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A much better day, just need a few more days (or weeks) like this, then we will be in much better position after all the recent turmoil. Are the value and bargain hunters finally seeing the merit of this company.
that was big?
Well we now have the name of the new CEO and it interesting that Xch continue to look for experience from the tech world which confirms where they view their future. Xch's PR on this has again been notable by its absence which strikes me as a missed opportunity. The share price took a thumping when it was announced that Ken was leaving because there was a view that he had been pushed for underperformance. As previously noted the long lead time prior to his departure suggests that this was not the case and that it was amicable and probably his choice; the fact that they have new man running in parallel with Ken for a couple of months confirms this to me. If the Board had lost confidence in Ken he would either have been pushed out immediately, as happened to David Andrews, with perhaps Geoff Unwin taking on the temporary role of Acting CEO, or at the very least they would have exited Ken as soon as Craig Wilson started. Filshare commented on Wed that he hoped Wilson would not feel the need to 'kitchen sink it' which is whay all too often new CEOs do - a couple of profit warnings, assets written off and provisions refilled all blamed on the previous team before a few years of good numbers which they then take the credit for. In the defence of CEOs doing this the previously team has often tried to keep the lid on the bad news so there can often be a need to clean the stables out. Ken however, unusually, has already taken one for the team and done the large write off by impairing worthless legacy procurement assets. The big fall off in revenues that Ken has had to deal with over the past four years are now over with the last one incurring this year. The restructuring is done and paid for, the heavy investment in technology also. Margins are excellent. In the half year report Ken confirmed that outside of procurement (remember only 6% of the business) they are ahead on their sales for both in year and total contract volume. A few sales in insurance software and this share price could really fly. Craig Wilson has joined at a very good time!
A month ago I wrote that the top 10 shareholders were sat on 56% of the company this has now risen to just short of 62% with the top 2 shareholders (Artemis and FIL) holding just over a quarter of the company between them.
From the telegraph: British Computer Society fellow Mr Wilson is joining the company from HP’s Enterprise Services business, which develops and runs computer systems for other businesses as well as government departments. Separately, HP has announced that the bulk of its 25,000 to 30,000 job cuts in the coming years will come from this division. Before moving to HP in 1995, Mr Wilson worked for PA Consulting Group, Informix Software and the telecoms group AT&T.
Would be nice to hear some positive news coming from Xchanging. Surprised at the lack of reaction to the share price considering there was a 25% drop to the news of Ken Lever leaving. I assume the market is still digesting the news, just hope what is known about the new guy is good news for the future.
Craig Wilson appointed as CEO. Blurb on RNS sounds encouraging. Anyone know more....lets hope he does feel the need to kitchen sink it, and instead we start seeing a steady confirmation of business wins....
Wonder when we might hear some news on the new man at the helm? It is about 5 weeks since the announcement that Ken was leaving, but hopefully the Board had some idea he was leaving before 30 July and already had some ideas about the successor. It is a complex business so be very interesting to see what skills they go for. Of course a new CEO often leads to a shake up. In the top team so even when that is announced there will be some uncertainty. As Prof says, a few reasonable sized deals announced soon would be good and give the market confidence that changes Ken made have embedded, gave Xch the right strategic focus and are starting to pay off.
I make it that the top 10 shareholders now hold around 140M share which equate to approx 56% of the company. That is pretty concentrated and suggests that this big fund managers have quite a lot of confidence in the company although from their end of the telescope it will be an infinitesimally small % of their funds under management. The good news is that if things start to pick up (which I think they will) their will probably not be many available shares sloshing around so we could see a quick price rise. The bad news of course if the opposite scenario which is if one of these large shareholders loses faith then them dumping the stock could cause significant downward pressure. I am not surprised that we are not hearing any sales news in August as it is always a pretty dead month, I do have high hopes that some of the Xuber deals that we were told by Ken Lever at the half year update, were in the contracting stage, make it over the line and get announced in September.
Interesting RNS today namely that Majedie Asset Management Limited passed the 5% threshold on 14th Aug. Their purchase that took them above the 5% was very small, just 125,000. It makes perfect sense that they should have been hovering just below the 5% threshold but why break cover to accumulate a further 125,000 unless you want to buy quite a lot more. Let us hope this is indeed the case and it will give the share some positive momentum.
'preferably legal but aggressive capitalisation' in the last paragraph was meant to read: 'perfectly legal but aggressive capitalisation"
With tangible assets you are meant to write them off over their expected life although there is nothing to stop you taking the full hit in year 1. There are some broadly accepted conventions (IT hardware over 3 years, cars over 5...) but ultimately provided it does not look too preposterous then your external auditors will sign off your accounts. With intangible assets it is even more of an art than science. How many years should you spread the cost that you have spent developing intellectual property over given that you usually have no precise idea of either the value of that IP or of how many years it will be of value for. In short a company can have depressed statutory profits because of decisions made in previous years as to accounting procedures but the one thing that can't be flexed is the amount of cash being thrown off. Now when a company impairs an asset, as Xchanging have just done with £47.7M of procurement intangible assets, at the half year what they are effectively doing is taking all the remainder of the capitalisation charges in that year and writing off the value of that asset. If the baker had crashed and uninsured van and had to write it off this would have a very real effect on his profits and cash as he would have to go and buy another on. If however the asset was intangible and it was decided that it no longer had any value then there are two important things to bear in mind: firstly it was contributing nothing towards profits and secondly, because of this there is no need to spend any money replacing it. In short, with the exception of horrible looking statutory profits in the year in which you write off the asset, nothing has changed on the cash front, and importantly statutory profits will be up in future years as there is no longer an amortisation charge. The key point is that the amount of cash the company is throwing off is exactly as before and that, as a shareholder is what I am really interested in. So coming back to the case of Xchanging, my guess as to what has gone on at the half year is that the Board decided to use the opportunity of the bad news on the Procurement performance, to also bring out their dead in the form of the impairment charge which most likely related to preferably legal but aggressive capitalisation of intangible assets under the old regime which were sitting on the balance sheet with little or no value. Notwithstanding the poor performance this year in procurement, the fundamental ability of Xchanging to throw of cash is unchanged despite the statutory loss for the year. I applaud the cleaning up of a messy legacy balance sheet.
There are lots of songs about money: 'Money, Money, Money', 'Give me Money (That's What I Want)', 'Money Makes the World Go Round' to name but a few. There are to my knowledge, no songs about 'Statutory Profits'. Cash it seems is king in the music world and so it is in business. Balance sheets of companies can be notorious opaque to the uninitiated. I have a theory that accountants like it that way because it makes them look clever when they are asked to explain the difference between, operating profit and EBIT and then onto EBITDA. Actually none of it is very difficult it is just made to look that way. Given that there are so many different numbers floating around to value companies it is of little surprise that you can usually find one that looks good, or should you be that way inclined, one that looks bad. Ultimately there is but one that matters and that is cash. I admit that others can be useful as early warnings of problems but if a company is spitting out large amounts of cash (and preferably increasing amounts of it) then that company is usually a pretty safe bet. One of the big variants between the amount of cash that a company spits out and the amount of profit it makes is the result of spreading the cost of assets acquired over a number of years. In many ways this makes a lot of sense - if a baker makes £10,000 profit per year but buys a bread oven worth £10,000, is it reasonable if you are trying to value his company to say that he makes no profit in that year? By spreading the cost of the oven over the ten years it is expected to last you get a far better view of the profits of that company which end up being £10,000 - £1,000, so £9,000. So in this year you have a cash position of 0 (£10,000 cash made but also £10,000 spent on the oven) but an accounting profit of £9,000. For the next nine years however, all else being equal, the cash position is £10,000 but the accounting profit is only £9,000 as each year a 'depreciation' charge of £1,000 is applied. When the assets are physical (tangible assets) we talk of depreciation and when they are non-physial (intangible assets) we talk of amortisation. It follows that a company can to a certain extent chose the profit it makes in a year both by choosing what it capitalises (the act of spreading the cost on the balance sheet over many years) and also by choosing how many years they spread it over. In the example of our baker if he chose to spread the asset cost over 5 years then the profit would fall to £8,000 per year for the first five years but would then increase to £10,000 per year for the next 5 years. Importantly nothing has happened to the amount of cash the company is throwing off, it is all down to accounting.
Terrific write-up El Prof, if a little deep for me on a Monday morning! Analysts. Well, over the years I have had to conclude that they often hold worthless views. If they were bookmakers on horse racing they would be potless almost instantly. You simply cannot value a company at 2.20 one week and 1.00 the next. That is plain daft. But back to XCH. I think it is very clear now that we are looking at one of the most undervalued companies on the markets. I did indeed top up at 98p but what bothers me since is what the new CEO will do. Should they concentrate on changing sentiment about XCH and thus keeping the shareholders happy, or should they concentrate on running the business in the belief the market will eventually wise up? Of course, as with all CEO's of listed outfits, they have to do both. So, my plea to the XCH board is to find an individual who has definite skills in both areas. What I fear is that they, like other listed companies, might take an arrogant view of the market and simply find someone who has the skills to run the business but not the PR talent and charisma to make investors come aboard. Still a good play but I am with this for the very last time now!
Interesting quote from Jeremy Thomas, manager of the Bruner Investment Trust, who has recently been adding to his holding of Xchanging, according to Jennifer Hill at Citywire, on the back of its evolution into a technology company: ‘It’s enormously misunderstood and undervalued’.
Now emotions and 'gut feeling' which the best fund managers put great store by, are ultimately different sides of the same coin. The important point is that the star manager finishes with gut feeling, in other words puts all the hard work in of gaining as much information as possible, analysing it and controlling their emotions before letting their 'gut feeling' which psychologists often refer to as the sub-conscious mind, do its thing. In short all the above explains why we do not all value a share in the same way, which is fortunate as otherwise there would be no market. In theory if anyone was an expert in valuing companies it should be analysts, they have the resources to dig out the extra information and they should have the skills to analyse that information and to keep their emotions in check. If they do not have these skills you have to wonder whether they are in the right trade. I wonder therefore what kind of thought process the analysts are Liberum go through that allows them to value Xchanging at 220p and then a week later at 100p. We know that bounded rationality means they cannot know everything about the company but it would have to be a pretty ground breaking unveiling of new information to more than halve their valuation of the company, which I am not convinced that underperformance, no matter how drastic, of a division that accounts for just 6.5% of total revenues of the business, qualifies for, particular when accompanied by the news that the other 93.5% of the business has had a record performance and is ahead on sales to boot. Even Investec's reaction of cutting their guidance from 250p to 185p seems a little over the top although I would put that down to the 250p being over optimistic rather than the 185p being too low and at least this revaluation I can understand. Liberum's strikes me as being down to nothing more than emotions running wild and trends being slavishly followed which is utterly unacceptable to see in a serious analyst firm.
The theory of perfect markets tells us that that the all knowing market takes into account all information available and then spits out a perfect price that matches buyers and sellers which in turn perfectly values the company. This is of course utter drivel for two reasons, the first because of what economists call 'bounded rationality' the second because humans are fundamentally irrational beings, driven as much by emotions and perceptions as by facts. 'Bounded rationality' is ultimately something we just have to live with, we will never know everything there is to know about either the company or the environment in which it operates therefore we have a 'bounded' view of the facts which limits our ability to value the company. For example it may be that the CEO of a company is planning to retire but until he shares that fact publicly the shareholders cannot price this fact in. Of course this is a pretty straightforward example, another might include the economic environment in which the company operates, for example interest rise may appear earlier than expected which, in certain sectors may negatively impact, or in others positively impact, the share price. Generally bounded rationality impacts all participants in the market equally, not least because regulators have pretty comprehensive rules in place to ensure information is released to all market participants simultaneously. Now of course some market participants have a head start here and that groups is the directors as well as the PDMR (person dispensing managerial responsibility) which is why share purchases and sales by these two groups are of such interest to the investor; purchases a lot more than sales as a sale could be simply because the person needs the money whereas a purchase is always a conscious decision. The emotional nature of investors is the other factor that prevents a company being priced perfectly. Most of us tend to place too much importance on trends, believing that the share that has been climbing for a long period will continue to climb and that conversely the share that has been falling for a long time will continue to fall. In many way this is a spin off of 'group think' as we believe that if people are broadly positive or negative on a share then we fall in with that view. Now the issue of bounded rationality, as I mentioned above, impacts all market participants, having said that more information can be unearthed through effort and some market participants are prepared to put that work in whereas others are not. In addition the information is often not in a ready to use form but needs to be interpreted which some market participants will be better at than others. That is why you have star fund managers. The other reason you get star managers is that they are better at keeping their emotions in check; they will never eliminate them but they will control them and let hard facts guide them rather than emotions.
Had been hoping for a slightly better bounce back than this, still think it was heavily oversold
This obviously explains some of the huge amount of buys from yesterday, still cant understand why the share price did not increase. Sentiment certainly is holding this back.
Odey has held this share for a long time I believe, and Rns confirms his has bought quite a bit more (11% to 13%) so doesnt appear to be concerned about the sucession. I agree with some of the comments below that, Ken having fixed and refocussed the business, and positioned it for growth,a job I think he has done very well) maybe someone else, with more sales, PR flair might be more suited to growing the business from here on in. Let's hope the NEDs get it right.
moorhey, Very interesting. Will look at the blog but I don't touch jumps at all. Flat only for me and on course only but mostly using the exchanges from there. Also, a big fan of AW racing in winter where form is incredibly reliable. I don't share tips at all, mainly because I work the horses in a very different way from most punters. For me it is all about grinding out small but very regular profits - and I do mean grind! Ageism - oh yes, at mid 50's don't I know but without it I would not be full time on horses. But boy, it is full-time. Figures, form and price watching all morning and then racing 4 to 5 times a week in afternoon and evening. Still, it is far better than IT work and what I always wanted to do. I love it, despite the stress. Was at Notts yesterday with a small profit but whole afternoon was blighted by thoughts of XCH's fall! To end, back to ageism. if we are both still about on here and I ever do end up mentioning why I have inside knowledge of XCH, you will see ageism mentioned again. Off to Thirsk now. Best wishes.
Thanks Professor. When I bought-in originally at 184, my interpretation of the fundamentals of the company suggested that a value of 220-240 would have been achieved at some time in the 1st-6 months of 2015. When the SP started to slip down, I topped-up at lower levels (much as I would when betting on a horse and the odds drift longer) thinking I'd read it right and the "sellers" have read it wrong. However, sheer weight of numbers has pushed the price down to current levels where I'd need a 100% increase in SP just to break-even. I could buy more shares and reduce my average buy price but, even if I doubled my shareholding and reduced my average buy-in to about 134, I'm still requiring a 38% improvement in SP from its current level just to break-even. Add to that the distinct possibility that the reason for the pronounced drop in the SP could be a valid one that neither you or anyone else who is "bullish" about XCH has spotted yet. Sometimes (as happens in horseracing) you need to take off the rose-tinted glasses and smell the coffee. Possibly the best decision anyone can make is to know when to cash-in and move on - be it marriage, job, or share-trade.
phoenixchi: it's always of interest to me when I come across another player on horseracing. I'm not full-time like you as I can earn-more from my freelance consultancy but, probably in about 5 y3ears time when ageist policies prevent me from obtaining new contracts, I will almost certainly fall-back on horseracing as a full-time income stream. If you are interested, my main focus (due to time constraints) is on the jumps game and I have been posting a blog with my selections (profitable every season since starting, with my best ever season the one just gone 2014-15) since March 2010. The blog selections are more of an icing on the cake, than a way of making a living. If you are interested it's http://waywardlad.blogspot.co.uk and I will start posting selections over the jumps from about mid-October through to Grand National day next April.
forgive me if i am being stupid but does anyone know what the 240k Trade was this morning
ElProf, Again, the best and most balanced write-up of a company I have read on any forums anywhere. One thing I am heartened by is that you feel Lever is going with good nature and not being forced. After yesterday's news I rather had the feeling he was jumping ship before one or two institutional investors lent on him. I am also in agreement with the sales picture. My long standing fear with this outfit has been that their manic, and often misplaced, obsession with procedures and process was always going to hamper any progress in this area but perhaps that fear can be dismissed now. (As I have said before, I do have very close hand experience of this company but still cannot say what it is. If I could, I am sure all on this forum thread would see why I developed such definite views!) Anyway, where do we go from here? Well, El Prof's views are the best guide, yet I still have one major worry. I now back horses full-time (not a glamour living BTW, i just grind it out using certain pretty dull methods) and so have an intimate knowledge of how bookies work. I know that bookies sometimes get the price of a horse wrong (more often than you would think) but the market place (the punters) usually correct this pretty quickly! Hence, whatever the fundamentals of a horse's profile, the market is usually the best guide to its chances. So, how does that relate to XCH? Well, the problem is with the market view of the company and not its fundamentals. Somewhere along the way, market sentiment has to be changed about XCH. The new CEO might be the key. He or she will have the tools to work with but will have to make XCH popular again. I very much hope the board in their search for a new CEO - if they don't already know who it will be - base their selection on the first task required - IE making sentiment in the City favourable again. I do recall the day David Andrews went. The share price halved when it should have gone up because Andrews had lost the plot! The skills he had in starting up the company, and then floating it, were all but redundant for how a publicly quoted outfit had to run. OK, his leaving was accompanied by some terrible, terrible figures but it was good news he was on his way. Hence, it is odd how the market seems to over-react to the departures of XCH CEO's more than any company I can ever remember. I really don't know why. Lastly, one other small worry. No offence to the individual responsible but the PR with XCH is terrible. They rarely blow their own trumpet enough and miss plenty of chances to push positive news. On the other hand, they time their bad news terribly! So, improvement here please. Anyway, let's hope the faith of those who are left as shareholders are at least rewarded with a bit of a bounce over coming days. With me, though, this the last chance saloon. if we are not around 15% better by end of this financial year I will be away to pastures new! GLA