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L&G yesterday published a 234 page prospectus to launch a £5bn Euronote. This is publicly available on line. It included a specific update on COVID-19, section 1.13 on p21. “As of 19th March, concerns regarding COVID-19 have had a minimal effect on the Group’s business...... “. L&G’s share price has recently halved and, at 165p, yields 7.2% on its declared final dividend which goes ex on 23 April. It’s credit ratings yesterday were confirmed in the prospectus as A2 (Moody’s), A (S&P), and A+ (Fitch). Insanely oversold.
Company had net cash of 42p/share at December 31. Assume AUM have fallen 40% since then, which is more than the market decline, EV/AUM is incredibly low at 90p, given it’s cum an 11p final dividend already declared, and this is a consolidating industry. If there is something going horribly wrong here the CEO doesn’t know of it, having bought 150,000 shares yesterday at 111p, and there is zero shorting of the stock.
If IAG is substantially grounded for the next 3 months that’s circa £5bn of revenue lost with a relatively small offset for lower variable costs, principally fuel. BA claims to have £7bn of cash reserves which could see it through the next 3-4 months but the problem is after that. Business travel will take a big long term hit as companies have recently learned to do without it and with UK insurers no longer offering travel insurance, nobody’s going to travel without it. It’s obvious to all Heathrow is not going to get a third runway leaving BA slot constrained at its hub. EU subsidy rules and the green lobby will prevent any government support. BA is not in a good place. The EU nanny state will extend lockdowns for months.
If IAG is substantially grounded for the next 3 months that’s circa £5bn of revenue disappeared with a relatively small offset for lower variable costs, principally fuel. BA claims to have £7bn of cash reserves which could see it through the next 3-4 months but the problem is after that. Business travel will take a big long term hit as companies have recently learned to do without it and with UK insurers no longer offering travel insurance, nobody’s going to travel without it. It’s obvious to all Heathrow is not going to get a third runway leaving BA slot constrained at its hub. EU subsidy rules and the green lobby will prevent any government support. BA is not in a good place. The EU nanny state will extend lockdowns for months.
M&G operates in a consolidating industry. A dividend cut and it will be taken over.
Coronavirus will teach many companies that there is no need to send executives on expensive business class flights and demand will take a big hit. Also, IAG is cutting back capacity by cancelling flights which is the surest way to alienate passengers booked on those flights. It is now obvious Heathrow’s third runway will never be built. The business model is crazily geared operationally, losing money at 60% load factor, very profitable at 70%. The only silver lining is the lower fuel price. There remains a real risk that governments will put public health ahead of the economy and ban all cross-border travel, grounding most flights. That is not priced in.
AGM with trading update due on Wednesday - critical to share price. Extra debt with new cruise ships means consensus forecast net debt/EBITDA is now 3.5x for y/e Jan 2020 and 4.5x for y/e Jan 2021, which is very high relative to most other companies. Any downgrade to EBITDA will raise fears of a rights issue. The shares are not being shorted, at least not yet. Share price weakness is existing holders exiting, with not enough buyers. A bid for the company obviously gets more likely as the share price falls but an insurance company won’t want the ships and a cruise company won’t want the insurance business, ergo the conglomerate structure of the group is a poison pill. Today’s Sunday Telegraph Article reads to me like the major institutional holders hoisting a For Sale sign over the group at 36p - like they’ve had enough.
Following 2018 full year results on Feb 28th, Investors Chronicle queried on 1st March this year how DGOC could have an operating profit greater than its top-line. The annual report for calendar 2018 was posted online on 18th March, confirming EBIT > revenue. On 27 March, the company raised £176m of new equity in an accelerated book build placing at 117p, the shares trading 8p higher the day after. I accept that Investors Chronicle is not universally read, but it was onto this aggressive accounting several weeks before oarfishresearch, whoever they are. To investors who participated in the placing, for whom the accounting now comes as a surprise, caveat emptor.
The issue here is the appropriateness of the accounting policies, which the Board determine. The accounting policies are clear enough in the Annual Report - investors cannot say they were not forewarned, nor can they now blame the auditor.
I read the oarfishresearch reports (there are 4) with incredulity and my initial conclusion was that any major auditor would have spotted this aggressive accounting. Having then read the company's 2018 Annual Report, what oarfish say is largely corroborated. The company's auditor is Crowe UK - I'd never previously heard of them. This rings alarm bells: remember the acquisitive Queens Moat Hotels where the shares became worthless in 1993, auditor little known firm Bird Luckin ? Clearly the DGOC acquisition spree with shares issued at a premium is over (the last issue was at 117p), profits have been over-stated by uber-aggressive accounting policies with inevitably low cash conversion of profit and the generous dividend policy is not as affordable as we previously thought. I assume the dividend due for payment on June 28th will be paid. The share buyback will inflame investors - issuing shares at 117p and buying them back a few months later much lower obviously makes sense to the company balance sheet but is being funded by investors' losses. The shares are not going up but nor is the company going bust and the recently appointed NED to Chair the audit committee needs to think about issuing a press release to counter the oarfish claims. Who are oarfish by the way ?
Token buying by directors - negligible amounts compared to their directors’ fees. Don’t be fooled. This is actually quite bearish because it is now obvious the directors know nothing about imminent Board change, otherwise the rules would prevent them from buying. So it looks like Lance Batchelor has security of tenure - for now.
Activists will look at this for sure, but no guarantee they’ll adopt it as a project. Activists target good businesses run badly. Saga has bad businesses which are also run badly. Insurance is competitive and they are a sub-scale operator in cruising, taking on a lot of debt. No bidder will be interested in the group because an insurance company won’t want the cruise ships and a cruise operator won’t want the insurance. The Board feels dysfunctional with the CEO being allowed to pursue a strategy that clearly isn’t delivering and a lot of capital being mis-allocated. It is no longer a category killer brand name for the wealthier 50+ and a lot of those in their 50s and 60s are tech savvy enough to look elsewhere. The recent shambles over the discontinuation of their successful Platinum credit card with AIB with users still not offered an alternative provider by Saga 14 days after the AIB switch-off is testament to how the company is being mis-managed. There is a price for every share at which you can make money, eventually: 40p ?
This is mainly automotive related via GKN - hard Brexit, Trump tariff threat and shocking UK new car sales in September which Pendragon, last Friday, said has continued into October (and Pendragon would know). But it’s not just that. Acquisitive industrial conglomerates that are stock market darlings eventually run out of road - Hanson and BTR for instance along with MRO forerunner Wassall - as investor doubts set in after a huge acquisition. Hanson and BTR shares were de-rated to yield 5% as investors lost faith: a similar yield for MRO shares would imply an eventual share price of 100p. On 11 January, the day before the GKN approach, MRO was capitalised at £4.2bn and GKN at £5.7bn. MRO offered an eventual £8bn+ for GKN. Market cap of the combined MRO/GKN group today at 160p is £7.7bn, which is huge shareholder value destruction, and IMHO difficult to reverse.
The 3x over-subscription statement was unaudited. If that was true, the shares should have been placed at a higher price.
I see from the Shorttracker website that Mangrove Partners have a short position in DGOC equal to 3.75% of the company. They are the only shorter. The short was taken out on 15 May so the June acquisition lifting the shares 25% will have hurt like hell. They have not increased the short position since the acquisition. Shorters often short companies they think have aggressive accounting policies. Any ideas, guys, what these might be ? Alternatively, Mangrove might just be bearish on the oil price.
It is sinister that there are more sellers than buyers with the share price hitting new all time lows every day. If somebody knows something negative, the FCA will investigate recent sales as you would struggle to explain reasons for a sale on the current consensus forecasts in the market, unless you have inside information. Nobody has profits to realise. Could be a large institutional seller not disclosing (it does happen) although lord knows why they would be selling at this price. No known short positions are being built either - shorts are the usual bellweather of more bad news. Odd. Rising probability of either an activist, or a bid at this lower level given shareholder dissatisfaction. The CEO's strategy isn't working - opinion - and he's presided over serious shareholder value destruction - fact. But the Board looks cosy and dozy and looks like nobody's challenging the CEO.
MoD cutbacks mean very valuable technology scattered across several quoted defence companies with falling share prices. Most of these companies have both MoD and DoD accreditation. This sub-sector is now very ripe for consolidation.
Most UK retailers' shares have taken a hammering in recent weeks (Next, Bon Marche, N Brown, Ted Baker and Mothercare) on subdued trading on the back of consumers holding back ahead of the referendum and for fashion retailers, because of the cool weather. Carpetright hasn't reported a slowdown yet but the institutional investors are betting that it might on the basis carpets are bigger ticket items than clothes. Downgrades to forecasts are therefore being priced in. Carpetright shares are cheap if there is no downgrade to forecasts, but the stockmarket is canny and rarely gets these things wrong, in which case Carpetright shares would fall further. Meanwhile business rates are crippling most bricks and mortar retailers, but this is not new news.