November 2017 UK Investor Magazine

UK INVESTOR MONEY // SHARES // INTERVIEWS

ISSUE 27 // NOVEMBER 2017

NIGEL WRAY

The UK Investor Show has never looked brighter Confronting the takeover code Five buy tips (and three sells) Minimum drink pricing? Is Scotland drunk?

UK Investor Magazine — 1 — November 2017

Intro

From The Editor INSIDE 3 Nigel Wray takes control of the UK Investor Show 4 Working with the new Takeover Code Marcus Young & Kelly Nash 6 Drunk on taxes: Scotland to implement minimum alcohol pricing Tom Winnifrith 7 SSE, boring company but exciting future Chris Bailey 8 Three resource shares to buy for Christmas Gary Newman 10 Shooting Blanks:: Attempting to ban guns in the US Tom Winnifrith 11 Take a pass on this share?

Next!

Chris Bailey 12 Three shares to sell in Christmas Tom Winnifrith 18 The House View: Is there really a Santa Rally?

CONTACT US UK Investor Magazine 91 - 95 Clerkenwell Road London, EC1R 5BX

Welcome to the penultimate issue of 2017 The year draws to a close. For me, it has been a good year. You will see the big news about selling the UK Investor Show to Nigel Wray’s family on the page opposite. For many years I thought, mistakenly, that the secret to life was to buy businesses. Too late I discovered that the real route to wealth is in selling them.

Over the past two years I’ve sold a restaurant after turning it around and now the show, a start up. The joy is not just financial but in knowing that this is one less business to be involved in managing.

Staff, investors, trade partners, customers - you need them all but they all can create headaches. How much simpler life has become with nothing to manage other than the small operation which is ShareProphets? In 2017 we changed our business model for that publication going for free to access advertising to subscription. It is the way the media world is heading.

10 weeks after that change we have seen revenues increase by 500% and are almost at breakeven. If you have not signed up for £5.99 a month you can do so here. A few more subscribers and I get to play Santa, handing out the first pay rises in four years to our excellent writers.

Our portfolio is modestly up on the year. Sure we missed out on blockchain insanity and other bubbles but owning shares in companies with cash and which are either profitable or on the brink of it allows us to sleep soundly at night. That is not too bad a place to be.

I hope this edition of UK Investor Show magazine has something of interest for you and I wish you all an enjoyable run up to Christmas.

E: info@ukinvestorshow.com W: www.UKInvestorShow.com EDITORIAL Tom Winnifrith Editor

Tom Winnifrith Editor www.ShareProphets.com www.UKInvestorShow.com www.TomWinnifrith.com

UK Investor Magazine — 2 — November 2017

Nigel Wray’s family buys UK Investor Show Writes UKIS founder Tom Winnifrith

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t would be odd if we did not report in a change of our ownership. In case yo have missed the news, the family of Nigel Wray, the man known as Britain’s Buffett, has bought from Tom Winnifrith’s family, the 50% it did not already own of the Global Group UK Investor Show, the country’s leading one day event for those who want to make money from shares.

The Wray’s investment comes ahead of the 2018 event which is already set to be the biggest and most controversial yet.

Nigel Wray said: “I have spent my entire life with small companies and am a huge enthusiast of them and their role in the country. Without little acorns there won’t be any mighty oaks! That’s what we’ll continue to encourage at The Global Group UK Investor Show, and there will also be a strong emphasis on the private investor getting a better deal. Tom Winnifrith and his team have been organising the leading one day event for 16 years and I’m delighted that my family can now take this show forward to the next level.”

Tom Winnifrith said: “My family interests have accepted an offer we cannot refuse. Naturally I shall continue to support my friends the Wrays in any way I can as they make the show ever bigger and more enjoyable for all concerned - including me.”

That is the key. Nigel’s daughter Lucy runs an events business with 20 employees which brings a new level of professionalism and organisation to the show. They simply run it better than ever before. And Wray himself is a man who can ensure that there are bigger and better companies attending and presenting and more

big name speakers.

The irreverence of UK Investor Show and its willingness to call our corporate wrongdoing will not change. The ShareProphets writers including Tom Winnifrith - will all be there and won’t be holding back. But they will be at a bigger and better run event. Everyone wins.

The 2018 Show will take place on 21 April next year in Westminster. In 2017, the Show featured over 120 listed PLCs and attracted in excess of 3,500 attendees, confirming its status as the largest one day conference on shares and other investments in the UK. Almost 110 companies have already booked presentation slots for the 2018 event, with attendee ticket bookings running at 20% ahead of last year. So the 2018 show will be the biggest ever one day investor conference in the UK by a country mile.

Keynote speakers at the 2018 event, at the Queen Elizabeth II Centre, include: Mark Slater, Paul Scott, Nigel Wray, Vin Murria, Lucian Miers, David Lenigas, Dominic Frisby, Luke Johnson, Nick Leslau, Dr Johnny Hon, Paul Jourdan, Matt Earl, Tom Winnifrith and Ed Croft.

You really want to be there! So we have 50 free tickets to give away today to readers of this magazine. Simply go to www.UKInvestorshow. com/tickets and book an investor class ticket using the promotional code WRAY to guarantee your place on April 21.

UK Investor Magazine — 3 — November 2017

Destination Britain: Investors facing new takeover procedures post-Brexit New proposals on changing the UK Takeover Code and buying businesses that may be related to national security will be closely monitored by investors.

By Marcus Young and Kelly Nash

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he UK has opened up its economy to an arguably greater extent than any other developed nation to foreign investment during the last 35 years. Investors from around the world have been drawn to the country by the flexible and attractive regimes governing M&A, capital markets and finance matters.

However, as Brexit edges closer, concerns have risen that the dwindling number of national champions means Britain may lack sufficient clout to compete on the world stage. To this end, the last two months saw the UK issue two sets of proposals that would affect M&A in the UK. The first, a consultation from the Takeover Panel in September, would result in changes to the rules regulating the purchase of UK-based companies while the second, the National Security and Infrastructure (NSIS) Review which launched in October, is a consultation on the national security implications of foreign ownership and control of such companies.

Interventionist inclinations Investors may be wary that such reviews signal a more protectionist approach from the UK. Indeed, calls for a more protectionist regime are nothing new, and a number of takeover attempts over the years have resulted in demands for change.

One of the most well-cited cases arose in 2009 when Kraft Foods made its hostile takeover bid for Cadbury. Kraft agreed, as part of the negotiations which resulted in the offer being recommended, to keep a particular factory open yet, shortly after completion in 2010, it announced the factory’s closure.

The move attracted criticism and even prompted the introduction of the requirement under the Takeover Code for a potential bidder to either announce a firm intention to make an offer in accordance with Rule 2.7 of the Takeover Code, or announce that it does not intend to make an offer, within 28 days of the date of the announcement in which the potential bidder is first identified.

As a result, companies planning a takeover now must make a firm offer for the target company within four weeks of expressing their interest and if they fail to meet this “put up or shut up” deadline, they are prevented from bidding for that company again for the next six months.

The consultation from the Takeover Panel in September 2017 builds on previous reforms. The review is proposing a number of important changes to the way takeovers operate. The proposals would: • require bidders to make clear their plans for the target company earlier in the process; • require bidders to be more specific on key aspects of the target company’s future which often cause public concern, specifically: - the research and development functions, - the balance of the skills and functions of the target company’s employees and management, and - the location of the target company’s headquarters and headquarters functions; • allow a target company facing a bid to slow down the takeover process (at present a target company has 14 days from the publication of the offer document to publish its response to the bid); and • require companies to report at least annually on how they were fulfilling their binding post-offer undertakings and to report at the end of 12 months on how they had fulfilled their post-offer intention statement.

National concerns Pfizer’s attempted hostile takeover of AstraZeneca in 2014, meanwhile, came amidst concerns about the disenfranchisement of R&D resources and technology from the UK, and promises from Pfizer to, amongst other things, keep at least 20% of the group’s total R&D workforce in the UK. This led to the Takeover Code being amended to introduce Post Offer Undertakings, which enabled undertakings given in the course of a takeover to be made binding on parties.

UK Investor Magazine — 4 — November 2017

Post Offer Undertakings were first utilised in June 2016 when Softbank, the Japanese technology entity, undertook in connection with its takeover of the UK-based microchip company, ARM, to double ARM’s UK headcount. This promise, amongst others, was made after discussions with the new Prime Minister, Theresa May, and was seen by many as an anticipatory move designed to pacify Government concerns over foreign investment in English companies.

Whilst May has stated that international takeovers will be assessed on a “case by case” basis, there has been a noticeable readiness from the Government to involve itself more heavily in potential takeovers. For example, the Government insisted it was “closely” following the London Stock Exchange’s £21 billion merger with German rival Deutsche Boerse, which was ultimately blocked by the European Commission. Increased monitoring alone of attempted takeovers is a marked move away from the more laissez-faire stance adopted by previous Governments.

The nuclear power station at Hinkley Point C is another example of the Government taking a more interventionist approach to overseas investment in the country. To mitigate concerns about foreign Government backed investment in Britain’s critical infrastructure, a number of conditions were attached to the Government’s approval, including a provision that the Government must be consulted if EDF attempts to sell its controlling stake.

The new NSIS report moves the focus on to protecting national security, adding another dimension to the existing takeover process.

Security issues – NSIS report The NSIS report, published on 17 October, 2017, sets out the Government’s intention to make changes to the merger control regime which are “necessary and proportionate to protect national security”. In the short term, the Government proposes to amend the turnover threshold and share of supply tests within the Enterprise Act 2002.

This would allow the Government to examine and potentially intervene in mergers that currently fall outside the thresholds in two areas: (i) the dual use and military use sector, and (ii) parts of the advanced technology sector. For these areas only, the Government proposes to lower the turnover threshold from £70 million to £1 million and remove the current requirement for the merger to increase the share of supply to 25% or more .

As with Hinkley Point C, the NSIS Consultation sets out the Government’s proposals to ensure that there is adequate scrutiny of whether significant foreign investment in the UK’s critical businesses raises any national security concerns.

The Government’s proposals include:

• an expanded version of the ‘callin’ power, modelled on the existing power within the Enterprise Act 2002, to allow the Government to scrutinise a broader range of transactions for national security concerns within a voluntary notification regime; and/or

• a mandatory notification regime for foreign investment in key parts of the economy”..

Mandatory notification could also be required for new projects that could reasonably be expected in future to provide essential functions and/or

foreign investment in specific businesses or assets.

Importantly, the NSIS Consultation makes clear that the Government is only concerned with transactions that might raise national security concerns, and the paper is at pains to reassure that no part of the UK’s economy would be off-limits to foreign investment. The Government notes in the Consultation paper that whilst the structure of the Enterprise Act 2002 means that the proposals would, in theory, allow the Government to intervene in smaller deals for media plurality or financial stability reasons, it cannot “currently foresee any circumstance where a merger related to enterprises undertaking this type of activity beneath the £70 million or current share of supply test could raise media plurality and/or financial stability concerns”.

A number of interesting questions are raised by the NSIS Consultation, including whether there would be a mandatory notification regime under the new ‘call-in’ power (the Government seems minded to keep this voluntary).

The future With the publication of the NSIS Consultation it would appear that the Government has decided, for now, not to implement a more protectionist merger control regime, which will be welcome news to investors. The proposed Takeover Code changes noted above are relatively modest in nature although they continue the trend for affording target companies additional protections against hostile bidders.

Intriguingly, the NSIS Consultation is almost completely silent on Brexit. There is an acknowledgment that whilst Britain remains a member of the EU it is restricted in the actions it can take, but no suggestion that on leaving the EU, the Government is considering taking further action in this area. There had been speculation that if Britain leaves the Single Market (which is the Government’s stated position), Britain would use the opportunity to move away, at least to some extent, from the current competition-based regime to a more public-interest, discretion-based version in which the Government could play a greater role in both overseeing and intervening in transactions which affect key British industries and/or businesses.

For now, the Government seems content to limit additional scrutiny to national security related transactions. In implementing any changes to Britain’s merger-control model (including in the national security area), the Government will need to be careful to balance the interests of those affected by any international investment with the interests of the British economy as a whole. The difficulty with a discretion-based public interest test is the potential for it to result in a lack of transparency and predictability, which in turn creates uncertainty and can deter positive foreign investment which would benefit the British economy.

In the wake of Brexit, Britain will be seeking to bolster its economy and ensure that it remains attractive as a country in which, and with which, to do business. Policy developments in this area will be watched closely.

Marcus Young is a counsel and Kelly Nash an associate in King & Spalding’s London office

UK Investor Magazine — 5 — November 2017

50p on a unit of Alcohol - Scotland sets a precedent for stupidity Writes Tom Winnifrith

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inally it looks as if the SNP is going to get its way and from next year if you buy booze from a shop in Scotland you will have to pay a minimum of 50p per unit of alcohol. Scotland sets a world precedent in stupidity.

Of course the middle class will be unaffected.

The price of the sort of wine I drink and the type of whiskey I enjoy at this time of year is well above 50p per unit. So we middle class drunks will not notice the change at all if we happen to be visiting the Greece of the North.

But the price of a 3 litre bottle of cider will zoom from £4.50 to £11.25. The price of 20 cans of cheap lager will race ahead from £13 to £18. It will be the poor and working class who are hit by this tax, as of course, they are by smoking taxes.

The middle class liberal evangelists say that pushing up the price of fags has cut smoking.

Nope, what has slashed smoking is vaping. It was the private sector that did for smoking not the state with its clumsy and regressive fiscal

bullying. The same will happen with poor Scottish drinkers as has happened with smoking.

Some will pay up. This will be a hugely regressive tax. A few will quit.

Others will, and if the elite were really to study history they would know this, simply get involved in crime. It takes 1 hour and 30 minutes to drive a mini van from the East End of Glasgow to Carlisle in England. If you stack your van up with 200 bottles of 3 litre cider at £4.50 you can sell it to your neighbours at £6 and they will love you and you will make an easy £300.

No doubt more Police time will be wasted chasing amateur Al Capone’s but enough will get through. Shops in Glasgow and certainly booze outlets in the borders will go bust and Carlisle and Berwick will enjoy a bonanza.

Surely if the “war on drugs” has taught Scotland anything it is that prohibition ( and such steep price increases are a form of prohibition) just does not work.

This article first appeared on www.TomWinnifrith.com

UK Investor Magazine — 6 — November 2017

SSE - the FTSE-100’s most boring company does something of interest

By Chris Bailey

T

he most boring company in the FTSE100 by far is in my opinion SSE plc (SSE, Scottish & Southern Energy). Admittedly utility companies are not meant to be sexy but SSE with its lack of growth and grinding up dividend payment (which encompasses pretty much all of its free cash flow) is the ultimate tortoise. Don’t worry I know the hare and tortoise fable and my own investment style is hardly rabid but shoot me now if I make this one a top ten portfolio position at any time before the age of 85. However...

Fair dues to the SSE management as they have actually announced something interesting with the proposed demerger of the household energy and services business into a joint venture with the equivalent business of peer innogy (which is owned by the German utility behemoth RWE). Why is this interesting? Mainly because it is perfect riposte to the government’s bonkers electricity/gas price cap plan which I talked

about a month ago on ShareProphets. Smell that lower competition and probably higher prices as utility investment spend crumbles even if the price cap might now be postponed to 2019.

Of course the government could block these efforts or force major divestments to limit market power (preliminary estimates suggest that the combined entity will have a market share in excess of that currently enjoyed by Centrica (CNA)), but I like the style and the implied gesticulation to the government by the SSE board. Kudos.

Inevitably the interim statement from SSE, released at the same time, was downright dull.

Dividend munchers will no doubt highlight the 3.6% rise in the interim dividend but (comedy) ‘adjusted’ operating profit and earnings per share down 8% tell their own story. A leopard cannot change its spots, right? I even saw that after an initial share price bounce, the stock is only modestly up on the day as I write. Plus ca chance.

Chris Bailey puiblishes Finacial Orbit. This article first appeared on ShareProphets.com

UK Investor Magazine — 7 — November 2017

Three resource shares to buy for Christmas

By Gary Newman

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il has been showing continued signs of strength recently, but some equities in that sector are currently lagging behind this recent rise in commodity prices, and that could present some good buying opportunities.

In recent weeks Brent has been consistently trading in the $56-58 range, and now even there is negative news – such as a build in inventories – it isn’t having the sharp downwards effect that we have seen in recent times. In the background OPEC has also been looking to cut supply, and has been in talks with Russia about how to achieve that going forwards.

I’m not convinced that we are going to see the price go much higher this year – barring some unexpected news to really drive it further upwards – but even if it were to stay at this level then that would be good news for producers, as it means they will be getting paid more than they had forecast or hedged for, in most cases.

high levels of debt alongside some concerns over its TEN field in Ghana, where there had been a dispute over maritime boundaries which could potentially have affected the licence.

Debt at this FTSE100 company is still high – it stood at around $3.8 billion at the end of June following a rights issue to bring it down to a level that was manageable and where covenants could be met – but it largely relates to the development of the assets which are now bringing in good levels of revenue. The interim results showed that the company achieved revenue of $800 million in the first half of 2017, and that resulted in a gross profit of $300 million and free cash flow of around $200 million, which is certainly a move in the right direction.

At the same time we will now start to see a significant increase in total production for the company, following a resolution of a dispute between Ghana and Cote d’Ivoire, and the company is planning to resume drilling at the field towards the end of this year.

During the first half of the year it was averaging over 81,000boepd, with virtually all of that coming from the Jubilee and TEN fields in Ghana, where it is targeting operating costs per barrel of just $8.

At TEN it has been averaging around 22,500bopd net to Tullow, but on completion of the remaining wells it will take gross production up to the 80,000 capacity that the FPSO has been designed for, and that will mean 37,500bopd net to Tullow.

That will certainly help some of the bigger producers, and one where I can see plenty of further upside, if this continues, is Tullow Oil (TLW).

The company has had plenty of problems with

There have also been developments elsewhere, such as working towards a field development plan for the Ngamia field in Kenya, and a farm down of 21.57% of its 33.33% share of the Uganda assets, which it sold to Total for $900 million.

Currently shares are trading around the 182p level and a market cap of around £2.5 billion, but I can see plenty of upside potential from here if

UK Investor Magazine — 8 — November 2017

oil prices remain strong.

to appraise, and there are plenty of other oil companies with a similar market cap of around £90 million that look to be far more risky to me.

Lekoil (LEK) has been a great illustration of how difficult it can be to operate in Nigeria, even when the company has some very well connected people working for it, and just how long things can take there.

But now it is in a situation where production at its 40% owned Otakikpo field is starting to ramp up towards the 10,000bopd production target for phase one – at the last operational update in midSeptember it had risen to 7,000bopd, compared to an initial production rate of 5,000bopd at the end of February, and had averaged 5,500bopd up to the end of July.

In addition there is upside potential at the OPL310 field, where it has a 70% interest and the Ogo-1 exploration drill back in 2013 made one of the largest new discoveries anywhere in the world that year. Analysis of the well data gave gross recoverable resources on a P50 basis of as much as 774mmboe, and it is now working on a plan to properly appraise the field as the next step. Production is still a long way off here and there is plenty of risk, plus it remains to be seen what sort of deal can be done to appraise it and whether a percentage of the field will be given away to do so, but if this was to prove a success there is huge upside potential for the company.

The last set of financials for the company up to the end of June look awful at a glance, with a net loss of over $14 million, and a gross profit of just $863,867 from the Otakikpo production.

But a closer look reveals that a significant amount of that was down to costs relating to the start of production at Otakikpo – including a $4 million production bonus payment – coupled with an initial low level of production, so I would expect the situation to improve.

At the end of June the company did still have $6.4 million in the bank, and the liquidity statement in the accounts expects that it will have enough money to cover at least the next 12 months.

The share price is currently close to the lowest that it has ever been, at around 16p, and I think that it presents a buying opportunity for a long term hold. There are still risks here, but at least it is producing and already has another discovery

There are times when it can pay to be patient and just buy and hold, and although production is still a fair way off at Hurricane Energy (HUR), I believe that is very much the case with this company.

Back in the summer the company announced that it had raised $220 million through the issue of convertible bonds and a further $300 million from a placing at 32p, in order to install an early production system at its Lancaster field in the West of Shetland area.

The FPSO for this is now being worked on at a shipyard in Dubai and it is expected to produce 17,000bopd when production begins in early 2019, assuming everything is on schedule. This is just the first phase of developing the field, which has 523 million barrels of 2P reserves and contingent resources currently in place, and it will provide the data need to develop the field in full.

Many were upset about the way in which the many was raised, but I still think it was a good move by the company as it has allowed it to retain 100% of the field.

On top of Lancaster, the company has also successfully drilled a well at Lincoln and the data suggests that it is likely to be part of a large basement feature which is connected to the as yet undrilled Warwick licence, and a CPR giving resource estimates is expected towards the end of this year for the whole Greater Warwick area (incorporating both Lincoln and Warwick).

Given that you can currently buy at slightly under the price that funds were raised at, I think 31.75p offers a great opportunity just to buy and hold, as I very much doubt it will still be trading down at this level when first oil is achieved from Lancaster.

UK Investor Magazine — 9 — November 2017

Banning Guns in America won’t work Writes Tom Winnifrith

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he latest mass shooting in Texas was curtailed when a law abiding citizen pulled a gun from his car boot and shot the assailant. Had the attack happened in liberal New England there would have been no saving grace, no-one would have had a gun in his car and the killer would have killed more people. The calls from the liberal left are to ban guns. It would not work.

There are at least 300 million firearms floating around the United States. Hypothetically if the Government tried to seize the lot it would no doubt find most law abiding citizens - who will never fire except in self defence - handing them over. The psychopaths and the criminals would, of course, hide their armaments and not hand them over.

They would carry on shooting and the innocent would have no way to protect themselves.

It is odd that the very same liberals who argue that prohibition of alcohol failed in the 20s and that the ban on drugs is failing today, wish to ban guns. The argument on drugs is that prohibition merely encourages crime and pushes up prices but you can still get drugs very easily across the states. That thesis is correct - the war on drugs is a disaster. The same would be true were guns to be banned. Criminals would still own them and trade them, happily selling them to nutjobs as long as they paid. The Texan killer should not, under current laws , have been allowed to buy. Officials allowed him to buy as they made an error. Put gun distribution in the hands of criminals and anyone will be able to buy. It will be easier for nutters to get guns.

But let us humour the liberal fantasists and say that every gun in America could be removed.

Would it then be a safe country. Ethan Epstein in The Weekly Standard notes: It’s true that roughly 11,000 Americans are murdered each year by gunshots, according to the CDC. That’s a rate of 3.5 deaths per 100,000 Americans.

The total homicide rate in the U.S., meanwhile, is 5.0 deaths per 100,000, meaning the non-gun homicide rate is 1.5 per 100,000 Americans. And here’s the thing: at 1.5 per 100,000, our murder rate is still higher than many of our peer nations.

Sweden’s murder rate is 1.15; Denmark’s is .99; Australia’s, .97; Germany and Greece each have murder rates of .85 per 100,000.

Spain comes in it .66, Ireland at .64. Japan’s

is an amazing .31 per 100,000.

So even if we removed every gun homicide in America, we would still be significantly more violent than other countries. And in a way, that’s much, much more disturbing than the fiction that America’s violence problem is one of technology, and not of deep societal rot.

You can bet that some of those killing today with firearms would kill with another weapon. And so the US murder rate even with all guns gone would still be way higher than the rates anywhere else in the West. I am afraid that the US is just a dangerous place for reasons that we can discuss at another time.

But the liberal fantasy would not work. Those who want to kill with guns would not hand over their weapons and indeed would by more guns from criminal dealers during the liberal prohibition so the US murder rate would almost certainly be unchanged by banning firearms. It is just that the innocent would be unable to defend themselves.

There are ways that the murder rate and gun crimes could be reduced. Too much of that crime is ( all too often black on black) related to the drugs industry. Ending prohibition there and allowing the state to sell drugs in a safe and regulated way would make a real impact on crime in general and gun related crime in particular.

Gun crime is also concentrated in poor urban areas where, sadly there are also disproportionate numbers of blacks. It is not because they are black that they become killers or victims but because they are poor. The gap between rich and poor widened sharply under Obama thanks to the post 2008 asset bubble created by QE and ZIRP. Closing that gap means deflating the bubble and getting America investing in real assets, real industry not just speculating on Real Estate or Wall Street penny stocks and daft Unicorns. That would be a painful re-adjustment but since most of the pain would be felt by those who have benefitted from the bubbles not the poor it is one that needs to take place and should take place.

Those are perhaps wider issues but the next time Piers Morgan and other naive innocents appear on TV ranting about how to make America safe simply by banning guns just be aware that such folks are, at every level, just plain wrong.

This article first appeared in Tom Winnifrith’s weekly newsletter the Tomograph.

To register (for free) to get the Tomograph emailed to you go HERE

UK Investor Magazine — 10 — November 2017

Next - waxing and waning just like the UK economy

By Chris Bailey

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ack in mid-September I told you to take your trading profits on Next (NXT) at around fifty quid a share. The recent trading update highlights again that currently the only way to play even UK retail names with good market shares, decent balance sheets and a propensity to chuck out dividends and undertake share buybacks is with a trader’s hat on.

Next’s trading update is a classic insight into the UK economy today. For all good stuff about a 1.3% year-on-year increase in full-price sales in the three months to October helped by a decent bump up (+13.2%) in revenues at the online Directory business, sales in the High Street branches fell by over 7%. And in terms of profit the company now expects a full-year generation of between £692 million and £742 million, compared to earlier estimates of £687 million to £747 million. Raise the lower end of the range... but lower the top end...so very UK economy 2017, where one piece of good data is closely followed by a shabby one.

The day after the tgrading update the B of E raised interest rates with the most fascinating aspect of that media frenzy being Governor Mark Carney’s attempt to justify why the cost of borrowing should go up given negative real wage levels and patchy consumer and business certainty levels. He argues that all he is doing is partially reversing the extra policy stimulus enacted after the Brexit referendum result last year. As St Augustine noted many years ago: ‘Give me chastity and continence...but not yet’.

The equivalent of Carney pointing out that policy is still super loose and so a little tilt at the monetary policy tightening tiller does not really matter is Next highlighting the weather. Funny how pub sales and outdoor theme parks were bemoaning a shabby second half of the summer weather wise whilst Next observes that after this benefit...there was a second warmer spurt that hurt sales: ‘Sales performance has remained extremely volatile and is highly dependent on the seasonality of the weather. In August and September sales were significantly up on last year, as cooler

temperatures improved sales of warmer weight stock. The change in sales trend came at precisely the same time UK temperatures became warmer than last year’ Blaming the weather is the last recourse of the rogue and not really that becoming of a company which overall is a profitable and sustainable business which fits the criteria I set earlier for the type of retail stocks you should like. The final filter though is the trading opportunity and Next is a £40-50 range bound stock. After the dump on the statement its shares are in the middle of this range and frankly this means you should not bother. In UK retail plc opportunities today, act on even the good companies only at moments of extremity because the general economy nor the Governor of the Bank of England are going to be bailing out the average UK consumer soon.

And as for Christmas trading scope...bah humbug

Chris Bailey puiblishes Finacial Orbit. This article first appeared on ShareProphets.com

UK Investor Magazine — 11 — November 2017

Three sells for Christmas

By Tom Winnifrith

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ah Humbug. Stuff the Santa Rally. Well actually it is we bears who are being well and truly stuffed right now. The world has simply gone insane. Luke Johnson expressed what is going on very eloquently in the Sunday Times: “When I look at the irrational exuberance being displayed by backers of Bitcoin or many tech unicorn companies, all I can see are quasi-Ponzi schemes. Some of the unicorns will become real businesses, but I suspect many will never succeed and their shareholders will lose all their money.

They might disrupt existing industries, but that doesn’t guarantee that they will make profits. In 2014 there were 39 unicorn tech companies — by this year there were 170 emerging, unquoted tech firms worth more than $1bn. Really?

The value of Bitcoin has grown more than 30-fold in less than three years, even as endless copycat digital currencies have been launched. The top five such currencies are supposedly worth more than $200bn.

This is financial madness matched only by phenomena such as the tulip mania in 17th-century Holland or the South Sea Bubble in 18th-century London. They are all examples of voodoo economics, and indicators of enormously overheated markets. There is a dangerous euphoria among present-day investors, which is bound to end in collapse and despair.

In the final stages of a bull market, investment concepts become ever more farfetched. The most important characteristic of such schemes is that promoters can manufacture more of them instantly to cash in on the frenzy. Cryptocurrencies are almost wholly unregulated — which is part of their appeal — and entirely nonproductive. Fundamental analysis of them is impossible. Any criticism is met with: “You don’t understand.” Valuing unicorns and cryptocurrencies using any classic methods is mocked. But to me they are sheer punts, which will only perform assuming a bigger fool buys your shares.

Of course, unicorn investing is almost entirely carried out by institutions, which should know what they are doing, but I suspect most of the cryptocurrency gamblers are private investors, which makes

it altogether more scary. I have no idea if a correction or even a crash is coming, but with the punchbowl of easy credit being removed, the party is likely to end soon.

Ends.

Spot on. In such a climate shorting shares can be very painful indeed. Even nailed down frauds which are almost out of, other people’s money, can see their shares squeezed sharply higher. We bears are a persecuted minority and some of us have suffered enormous losses. Maybe I should do a Christmas appeal for the bear community? Maybe not. The madness will end and I fancy that it will end sooner than most folks think. As such there will be big gains next year and shorting slam dunk frauds even now should - ceteris paribus - pay off.

So here are three which could go pop at any time.

I start with MySquar (MYSQ) which is an AIM listed so0cial media and gaming company operating in Myanmar. It is also a fraud. Last summer it pumped its stock with a series of statements about average daily revenues which appeared to be roofing it.

But as of July 1 those sales collapsed so that the company was no longer at breakeven but once again burning cash. The company only fessed up to this in October. And we also know that the surge in sales came from non-core related party orders.

But the pump worked and on July the company got a bailout placing away. It knew that investors were buying on a false prospectus (those “soaring sales”) but went ahead anyway. That is fraud.

The boss at MySquar has been running businesses into the ground for his whole career and was nailed by American regulators for being a naughty boy. What is not to like? MySquar will run out of cash next spring and go bust as even morally bankrupt advisors SP Angel and Beaufort won’t arrange another placing. In a normal world Beaufort & SP Angel would have quit as the fraud emerged. They may still do so and that would be suspension and a month later the loss of the AIM listing. Fingers crossed that one of the advisors gets a moral compass for Christmas. The target here is 0p. The shares are now c2p.

Next up is Telit (TCM) which has also committed fraud booking sales through patently bogus

UK Investor Magazine — 12 — November 2017

distributors. That was under former boss Uzi Katz, a proven fraudster and fugitive from US justice. The new boss Yosi Fait sold all his shares when fully aware that the company would breach banking covenants and miss forecasts but apparently, on AIM, that is not considered insider dealing.

Whatever.

Telit has served up 3 profits warnings since August 7 coming up with three different excuses.

But sales and margins are clearly heading south and whatever it says about EBITDA (bullshit earnings) it is burning cash. It is drowning in debt and continues to breach bank covenants. Sooner or later the banks will either force a firesale of assets, a deeply discounted placing or just pull the plug.

What is not to like? At 147p; ( almost 200p below the price of a $50 million placing and £24 million of boardroom share sales in June), the stock is a standout sell.

Finally, an old favourite, UK Oil & Gas (UKOG) at 4.15p mid. This is not a fraud it is just massively overvalued. It has just managed to raise £10

million but the only backer it could find was a death spiral provider so that puts a rolling short on the stock.

Drilling at Broadford Bridge has been hit by numerous problems and we still have no real flow rates from any of its Weald Basin sites which cover a long enough period to be in any way meaningful. Indeed the last statement on Broadford Bridge made it clear that it may well only be a commercial runner with fracking and in the UK stockbroker belt that just is not going to happen.

Yet the current market cap discounts UK Oil & Gas generating £50 million + free cashflow per annum within a few years. There is no way on earth that its small scale onshore permits can deliver that.

This stock has been pumped by a combination of shameless promotion by CEO Lyin’ Steve Sanderson and the ignorance and naiveté of mug punters. In a bear market Lyin’ Steve can say what he wants but no-one will listen and this stock will collapse.

Tom Winnifrith’s

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newsletters.advfn.com/tomwinnifrith UK Investor Magazine — 13 — November 2017

the house view

A Santa rally on the way?

N

ot only does ShareProphets stalwart Malcolm Stacey believe in the existence of a money tree but he also believes in Santa Claus. Well not exactly. But each year he seems to place great store in the Santa Rally, a last minute end of year surge in stocks which lifts our portfolios and our spirits ahead of Christmas.

Some years it arrives. Some years it does not. This year in certain sectors notably blockchain - we seem to have been enjoying a Santa Rally for many months already. This can only be described as irrational exuberance and Luke Johnson sums up what is going on very eloquently on page 12.

So will shares race ahead in December? Maybe they will. Maybe they will not. Volumes tend to be thinner in the run up to Christmas as sensible folks enjoy the party season or opt to spend more time with their loved ones. Or failing that, with their family. And thin volumes can mean that share prices, especially of small caps, where volumes really will dry up, move sharply in both directions.

Our view remains that the market is more than fully valued. PE’s are near record highs yet we saw, in the recent budget, a reduction in UK GDP forecasts which can only mean lower corporate earnings growth. The risks - notably the record levels of consumer debt and record low levels of consumer savings - seem nearly all to be on the downside. As such it will not surprise you that we do not advocate buying shares aggressively per se, and not even ahead of Malcolm’s Santa rally.

Indeed we would go one step further. If there is a Santa rally take that as an opportunity to reduce your equity exposure and up your cash weighting.

This is a general point but also a company specific one when it comes to small caps. If you are lucky enough to own a stock that, for whatever reason is roofing it and attracting buying from desperate momentum traders, view that as a liquidity event, a rare opportunity to sell out at an inflated price when there are buyers around.

Bah humbug. Santa does not really exist but if he serves up a rally for Malcolm you know what to do.

UK Investor Magazine — 14 — November 2017

Saturday 21st April 2018 | London Save the date!

UK Investor Magazine — 15 — November 2017