Barclays, Tesco and MoPowered – two big companies and one a typical new AIM company which has yet to show it can make a profit – but all three are under the weather in the last couple of days.
Barclays have today (23/9/2014) been fined £38m by the Financial Conduct Authority for failing to ensure that clients money in the investment bank was kept separate from the banks own assets. When I joked in my local Barclays Bank this morning that I hoped they were keeping my cash separate to their own, it did not raise a laugh. But there is a serious issue here. Barclays is the largest retail stockbroker in the UK, all of whose clients are in nominee accounts. I was also told today that the contract they have with their clients is one that no reasonable person would sign up to, but probably few people read it. Those who use such nominee accounts are reliant on the wording of their contract with the nominee operator (i.e. Barclays in this case), to protect their investment.
But when a really big bank can risk £16.5 billion of client funds in this way, what certainty is there that they will adequately protect the assets of all their small investors in their retail stockbroking business? ShareSoc is of course holding a meeting on the 14th October to discuss this and other risks associated with the use of nominee accounts (see http://www.sharesoc.org/shareholder-rights.html).
The Tesco share price fell 12% yesterday, and a further 4% today after announcing that the expected profits for the half year were going to be £250m less than previously indicated. This might be seen as a warning about a profit warning. The error seems to be down to some dubious accounting treatment of rebates due from suppliers and has resulted in the suspension of a number of staff. Of real concern though is the possible failure of the auditors to pick this up previously and it only came to light from an internal “whistleblower”. Interim accounts are not audited of course, but if this has been a long running error then auditors PwC might have a lot of questions to answer.
Investors do of course rely on the accounts of companies and any failure by the company to produce accurate financial information, or by their auditors, is of serious concern, even if it does not happen very often in large FTSE-100 companies. But it is not so uncommon in smaller companies. For example, HP are complaining that the audited accounts of Autonomy did not accurately reflect the underlying business before they acquired the company.
Now oddly enough the issue of trust in auditors came up at a seminar hosted by the BIS and FRC yesterday. Although the attendees seem to generally accept that auditors are trusted, one institutional investor pointed out that the financial crisis partly arose when many people became suspicious of the accounts of banks (and their stated assets). The debate as to whether they breached Company Law and did not present a “true and fair view” as required, and whether IFRS rules conflict with the former, has continued. I commented that trust in auditors is undermined when they are seen apparently to be acting in a way that favours the interests of their clients. When there is more than one way to present accounts, or questions of interpretation, there may be a tendency to do what the client wants rather than what investors might prefer to see. Of course the essence of this problem is that currently auditors are only responsible to their clients, i.e. the companies who pay them. The Caparo legal judgement overturned any previously assumed responsibility to shareholders in a company, more’s the pity. This was an issue that the seminar could have debated in more depth, but did not.
Mopowered is an AIM company that yesterday announced a placing to raise £3.5 million at a discount of 75% to the previous market share price. The market share price promptly collapsed to match and it’s now trading at about 6p at the time of writing. That’s down from the placing price of 100p in December 2013. So what you may ask? It’s just another AIM company that has failed to meet its sales targets in the business plan used to raise funds in the IPO and hence has run out of cash.
But MoPowered did present at one of ShareSoc’s Growth Company Seminars in March of this year, so it’s worth making a few comments on the business. In their presentation by CEO Dominic Keen at that meeting it looked an interesting product and some aspects of the business looked attractive (at least for someone like me who likes to invest in software companies). The product was selling well already and there were claims for significant unexploited demand. The product enables companies to create mobile versions of their web offering more cheaply and easily. All the company needed to do was accelerate their roll out plan by hiring more sales and marketing staff.
But in the interim results announced on the 19th September, it was obvious that sales were behind plan. As it said in there “the rate of new client acquisition has not grown at the pace the board anticipated at the time of the IPO“, but otherwise there were positive noises about future prospects. Costs were being reduced, but it was clear that cash flow was substantially negative (£2.1m flowed out in the period). Sentiment was not helped by the resignation of the finance director in July.
Now there are two questions worth posing here: 1) How to avoid investing in such companies at the IPO or soon after (i.e. could the failure to match objectives have been anticipated), and 2) Should ShareSoc allow such companies to present to our Members?
The answer to the first one is easy. I chose not to invest at the time (even though I liked the business in many ways) because investing in any new IPO is exceedingly risky. It is not uncommon for share prices of new IPOs to head downhill. The money gets raised, it is quickly spent as per the business plan, but revenues do not match the plan. In reality they may be achieved subsequently but effectively the plan runs late (anyone who invests in early stage companies knows this is the commonest failing). The result is negative cash flow and more fund raising required. Gearing up a sales force is also not easy. Good sales people are few and far between, and difficult to hire. It’s likely those hired will take many months to learn how to sell a new and innovatory product, and half of them will turn out not to be up to the job to begin with (I am speaking from experience here of running similar businesses). So I thought that although it was an interesting company back in March, I would wait and see what progress was made before I invested. I am of course still waiting for it to turn the corner. Private investors have that luxury, while institutional investors who participate in the IPO do not.
As regards whether ShareSoc should permit or encourage such companies to present, I still think we should because it enables our Members to learn about companies in their early stages even if they perhaps are not investable propositions as yet. Unfortunately we cannot tell Members whether to buy or sell companies, and some might wish to take a chance on the success of an early stage company anyway. All we can do is give the companies presenting an opportunity to convince our Members of their merits and for our Members to learn about a business, ask questions and make their own decisions on whether to invest. Anyone attending our seminar at which MoPowered presented will no doubt have perceived that there were risks in the roll-out, and perhaps taken a more sceptical view of the brokers forecasts for the company which is all some investors rely on before making investment decisions. The moral is surely make sure that you learn as much about a company as possible, and understand the business model, particularly of new and unproven AIM companies before investing by taking opportunities to do so such as we provide.