Stock analysis and other stuff

Friday, 12 May 2017

All good things ...

Friday 12th May 2017

Seven years is a long time to wait but at long last, PwC, the auditor to Connaught Plc, the latter which collapsed into administration due to accounting irregularities in early 2010, has finally been fined for signing off the books.

PwC fined £5 million
Source: Sky News

The full story can be read here: PwC has been fined a record £5m for failures relating to its audit of FTSE 250 property services firm, Connaught.

Here I am, looking somewhat younger and more sprightly ...

City Sceptic Strikes
Source: Financial Times

Readers may note the amusing commentary from Connaught's CEO at the time, Mr Mark Tincknell.

After I issued a Sell note on Connaught, Mr Tincknell sent an email round to other sell side analysts, investors and the media telling them that I was under the pay of hedge funds - that were short of the stock, that I was generally incompetent, and had got all my numbers wrong. He had a point with regards to my numbers. I'd massively underestimated the bad debts, and other borrowings that Connaught had hidden.

There were several lessons I learnt from that period.

Crooked management will go to great lengths to smear and traduce those who speak out against them.
Director purchases are meaningless when not placed into context or it is not revealed how those purchases may have been financed. See here and here.
Other sell side analysts will not hesitate to rally to the defense of crooked management.
Anyone that speaks out against a company will generally be ignored by its major investors who fall into a peculiar state of denial.
When things unravel, the company blows up faster than you can say "das ist nicht so gut".

Not a lot has changed.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Tuesday, 6 December 2016

Wirecard (WDI GR) ... 'Skin in the Game'?

Tuesday 6th December 2016

No sooner had I finished writing the post below, than I was alerted to yet another range of alarming concerns being raised regarding Wirecard (WDI GR). Whereas originally, there was the:

FT (here, here, here, here, here, here, here, here, here, and here),
J Capital Research,
then Zatarra Research & Investigations

THIS time, an unnamed author has meticulously pieced together a whole range of information. It is fascinating stuff.

This follows on from the engrossing article published a few weeks back in Reuters:
How a British town became a hub for online porn and poker

As for me, I have written on Wirecard before (see here), focusing on its acquisition of the Indian, GI Retail business.

This post will likely be another of a series of further posts looking at Wirecard.

In the spirit of openness, I am short Wirecard. Wirecard is my biggest short position since Globo (GBO LN). In fact, my confidence has persuaded me to make it my biggest short ever. Time will tell if this is mere swagger. However, my money is where my mouth is which is not altogether clear for others, and so on that subject I present these observations below ...

Director Purchases

I've written on Director purchases before: see here - Director purchases and sometimes lazy longs.

By and large, investors like management with stakes in the companies they run. The thinking goes, that with 'skin in the game', any weakness in the share price is felt not just by the investors but also by management. Hence, interests are closer aligned, and there's few better signals to get an investor's fists pumping than seeing a Director dip his/her hand in their pocket to hoover up some stock.

Usually this simple reasoning is valid. Usually.

Aside from the example of Connaught in the link above, more recent examples of where this reasoning has gone wrong include:

Rob Terry, the former Chairman of Quindell (now Watchstone Group Plc WTG LN) and his use of the services of Equities First Holdings (EFH); and
Konstantinos Papadimitrako, the former CEO to the fraud, Globo Plc (see concerns raised here).

In Rob Terry's case, he initially led market participants to believe that he'd pledged some of his Quindell stock as collateral to an outfit called Equities First Holdings (EFH) in exchange for cash that he then intended to use to buy further Quindell shares. Most of Quindell's shareholders rejoiced at this gearing up. However, in the event, while Mr Terry bought a few shares, he bought nowhere near as much in value as the cash amount he received when pledging his stock for the loan. Mr Terry then withdrew from any further dealings with EFH, kept the majority of the cash from the pledging of his stock, and as soon as he stepped down from Quindell's board, he sold a load more stock into the market.

In the example of Papadimitrako, he merely dumped as much of his c. 18% stake in Globo as was possible in the months leading up to Globo's bankruptcy. This selling was concealed from Globo's hapless shareholders as Papadimitrako simply didn't report his selling until the days after he came clean on the falsification of Globo's financials. All told, Papadimitrako probably pocketed at least £12 Million through selling stock and not declaring it until it was too late.

There are other examples, but in each case of the three given above, Connaught, Quindell, and Globo, despite flags being raised well in advance of each company's downfall, longs were seemingly always comforted by the management's 'skin in the game'.

Purchases by Wirecard's Management

According to Bloomberg, through his German company, MB Beteiligungsgesellschaft mbH (MB B), Markus Braun, Wirecard's CEO, is Wirecard's third largest shareholder. Bloomberg shows that MB B holds 7% of Wirecard's stock at the latest count, not far behind the institutions, Jupiter Investment Management and Alken Asset Management; the No. 1 and No. 2 shareholders respectively. The other major holdings can be seen in the table below:

Major holdings in Wirecard AG
Source: Bloomberg

Bloomberg also has a feature which shows the timing of Markus Braun's sales and purchases through his German company, MB B. The data goes back to at least mid 2008. Red is sales, green represents purchases. This can be seen in graphical form below:

Sales and purchases by MB Beteiligungsgesellschaft mbH (MB B - Markus Braun's German company)
Source: Bloomberg

The timing, volume and closing price on the date of transaction of those MB B sales and purchases is shown by Bloomberg in tabular form below:

Sales and purchases by MB Beteiligungsgesellschaft mbH (MB B - Markus Braun's German company)
Source: Bloomberg

This information makes for some interesting number crunching. Word of warning, I'm assuming Bloomberg data is an accurate source and also that I've not made any inadvertent errors in my maths, so please do double check with your own Panasonic scientific calculators.

Ok. Here goes ...

The Number Crunching

On my maths using Bloomberg's data, since July 2008, Markus Braun has purchased 1,365,000 shares in Wirecard through his German company, MB B.

Again on my maths using Bloomberg's data, since July 2008, Markus Braun has sold 1,414,050 shares in Wirecard through his German company MB B.

However, with the exception of the 50,000 shares and a further 150,000 shares, which MB B acquired in 2008, the remaining 1,165,000 were purchased after MB B sold 1,414,050 shares in 2012.

At the closing prices listed by Bloomberg in the table above (which does not necessarily mean the actual prices realized but might be a ball park figure):

The purchases in 2008 would have cost MB B, c. €1 Million. This is by no means small change.
The subsequent sales in 2012 would have brought to MB B, proceeds of c. €24.2 Million. A material win.
The subsequent purchases from 2015 onward, would have cost MB B, c. €45.4 Million. A significant outlay.

Now, of course there is some rounding error here and there is no guarantee that sales and purchase proceeds and costs would be made exactly at the closing prices listed above. But ball park figure wise, it would seem possible that MB B has hauled in c. €24.2 Million in share sale proceeds and spent c. €46.4 Million in purchasing shares in Wirecard. A net expenditure of c. €22.1 Million on Wirecard stock by MB B since 2008. Wirecard's shareholders must surely be pumping their fists at the results of that number crunching.

So what is the source of that net c. €22.1 Million spent on Wirecard shares?

Perhaps Markus Braun is very well paid?

According to Wirecard's 2015 annual report, Markus Braun received total remuneration payments (including benefits) of c. €2.4 Million (2014: c. €1.8 Million).

According to Bloomberg's data and on the same basis as used above, MB B spent c. €26.6 Million on Wirecard share purchases in 2016, and c. €18.8 Million on Wirecard share purchases in 2015.

So even though MB B hauled in c. €24.2 Million in proceeds from share sales in 2012, it would appear that MB B's net purchases of c. €22.1 Million dwarfs Markus Braun's annual pay.

Perhaps there's another source?

It would seem that the annual balance sheets for Markus Braun's German company, MB Beteiligungsgesellschaft mbH (MB B) are filed at the German Company Register: www.bundesanzeiger.de

Unfortunately, the most recently available balance sheet for MB B is as of 31 December 2014. Nonetheless, this bears what some may find to be interesting information. Here is that balance sheet in German - and then a google translation (which I have assumed is accurate) into English - below:

Balance sheet of MB Beteiligungsgesellschaft mbH to 31 December 2014
Source: www.bundesanzeiger.de

Balance sheet of MB Beteiligungsgesellschaft mbH to 31 December 2014 - Google translation into English
Source: www.bundesanzeiger.de

According to the MB B filings, as of 31 December 2014, the company held:

c. €31.9 Million in financial assets, up from c. €7.0 Million in 2013. It may be worth noting that after the sale of 1,414,050 shares in 2012, that according to data on Bloomberg, the first of MB B's share re-purchases didn't occur until May 2015. This entry may possibly represent MB B's other holdings of Wirecard stock at the time, although one would have thought the market value to be higher than c. €31.9 Million.
c. €28.9 Million in receivables and other assets, up from c. €22.7 Million in 2013.
c. €0.7 Million in cash and cash equivalents, down from c. €7.3 Million in 2013.
c. €25.1 Million in liabilities, up from c. €31 Thousand in 2013.

Further down the balance sheet of MB B, there are some notes corresponding to the balance sheet items. Here are the notes in German - and then a Google translation into English (which I have assumed is accurate) - below:

Notes to the balance sheet of MB Beteiligungsgesellschaft mbH to 31 December 2014
Source: www.bundesanzeiger.de

Notes to the balance sheet of MB Beteiligungsgesellschaft mbH to 31 December 2014 - Google translation into English
Source: www.bundesanzeiger.de

As shown above, these notes appear to show that as of 31 December 2014, MB B held receivables due from its shareholders, which presumably is Markus Braun, of c. €28.4 Million.

The notes also appear to re-highlight that MB B had c. €25.1 Million in liabilities.

Unfortunately there is no further information on the balance sheet items so it is not possible to conclude:

Why Markus Braun appeared to owe MB B c. €28.4 Million in 2014, nor what it related to?
If the c. €25.1 Million was a debt item, and if so, WHO had MB B borrowed the c. €25.1 Million from and was any security provided had it been a debt?

Although there is scant detail, one explanation - from the notes to the balance sheet - may be that MB B borrowed c. €25.1 Million from an unknown party and has sent some or all of the monies and more to Markus Braun. There are of course alternative explanations as to the funding of Markus Braun's share purchases. For example, he may simply be incredibly rich or there may be tax advantages to this arrangement. But whether this answers why Markus Braun possibly owes MB B the monies he did in 2014 and who MB B possibly borrowed from in 2014 is unclear.

And another thing

As far as I can tell, Markus Braun is not a member of the Board of Management or Supervisory Board of Wirecard Bank. In light of the above, I found that interesting.

Wirecard Bank - Board of Management and Supervisory Board
Source: www.bundesanzeiger.de

Wirecard Bank - Board of Management and Supervisory Board - Google translation into English
Source: www.bundesanzeiger.de

I am short Wirecard.

Monday, 19 September 2016

Mitie (MTO) ... yet another "one-off"

Monday 19th September 2016

Palm to forehead (Thwack!) time for holders of Mitie (MTO, mkt cap £742m) this morning.

The group has announced a profit warning where:

"Operating profit for the full year is now expected to be materially below management's previous expectations as a result of a continuation of the pressures experienced in the first half and further one-off costs of organisational change associated with our cost efficiency programmes, which are expected to total up to £10m in the year."

"further one-off costs" ... hmm. Doesn't the fact that they are labelled "further" kind of suggest they may no longer be "one-off"?

In fact, Mitie has a long history of so-called "one-off" or "re-structuring" associated costs. On my maths, these "other items" together with restructuring, acquisition related and exit costs, have cumulatively totaled c. £216m since 2011. Make that c. £226m as of this morning's update.

However, I fear there will be yet, further, "one-off" costs to come. I continue to believe that Mitie's P&L has been writing profits its balance sheet can't cash.

Mitie's amounts recoverable on contracts and other trade receivables classed as non-current assets, continued to pile up in the last accounts. Now standing at near £90m from £0 in 2010.

Mitie amounts recoverable on contracts and other trade receivables classed as non-current assets, £m
Source: Mitie annual reports

Mitie share price

Monday, 25 July 2016

Rocket Internet (RKET GY) ... And So It Goes

Monday 25th July 2016

Groupon (GRPN US, mkt cap $2.2bn) acquired CityDeal Europe GmbH in May 2010. CityDeal was owned and founded by Oliver Samwer, Marc Samwer, and Alexander Samwer; the Samwer brothers. They are also the founders of Rocket Internet (RKET GY, mkt cap €2.9bn). CityDeal was effectively a replica of Groupon, although principally focused on the German market.

We began our international operations in May 2010 with the acquisition of CityDeal Europe GmbH, or CityDeal, which was founded by Oliver Samwer and Marc Samwer. Since the CityDeal acquisition, Messrs. Samwer have served as consultants and been extensively involved in the development and operations of our International segment.

Source: Groupon 2012 10-K filing

GRPN's 2012 10-K filing suggests that it paid up to $204 million for CityDeal in May 2010, five months after the business was launched in January 2010. Yes months!

Acquisition‑Related
In May 2010, we acquired CityDeal, a European‑based collective buying power business launched in January 2010 that provided daily deals and online marketing services substantially similar to the Company. As part of the overall consideration paid, we were obligated to issue additional shares of our common stock in December 2010 due to the achievement of financial and performance earn-out targets. We recorded a liability on our consolidated balance sheet as of the original acquisition date for this consideration and subsequently remeasured the liability on a periodic basis until final settlement. As a result of this remeasurement, we recorded a total charge of $204.2 million in acquisition‑related expenses in 2010, which was partially offset by other nominal acquisition‑related items.

Source: Groupon 2012 10-K filing

GRPN has been something of a disappointment. Having floated at around $20 a share in late 2011, its share price is now some 82% lower at $3.76/shr. Whether the CityDeal acquisition created value or destroyed value for GRPN is uncertain. What is more clear cut is the destruction brought about by the other business which the Samwer brothers sold to GRPN; E-Commerce King Limited.

E-Commerce King Limited

According to GRPN's 2012 10-K filing, in January 2011, GRPN acquired 40% of the ordinary share capital of E-Commerce King Limited in exchange for $4.0 Million.

Equity Investment in E-Commerce King Limited
In January 2011, the Company acquired 40.0% of the ordinary shares of E-Commerce King Limited (“E-Commerce”), a company organized under the laws of the British Virgin Islands, in exchange for $4.0 million. The Company entered into the joint venture along with Rocket Asia GmbH & Co. KG (“Rocket Asia”), an entity controlled by former CityDeal shareholders Oliver Samwer, Marc Samwer and Alexander Samwer (the “Samwers”). Rocket Asia acquired 10.0% of the ordinary shares in E-Commerce. E-Commerce subsequently established a wholly-owned foreign enterprise that created a domestic operating company headquartered in Beijing, China (“GaoPeng.com”), which operates a group-buying site offering discounts for products and services to individual consumers and businesses via internet websites and social and interactive media. GaoPeng.com began offering daily deals in March 2011 in Beijing and Shanghai with expansion to other major cities in China to follow.

Source: Groupon 2012 10-K filing

This would suggest a $10 Million valuation for the entire issued ordinary share capital. GRPN's stake in E-Commerce King, was with a joint venture with Rocket Asia GmbH & Co. KG, which was controlled by the Samwer brothers. Rocket Asia acquired 10% of the ordinary share capital in E-Commerce King.

GRPN went on to highlight that around six months later, GRPN acquired a further stake in E-Commerce King, purchasing its increased stake in E-Commerce King from the Samwer brothers', Rocket Asia, for $45.2 Million. GRPN also injected a further $26.7 Million into the E-Commerce business during the same year.

On July 31, 2011, the Company entered into an agreement to purchase additional interests in E-Commerce for a purchase price of $45.2 million from Rocket Asia consisting of 2,908,856 shares of non-voting common stock. See Note 15 “ Related Parties ”. The investment increased the Company's ownership from 40.0% to 49.0%. In addition, the Company made various cash investments for an aggregate amount of $26.7 million in the year ended December 31, 2011. At the same time, the remaining investors made additional proportionate investments that resulted in no change to the Company's ownership percentage in E-Commerce.

Source: Groupon 2012 10-K filing

GRPN's stake rose from 40% to 49%, suggesting that the $45.2 Million purchase valued E-Commerce King at c. $502 Million. That's an impressive 50x increase in valuation in a matter of six months. Although somehow the remaining investors made proportionate investments which resulted in no change to GRPN's ownership percentage in E-Commerce King.

Incidentally, E-Commerce King appears to have racked up losses of $26.5 Million during its first year of trading.

The Company recorded its share of the loss of E-Commerce in the amount of $26.5 million within “Equity-method investment activity, net of tax” in the consolidated statement of operations for the year ended December 31, 2011.

Source: Groupon 2012 10-K filing

A few observations:

Incredible uplift in valuations in short order.
As astonishing losses in short order.
The Samwer brothers didn't stick around.

Skip forward a year

During 2011 and 2012, GRPN made additional cash investments into E-Commerce King of $32.9 Million, increasing its stake to 49.8% along the way. Then in June 2012, E-Commerce King was absorbed by Life Media Limited (F-tuan). In return for GRPN's 49.8% stake in E-Commerce King and a further $25 Million in cash, GRPN received a 19% interest in F-tuan.

In June 2012, Life Media Limited ("F-tuan"), an exempted company incorporated under the laws of the Cayman Islands with operations in China, acquired E-Commerce. In exchange for its 49.8% interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19% interest in F-tuan in the form of common and Series E preferred shares. The Company paid $5.0 million of the cash consideration on June 25, 2012 and the remaining amount was paid on July 2, 2012.

Source: Groupon 2013 10-K filing

However, GRPN's stake in E-Commerce King was seemingly valued at $128.1 Million when it was transferred to the new entity, F-tuan. Then this value was impaired by $50.6 Million to $77.5 Million by December 31, 2012. This was c. 85% lower than the heady times when it bought an additional 9% for $45.2 Million from the Samwer brothers at an implied valuation of c. $502 Million, just 18 months earlier.

Cost Method Investment in Life Media Limited (F-tuan)
The investment in F-tuan is accounted for using the cost method of accounting because the Company does not have the ability to exercise significant influence. Accordingly, the investment is adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The $77.5 million carrying amount of the investment represents the $128.1 million fair value on the date the Company obtained it less the $50.6 million impairment discussed below. The estimated fair value of the investment as of December 31, 2012 was $77.5 million.

Source: Groupon 2013 10-K filing

Skip forward another year

By 2013, GRPN's full investment in F-tuan was written down to ZERO!

Investments in E-Commerce and Life Media (F-Tuan)
In June 2012, Life Media Limited ("F-tuan"), an entity with operations in China, acquired the Company's 49.8% interest in E-Commerce King Limited ("E-Commerce"), an entity with operations in China. In exchange for its interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19.1% interest in F-tuan in the form of common and Series E preferred shares. The Company recognized a non-operating gain of $56.0 million as a result of the transaction, which is included within "Other expense, net" on the consolidated statement of operations for the year ended December 31, 2012. The gain represented the excess of the fair value of the Company's investments in F-tuan over the carrying value of its E-Commerce investment as of the date of the transaction and the $25.0 million of cash consideration.

In August 2013, the Company entered into an exchange transaction with F-tuan whereby it received newly issued shares of Series F preferred stock in exchange for all shares of F-tuan common stock previously held by the Company and $8.0 million of cash consideration, which was paid in two installments of $6.5 million and $1.5 million in August and October 2013, respectively. The transaction was recorded at cost. The Company’s investments in F-tuan following this transaction are in the form of Series E and Series F preferred shares. Those preferred shares rank pari passu with certain other classes of F-tuan’s outstanding preferred stock and have an aggregate liquidation preference of $85.5 million. The Company’s voting interest in F-tuan remained 19.1% after the transaction.

The Company's investments in the Series E and Series F preferred shares of F-tuan are classified as available-for-sale securities because the investee's Memorandum of Association provides for redemption of the preferred shares at the Company's option beginning in October 2017. The Company's investment in the common shares of F-tuan, which were held prior to the August 2013 exchange transaction, was accounted for using the cost method of accounting because the Company did not have the ability to exercise significant influence over the operating and financial policies of the investee. As discussed below, the Company's investments in F-tuan were written down to zero through an other-than-temporary impairment charge as of December 31, 2013, and continue to have an estimated fair value of zero as of December 31, 2014.

Source: Groupon 2014 10-K filing

That's some ride from a $10 Million valuation in January 2011, to an implied $502 Million valuation six months later, and all the way back down to ZERO within a few years.

This is precisely what I expect will happen to almost if not all of Rocket's "proven winners". And for that reason I am short Rocket.

Now ... how about those Kinnevik write downs, huh?
Hint: FT Alphaville Markets Live: Friday, 22nd July, 2016

Tuesday, 17 November 2015

Wirecard (WDI GY) ... GI Retail and a rapidly shrinking market share

Tuesday 17th November 2015

Were one to buy or invest into a business, paying up to say €340 million, or c. 49 x run rate EBITDA, then on that multiple there's a few criteria of investment one may look to tick off. In this list would be a fast growing underlying market. One would also seek the presence of a high barrier(s) to entry or, absent this, at least some sort of first mover advantage. There's no denying that the Indian payments market is growing rapidly.

Financials of Wirecard's acquisition of GI Retail Group
Source: Wirecard

Data, data, payments data

The World's major central banks generally provide what seems like an endless amount of economic and financial data. The Reserve Bank of India (RBI) is no exception.

Below is the section from the RBI's November 2015 bulletin pertaining to transaction values and volumes by a range of payment and settlement systems. This data is published monthly and goes back many, many years.

Indian Payment and Settlement Systems data July-September 2015
Source: Reserve Bank of India - November 2015 Bulletin

The data can be found at this link here.

Historic data can be found here.

The data that is of interest is that found along the Immediate Payment Service and Prepaid Payment Instruments (PPIs) rows.

This data shows that in September 2015 there were:

17.7 million Immediate Payment Service transactions.
120.7 billion Indian Rupees worth of Immediate Payment Service transactions.
58.0 million Prepaid Payment Instruments (PPIs) based transactions.
40.8 billion Indian Rupees worth of Prepaid Payment Instruments (PPIs) based transactions.

At a rate of c. 71 EUR:INR this equates to:

€1.696 billion worth of Immediate Payment Service transactions.
€0.573 billion worth of Prepaid Payment Instruments (PPIs) based transactions.
€2.269 billion in total.

Commission fees in the payments space typically range from 1% to 1.5%. Indeed, Suvidhaa's commission rate was reportedly c. 1.37% as highlighted in my prior post: Suvidhaa vs. GI Retail.

Further, Dan McCrum's latest feature, Rupee do, from his House of Wirecard series, shows how GI Retail's Hermes i-Tickets business appeared to earn gross commission of c. €1.6 million on total sales of c. €185 million in the year to 31 March 2014. This is a c. 0.9% rate of commission, which is somewhat lower than the typical 1% to 1.5% range. Hermes' commission was also seemingly principally related to airline and railway ticket bookings and less so to money transfers.

However, what Wirecard says is that the GI Retail Group as a whole achieved revenue as follows:

FY13/14 (31/03) 1,109.2 million INR or €15.8 million in revenue.
FY14/15 (31/03) 2,677.6 million INR or €38.3 million in revenue.

and is projected to achieve

FY2015 (31/12) €45 million in revenue.
FY2016 (31/12) €75 million in revenue.

Presumably all this revenue (achieved and projected) is largely related to payments and money remittance. Indeed Wirecard's CEO, Markus Braun says as much:

"Great Indian (GI) Retail Group has been at the forefront of India's dynamic and early-stage e-commerce and money remittance market for many years. Our investment into one of the region's leading payment groups secures us a strong position in one of the world's most rapidly growing electronic payment markets."

Hence, if commission rates are in the range of 1% to 1.5%, then if we assume GI Retail earns mid-way in this range, receiving 1.25% of total transaction value, then this would imply the following:

FY13/14 (31/03) 1,109.2 million INR or €15.8 million in revenue = c. 88.736 billion INR or €1.264 billion in transaction value.
FY14/15 (31/03) 2,677.6 million INR or €38.3 million in revenue = c. 214.208 billion INR or €3.064 billion in transaction value.
FY2015 (31/12) €45 million in revenue = c. €3.6 billion in transaction value.
FY2016 (31/12) €75 million in revenue = c. €6.0 billion in transaction value.

The data goes back a few years

As mentioned above, the RBI Payment and Settlement Systems data goes back some time. Well it goes back to 2013 and a bit before that.

Here is the Payment and Settlement Systems data from the Reserve Bank of India's May 2014 bulletin:

Indian Payment and Settlement data January-March 2014
Source: Reserve Bank of India - May 2014 Bulletin

This shows that in the twelve months to March 2014 there were:

15.3 million Immediate Payment Service transactions.
95.8 billion Indian Rupees worth of Immediate Payment Service transactions.
144.3 million Prepaid Payment Instruments (PPIs) based transactions.
79.05 billion Indian Rupees worth of Prepaid Payment Instruments (PPIs) based transactions.

At a rate of c. 71 EUR:INR this equates to:

€1.349 billion worth of Immediate Payment Service transactions.
€1.113 billion worth of Prepaid Payment Instruments (PPIs) based transactions.
€2.462 billion in total.

As highlighted above, Wirecard's claims for GI Retail's FY13/14 (31/03) revenue should imply it was related to c. €1.264 billion in transaction value.

That would suggest that GI Retail had c. 51.3% share of the combined Immediate Payment Service and Prepaid Payment Instruments transaction business that was up for grabs in the twelve months to March 2014.

That seems quite a lot.

Skip forward a year and here is the Payment and Settlement Systems data from the Reserve Bank of India's May 2015 bulletin:

Indian Payment and Settlement data January-March 2015
Source: Reserve Bank of India - May 2015 Bulletin

This shows that in the twelve months to March 2015 there were:

78.4 million Immediate Payment Service transactions.
581.9 billion Indian Rupees worth of Immediate Payment Service transactions.
314.5 million Prepaid Payment Instruments (PPIs) based transactions.
213.4 billion Indian Rupees worth of Prepaid Payment Instruments (PPIs) based transactions.

At a rate of c. 71 EUR:INR this equates to:

€8.195 billion worth of Immediate Payment Service transactions.
€3.005 billion worth of Prepaid Payment Instruments (PPIs) based transactions.
€11.2 billion in total.

As highlighted above, Wirecard's claims for GI Retail's FY14/15 (31/03) revenue should imply it was related to c. €3.064 billion in transaction value.

That would suggest that GI Retail had c. 27.4% share of the combined Immediate Payment Service and Prepaid Payment Instruments transaction business that was up for grabs in the twelve months to March 2015.

That seems quite a lot but is down from the c. 51.3% share it appeared to have a year earlier.

Now, bringing this up to where Wirecard reckons GI Retail will finish the year shows as follows.

The RBI data indicates that transaction value related to Immediate Payment Service and Prepaid Payment Instruments totaled €16.705 billion during the nine months to September 2015.

Transaction value has been increasing by an average €123 million per month during 2015. On that basis, total transaction value related to Immediate Payment Service and Prepaid Payment Instruments would be expected to total €24.266 billion* during the twelve months to December 2015.

Now Wirecard reckons GI Retail's FY2015 (31/12) revenue will be c. €45 million, which should imply it will relate to c. €3.6 billion in transaction value.

That would suggest that GI Retail had c. 14.8% share of the combined Immediate Payment Service and Prepaid Payment Instruments transaction business up for grabs in the twelve months to December 2015.

That still seems high but is down from the c. 27.4% implied to March 2015 and the c. 51.3% implied to March 2014.

*Total transaction value in the nine months to September 2015 = €16.705 billion.
Total transaction value in September 2015 = €2.275 billion.
On average total transaction value has increased by €123 million each month in the first nine months of 2015.
Hence, expected total 2015 transaction value = €16.705 billion (9 months to September) + €2.275 billion + €123 million (September + average increase in the month) + €2.275 billion + 2x €123 million (September + 2 x average increase in the month) + €2.275 billion + 3x €123 million (September + 3 x average increase in the month) = €24.266 billion.

Incidentally, as a corollary, if Wirecard expects GI Retail's revenue to rise to €75 million in 2016, then for GI Retail to maintain (or grow) its implied 2015 market share, then market growth needs to slow to (or fall below) 67%. This is still strong growth but would be a sharp slowdown from 214% growth in 2015 and 351% growth in 2014.

And another thing

As Dan McCrum amusingly^ highlights in his latest feature on Wirecard, Hermes is signed up with India's Yes Bank to provide money transfer services. Now you might think that on the basis of GI Retail's implied market share of c. 51.3% from a few years back, that Hermes/GI Retail was either the only (or one of very few) to be signed up with Yes Bank. You'd be wrong to think that.
^Look for the section on an unusual headline.

Here is Yes Bank's latest list of Money-Business Correspondents:

Yes Bank's list of Money-Business Correspondents
Source: Yes Bank November 2015

And here is Yes Bank's list of Money- Business Correspondents from August 2013, around the time it would seem (on the basis of above) that Hermes/GI Retail had c. 51.3% of the combined Immediate Payment Service and Prepaid Payment Instruments market.

It was clearly slim pickings for the other twelve members signed up with Yes Bank. Of course Yes Bank is only one of many retail banks in India.

Yes Bank's list of Money-Business Correspondents
Source: Wayback Machine - Yes Bank August 2013

Just one more thing

Wirecard highlights that:

"The National Payments Corporation of India (NPCI) ranks GI Technology as number one bank's remitter among 123 members as of 6th October 2015."

And here is the NPCI's website showing GI Technology with c. 3.7 million subscribed users (1 lakh = 100,000).

Prepaid Payments Instrument Issuer subscribed users
Source: National Payments Corporation of India

Strangely the only other subscribed user data is provided for ITZ Cash Card. One can see why one may reckon that Wirecard views GI Technology as being the number one bank's remitter.

But this may not have always been the case.

According to the NPCI, in December 2014, GI Technology had c. 1.4 million subscribed users while Oxigen Services had 50% more or c. 2.1 million subscribed users.

Prepaid Payments Instrument Issuer subscribed users
Source: Wayback Machine - National Payments Corporation of India December 2014

And prior to this, in May 2014, GI Technology had c. 0.5 million subscribed users while Oxigen Services had c. 0.9 million subscribed users. These numbers are indeed odd, when at the same time, going on Wirecard's claims for GI Retail revenue and the RBI data, it would appear that GI Retail had c. 51.3% market share.

And finally

Here is the iCashCard website, "India's number one domestic (Immediate Payment Service - IMPS) remittance instrument":

iCashCard website and click option for Agent Login
Source: www.icashcard.in

If you click on the "Agent Login" option (highlighted above) it takes you here:

iCashCard Agent Login site
Source: http://agent.icashcard.in/login

And if you click on the "Want to become retailer click here to apply provide us details. We will reach you shortly" option, it takes you here:

GetMyTrip application/enquiry form
Source: www.getmytrip.com

Why does an application to become a retailer for the iCashCard payments business ("India's number one domestic remittance instrument") take you to the Hermes' travel agency site, Get My Trip? This is altogether very odd.

I increased my short in Wirecard.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Friday, 6 November 2015

Atkins (ATK LN) ... as night follows day

Friday 6th November 2015

Coming up to two years ago I sold short in Weir Group (WEIR, mkt cap £2.4bn), at 2,094p/shr.
Demand driven short.

I quickly covered the short about a month or so later at around 2,300p/shr. I closed in the midst of a sharp run up in Weir's price, driven by spurious bid speculation and a short squeeze; short interest at the time was 12%. The market then was also fairly unforgiving for shorts, still being juiced by QE, statements of "whatever it takes" and all that.

Weir's shares peaked at 2,848p and loitered above 2,500p through to September 2014.

It's a pity I didn't review my bearish view on Weir in H2 2014. The shares have since collapsed to 1,136p.

Weir share price
Source: Bloomberg

The rationale behind my short was pretty straightforward. For months, Weir's customers had been broadcasting an enormous contraction in their collective capex plans in the years ahead. Hence, it was obvious to me, that as night follows day, that Weir's revenue and margins would come under pressure following that contraction in demand from its principal customers. And yet for some reason, consensus earnings expectations remained absurdly optimistic.

In early 2014, I'd calculated that Weir's top 13 customers* accounted for 32% of its revenue and from those customers' capex guidance, they were about to cut their combined annual capex by 14% over the next three years. At the same time, consensus* estimates projected Weir's revenue to grow 19% over the same period. Go figure!
*data from Bloomberg

Weir consensus revenue growth projections
from January 2014 as compared to current consensus
Source: Bloomberg

Weir consensus EBITDA margin projections
from January 2014 as compared to current consensus
Source: Bloomberg

That was then

Now I reckon the same bearish argument could be made for Atkins (ATK, mkt cap £1.4bn), the design, engineering and project management consultancy business.

According to Bloomberg estimates (BBE), Atkin's top 12 quoted customers^ account for 16% of its revenue. Further, BBE suggest that these customers are set to cut their combined annual capex each year by 15% in 2015, 4% in 2016 and a further 2% in 2017. This is a total capex cut of 21% through to 2017 from 2014 levels.

By comparison, BBE forecasts that Atkins is set to grow its revenues by 5%, 3% and 4% in 2016, 2017 and 2018 respectively (Atkins has a March year end). This is total growth of 13% through to 2018 (March year end) from 2015 levels.

Further, consensus expects Atkin's EBITDA margin to rapidly increase from 7.7% in 2014, to 9.4% by 2018.

I find all this very unlikely. So I sold short a few Atkins.

^Bloomberg estimate of Atkin's revenue by customer - Airbus (4.3%), Apache (2.0%), Statoil (2.0%), CNOOC (1.6%), Chevron (1.4%), ENI (1.3%), Boeing (0.9%), Royal Dutch (0.9%), Rolls Royce (0.7%), BP (0.6%), National Grid (0.4%), Alstom (0.2%)

Atkins consensus revenue growth and EBITDA margin forecasts
as compared to consensus capex plans by top 12^ (see above) quoted customers
Source: Bloomberg

Incidentally, Atkins trades on a forward P/E of 12.5x and a forward EV/EBITDA rating of 6.9x when as one can see, historically the shares have traded somewhat lower.

Atkins forward P/E and EV/EBITDA rating
Source: Bloomberg

Atkins share price
Source: Bloomberg

And another thing

As night follows day ... I found the following charts reasonably compelling.

Atkins share price as compared to Apache Corp (2.0% of ATK revenue*)
Source: Bloomberg, *Bloomberg SPLC

Atkins share price as compared to Statoil (2.0% of ATK revenue*)
Source: Bloomberg, *Bloomberg SPLC

Atkins share price as compared to Chevron (1.4% of ATK revenue*)
Source: Bloomberg, *Bloomberg SPLC

Atkins share price as compared to ENI (1.3% of ATK revenue*)
Source: Bloomberg, *Bloomberg SPLC

Atkins share price as compared to Rolls Royce (0.7% of revenue*)
Source: Bloomberg, *Bloomberg SPLC

I'm short Atkins.

Thursday, 5 November 2015

Wirecard (WDI GY) ... Suvidhaa vs. GI Retail

Thursday 5th November 2015

In my previous post I wrote about Wirecard's acquisition of Great Indian Retail Group.

Here are the main details as indicated by Wirecard:

Wirecard is set to buy GI Retail for €230 million in cash.
A further payment up to €110 million is possible, linked to the overall financial performance of the acquired businesses in calendar years 2015 to 2017.
Consolidated revenue for the acquired businesses is expected to exceed €45 million in calendar year 2015, an increase of more than 50 per cent compared to calendar year 2014.
EBITDA is expected to more than double year on year to exceed €7 million.
Revenue for calendar year 2016 is expected to exceed €75 million and EBITDA after integration costs is expected to be between €15 million to €18 million.

On this basis, the businesses being acquired under GI Retail appear very attractive.

Revenue is expected to rise by over 50% in 2015 and increase by a further 67% in 2016.

The EBITDA margin is expected to be 15.5% in 2015 and rise to somewhere between 20% to 24% in 2016.

No wonder Wirecard is potentially paying €340 million or c. 7.5x projected 2015 sales or c. 49x forecast 2015 EBITDA to acquire GI Retail.

In my previous post, I also mentioned a company called Suvidhaa Infoserve Pvt. Ltd.

Suvidhaa Infoserve Pvt. Ltd

According to Suvidhaa's website, "Suvidhaa is a renowned company in the payment and remittances space."

Here is the front page to Suvidhaa's website:

Suvidhaa website
Source: www.suvidhaa.com

Suvidhaa says it is a "... leading aggregator of multiple services like utility bill collection, insurance premium, mobile and DTH recharge, travel tickets, money transfer services on a single platform through a network of 80,000 franchises outlets across the country."

About Suvidhaa
Source: www.suvidhaa.com/aboutus

Suvidhaa's website appears somewhat more refined than GI Retail's. For a start it clearly states who the management team is, with detailed biographies for seven members of that team. By contrast, GI Retail's main website mentions nothing of its management. However, GI Technology's website does provide biographies of the group's management.

Further, Suvidhaa's website details the group's investors. These include Norwest Venture Partners, Reliance Venture Asset Management Ltd, International Finance Corporation, and Mitsui & Co. By contrast, GI Retail's website mentions nothing of its financial backers. There is yet another website with details of GI Retail. This is at www.zoomcard.in. It's a rather incomplete site as around half the links do not work including the link that should direct to the group's investors.

Here is a YouTube video of Suvidhaa's founder and Chairman, Mr Paresh Rajde, seemingly being interviewed on an Indian financial news broadcast.

Here is a YouTube video of GI Retail's Managing Director, Mr Ramu Annamalai Ramsamy, seemingly at a desk in a small cupboard. The video has some editing issues as it's rather jumpy throughout as Mr Ramu Annamalai Ramsamy talks through ICASHCARD.

Customers

Suvidhaa claims "3 Crore (30 million) satisfied customers."
GI Retail declares to have "... served more than 60 million customers for travel and payment services across our agent network in 2014."
GI Technology mentions "GI has fast grown to serve more than 1 crore (10 million) customers in the under banked segment."

Transactions

Suvidhaa claims "1.5 Lakh (150 thousand) transactions daily."
GI Retail indicates that "Over the last years we have issued more than 35 million money transfer accounts for financial institutions, including our own ICASH wallet."
ICASHCARD YouTube video claims "Every month ICASH wallet is doing close to 1.5 million transactions, helping migrant and marginal workforce to send money safely and instantly."
GI Technology highlights that "We provide more than 200,000 people daily with access to affordable financial services and other related services and through our retail partners offer tens of thousands of retailers the opportunity to earn extra money by driving financial inclusion in India."

Locations

Suvidhaa claims to be present across a network of "80,000 retail outlets."
GI Retail suggests that its Hermes newtork has "... more than 90,000 locations across India, more than 9,000 locations on (sic) the Philippines and retail partnerships in Indonesia and Malaysia."
GI Technology mentions that "ICASH wallet is also being distributed by other partner networks numbering more than 100,000 agents across India."

On the tale of the tape, Suvidhaa appears to be a remarkably similar business to GI Retail.

Here are Suvidhaa's accounts to 31 March 2014:

Suvidhaa Infoserve Private Limited annual report
Source: www.mca.gov.in

Here is Suvidhaa's balance sheet to 31 March 2014:

Suvidhaa Infoserve Private Limited balance sheet to 31 March 2014
Source: www.mca.gov.in

At the time of posting there is c. 101 Indian Rupees to the pound, Sterling.

According to its balance sheet, Suvidaah's net assets totaled 404,808,529 Indian Rupees (INR) or c. £4 million as at 31 March 2014.

Here is Suvidhaa's P&L to 31 March 2014:

Suvidhaa Infoserve Private Limited P&L to 31 March 2014
Source: www.mca.gov.in

Suvidhaa Infoserve Private Limited P&L (continued) to 31 March 2014
Source: www.mca.gov.in

According to its P&L, Suvidhaa reported 31,753,568,481 INR or c. £314 million of gross transaction value in 2014.

Total income (revenue) was reportedly 434,888,828 INR or c. £4.3 million, up 79% from 2013.

EBITDA was reportedly a loss of 89,472,779 INR or c. £886,000, an improvement on a 180,498,483 INR or c. £1.8 million loss in 2013.

This compares to GI Retail, which Wirecard suggests is on track for at least €45 million in revenue and greater than €7 million in EBITDA for 2015.

It would seem the businesses aren't so similar after all.

I am still short Wirecard.