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Excellent, insightful comment, Pokerchips. Tom Joule will do what it takes to preserve what he can of his capital and save the company. Obviously we are all taking a bit of a haircut but better to ride this out than to leave the barber’s shop now. Comparisons with Laura Ashley and other failed retailers are daft, as anyone who knows the specifics will attest.
The rises over the past couple of trading days were on low volume. Nevertheless 16% is not to be scoffed at and shows how quickly the share price can move in a thin market. Dangerous to be short on this share, I would have thought. An out of court settlement is a distinct possibility, but I’m guessing this would most likely happen closer to the June 2023 deadline. The amount at stake is relatively unimportant to a large corporation like Allianz, so they may be more inclined to sit back, in the hope that time pressure gives them leverage on BWNG. But my assumption is that the settlement amount will no more, or not much more than Allianz’s original claim of £30m; so if the market is really expecting a much bigger number the eventual outcome will be a pleasant surprise.
I'd just add that HOC is not the only resource stock that is suffering a sharp drop today. All miners, like ANTO etc, are falling hard. First Majestic has fallen by a bigger percentage than HOC. Energy stocks are also suffering serious losses. All this reflects a general market panic about recession. Once the panic passes, I would expect HOC to claw its way back to roughly where it was when the panic started. None of the above detracts from the excellent comments from Sotolo and others about HOC which I found most insightful.
The trial is scheduled for June 2023. And any payments will not arise until at least FY 2024. So those pinning hopes for 10p on the (theoretical) possibility of an equity raise linked to the worst-case scenario for BWNG will have a long time to wait. On the other hand, if the eventual outcome is more favourable to BWNG than the worst-case scenario, expect the share price to soar, perhaps by many multiples of 10p!
I'm amazed by the strong market reaction (down 12% as I write) to the Times article. I thought the results were OK. Someone on the other discussion board has made a good case to show that the Times journalist got it wrong, but it seems that the market agrees with her! The shares are now on a huge discount to NAV and my belief is that they will claw their way back once the dust has settled. I have topped up on the way down!
“The court case could bankrupt them.” Really? Allianz is claiming “up to” £66million, which means that £66million is the worst-case scenario for BWNG. On the other hand, BWNG has made counter claims against Allianz and has made a provision in the accounts to settle for £29.8 million inclusive of legal costs, which looks realistic. Unfortunately, an attempt at mediation in April failed, so most likely the case will now go to court. But the Annual Report states that “the likelihood of a Court finding wholly in favour of the Insurer, without taking into account the costs already borne by JDW, is considered remote. Accordingly, the maximum potential outflow is considered to be significantly less than the £66 million claimed by the Insurer.”
The uncertainty over the outcome, which is likely to continue until at least the scheduled date of the hearing in June 2023, will no doubt weigh on the share price, along with all the other current macro-economic headwinds. But a fall in the SP to “the low teens” seems implausible, as this would take it back close to the Covid lows of March 2020, since when the company’s financial position has significantly improved after it raised almost £100 million to pay down its debts.
I also topped up today, as I had a buy order in at 472 which was triggered. I'm amazed that the SP has fallen over 9% on a broker opinion, which has affected LAND in a similar way. I'm betting that the effect of Merrill Lynch BOA report will wear off within a few days, in which case today's fall will be seen as a buying opportunity. Time will tell!
Good response, Brighty! I am a perma-bull on this share and believe it will come good in time. But I must confess I have started to get a tad rattled by the persistent share weakness, including the fall back from the spike up to 38p following the recent positive trading statement. So I am asking myself, what is it that the market knows that I don’t know, or what am I overlooking that is weighing on the share price performance? I understand that all online retailers are suffering; that inflation could cut into margins; that higher cost of living could suppress consumer demand; and that the Allianz case is unresolved, etc. I assume that if (if) the Allianz family were to take the company private, the offer would be at a considerable premium to the current price. So what could possibly go wrong? If it’s just a matter of time before the SP rises, I am happy to wait, or even add at these levels.
Has anyone seen a recent article or comment in Investors Chronicle about IG Design? Its last recommendation in July 2020 was Buy at 514p. It should have updated its recommendation following the recent share price fall. Anyway, I tripled my holding In October and feel increasingly hopeful that this was the right decision.
Over the past couple of years or so, BATS has traded in a range 2400/3000 (apart for a couple of months when it stayed over 3000). Now it’s fallen towards the lower end of the range and probably a safe buy at these levels. I confidently expect that sooner or later it will move towards the upper end of the range and you would then be able to sell at around 2800, if you still want to.
https://www.investopedia.com/ask/answers/how-short-sellers-short-a-stock/
I managed to get my order filled this morning at 550, which is within a whisker of the mid September low. I’m hoping that recent history repeats itself and we will soon see a fresh challenge of 600.
Allianz would be loading the dice against themselves if they were to antagonize the Court by holding out for an unnecessary and time consuming trial, instead of going for an agreed compromise, which the Court appears to want to encourage.
It’s worth noting that the Court:
“Varied the existing ADR order to provide for the parties to take steps toward Alternative Dispute Resolution (ADR) before 10 January 2022, in advance of the third CMC”.
It also “vacated (cancelled) the March 2022 trial date.
I read this as meaning that the Court wants the two parties to sort this out through the ADR route. It’s a pretty strong hint that it is looking to them to reach a compromise without the need to waste more of the Court’s time. If I were advising Allianz, I’d be telling them that half a loaf is better than none and that they risk antagonizing the Court by dragging everyone back to a trial in late 2022/23.
But hey what do I know. If fear of this “Sword of Damocles” encourages people to sell down to 40 or below, I’ll be happy to add to my position.
In his reply to you, Matthew Earl provides a screen shot showing the shifts in major holdings that took place up to 7-Oct - 3 weeks ago - which was the day after the SP bottomed, hitting an intraday low of 85.2. The price action since 7-Oct suggests to me that (1) there have been no further significant institutional disposals in the past 3 weeks; (2) it was the PIs who were selling at and around the 7-Oct bottom; and (3) one or more of the bigger players may now be adding.
I haven’t read the Tom Winnifrith article (too mean to stump up a subscription) but if he is saying, as the headline implies, that a senior member of the RSH is “working with” SF, that is probably libelous!
The trading update is obviously not at all good, but a 30% drop in the share price seems a bit overdone to me. The market is currently very harsh on businesses that face supply chain and cost inflation headwinds. I will continue to hold in the hope of long term recovery and might consider adding at around these levels.
Lucy
On your point about discount rates, it is worth noting what is said about this in CSH’s annual report (page 114-115):
https://www.civitassocialhousing.com/media/1928/csh_annual-report_mar-21_web.pdf
"Key factors in determining the discount rates applied (to rental flows) include the regulated social housing sector and the demand for each SSH property owned by the Group, costs of acquisition and refurbishment of each property, the anticipated future underlying cash flows for each property, benchmarking of each underlying rent for each property (passing rent)and the fact that all of the properties within the Group’s portfolio have the benefit of full repairing and insurance leases entered into by an Approved Provider.
"The average discount rate used by the valuer in the Group’s property valuation is 6% (2020: 5.3%). The range of discount rates used by the valuer in the Group’s property valuation is from 4.7% to 10.7% (2020: 4.9% to 10.7%)".
The note goes on (page 115) to discuss the methodology behind assessing the range of discounts (too long to reproduce here).
From this we can see that (1) several key factors are taken into consideration in determining the discount rate; and (2) different discount rates are applied to different properties. I don’t think the statement by the Deputy CEO of the RSH, which is general in nature, would have a significant impact on the discount rate applied to properties covered by an existing lease agreement (and of course there is no legal basis for these agreements, that were freely entered into, to be broken).
The other point to make, of course, is that all of this is essentially reheated rice, spiced up with a generous helping of chilli sauce supplied by ShadowFall. In April 2019 the RSH published a paper that was critical of the lease-based model:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file792650/Lease-based_providers_of_specialised_supported_housing_-_April_2019.pdf
Publication of this report contributed to a 20% decline in the CSH share price, rather like what we have seen this time. But the share price duly recovered, as I expect it will do again, in due course, once sentiment settles down.
On your point about LTV and CSH’s banking covenants, details are provided on pages 117-19 of the Annual Report. There is an LTV cap of 40% on one of the loan facilities (Scottish Widows) but the LTV caps applied to the others (HSBC, Lloyds, NatWest and M&G) are 55%-60%. Loans are of course secured on different properties so a change in the valuation of certain properties, if that were to occur, would most likely have only a marginal effect on overall LTV.
Following on from Matt’s points: The number of public sector beds for people with a learning disability or mental illness has fallen by 80% over the last 30 years. Mencap estimates (2018) that there are 22,000–30,000 SSH units in England. However, that is clearly insufficient given that there are currently 250,000–300,000 adults in the UK with a moderate or severe learning disability. The government needs the input of the private sector to help to meet a requirement which cannot be met from public resources alone.
The IC article quotes the Deputy Chief Executive of the RSH, Jonathan Walters, as saying that the only way to remedy concerns around tenants’ capital strength and liability management is “through a better sharing of risk and reward between freeholder and leaseholder”. This could include “lower lease payments and more provider expertise on the lease size”.
I think this is likely to be the shape of things to come over the medium to long term. I see this as a gradual and steady process of strengthening the system, not radically and abruptly changing it. Putting the relationship between freeholder and leaseholder on a firmer long-term footing would ensure that the sustainability and durability of the business model. It would be in the long-term interests of shareholders who are seeking an investment that is (1) uncorrelated with economic cycles, or arguably even the broader property market; and (2) provides an opportunity for defensive, inflation linked income.
Yet the IC concludes “For all the demand in this sector, bad news is never far off. Avoid.” Having been an enthusiastic advocate of CSH and SOHO, the IC now needs to cover its back. It errs on the side of caution and provides no analysis to evaluate the risk of further “bad news”. But most if not all the “bad news” is already in the public domain and (IMHO) probably mostly already reflected in the share price. Efforts to construct a bear case based on, for example, the future direction of interest rates are (with all due respect to Lucy) like trying to squeeze juice out of a lemon that is already dry. For me, therefore, the risk reward balance favours holding the share and I am ready to accumulate on any further weakness.