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What is unfolding in Ukraine is an abomination. The response from the decent world has at one level been unprecedented and at another wholly inadequate. The actions undertaken to date should however, be very supportive of Ince's core legal offering.
From "seizing"private yachts to invalidating insurance contracts, from demanding the return of leased commercial aircraft to making sure KYC is adequate, from export controls on certain products to understanding if it is better to claim "force majure" or "frustration" clauses in contracts. This will all be happening on a multi jurisdictional basis and is likely to be long lasting. These are all areas where Ince should be one of the first names called given the strength of its offering in these areas.
Once the purdah caused by the take over is lifted I will be interested to know how their China alliance with W&H Law performs during this period. In theory it is Chinese firms with multi jurisdictional businesses that are in the most delicate position and where mistakes could be costly. One might suppose that they will need a significant amount of multi jurisdictional legal advice. Given the problems with lock up in Hong Kong I hope they ask for decent retainers.
@APD709 : Inflation is an certainly worth considering. In my experience lawyers are a bit like school fees they are pretty good at adjusting to inflationary environments. But the point you make is valid and there could well be a lag between high costs and adjusted billing rates.
I think you also hit the nail on the head when you talk about profitability being the key. If they can clear the Ince acquisition overhand and normalise profitability even if you saw revenue halve you would see no change in current levels of profitability. I think it is also worth remembering that they bought Ince out of bankruptcy and a good part of the reason Ince got their was their bloated cost base. That is being addressed and you can already see that in the financial metric but the over hang of the acquisition costs, covid and the long cycle of some of these costs have not allowed this to flow through to the profit line yet.
We are all investing in an GBP 18 million pound market cap company, that has been under the pump for a few years now. I am assuming we are not widows and orphans, so we all accept their is risk. However from my perspective the risk reward ratio looks very favourable. The possibility/ probability exists for significant profitability increases and significant multiple expansion, that is a very powerful combination.
Agreed on the length of time markets can stay irrational and the only way to see Ince rerate meaningfully is with cashflow and profit. So, yes they do have to deliver and I think with the headwinds from the Ince acquisition abating over the next 6 months the ball is now firmly in the managements court.
You ask do I thin management can deliver ? Well I certainly think it is possible, even probable that they can but I also understand why the market has concerns and those concerns are not without validity. As for Arden, I would not have bought it but I get the logic of why they did. This is a bolt on acquisition and If the legal side of the business recovers, as I think it will Arden will not be a key driver Ince Group earnings in future years.
I agree that Ince have not overpaid. I am simply suggesting they should have not paid at all.
With the rest of your thesis, as you lay it out, I can only agree. Stock markets are not rational. However, stock markets can remain a lot more irrational than investors can remain patient and or solvent. Tesla Shorts being one notable example.
Do you think management can deliver? The stock may well be cheap on a relative basis but margin contraction can be met with earnings contraction. Then the stock will not look so cheap. The Bank of England report on productivity and broader focus on the UKs small cap productivity may align with this stock, time will tell. Comparing INCE to an immediate peer group it is cheap at 11 x trailing P/E but then compared to Knights it has half the earnings margin at 5%. Furthermore it has the worst EPS growth in its peer group at negative 37%. Supposedly Biles enjoys a close relationship with Donald Brown and chatter is that the price of Arden was "agreed over a pint". Is this really indicative of quality management? Where is the actual logic that Arden can tap city sources for cash properly for Ince Clients when they have consistently been unable to find money for capital raises for their existing clients resulting in either deeper discounts or a reduced raise?
Hi erratum, I agree with all you have shared but one thing for your consideration is inflation and higher interest rates which have already entered the market and the world is going to face for at least a couple of years and both these points about inflation and higher interest rates are a fact as of today.
What am i trying to say with higher inflation and interest rates: both will have a significant impact on spending power of the human beings and on the corporate side the costs will rise to service the debts which most companies will have (Ince has too) thus reducing their spending power so Ince's clients spending power will reduce as well.
Both the above parallel streams may mean and we can anticipate that Ince may drop its annual revenue from circa £100 million (to a figure I can't work out) and we can be okay with that but what is most important is for Ince to find ways to increase their profits (if Ince really has shareholders interest at heart and is not working heavily to satisfy its partners interest over shareholders).
Of course, higher interest rates is good for cash rich companies so let's hope Ince can settle its debts and start the multi-year journey towards gradual increase in profits YoY and then sky is the limit for this company. If the foregoing comes true, from the current SP level one can imagine £3 to £5 in 3 to 5 years time. Let's just think about that for a second :)
Look forward to hearing your views on my thoughts above erratum.
Arden is a cyclical business that has been poorly run, no disagreement there. In principal being part of a larger group with cross selling opportunities, should improve the quality of the business and profitability. Can Ince bring that outcome about ? Well that is to be proved. That said they are not over paying for the business it should make at least GBP 1.5 million profit when it report last year’s financial results, it comes with a pile of net cash and one or two decent clients, AssetCo for example. If they could get a slice of AssetCos legal work that would be attractive.
As for Ince, some investors will move on and some will move in. For every share sold there is a share bought. I don’t read to much in substantial shareholders not adding more, each will have their own circumstances, limits and reasons for not doing so. Your outlook seems to be built on the premise that stock prices are rational. I work on the basis that very often (and it holds particularly true for Micro Caps) they are not. Is it rational that Tesla was worth more than US$ 1 trillion or that European corporate bonds had negative yields or that oil traded at -$40 per barrel a couple of years ago ? Irrationally in asset markets is common. Even just doubling Inces first half performance would give an EBITDA profit of GBP6.4 million for the FY ending March 22. They have indicated that profitability should increase in the second half. Nevertheless assuming no improvement that puts us on a P/E of 3 x trailing. For you to be right about more share price weakness, from a fundamental perspective, you have to expect the business to materially deteriorate from the levels it was doing in the first half. I can see no evidence to support that position.
Correction.
Melvin Hemming +904,700 in Q4/21 not Biles Q4/20
But Charles Robert Biles did add +387,730 in Q4/21
Others:
John Parkinson +1,200,000 (Like Melvin Hemming and Robin Hall a new investor) in Q4/21
Allianz have trimmed position by 75% since deal announced.
@errattum You make a very balanced and reasonable set of points. However what I would say, recognising that your points also allude to not being able to read the future is that both businesses are clearly challenged. For certain micro cap companies attract volatility and liquidity droughts. That being said, micro cap companies remain micro for extended periods of time (Arden being no exception) for good reason. The fundamentally are unable to produce meaningful, durable earnings. We can point to liquidity and technicals all we want. But the underlying quality of the business matters.
In Arden we have a business that struggles to make profits. In periods where it has made small ROE, it has gone and squandered the cash either in the form of a periodic dividend or in covering losses in very short order. No annual report makes reference to meaningful investment in technology, capability operationally let alone a concrete strategy beyond 'spray and pay' which in an ever dwindling and consolidating broking market does not make sense. Peel Hunt and Numis have made very considerable investments in technology and strategy. Their results YoY speak for themselves. Whereas in Arden, It has never moved up the value chain. The quality of its clients, reputation and deals falls and has fallen YoY. Its inability to access the abundance of cash in the city of London for micro deals and then let clients down speaks for itself. This is reflected in staff retention and reputation and latterly the income statement. Its an incredibly challenged business.
In the case of Ince, despite having a far larger and broader operation, the very fact that the very engaged shareholders have allowed the price to fall to this level is not to be entirely dismissed. Any asset with value proposition will see a floor given that the 'sticky' holders will wish to reduce their average price, given the market cap it's not as if the small investment community here could not produce a meaningful floor to support the market cap. A relation of Adrian Biles, a Mr Charles Robert Biles gave this a go with a purchase of 904,700 in Q4/20. This and the handful of individuals who are the top contributors in the last 5 months, Robin Hall (+1,538,330) and John Parkinson (+1,200,000) have not stopped the fall. Tellingly, Ruffer the largest institutional owner and the Stonehage Fleming have not seen it fit to pick up a 'bargain' as any true believer would. They have both moderately trimmed their positions in the last two years. Wait and see only lasts so long when there is true value to be held elsewhere. After all, given the opportunity to switch alliances in a running race, you might start to question the runner who is forever doing up his laces when his competitor is prized to go. I suggest that in the case of both these businesses, with the value destructive acquisition as a leading indicator, investors will see other opportunities as better horses to make up for their not insignificant losses
Well you have moved the market in a positive way CT - well done for the cojones
Ok erratum and by extension to Tshaw, your explanations are logical - sorry for the paranoia
ah, thank you Cane :)
@APD: I experienced that on HL, but only when using a Market Order. A Limit Order worked.
Can't buy any shares from HL this morning (since the last 30 mins). Anyone else is experiencing the same?
@CaneToad - At these levels I think you have a very decent margin of safety.
I've added to my position with another 60k shares. I cannot understand the disconnect between the valuation and other law firms: DWF, Knights Group, Gateley Holdings, Keystone Law, nor can I understand the current strategy, nor do I like the current management, but if they can eek out some more profitability, I can see it being a good investment over a 1-2y time frame. There are *lots* of IFS here.
So if I understand you correctly the point you are making is a mark to market analysis or that of a shareholder who held at the time of the offer and was to sell today ? If that is the case then I agree with your logic. I would however make a few points.
1) I would not read to much in to the spot share prices of two microcap companies with low liquidity and a few hairs on them. I think they are indicative of exactly nothing other than liquidity and an information vacuum created by the TO process.
2) Share prices on AIM and in the penny dreadful range are not rational and are certainly not predictive of future underlying business performance in either direction.
3) With issues in the Ukraine and worries about inflation. Babies are being thrown out with the bath water. The frustration evident on the BB over the last 4 or 5 months signals to me that expectations for the group are pretty low as is understanding of the group, its accounting and cash flows. A disconnect between the share price and reality perhaps ? Time will tell
Ince has had a pretty rough run of things over the last 2 1/2 years. Partly through its own missteps, partly through poor luck with the timing of the Ince acquisitions and the debt they took on to fund it. Over the next 12 months they need to "show me, don't tell me". If they can do that the share price will go 5x from here, if they cannot I think the downside is in the 18p to 20p range. From all the work I have done I am confident that cash flow will improve significantly from this point. With a fair wind and a bit of luck the company will generate @ GBP 18 million of free cash flow over the next 24 months. It will be lumpy given the seasonality in cash collections but on a pcp basis the trend will be strongly positive from the next financial year onward (starting April 2022).
@contrarian123 : I can allay one of your concerns, as of today I am a shareholder. Any Ince specific knowledge I may have has come from reading the financial reports, watching the Investormeetcompnay presentations, RNSs and the Arden Offering circular.
We all want (those invested in Ince) the same thing which is Ince to start being more profitable and to keep up their circa £100 million per year revenue at least or increase it.
Good to see the healthy and quality exchanges.
Evidently:
1. I joined today as I said at 16.34 with the explicit purpose to discuss this deal
2. I am not purporting to be two different people (given similarity of usernames)
The second account came as I am unable to login to my first. I am sure there are more effective and subtler ways of stirring up trouble than simply creating a new account which is evidently born out of the first. I am here to discuss the deal not accept conjecture. Erratum, whom I don’t know clearly has an opposing view to mine so we are hardly acting in concert.
Strange there seems to be two(2) Tshaw's one with a 2 at the end.
Both commenting on INCE and in conversation with erratum.
Funny goings on
Right, my original post and my post at 13.04 suggested what you say. There is a fixed ratio, agreed at the start of the deal. This is simply a function of the number of outstanding shares. Looking at the offer...
Arden have 32,299,211m this will be multipled by 0.583r to get to 18,841,206
This will be added (diluted to create new shares) to the Ince share capital of
68,540,912
+
18,841,206
= 87,382,118
When you divide the Arden 18m by the new number you get 21.5%, precisely what the RNS reads.
I recognise that the dilution amount, which is strictly a number of shares, is not a function of interim valuations. I recognise that my language did not make this understanding clear.
My original maths still stands. The original offer was obviously set about with Arden thinking Ince held some value. There was an indicative upside to the 0.22p vs 0.53p. 40.5% is a great upside. It provides a cushion to Arden shareholders.
Arden's share price, perhaps in anticipation of lacklustre results and a failed 'home run' corporate action in 2021 for a client which would have otherwise brought decent EPS in, has fallen off by 14%. Not so bad.
Ince's share price however has fallen off by 52%. This dramatically changes the value proposition of the deal/ If there are any cost savings to be found they will take 1yr + to materialise, savings I am highly cynical of given that there will be pro-rata accounting required for Arden as it will remain a standalone company within the group with complex regulatory accounting etc for its market making. If we assume the market has correctly priced the wisdom of this deal today then the current share price pair represents a -21.7% fall. Worse still, when these shares join the group, assuming current market cap of Ince is near enough priced well, then the 21.5% of £17.5m market cap represents £3,762,500 of value. Vs Arden Market Cap today of £5,400,000.... i.e a 30% drop.
30% is not insignificant.
Perhaps the market will reward Ince for this acquisition and the price will climb. My evidence around client retention, staff turnover, retained earnings and perception of Arden would suggest otherwise. What we can say for certain is that Ince shares need to climb a very long way for this to make sense.
Maths = 12 Arden shares @ 19p = Cost £2.28
7 Ince shares @ 22.5p = £1.785 = P/L -0.495p (-21.7% vs starting cost)
Hi APD I did wonder myself and asked erratum if he was an insider.
He seems to be extremely knowledgable on the shareholder structure and contents of the Arden deal yet he claims he neither is an insider and also says is not a shareholder.
It is admirable that he has done so much research if indeed not an insider and still not a shareholder yet he bothers posting here.
Very strange that erratum and Tshaw have joined recently and their very first posts are a discussion of INCE. What are the odds?
I joined today 23/02/22 with the explicit purpose to scrutinise this deal. I do not know who erratum is.
@canetoad : I think a takeout by management is a low probability event. Hard to raise cash and hard to get pass the shareholders, if it is a low ball.
I think it is much more likely, that if we see the predicted cash flow improvements that in addition to the dividend they will launch an aggressive share buy back.
Dropping to 20. That’s the next support point on which I’ve set an alert at 22. I’ll be watching and possibly be increasing my stake then…