United Cacao – the Perils of AIM, and Fyffes

The Daily Telegraph ran a lengthy article yesterday covering the story of AIM listed United Cacao Ltd SEZC (CHOC) under the headline – “a bitter warning of the perils of AIM”. The company delisted from AIM on February 6th.

United Cacao were developing cocoa plantations in Peru under the persuasive leadership of Dennis Melka. I never held the stock but I did attend a presentation by the company hosted by ShareSoc in 2015 (the ppts are still available to ShareSoc Members on our Members Network). It was a typical “story” stock. Growing demand for cocoa when world supply was falling, cheap land and ideal climate in Peru, low taxes, and an experienced manager who had made money for investors before. But as the Telegraph article states, “the company ran out of money” and its Nomad resigned. Its problems were compounded by shareholder disputes and its inability to raise further funds, and ultimately Melka resigned.

Shareholders are left in a company where there is only a glimmer of hope although the “trees have not stopped growing” as the Telegraph puts it (it takes some time for Cocoa trees to come into production after planting).

So what is the moral of this story? There are very high risks when one invests in companies with no revenues or profits. This was essentially a start-up with an unproven business model, i.e. can cocoa be produced profitably in Peru? Nobody really knows. It also would not have rated highly on the AIM Scorecard published by ShareSoc – see http://www.sharesoc.org/scorecard.html . For example, registered in an overseas country, executive chairman, etc.

But in essence this company was an easy one to avoid when there are lots of other more mature companies available on AIM. It does of course bring into question whether such companies should ever be listed on AIM. Was this company suitable to be a publicly listed company when it had no track record and when it was in essence a risky speculation? I think not in essence.

You can make a lot of money by investing in good AIM companies, but United Cacao was the kind of company to avoid.

For example, if you wished to invest in a fruit business you might have considered Fyffes (FFY). A very long established business paying a dividend. That also recently delisted from AIM. The reason? The company was the subject of a bid from Sumitomo – a cash offer that represented about a premium of 50% to the previous share price.

Roger Lawson

Asian Citrus Shares Suspended

Asian Citrus (ACHL) is one of those Chinese AIM companies that you have heard so much about – for example in the BBC Radio Programme reported on in my last blog post. The revenue has been falling and the losses rising at Asian Citrus but any investors still holding the stock are going to have a very bitter taste in their mouth after the latest announcement.

Today (29/9/2016) the company announced that it could not issue its Annual Accounts on time and hence the shares have been suspended on both AIM and the Hong Kong Stock Exchange. What’s the problem? Simply that the auditors have met a Mr Man Gui Fui, a manager in the company’s subsidiaries who has provided bank statements that seem to bring into question those previously reviewed and in addition another manager, Mr Chen De Qiang, has indicated that balances on customer and supplier accounts may be incorrect. The auditors (who incidentally changed in January of this year, usually a warning sign), are unable to judge the “scale of materiality or misstatement” so they require to do a lot more work before approving the accounts.

The story may be even more complex in that the directors have been told that these allegations may be related to an attempt to stop the major transaction announced on the 25th August. But it is in essence the same old story that we have seen at many AIM companies, particularly Chinese ones. Namely that the accounts are likely to be fictitious and the internal affairs of such companies are like the wild west, or now perhaps the wild east, where nobody can be trusted and the rule of law is barely in evidence.

The management of AIM at the LSE must surely make some tough decisions about allowing any more Chinese companies to list until they get to the bottom of these problems and can be assured that the moral climate and business practices in China are more like those in the West. ShareSoc has also made some suggestions about how to improve AIM which would have helped to avoid these kinds of difficulties – see http://www.sharesoc.org/aim-campaign.html

In the meantime, wise investors should simply avoid foreign companies that are listed on AIM, and particularly Chinese ones.

Roger Lawson

AIM – Is Enough Being Done to Protect Investors?

Last night (27/9/2016) BBC Radio covered the topic of the AIM market and asked whether enough was being done to protect investors. See File on Four http://www.bbc.co.uk/programmes/b07wby0z . Here’s a brief summary of the contents with some comments.

The BBC visited Hotel Chocolat, a recent AIM listing, and spoke to Angus Thirlwell, the CEO. He indicated they wanted “light touch regulation” so as to avoid a lot of paperwork and said it was one of the attractions of AIM. Comment: it seems that AIM promotes the market on that basis, while telling investors that in terms of regulations and oversight it is very similar to the main market. Somewhat contradictory is it not?

ShareSoc Director David Stredder explained that almost everyone might be invested directly or indirectly in the AIM market and that now that ISAs have been opened to AIM holdings there are a very wide range of investors.

Simon Taylor-Young explained the role of Nomads and suggested they are supposed to act as both policemen and advisors. He mentioned the problems of AIM companies in one country in particular – China and explained what happened at Naibu.

Richard Edwards, a director of Anpario, explained how he had invested tens of thousands of pounds in Naibu. At one time the company was valued at £70m but it fell over 90% (it’s now delisted and the shares are in essence worthless). Despite some negative announcements he continued to hold the shares. He asked what happened at Naibu and suggested “no one really knows”. Investor Brian Geary flew to China and found information about the company that was not disclosed in the IPO – loans undeclared for example. (Comment: in other words a typical example of complaints about AIM companies that information was concealed to investors, inadequate due diligence done before listing, and thereafter failure to disclose significant news when it comes to light that all might not be as it appeared). It was said the management of Naibu have now vanished.

Giles Elliott, the former Chairman of Naibu, spoke and said he is still pursuing recoveries for shareholders. But said you cannot check all the numbers, interview all the staff or visit all the sites. Naibu Nomad Daniel Stewart was asked to comment for the programme but did not want to do so.

Marcus Stuttard, Head of AIM, then defended it. He said the Nomad model works incredibly well and had been copied in other countries. The interviewer suggested there was an issue in that the Nomads are paid by the companies. Marcus said that Nomads are not policing the companies. But Nomads are held to account and there have been a number of situations where they have been censured and in some cases it caused them to go out of business.

Simon Taylor-Young criticised AIM for not taking action when problems appear in companies. He suggested AIM should be doing this. Marcus Suttard said there were a number of problems – a lot related to the economic backdrop in China. Comment: this is not so surely – the problems were due more to cavalier approaches to accounts and regulations in China, and the inability for directors and shareholders to enforce rights under Chinese law. When asked what he had done to ensure it cannot happen again, Marcus focussed on the complete disclosure of the risks involved in investing in AIM companies (effectively saying that investors should and could have their eyes wide open on the risks they might be facing).

The programme then turned to the activities of former England cricketer Phil Edmonds and his colleague Andrew Groves who launched 9 AIM companies operating in Africa – mainly mining companies but also a medical business named African Medical Investments. This story has been well covered by an organisation called Global Witness. The allegations are that Edmonds and Groves profited by buying a property for $2m (via an offshore company, thus concealing their interest), and then selling it on to the AIM company for $5m which was higher than it’s real value. They also covered the case of Sable Mining where allegedly the mine was acquired by bribing local officials. {Note: both companies subsequently delisted). The allegations are denied.

The programme presenter suggested that AIM is unable to regulate such companies effectively but Stuttard suggested it was simply the reality of risk capital.

David Stredder summarised the position by saying he wants stronger checks on companies before they list on the market and that regulations should be upheld and enforced.

In conclusion this was useful coverage of some of the problems of AIM faced by investors. It was reasonably well balanced and factually correct, but some might think that AIM management got off somewhat lightly.

As readers are probably aware, ShareSoc has been running a campaign to improve the AIM market because of the numbers of complaints from our members (the companies mentioned in the BBC programme are just a very small sample of those who have gone bust or delisted). See http://www.sharesoc.org/aim-campaign.html for more information, and to register your support.

Indeed we had a meeting with Marcus Stuttard and colleagues the day before the programme went out and will report further on that later. As we said at that meeting, we do not wish to see investors discouraged from investing in AIM companies because it can be very profitable to invest in good early stage companies. But the AIM market does need to be improved to remove the gross abuses and unacceptable risks that investors face. If the BBC programme concentrates the minds of LSE management to improve matters, so much the better.

As David Stredder has pointed out, taking into account all the AIM failures there could have been many millions of pounds diverted into the pockets of individuals or otherwise lost that could have been invested in sound companies.

Roger Lawson

BBC Radio Programme on AIM

Are British investors being ripped off by unscrupulous businesses exploiting the AIM market? This is one of the questions being tackled on the BBC tomorrow night (27/9/2016) in a File on Four radio programme – BBC R4 at 8.00 pm – see http://www.bbc.co.uk/programmes/b07wby0z

It should make for interesting listening.

It certainly came up as a topic of conversation in our meeting with LSE management today where we discussed the problems of AIM. More on that later and I hope to write a report on the BBC programme in due course.

Roger Lawson

Berkeley Results, Pay, Brexit and AIM

We are now definitely in the usual summer doldrums in the market, compounded by the uncertainty over Brexit. It is obvious that private investors have been taking their money off the table for some time and this is clear from the results of Charles Stanley, a stockbroker and “platform” operator that were issued this morning. Both transactions and funds under management down over the year and other brokers are seeing the same. That does of course not bode well for the future figures from problematic Alliance Trust subsidiary ATS.

Private investors tend to buy when the market is rising, and even looking expensive, and sell when it is falling, or looking cheap. This is a recipe for long term poor investment performance as against a simple index tracking or “buy-and-hold” strategy. Or keep an eye on when the market is looking cheap which if it continues to fall it might soon be.

But life goes on so here are some comments on some recent news.

Berkeley Results

Housebuilders have been bouncing around for some months, and the results from Berkeley Group were published yesterday. At first sight they were positive – adjusted profit before tax up by 5.6% and forward sales now £3.25 billion. But the undercertainty over the referendum and the tax changes on buy-to-let properties is clearly having a significant impact on sales.  Sales in numbers were down 4% on the year and the London market is clearly slowing down at the top price level. However price inflation remains for properties of less than £1.25 million the announcement suggests. This surely reflects the underlying and continuing shortage of housing in London and the South-East for a growing population.

Berkeley, like Persimmon (and I hold both these companies), somewhat anticipated the cyclical impact on property sales caused by the long-term nature of building construction and recognised they might be getting near the top of the cycle. They both have plans to return substantial cash to shareholders via dividends over the next few years. In Berkeley’s case this means returns of £16.34 through to 2021 while the current share price is about £30. Effectively they are taking a conservative strategy and not gearing up in response to the housing boom of the last few years.

Remuneration

Tony Pidgley who founded and runs Berkeley, does of course get rather well paid for his long term experience and wisdom. His “single figure remuneration” figure for the year to April 2015 was £23.3 million generated from the aggressive bonus/LTIP schemes. Last years figures are not yet available but this might be another company where there is a substantial revolt.

But it’s worth noting that last year when the show of hands vote came at the AGM, I did not spot anyone voting against other than myself. And on the proxy counts only 14.5% voted AGAINST. This just shows how difficult it is to get investors to vote against resolutions when they are happy with the company’s performance and its share price. ShareSoc will probably be issuing more comments before the AGM on the 6th September.

Brexit

Tony Pidgley is in the Remain camp so far as Brexit is concerned and it is clear from his comments in the Preliminary Results yesterday and at last year’s AGM as to why. The financial interests of Berkeley are linked to not just a growing population in London, but on skilled labour coming in when there is a shortage in the UK.

Was very amused to talk to my local M.P. recently at the Chislehurst Summer Fair. He had apparently already predicted how I was going to vote despite the fact that I had only recently made up my mind while not advertising the decision, and he mentioned he was supporting the Remain side which did not surprise me either. This despite the fact that I applauded his role in the democratic structure of the UK which is being undermined by the EU in a recent editorial for the ShareSoc Newsletter which you can download from here: http://www.sharesoc.com/brexit.htm . As I said in a recent blog comment, I just wish all those commentators who forecast financial disaster, or the opposite, would run my portfolio because they clearly have more data, or are closer to the Delphic oracle, than me. And that’s the last I will say on this topic I think.

AIM Market

As you probably know ShareSoc recently launched a campaign to improve AIM – see http://www.sharesoc.org/aim-campaign.html . There were a couple of relevant stories on the front page of the AIM Journal (sponsored by Northland) this month.

The first one mentioned that it was the 21st birthday of AIM and mentioned that of the first ten companies listed on AIM only one is still quoted, and even that has moved to the main market – this is Athelney Trust. The rest have been taken over, delisted or simply faded away into history and such is the track record of many AIM stocks. The second article was on new AIM listing Directa Plus (DCTA). This is an Italian company that produces graphene. Graphene is a wonderful new product with many potential new applications, but most of the producers of it currently lose money. It is therefore a rather typical “concept” stock where it could have a wonderful future if you believe the hype and future growth forecasts. The current market cap is £72 million, but it made substantial losses in the last financial year and previously. Revenue last year was only £1.7 million. So this looks like yet another grossly overvalued stock being promoted to investors as with lots of other AIM stocks. Not all new AIM listings are such speculations, but unfortunately many are. This is one aspect of AIM which we suggested could be tackled.

Roger Lawson

AIM Campaign Comments

The launch of our campaign to improve the AIM market (so as to stop the abuses which have led to investor losses) received a lot of media coverage. As expected those who have profited from the cavalier approach to the listing of AIM companies and the “light touch” regulation were unhappy with some of our suggestions. But here is some analysis of the more reasoned comments published in the media:

  1. Removing risk might reduce returns. This argument is based on the financial theory that high risk investments generate higher returns and vice versa. This is based on an academic theory related to high beta stocks (using beta as a measure of risk) but in practice it may be bunk. To quote Dylan Gricce formerly of Societe Generale: “High risk offers high excitement, not high returns, because excitement is overvalued. In other words, the myth entices many more people to invest in higher-risk stocks. The higher demand drives up prices – and, in turn, drives down their profit potential”. That is surely what has been happening on AIM. It is of course true that those companies which are high risk investments may be valued more lowly and hence experienced investors, or those who can accept the higher risk, may profit in comparison with others. But that hardly seems relevant when AIM actually attracts many more private investors, who are often less experienced, than institutional ones and AIM companies are generally not lowly valued on a fundamental analysis. Their average p/e ratio is higher and the yield lower for AIM companies than for the FTSE All-Share which reinforces Mr Gricce’s point.
  2. That AIM does not need more regulation, or it would be expensive. ShareSoc’s proposals did not advocate substantial changes to regulation. Simply that those existing should be enforced and likewise the general laws on such matters as market abuse where the FCA have been very weak. We do not wish to impose higher costs on market participants, but it seems some commentators did not read the details of our document before jumping into words. The details are present in this note: www.sharesoc.org/Improving-the-AIM-Market.pdf and our proposals would of course be subject to detail scrutiny and consultation. Neither did we argue for “a corporate governance structure equivalent to a main market company” as one person alleged. We recognise that smaller companies need a simpler code. The QCA provide such a code for smaller companies and it is used by some, but many do not and hence have no principles to follow.
  3. The failure rate of AIM companies is low and therefore there is no need for change. The former statement is simply not true. The failures and number of withdrawals from the market are much higher than the main market and much higher than most investors expect.
  4. The impact of pre-pack administrations. One commentator on a blog mentioned the abusive use of pre-packs in AIM companies resulting in shareholders being wiped out. Despite being the owners of the business, and where other options might have been pursued, they are not consulted. A classic example of this was Torex Retail some ten years ago in which RBS was involved. See a recent ShareSoc blog here on this case, but there have been numerous other examples: https://sharesoc.wordpress.com/2016/06/12/rbs-and-pre-packs/ . The insolvency laws need changing to stop the abuses generated by pre-packs and AIM companies are particularly susceptible.

We are not suggesting that the AIM market be scrapped, or made unviable. It is possible to make money from investing in AIM companies and there are tax advantages from it being a market for “unlisted” shares (i.e. securities in a non-Government regulated market) but the current structure encourages abusive practices. Nor are we advocating a revolution – just some relatively simple changes that would avoid the unacceptable and unforeseeable risks that investors face. There is no reason why such changes would reduce the returns available to AIM market investors.

If you have not yet done so, please sign our petition to get some change which you can find at the bottom of this web page: http://www.sharesoc.org/aim-campaign.html

Roger Lawson

ShareSoc Proposes How the AIM Market Should Be Improved

ShareSoc has issued the following press release today:

The AIM market run by the London Stock Exchange (LSE) has been criticised by many people for the quality of companies listed on the market and for the way it operates. ShareSoc and our Members think that some reform is necessary.

There is no denying that it is possible to invest in successful AIM companies but as any experienced AIM investor knows, doing so consistently and avoiding those that either never establish a profitable business, get delisted, go bust or otherwise become the walking dead is another matter altogether. Picking out the quality companies that will give a good return from buying their shares is not easy and in comparison with main market companies it is a minefield for inexperienced investors.

Over 3,500 companies have joined AIM in the last 20 years since the market was launched. How many are left? The answer is about 1,000. Now some will have moved to the main market, and some will have been taken over (not necessarily at a profit for the shareholders from their original investment), but clearly there is a very large amount of turnover in AIM companies. Many will have gone bust or been delisted. Or as Claer Barrett said in the Financial Times: “20 years of a few winners and many losers”.

One only has to remember recent cases such as Globo and Silverdell, or companies such as Izodia, Versailles and Langbar, or the numerous oil/gas or mineral exploration companies some of which were of course simply fraudulent businesses. Do the few, sometimes massive, winners offset the losers? The answer is no. The AIM index has underperformed main market indices over the last 20 years.

The LSE has consistently defended the way AIM operates and claims it is one of the most successful small cap exchanges in the world. But many private investors would not agree.

The reputation of AIM is such that it actually puts off good quality companies from listing on it. Therefore SMEs that wish to raise equity for expansion are often discouraged from listing on AIM and this is damaging for the health of the UK economy.

But there are some simple ways to improve the AIM market without imposing large costs on the market participants. ShareSoc has published a document which spells out exactly what should be done. It is present on our web site here: http://www.sharesoc.org/aim-campaign.html

There is also an electronic petition for investors to sign who support the ShareSoc initiative here (see foot of page): http://www.sharesoc.org/aim-campaign.html

Summary of Key Recommendations:

These a few of the key recommendations in our proposal:

– The enforcement of AIM regulations needs to be improved.

– The roles of Nomad and Corporate Broker should be separated because of the conflict of interest therein.

– A corporate governance code should be introduced.

– Directors remuneration should be reported and votes required to approve it at AGMs.

– AIM company directors should have knowledge of UK Company Law.

– Share placings should be constrained.

– New listings should be vetted by an independent panel.

– Nomads should have clearer responsibilities.

– Non-executive directors should be clearly independent and have a limited number of roles.

– General Meetings should be held within the UK and at convenient dates and times.

– All AIM company directors should be fluent in English.

These recommendations are spelled out in more detail with explanations for their need in the aforementioned document.

Roger Lawson