Quindell Portfolio ... "Loans to other parties"?

Friday 10th May 2013

The share price of Quindell Portfolio (QPP, mkt cap £217m) has plummeted by over 50% this week. Reading its prelims for the year ended 31 December 2012 it was easy to understand why. Most concern seemed to centre on the scale of the group's trade and other receivables, which totalled £202m or 147% of 2012 revenue. Then attention turned to a £15.6m cash outflow for "Payments for swaps contracts". Apparently this was an equity swap contract issued as part of the funding for an acquisition. But there is still little clarity as to what the terms are and when it expires. The group's clarification regarding press speculation RNS was pretty pathetic. 

Little attention seems to have been directed to the other sizeable cash outflow in the line above the "Payments for swaps contract". At £15.1m, this was also material and relates to "Loans to other parties." I can find no explanation for what this loan is for, who it went to, what the terms were and when it is due to be repaid. However, the last time I can recall seeing this item crop up in a set of accounts was in the 2009 Annual Report for Xchanging plc (XCH, mkt cap £341m); in note 33. What Xchanging had done was to loan its Directors and key management personnel a wad of money to buy shares in the company. What then happened was that Xchanging's share price keeled over and there was little prospect of the loans being repaid. Xchanging's Directors and key management personnel were sitting on paper losses on Xchanging's shares of c. 50%. 

I can't help wonder whether Quindell has provided a similar arrangement for its Directors and key management? It would help to explain why there have been no Director share purchases subsequent to the plunge in the group's share price to support market confidence. Who would want to wade back in for further purchases if you're up to the gunnels in stock that has already dropped 50%? I would add that another possible explanation for lack of Director buying is that the Directors are prohibited from purchasing shares in market as the company is still in closed period until the full accounts are published. But publication could be months away and I have been advised that if requested to AIM, then Directors are permitted to purchase shares post the publication of prelims as long as no price sensitive information is known. Has anyone heard of an explanation for the "Loans to other parties"? The lack of clarification on the accounts is ridiculous. 

Quindell Portfolio share price
Source: Bloomberg

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. 

When QE stops ... the Long Bond drops

Friday 10th May 2013

As far as I can infer, shorting the US Long Bond (US1 Comdty) is some of the easiest money to be made. The main uncertainty is determining precisely when it takes the plunge. Enter the Federal Reserve Bank of Chicago President, Charles Evans. Yesterday Charles said the US job market is “doing better”. He went on to suggest that were the labour market to continue to perform strongly, then QE would be ended abruptly rather than tapered off. Further, given the aggression with which it yesterday got shoved back down from $147, that seemed to provide a clue as to where it wants to go. So I rang up Jackie at ETX and sold short at $146.8. When QE stops, the Long Bond drops. Where it drops to is the question. I would posit $120 for starters. From what I can see there is at most $4 downside to $26+ upside on this and even that may be conservative. The risk/reward is ever so asymmetric. 

US Long Bond
Source: Bloomberg

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. 

Compass Group (CPG) ... a free hit?

Sodexo (SW FP, mkt cap €10.4bn) is currently off 7% this morning on the back of softer than expected H1 earnings and expectations (according to Bloomberg) that consensus earnings will be cut by c. 5%. North America seems to be ok, but as was always likely, Europe is soggy. By contrast, Compass Group (CPG LN, mkt cap £14.8bn) is just over 1% lower, at 815p/shr. As a percentage of sales, CPG (c. 44%) is more exposed to North America than SW (c. 39%), but at just c. 5% more the difference is relatively marginal. Both have c. 35% exposure to Europe. One would imagine that a tough European market would also be impacting CPG, and that analysts may sharpen their pencils. A short on CPG looks like a free hit. So I've bopped it at 815p.

In summary:

• SW disappointing H1, likely c. 5% cuts to earnings.
• CPG and SW both c. 35% exposed to Europe.
• CPG trading on 15.8x forward earnings (Bloomberg) close to six-yr high.
• SW trading on 16.6x forward earnings (Bloomberg).
• Strong correlation between share price performance of CPG and SW; as one would expect of World No.1 and 2 in outsourced catering.
  
  

Sodexo vs. Compass share price
Source: Bloomberg

Compass valuation, forward P/E and EV/EBITDA close to 6-yr highs
Source: Bloomberg

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. 

Afferro Mining (AFF) ... IMIC might do it

Afferro’s share price has fallen almost as quickly as it had risen in December last. At 60p/shr, it now trades roughly where it was prior to the bid speculation, which prompted the shares rise to as high as 105p. Capitalised at £63m, its enterprise value equates to c. £8m, which suggests that its 2.5bn tonnes of prospective iron ore (1.2bn tonnes indicated / 1.3bn tonnes inferred) is priced at c. 4.8 US cents per tonne. I am told that the going rate for African iron ore juniors EV/contained Fe is between 20-30 cents per tonne. On this basis, AFF would appear cheap. However, AFF is somewhat stranded in Cameroon, many miles away from a port and with no passing railway line. The cost to remedy its isolation is predicted to begin at $4bn.

Sundance Resources (SDL AU, mkt cap AUD 270m), another iron ore junior, is also in Cameroon and now that Hanlong (in hindsight some ramshackle Chinese outfit) is no longer bidding, would seem to be just as isolated. SDL’s share price has fallen from above 30 AUD cents per share to less than 9 from the evaporation of this bid. It may be worth noting that although SDL may be as stranded as AFF, now capitalised at 270m AUD, its resource is priced at c. 9.5 US cents / tonne. Almost twice as that of AFF’s. But this discrepancy is probably neither here nor there as both prospects are nonviable without infrastructure. 

What I find odd, when considering the collapse in AFF’s share price, is that AFF is still in a bid situation. Although Jindal Steel (JSP IN, mkt cap £3.7bn) was touted as a potential bidder, it was the small AIM listed company, IMIC (IMIC LN, mkt cap £16m) which made a formal approach. IMIC proposed it would be prepared to “make an offer, subject to completion of satisfactory due diligence and certain other conditions, for the entire issued and to be issued share capital of Afferro at between 115 and 140 pence per Afferro share. The consideration is to be satisfied by an undisclosed mix of cash, yet to be raised by IMIC, and new IMIC shares.”  The lower of this range equates to 91% higher than AFF’s current share price.

The decline in AFF’s share price suggests that IMIC’s bid is not credible. However, since making its initial approach in December last, IMIC has increased its stake in AFF to 6.8% of the shares (1.8% through options). Further, according to its recent interims from 28 March 2013, IMIC have “... appointed Bank of America Merrill Lynch in the fourth quarter of 2012 to advise on a possible offer for the entire share capital of Afferro ...” IMIC appears to be continuing with its due diligence and efforts to raise finance.

IMIC may be more credible than its current market cap would suggest. It highlights that it has a strong strategic partnership with the African Iron Ore Group (AIOG). The AIOG comprises China Railway Group (390 HK, mkt cap £6.3bn), China Machinery Engineering (1829 K, mkt cap £2bn), MCC Huaye Resources Development, and China Railway Materials. How strong this strategic partnership is remains uncertain, but it is a formidable roll-call.

In terms of what needs to be raised, if IMIC were to tender full cash at the lower end of its suggested range, 115p/shr, this would equate to £121m. The upper end of 140p/shr would require £147m. However, it is worth recalling that AFF retains c. £55m in cash on its balance sheet, or c. 52p/shr. So the net requirement may be as low as £66m and up to £92m. Further, in October 2012, IMIC secured a US$50m/£32m bond instrument “to unlock the potential of iron ore in West and Central Africa.” In June 2012, IMIC raised £10m in equity at 20p/shr, principally funded by high net worths and support from its strategic partner, the African Iron Ore Group (AIOG). It would appear that IMIC has good connections and is relatively competent at raising finance. Appointing BoA Merrills will also probably help on the latter.

Earlier this week, a niche specialist resources broker, Ocean Equities, published a detailed research note on IMIC. The note outlined IMIC’s plans for AFF; in corollary it also demonstrated AFF’s extreme cheapness relative to peers. While the note was well written it seemed a bit presumptuous to detail a company’s plans for that of another when the former hadn’t even tendered an offer to the latter. A bit like me viewing a house and telling the vendor to their face what my decorative plans were to his/her home before an offer was accepted and solicitors’ details exchanged. I would imagine that IMIC had a strong hand in constructing this note.

At 60p/shr, I reckon AFF presents an attractive speculative buy opportunity. So I have bought.

In summary:

• AFF remains in a bid situation where a suggested offer has been in the range of 115p to 140p per share.
• AFF is currently priced at virtually a zero enterprise value.
• AFF is net cash positive, with $89m at the last count.
• IMIC may be a more credible suitor than the market believes.
• IMIC has a good record of raising finance and has developed strategic partnerships with key infrastructure players. 

Afferro Mining share price
Source: Bloomberg

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.