. Too often in the past Central banks and policy makers have allowed fears of stockmarket weakness to dictate policy.

Indeed we have seen in China in recent months that farced played out in its full glory. Policy makers have to accept that shares can go down as well as up and right now there is a striong case for saying that the UK market is fairly fully valued. It is unlikely to rally strongly whatever happens to UK base rates.

The real issue policy makes must address is the asset bubble in real estate. It is something that is rewarding the speculators and the rich and causing real stress for the poor and the young. Meanwhile ultra low base rates continue to unfairly punish the prudent and those on fixed incomes.

The longer the property bubble is allowed to expand the more painful its eventual collapse will be. And that is why the UK needs to increase base rates during 2016 and indeed will do just that. Ignore the doves and those special interest groups pleading their own cause, base rates are going up this year.

UK Investor Magazine — 19 — January 2016