April 2017 – Running Tip P&L

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


In the interests of absolute transparency I record all my share recommendations and produce a P&L in % terms on an ‘Inception to Date’ basis. Unlike a lot of ‘tipsters’ my trades also include a % adjustment for bid/ask and transaction costs.

I will also continue to state my positions at the end of all company specific articles too.

April 2017 ROLLING P&L

Here is the summary as at 30th April 2017. The average stock tip has delivered 24% return Inception to date, with 88% of my 27 tips in profit. On an annualised basis the average tip is 366%.

As was the case with March, the principle detractors are is my short call on Sterling Bonds (SLXX) and longs on Ovoca Gold and Berkeley Energia (OVG). On the longs I currently on Ovoca Gold ‘under review’ as I made a critical mistake in not fully reflecting on the size of the director holdings, which indeed give them a blocking share. This means poor performance is tolerated and chances of shareholder activism are limited, I have had no response from the board despite my best efforts to contact them despite by best efforts. The share price is still significantly below book value but it is hard to see a catalyst for a re-rate towards fair value when the board refuse to pull their finger out of arse…

Regarding Berkeley Energia (BKY), the market was spooked by a bearish broker note, the exit of BlackRock as an investor (likely following the research note) and the lack of further financing news for the completion of the mine. I wrote an article a few days ago here explaining why I still believe a share price target of 71p is achievable though.

Regarding Sterling Bonds; I have seen nothing to indicate that my belief of a due correction is incorrect. Patience required here in my opinion.

On the portfolio boosting side, Sirius Minerals looks finally clear of the placing overhang and the share performed well on positive construction news and a move to the main market. The EasyJet position was closed in the month after reaching my target and returning investors a respectable 18% in 2 months, i.e. 98% on an annualised basis.

The full report is here:

04 Trading Record

Click Here to Download Full Trading Overview 

 

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Berkeley Energia, recent weakness in share price. Is it still a buy?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


I covered Berkeley Energia (BKY) back in October 2016 and it has regrettably been one of my most disappointing tips since I started writing on this website. Back then I tipped the share at 48p with a target of 80p. As at today, May 14th 2017 the share price still sits around the tip price, at 51p.  The share price did actually react strongly through to the end of January 2017, touching an intra day high of 71p, since then the price has been on a downwards trend though, reaching a low of 41p last week, despite rallying strongly again since. In this piece I take a look at what has happened since my initial tip and try to assess whether I still expect the Berkeley share price to go nuclear…

QUICK FACTS

Berkeley Energia is focused on bringing its 55 Million Pound (lbs) Uranium mine at Salamanca, Spain into production. I refer to this as the ‘construction project’ throughout. This project is expected to be completed in 2019 with the first Uranium production expected towards the end of 2018. The company states project economics are strong even in the continued low uranium price environment. Major hurdles left on the project prior to full construction are the financing and the final permits. The company also has some interesting ‘near mine’ exploration prospects which could bolster the economics further.

The Share Investors full research report can be downloaded here, this is an extensive research pack, which complements this article for the ‘number connoisseurs’ amongst you.

Snapshot of data as at May 12th 2017:

Current Share Price 51p
All Time High 71p – 17th January 2017
52 Week Low/High 71p – 17th January 2017
30.2p – 16th May 2016
Market Capitalisation £139m
Enterprise Value £116m, includes Net Cash £23m
Fully Diluted Market Capitalisation £139m, some options outstanding
ShareInvestors Risked Valuation £251m, 0.71p per share (40% upside)
PE/EPS N/A
BKY Share Price.png
Fig 1. 5 Year Share Price. Source – Yahoo Finance

THE RECENT DEVELOPMENTS DISSECTED…

Before you proceed, please familiarise yourself with my earlier piece here which will give you a gentle introduction to the company.

You’ve read it… on to the recent developments then:

1) Further Zona 7 Deep Exploration Success…

The company announced in Mid March 2017 that the company had yielded further success with the exploration drill bit. The company revealed that further additional high grade intersections has been encountered below the Zona 7 deposit through two recent exploration drills, Z7M-376 and Z7D-379. This complemented the previous exploration announcements on September 2016 here and January 2016 here, giving a total exploration program of 17 holes.

The exploration drills reported this time around reported grades as high as 0.38% (3,761 ppm) of Uranium, albeit for small sections. I’m not a geologist and I struggle to interpret all of the drill results and corresponding grades, but the overall conclusion when assessing the entire exploration programme is that it appears that grades seems inline with the existing Zona 7 deposit, which forms part of the up and coming construction project. This is important as the findings could mean that we have one or both of a) an extension of the existing envisaged mine life and/or b) potential to extend the production rates become distinctly possible.

Berkeley Energia have kindly supplied a graphic in Figure 2 for the non geologically minded which helps me at least visualise the above results somewhat showing an overview of the various exploration drills to date. Drill Z7R-360, drilled in September 2016 is highlighted in blue together with the corresponding grades at each depth. Figure 2 also outlines how the deposits could look, with the existing Zona 7 forming part of the construction project being the deposit closest to the surface in figure 2:

z7-1024x7201-1024x720.png
Fig 2. Zona 7 Exploration Drills. Source: Berkeley Energia

The results are clearly promising but it is also worth nothing though that the company has spent around $A20m (£11m) on exploration work in 2016 and 2017 and thus rationally cannot keep going with this when the company has an expensive construction project to fund in situ. The company though informed us in the same RNS that:

…discussions have commenced with strategic partners to fund an exploration joint venture designed to delineate additional resources to extend the mine life or expand production.

The partners would be expected to bring extensive multi commodity exploration experience and the very latest expertise that could be applied to the large body of structural and mineralising events at the project.

It seems like a smart move, the company does wish to continue to try to prove up additional reserves in conjunction with the completion of construction but thinks the best way to achieve this is to bring on a strategic partner by forming a Joint Venture (JV). The substance of how any Exploration JV will look; we don’t know, I suspect though to conserve cash for the construction project that Berkeley Energia will be looking to enter some sort of ‘carry’ arrangement where a partner will get an equity share of the exploration acreage in exchange for covering the future exploration costs. A historic back costs rebate could also come into play which would obviously go towards the financing needs of the Construction project.

In summary this exploration area remains an exciting upside, especially when the company reminds us that just 7% of the company’s 1,160km2 has been explored so far. That said it is early days and pre JORC (independently approved resource/reserve estimate), so it is hard to assign a value from an academic perspective of much beyond the back costs at present. Things could move quickly though if a JV is formed and exploration continues to yield success.

2) Construction gathers pace…

The company provided a construction update in late April here. Berkeley Energia told us that everything is on track, the majority of the land acquisitions have been made and key items such as the crushing circuit are being fabricated as we speak(read). Also rather encouragingly the order of the first items associated with the crushing circuit came in at around a 20% lower cost than was anticipated in the Definitive Feasibility Study investment case.

Further detail was also added on the construction progress in the Q3 financial report, although the only item of interest for me was the discussion around permitting, buried in the details the company reminds us that:

The Company is fully permitted for all the work it is currently carrying out in preparation for full construction.

With the Mining Licence and Environmental Licence already obtained, the next approvals comprise the locally issued Urbanism Licence and the Construction Authorization by the Ministry of Industry, Energy and Tourism for the treatment plant as a radioactive facility, and which are currently in process.

The permitting is the only item at present which is making me nervous about the ‘project execution’. There have been some negative stories in the local press recently, which is fairly unsurprising to me, for anything nuclear it is pretty much ‘par for the course’ to receive objections.  However, could continued bad press influence these permitting processes? CEO Paul Atherley addresses this in the recent investor Q&A describing various pieces of ‘fake news’ from local Green protest groups. Paul also reassured investors that on top of dismissing the protests as fake news ‘a la Donald Trump’ (my words), the company is engaging with local stakeholders and ensuring the elements of the firm’s Corporate Social Responsibility (CSR) programme are also being clearly communicated to the community. So hopefully this is something the company can control.

Last but definitely not least, the company also reminds us it is still working hard on raising the $200m or so ($95m initially) it needs to finance the construction project, but as yet it has nothing to update us on. This is not a major issue as cash balances look healthy at $38m as at March 2017 and are enough to get us under way with construction…

THIS ALL LOOKS ROSY, SO WHY HAS THE SHARE PRICE DROPPED?

There have been a few events to note since the share price hit an all time high of 71p in January 2017. Global X Uranium Fund purchased an initial 5% which latterly moved up to 6% of Berkeley Energia after the company was included in the Solactive Uranium Index. This index aims to track the total returns from the Uranium industry and can be seen as the closest proxy to the uranium price (as mentioned in my earlier piece there is no spot market for Uranium). This ETF has had a 52 week high of $19.33 and a low of $11.68, VOLATILE! The issue of including a relatively illiquid stock like Berkeley Energia, i.e. where just 0.19% of shares change hands on the average day in a much more liquid ETF is that it can create big price movements in the underlying issue…

This is exactly what Paul Atherley claimed had happened in the recent investor Q&A. Paul notes the recent spike and retrace in the Uranium spot price (spot being really an approximation published by a consultancy firm) which caused redemptions in the ETF and forced the sale of underlying holdings, including our beloved BKY. The logic does appear to make sense, albeit that it doesn’t completely stack up for me as we have had no TR-1 for Global X since the notification that they had 6% here.  In addition what Paul fails to acknowledge is that we have had what appears to be a disposal of shares from BlackRock here, taking them under 5% and therefore beyond the reportable requirement. It is probably the safest assumption to assume they now have nil shares. I do note that Berkeley Energia are still proudly showing BlackRock as a partner in the latest company presentation though, so perhaps I am wrong.

The other catalyst for the share price was a HOLD recommendation and Share Price target of just 60p from Liberium Capital, which was issued Late February. I have not been able to view the research as it is only available to paying institutions. As far as I am aware though the research was independent and thus should be taken note of, furthermore this target was published shortly before BlackRock made their disposal. The share price was actually around trading at 60p at the time of the Liberium research being published, but it may have convinced BlackRock that BKY was fully valued, triggering a sale. Disposing of 14.75m shares in an average daily volume of 0.5m is not easy without knocking the share price back a bit!

In summary there hasn’t been any negative company news of note and the share price was likely knocked by technical factors, i.e. big institutional sellers rather than on fundamentals. Note the share register still reads well, with big names such as Fidelity holding strong so nothing which worries me outright.

The price actually reached as low as 40p but has though started to recover this week, with the share price recovering back above the 200 Moving day average to close at 51p on May 12th 2017. So does this mean there is now a buying opportunity? Lets look at the valuation…

WHAT IS AN APPROPRIATE VALUATION FOR BERKELEY ENERGIA?

For a company with a market capitalisation of just £130m the stock is fairly well covered by brokers. (Hats off to Paul and the team, no wonder the IR team have been nominated for IR team of the year at the coveted stock market awards!).

Brokers have set targets as outlined in figure 3:

BKY Brokers
Fig 3. Berkeley Energia Broker Targets. Source: Hargreaves Lansdown

I pre warn you I get a little technical from here on…

As you can see my own price target is 71p, which is also outlined in a detailed financial model here, for those who want the detail. For those who don’t want to wade through 50 pages of figures, here is the ‘sum of parts’ valuation for the Equity:

bky dcf
Fig 4. Berkeley Energia Equity Valuation. Source: ShareInvestors.co.uk

I’m not going to explain my calculation in any detail, but feel free to contact me or leave a comment below and I would very happy to explain it further to any curious folk. At a high level though I have been more prudent on the Uranium Prices than the company and particularly in the research note from WH Ireland, the house broker. The only evidence we have for pricing so far is an offtake agreement with Interalloys for 2m/lbs over 5 years, which has an average fixed price of US$43.78. I have therefore taken this as my Uranium price assumption and then made an allowance for general increases in Uranium prices. There are of course people much cleverer than I who are predicting uranium prices of US$65 per lb from 2020, which I discussed the merits of in my other piece here. To me though forecasting commodity prices is inherently problematic and thus I always like to take a huge margin of safety, hence sticking with the price we know – afterall the price is the price until the price isn’t the price.

The other key assumption behind my valuation is to assume the project is funded 50% equity/50% debt, which obviously involves the number of shares that the NPV is being over being larger than the current number of shares in issue. I am well aware of course that the intention is to bring in a partner, but any partner will be taking equity type risks and therefore in my view will want equity type returns. I don’t believe swapping equity for partner stakes will materially alter the valuation either. It will though be preferable for the company to try to bring in a partner at project level as opposed to issuing fresh equity in ‘TOPCO’. The reason being that whilst the NPV per share differential will be immaterial in the short term, in the long term as the company brings on more projects more of the equity value will be preserved. The financing package is discussed in more detail below.

Final key assumption is that I have applied a risk factor of 0.7 to the Salamanca Construction Project Valuation and 0.3 to the Inferred Satellite resources valuation. These risk factors are actually more generous than WH Ireland. Instead I have been more conservative in my commodity price and finance assumptions, my risks factors therefore represent remaining construction risk and the appraisal risk for the satellites respectively.

I also include something in Figure 5 for those who are not au fait with NPVs, DCFs etc. This shows how the Free Cash Flows and Dividend Yields look based on my valuation, which I hope is informative for those without all of the technical knowledge:

bky_FCF
Figure 5, Berkeley Energia FCF and Dividend Yield Projections. Source: ShareInvestors.co.uk

UPSIDES AND DOWNSIDES TO THE VALUATION

As mentioned above, my base case valuation is 71p per share, but there are some core upsides/downsides to the valuation you should take note of:

1) Uranium price

I have performed a sensitivity analysis in Figure 6, showing the effect of CAPEX budget increases and the long term Uranium price on the overall company valuation. Given the low CAPEX required to bring Salamanca to production it is of no surprise that even a 20% increase in the CAPEX budget only reduces the risked valuation by 5p a share, i.e. from a base case NPV per share of 71p to 66p.

The long-term uranium price though has a huge effect, a long term uranium price of $US20, i.e. somewhere around a current ‘spot’ price would yield a risked valuation of just 6p per share, yet a price of US$65, i.e. the figure quoted by the ‘experts’ would double the risked valuation to 141p.

bky uranium vs capex
Fig 6. Sensitivity to NPV of CAPEX Overuns and Uranium Prices. Source- ShareInvestors.co.uk

As Uranium is negotiated on long-term offtake contracts though, any increases in Uranium spot will not necessarily translate into the valuation…

2) Securing Further Offtake Agreements

There becomes a slightly double-edged sword as result of supplying Uranium on long term contracts, the company can sign more offtake agreements and protect more equity value (see the financing discussion next) but signing too many offtakes could potentially cap future returns in the current very low uranium price environment. There is no right or wrong answer here and unfortunately for Paul Atherley I am sure Captain Hindsight will be out in force on the bulletin boards at some point in the near future.

To illustrate the current position, here on Figure 7 is an overview of current offtake agreements vs. total production. As you can see, very little has been committed though offtake agreements, in fact just one offtake agreement has been signed to date:

bky_ofttakesvsprod
Fig 7. Production vs Offtake Agreements. Source: ShareInvestors.co.uk. Note – production profile is slightly different to that published by company.

The more bankable offtake agreements are in place, the more likely the company will be able to include a greater proportion of debt in the financing package. I haven’t done the sums but in a perfect world, perhaps locking in 50%+ of the first few years production would satisfy debtholders whilst still giving Berkeley Energia upside to the alleged higher uranium prices post 2020.

But how critical to the equity valuation is it to secure more debt and less equity funding?

2) Financing Mix

The financing mix is pretty important and explains why the company has made it clear to investors that they will aim for the least dilutive form of funding. Note for the purpose of the below I consider convertible debt and project level equity finance tantamount to equity (as already explained above).

In summary, assuming an interest rate of 10% on debt, I calculate an unrisked NPV per share of 86p for 0% equity (100% debt) and 64p for 100% equity. My base case assumed a 50/50 capital structure giving a 71p unrisked NPV Per Share.

bky debt equity
Fig 8, Sensitivity to NPV of Differing Debt/Equity Ratios. Source: ShareInvestors.co.uk

As already mentioned I feel further bankable offtake agreements would be needed to secure 100% debt funding. Even then Berkeley Energia needs to borrow approximately 200% of its current market cap to fund the complete construction at Salamanca, so this is no small amount, but I do still feel a 50/50 debt/equity mix is achievable. That said It will be challenging, I very much doubt the debt market is awash with potential lenders to uranium projects,

Final comment – It is also worth observing that even paying a very expensive 15% interest rate on debt is still preferable to taking on equity based on my calculations.

3) Consenting Delays

The construction project I am told is fairly straight forward from an execution standpoint, therefore the only forseeable material holdup I can see is a delay to the permitting process, as discussed above. The very worst case scenario would be for a denial of the remaining permits, spelling the end of the project (Share Price=0). It is hard to see this given the 2,500 direct/indirect jobs the mine is claimed to create. That said the Spanish are not known to have the smoothest bureaucratic processes and a lengthy delay does indeed still have the ability to be a material value destructor.

4) Exploration and Inferred Resource Progress

Again, covering old ground but as further work on exploration progresses and more of the inferred resources can be upgraded to reserves takes place then further material upside on the valuation is probable.

SUMMARY

BUY – 71P Target (40% upside)

It should be noted that Paul Atherley and team have done a superb and professional job and have made rapid progress developing this asset in the last two years. The calibre of the management attracts me immensely to the share. I have though gone beyond my ‘gut feeling’ and prepared a fairly conservative valuation and still come up with 40% upside from here.

What I particularly like about the share is that on top of the clear value in the ‘base case’ there are some serious re-rate levers here too in a) the uranium price but also with b) the near field exploration work. On the former it is hard to see too much downside to the uranium price from here, but obviously it works both ways and the uranium price also has the potential to be a serious de-rater too and if the ‘spot’ price doesn’t at least climb back to $US30 it is hard to see too many more offtake agreements being signed at north of $US40.

Berkeley Energia is still what I consider a speculative investment, so don’t completely fill your boots but I believe the risk/reward to be favourable at present. Ceteris paribus, I expect this share to return to 70p by the end of the year (if not much sooner), save for a disappointing financing package, a permitting catastrophe, a black swan or a failure in any meaningful recovery in the uranium price.

Good luck!


Disclaimer – I have a potential conflict of interest regarding the company Berkeley Energia. I have a LONG position estimated at 4% of my Net Assets. I receive no other financial or non financial incentives for publishing the post. I will not initiate any further positions in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

Basic stock technical analysis and charting techniques

Many traders rely solely on Technical analysis to give them the indicators they need to press the BUY or SELL button. As I outline in my Investment Approach, I do not place a huge reliance on technical analysis signals when making an investment decision, the simple reason being, technical analysis works until it doesn’t. In the long term the stock price always reverts back to the risked discounted cashflow generated by the company. In my view to make money from the stock market consistently a deep appreciation of the fundamentals is therefore required.

That said the technical picture is the aggregate of the other market participants views so it shouldn’t be ignored either. Technical analysis can therefore be a useful complement to deep fundamental analysis and on that basis it can though help you to take better positions and therefore squeeze out additional margins on your investments. Moreover, used correctly the charts can also help you identify resistance points in stocks and momentum/trends in either direction which can provide a very useful sanity check on the logic behind the fundamental analysis that you (should) have already done and the resulting valuation you place on the stock.

I am not an expert in Technical Analysis, nor do I desire to be, but I will introduce you to the techniques I use:

First step, get access to charting tools.

You don’t need an expensive charting package, there are many descent free services available which cover UK stocks. The basic techniques (and some more advanced) are all available with IG Index Stock Broker Accounts. This service also allows you access to Level 2 data and Direct Market Access on a range of markets, including the UK. I will come to these two topics in a future blog post but there are lots of information available on both only a google away. If you are happy with your existing broker you can also grab a free account with Vox Markets which also has basic charting tools available amongst many other features, which I covered here.

So anyway by now you should be staring at a blank chart, so now on to some techniques you can apply…

THREE CORE CHARTING TECHNIQUES 

I will use British Land (BLND) as a company to work us through the following techniques. I chose this company as it has had some interesting moves, it is also a stock I don’t know well, so it should avoid any bias creeping into my analysis.

1. Plotting the General Trends

The trend is very important to establish and if you do just one piece of technical analysis then this is the one you should do before making your final investment decision. It is an uncomplicated approach and it involves simply plotting a line on the highest highs and the lowest lows in the period.

This analysis will reveal one of three outcomes. An uptrend, which is a series of higher highs and higher lows with a downtrend showing the opposite picture. A sideways movement will show no clear trend. The time period you perform this analysis is also important, with in technical analysis a long term trend is seen as one over 1 year and an intermediate trend over one – three months with short term trends being less than one month.

My suggestion is you plot the trend over at least 1 year, but also look back further. The results of the this analysis is important as it shows the general direction of travel. Once this is established then it is important to ask some questions. If you are considering buying against a long term downtrend, why? What do you know that is against the general trend of the market?

Taking our stock British Land (BLND) and looking back 14 months from today, i.e. to January 2016, I have plotted a long term trend line and intermediate trend line as follows:

BLND Trends.png

The results show a long term downtrend and an intermediate trend down. There is a short term trend up in April which we will come back to this when looking at Resistance and Support levels as this deserves attention albeit it is not an established change in trend at this stage.

It is pretty clear here that the long and medium term picture is a downtrend. The stock has been unpopular and clearly a BUY here would be contrarian. I won’t attempt to do any fundamental analysis, but it is worth noting that the company is a part of the ‘BREXIT Basket’. As British Land is an owner of commercial property its’ fate is seen linked to the strength of London’s business sector. On this note you will see I have not tracked the lowest lows that were achieved in the immediate aftermath of BREXIT, which would result in a much deeper trend downwards. Perhaps charting purists handle these events differently but given this was a short term movement triggered by a ‘black swan’ event it I feel it distorts the picture.

2. Resistance/Support levels

The resistance and support levels are areas where supply/demand kicks in and the share price struggles to get past a certain price, i.e. a restitance level or fails to fall below another price, i.e. a support level. This analysis can identify a trading range which can be profitable to trade within and it could also indicate that BUY orders should be parked when the price is approaching the resistance level. It also should prompt the question as to why the market buys and sells heavily at certain points and whether you concur with these BUY and SELL targets based on your fundamental research.

This method involves drawing horizontal lines on the chart where the same highs and lows have been achieved repeatedly and/or where a clear sideways pattern can be observed.

Below is the chart for British Land (BLND) from October 2016 to April 2017, which is a smaller snapshot of the longer term chart above.

BLND Resitance Support

The chart shows us that the share had been trading between October 2016 and Mid April 2017 between 575p and 640p, i.e. a 11% trading range. Interesting features from above are A, B and D when the price approaches the support and rebounds from this level. Point C shows the first attempt to breach the resistance in late December 2016 and point E shows this resistance level was finally breached in late April, 4 months later.

We are looking at a fairly short period of time, but it is important in the context of British Land as this period follows the period immedatedly after the BREXIT vote and thus can be seen as the ‘new normal’. Questions to ask yourself from this analysis are why does the market sell off in 640p region and buy in the 580p region? Where are your BUY and SELL Targets? The resistance has though just been broken and the stock is currently trading at 650p, why? What facts have changed? If momentum is established, the theory goes that the stock is more likely to continue in the same direction, particularly after breaching resistance, so should you SELL at this point?

3. Simple Moving Averages

A moving average is a trend line of sorts. The moving average is the sum of all closing prices over the period, divided by the number of days in the period. So the 20 day moving average on the 28th January would take the sum the closing prices over the last 20 trading days and divide by 20. For example, If we assume the price was 550p for the first 10 days and 600p for the next 10 days then the 20MA would be 575p on the 28th January.

Moving Averages can be used to identify the breakouts or reversals and two particular terms or features can be noted to assist here. A price crossover is where the current share price breaks out from the moving average. The longer the number of days in the moving average the larger the assessment is against the current share price. A Moving Average crossover is another signal, this is where one Moving Average crosses another, for example a 50 day moving average crossing over a 200 day moving average.

Let take a look at British Land again…

BLND Moving Averages

You will note some features from the discussion above, i.e. point B is a price crossover, i.e. the 200 day and 50 day Moving Average is crossed in Mid April 2017, which is also highlighted above in method 2, a break of resistance. There is also a Moving Average Crossover in late April 2017. This analysis very much supports the short term bullish move as highlighted above and the same questions should be pondered, i.e. is the long term trend about to turn? What facts have changed to support this move?

It is also worth noting point A, the BREXIT vote. The stock drops upto 30% below the 200 day MA. On the face of it this could look like a BUY opportunity but clearly this was as a result of the BREXIT vote so it is very important to assess the facts that have changed before diving in.

SUMMARY – What can we conclude on British Land from the Charts?

The long term picture is a down trend, the short term picture is a period of momentum. As mentioned above, the important part of technical analysis is to look for fundamental rational for the technical picture moving. This is why the technical picture should never be dismissed though, the aggregate of the other market participants have formed a view and it should be understood why. So in the case of British Land, If I were looking to take a position then the questions I would be seeking an answer to are:

  1. There is a long term down trend. Why? Is this suitable as a long term investment?
  2. There has been recent resistance and support levels established, what do these levels imply for the valuation?
  3. There is a short term period of momentum with key technical bullish signs, including break of resistance, price crossover and moving average crossover. What has prompted this increase in sentiment? Is there any potential to reverse the long term downtrend? If I am an existing holder should I ride the momentum to squeeze out some further gains or consider selling at this level?

I hope this is a useful overview of the merits of combining technical and fundamental analysis. I will do a fundamental analysis of British land in the coming weeks where I will incorporate the technical analysis and attempt to answer the questions it raises.

Happy Charting!

BKY Shares off 40% since recent high. MD Paul Atherley addresses in new video.

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


Soon to be uranium miner Berkely Energia (BKY) shares have come off a fair bit since the recent intra day high of 71p in late January 2017. The shares are sharply trading down at 43p as I write, a 40% fall. CEO Paul Atherley explains the potential reason for the fall back in the price, i.e. inline with current Uranium spot price. He also goes on to explain why short term movements in spot price are perhaps irrelevant to the current valuation.

I still like this company as I mentioned last year here. I intend to do a much more detailed research piece on the company in the coming days, but until then here is some output from the company itself…

https://www.brrmedia.co.uk/broadcasts/58fa26e1ad2a006c3094cce5/berkeley-energia-pre-construction-activities-advancing-at-salamanca

 


Disclaimer – I have a potential conflict of interest regarding the company Berkeley Energia. I have a LONG position estimated at 2% of my Net Assets. I receive no other financial or non financial incentives for publishing the post. I will not initiate any further positions in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

A dummies guide to spotting a PUMP AND DUMP on AIM

Anyone who has seen The Wolf of Wall Street movie will be familiar with Jordan Belfort (played by Leonardo de Caprio) and his exploits in ‘pump and dump’ boiler room scams involving US Penny Stocks. The movie is sadly based on a true story which took place in the late 80s and eventually let to Mr Belfort’s downfall, rewarding him with a 22 month custodial sentence for his scheming. The events may have taken place some time ago but the sophistication of these schemes has not changed much in the almost 20 years since, these schemes are very much still alive and kicking on many international markets, including the UK’s AIM market.

wolf-of-wall-street-48

A SUMMARY OF THE AIM PUMP AND DUMP

The AIM pump and dumps come in all shapes and sizes, from the well organised boiler room scheme scams to a very loose and decentralized pump. Many of the ‘pump and dumps’ now operate exclusively online rather than through the traditional cold calling method used during Mr Belfort’s heyday in the late 80s. I will focus today on the typical social media promoted ‘pump and dump’, which tend to be low level and unsophisticated, but that is not to say significant financial loss does not occur. The typical schemes have some some or all of the following symptoms and follow a certain pattern:

Which companies are targeted for the pump and dump?

Some market commentators tend to exaggerate the extent to which stocks are pumped and dumped on AIM. It is actually a very small minority of the 973 companies quoted on AIM. My own experiences would suggest there are only a handful of stocks under the complete control of the P&Ders at any one time. These stocks though are almost always micro cap ‘penny stocks’, i.e. stocks with a market capitalisation of less than £30m. This tends to mean that with limited shares in existence that the price will jump quickly with any liquidity.

The other criteria is a stock in a sector which lends itself to speculation, this means junior resource stocks, junior biotech and other blue sky technology stocks. These sectors are the ones that capture the imaginations of gullible private investors, the ‘willy wonka’ effect where investors dream of the hallowed ’10 bag’ i.e. returning 1000% or 10x your initial capital. Two recent stocks that fell victim to these schemes were African Potash (Booted off AIM to the limited liquidity ISDX market) and Cloudtag (Booted off, private and I would guess soon to be in liquidation). There typically also usually needs to be expected news flow to drive interest and speculation.

Stage 1 – The Pump Takes Hold

It usually starts by one or a few experienced ‘pumpers’ purchasing stock in a company. The experienced pumpers will have a large following on the bulletin boards and increasingly also on twitter. The pumper will normally go by an ‘alias’ and often have pictures of flash cars, money and other tacky photos as part of his/her profile avatar or wallpaper. You can spot them a mile off.

The pumper will write confirming they have bought the stock and usually post some ludicrous claims about the company concerned. I will invent one, company XXX:

Screen Shot 2017-04-21 at 15.34.15Rocket emoticons or a similar GIF is normally posted for dramatic effect.

The statements usually have some ‘tie back’ to official company news. For example, the 1bn barrels could be the gross oil in place and this figure multiplied by current oil price gets to £100bn. The pumper has though conveniently forgotten the resource recovery factor, the CAPEX needs, the OPEX and critically that the company XXX owns just 10% of the licence, let alone commercial chances of success for this pre drill prospect.

The other method is to quote ‘a rumour in the city’ to imply they have inside knowledge, which may or may not be true.

Stage 2 – The Pump is Maintained

The next step is for ‘Sub Pumpers’ to join in, they have probably already had reasonable success on other stocks just hanging off the coat tails of big pumpers. Sub pumpers will typically have a reasonable following too, perhaps 300 or so followers on twitter. They will also use rocket emojis…

Screen Shot 2017-04-21 at 15.35.34A common tactic of sub pumpers is to outline how difficult it is to buy shares, comment on the Buy price being about to move up based on the Level 2 order book or they might instead post charts prophesying how the share is about to breach a key resistance level. This plays on the human phycology that you are about to miss out on the golden ticket. Simple but very effective.

These posts may also be genuine and relate to good shares too, so it is not always easy to sort the wheat from the chav (chaff). The surefire way though is to ensure ‘sceptical’ is always your default mindset when investing in small caps. For example, the easy way to test whether it is indeed difficult to buy the share is get a quote on the stock from your broker, don’t go in blind. IG Stockbrokers are particularly good as they allow you to get quotes from the market makers irrespective of whether you have funds in your account. Try obtaining a £10,000 BUY and SELL quote. It is normally very easy to buy these stocks at any level but very hard to sell with any size. This implies there is limited real demand for the shares and sub pumper is lying.

Stage 3 – Peak Pump is reached

Once critical mass is gained a whatsapp or twitter private group will typically be created where all bulls will be invited to join. This is where naive and inexperienced investors begin to think they have the golden ticket, as in these forums they will only hear as to how fantastic the company’s prospects are. As a result they begin to tell the ‘offline’ friends, family and may even place large sums of their savings into the share. Significant volume is generated which can see sometimes 10-100x the average volume of shares changing hand in a day.

The bears will beginning to take note at this stage too, this includes experienced bearish investors such as Waseem Shakoor, Tom Winifrith, Gary Newman and many others. These guys usually highlight the flaws, or in the case of Waseem declare a short position. At this point the pumpers and ordinary investors who have far too much at stake will become aggressive and attempt smear campaigns. Any bearish posts will usually be reported on bulletin boards or twitter. This combined with ‘bulls only private groups’ means it is very difficult to receive any bearish commentary on the stock on question. At this stage the stock is likely to have achieved a valuation well in excess of fair value. This is the final stage of the pump and now it we are ready for…

Stage 4 – The DUMP.

The typical catalyst for the dump will be some sort of funding, usually a heavily discounted placing or other quasi equity issue. The price may have already come off a little ahead of the announcement as some participants in the placements (which may even be the same original pumpers) forward sell stock (sell stock with a delivery date in the future).

The dump can be horrific, for example the CloudTag Pump and Dump, dropped 40% on the day when the financing was announced. Those investors who bought into the Pump late could be nursing extreme losses over a very short period of time.

Once denial is overcome the usual reaction will be anger towards the various stakeholders in this order 1) The bears, 2) The board and 3) The broker. The individuals who actualy pumped the stock don’t get much flack. Quite often a lot of the social media accounts disappear often after the dump has landed and the cycle just repeats again…. Same tactics, different stock…..

REFLECTIONS

Pumping is grey area, how is it defined?

There is often a grey area with stock promotion, particularly for those in wave 2 or 3 of the pumping. The acid test for market abuse is ‘deliberate dissemination of false or misleading information’.

The issue is that some involved in distribution of information on bulletin boards and twitter might well believe what they are writing. The FCA Market Abuse Regulation does though not require the person engaging in such market abuse to actually intend to commit market abuse, however the FCA does define the below in MAR 1.8 as a factor to be taken into account in determining whether behaviour amounts to dissemination:

A normal and reasonable person would know or ought to have known in all the circumstances that the information was false or misleading, that indicates that the person disseminating the information knew or ought to have known that it was false or misleading.

It is though natural to be bullish on the stocks you own, I post positively about the stocks I own on twitter and on my own blog. The difference between blogers and other commentators such as I and the pumpers is that I genuinely believe in the investment case for the stocks I own and make considerable effort to verify what I post. I also have a financial background and post a transparent history of all my tips. On top of this I also outline the downside risks and make it clear to followers that this is not a recommendation to buy.

The FCA is not prescriptive on what is ‘false’ and ‘misleading’ but I believe the following factors are likely to be relevant if a case is bought:

  1. Posting content which you know to be false or misleading, which are deliberately designed to to make profit. As mentioned above.
  2. Correspondence proving intent to create a flase market. e.g. emails showing collusion between ‘pumpers’ and other documentation showing an organised ‘effort’.
  3. Your ability to impact the share price. If you have a significant following on social media or twitter then you have a higher degree of responsibility to verify your content in my opinion. Also important is the size of the company, with my 700 or so followers on twitter I can pump a FTSE100 company all day long, but it would not have a material impact on the share price. This does not make that activity moral though, as it still has the ability to cause financial loss to others.
  4. Selling your position whilst encouraging others to buy. It is natural to derisk some positions but to sell a large proportion of your holding substantially around the same time as promoting the share could be decisive factor as provide evidence as to whether there was an intention to make profit from the ‘false and misleading’ information or whether you had a genuine belief of the company as a long term investment.
  5. The level of financial gain made.

So Surely Convictions every week then?

Sadly there are limited convictions for ‘pumping and dumping’ on AIM. The FCA has limited  resources and simply does not have the time to investigate every case and naturally focuses on the market abuse at the higher end of the scale.

Unfortunately the best you can do for now is raise awareness of the ‘pump and dump’, which is the reasoning behind this blog post.

Are the companies concerned complicit?

There are four types of companies who find themselves those on the end of a pump and dump.

  1. Those directly responsible.
  2. Those indirectly responsible.
  3. Those who tolerate it.
  4. Those who extinguish it.

At the bottom end of AIM it is one of the CEO’s key roles to be able promote the company to enable it to raise money. The company leaking inside information directly to stock promoters is extremely rare though, two cases centre on African Potash and Cloudtag where both have been accused of lying in RNSs and therefore creating a false market. The information in these cases, if proven, also relates to deliberate dissemination of false information, albeit this is via the company directly rather than through a boiler room scam or a ‘pump and dump’

A source of inside information can also be from the city advisors of the company, i.e. indirectly. The broker arguably has the biggest conflict of interest in this context, they have an incentive to generate volume to enable the company to raise finance, and take a hefty commission as part of that process. This is of course is not sanctioned by the broker as a corporate but individual sales traders can lack the integrity and leak select information to known stock promoters.

Many companies tolerate the pump and dump, a single day pump and dump occurred on Fitbug where the company released a non regulatory news release (see article for details) which led to pumpers to propel the price to 550% in a single day. Rather than FITBUG immediately extinguishing and clarifying the news the company allowed the shares to trade most of the day before the NOMAD towards the end of the day pulled the plug and forced a clarification. The company followed up with a fund raise the following week on the back of this volume.

Some companies though immediately issue ‘speeding tickets’ when the share price rises on the back of no news – the right thing to do. Unfortunately though this is fairly rare and companies often let the share price get well ahead of fair value before taking any action.

Is this a victimless crime?

No. Some individuals recklessly promoting or pushing stocks on social media do not believe they are committing a crime. Ultimately though, selling stock in a false market to another punter is not a victimless crime. I don’t deny riding the momentum created by a ‘pumper’ can make you a lot of money, but there will always be someone left ‘holding the baby’ and the process is ultimately transferring wealth from the ‘Mugs’ to the ‘Pumpers’. For example, according to posts on bulletin boards some individuals who bought stock in Cloudtag at peak ramp have lost entire life savings. Think about that for a moment…

SUMMARY

The last year has seen some incredible gains on some small AIM stocks and whilst some of this has been as a result of renewed sentiment towards junior resource stocks on the back of a recovery in commodity prices, some I believe is as a result of an increase in the ‘pump and dump’ method.

Hopefully this piece though has given you an ability to spot when a stock is in the midst of a ‘pump and dump’. It should equally give you some insight into what is Market Abuse so you don’t inadvertently become a pumper yourself.

The pump and dump is not a victimless crime, it is a transfer of wealth from naive new investors to experienced pumpers.

Understanding the rules and intent of Director Share Dealings

I’ve been meaning to put aside a section of the blog for regulatory topics. There is a lot of misconception in the smaller cap investment community around certain FCA and Stock Market rules. Some of the rules around Statutory Director Dealings, Prompt Release of Inside Information and Notifications of Substantial Shareholder Interests can be complicated and hence are frequently misunderstood amongst retail investors.

I’ll start by covering Director Dealing, prompted by a twitter debate yesterday I had with a few people on this topic.

When Can Directors Buy and Sell Shares?

Directors, like any other shareholders must comply with Market Abuse Regulation (MAR) 1.3.2 on inside information. This regulatory mandates that Persons Discharging Management Responsibility (PDMRs) i.e. the company statutory directors in this context cannot deal when they are in possession of price sensitive information, i.e. information that when released to the public is likely to have a material impact on the share price of the stock in question. A period of time when Directors are prohibited from dealing is referred to as a ‘closed period’.

On top of this ‘catch all’ the EU Market Abuse Regulation (MAR), Section 19 goes a step further to explicitly state that PDMRs cannot deal in the period of 30 calendar days before the announcement of interim financial results or a year end results. This is referred to as the MAR closed period. Taking the AIM market for example, companies need to publish a half year financial report within 3 months of the half year period ending and the final results within 6 months of the end of the full year. It is worth noting that the full annual report does not need to be published on the same day, the closed period can end on publication of the final results statement, assuming no additional material information will be produced in the annual report which is not included in the Final Results statement.

Let’s take a look at how this affects AIM companies specifically now. The rules prior to the adoption of EU MAR from summer 2016 were actually 60 days, so the MAR actually relaxes the closed period requirement relating to release of financial information somewhat. AIM companies as part of AIM rule 21 are though also now required to have in place at all times a dealing policy which must also specify the company’s closed periods. This dealing policy though is not required to be published publically by the company and therefore it may not always be clear whether the company is in a closed period of not.

What director deals should be disclosed to the market? When should disclosure take place?

The EU MAR sets out all the requirements, but the core requirements are the PDMR’s Name, Position within company, Volume and Value of shares. Disclosure is only required for transactions in aggregate over EUR 5,000. This does not mean PDMRs are free to deal though during closed periods, it is just that no disclosure is required for dealing below EUR5,000 in aggregate.

The PDMR must disclose to the company within 3 business days of the transaction, and the company must disclose on the same terms. I.e. if the PDMR discloses to the company after 1 business day then the company has a further 2 business days to disclose.

Do these rules apply to other instruments, such as debt or options? Are there any other exceptions?

Debt and other financial instruments are within scope, as is the lending or pledging of existing shares. Section 19 (12) of the EU MAR does make two important exceptions, 1) if the director needs to make a sale due to financial distress and 2) ‘participation of employee share saving schemes and qualification or entitlement of shares’.

Point 2 from the MAR is not prescriptive, unlike the Model Code which was the UK precursor to these rules. There is some good commentary from lawyers Stephenson Harwood on topic though. The understanding from SH is as follows:

  • Grants of options/awards of shares will be prohibited in a MAR closed period
  • MAR sets out certain circumstances in which the issuer may permit options to be exercised during closed periods.  These include the situation where the option would lapse, if not otherwise exercised, during the MAR closed period, provided the option holder has given at least 4 months’ notice of the intention to exercise.

The view seems to suggest that Point 2 above concerns the joining of an employee share scheme rather than anything that could be considered ‘dealing’. In summary share option cannot be exercised nor transferred during a closed period.

Worked Example – URU Metals

The example I debated on twitter related to the exercise of share options by URU Metals CEO John Zorbas and the belief that an insider can exercise share options during a closed period. For information, the value of the transaction was £60,000 or 0.38% of the share capital of the company. Prior to the announcement Zorbas owned 3.6% of the company, so this takes his holding above 4%.

Firstly to establish is this considered a director dealing? Yes, this is the exercising of share options and as noted above is to be considered as dealing. The director cannot therefore deal during a closed period. However it is stated that:

The existing options expire on 23 May 2017.

This could mean the options could lapse if a closed period occurs, (i.e. the directors have inside information, remember this has to be price sensitive) between today, the 20th April and the next four weeks, i.e. 23rd May.  The only exception which would allow the exercising of these options during a closed period is if four months notice had been given by the director. The RNS though states:

Mr Zorbas has informed the board of his intention to exercise his existing options today. (19th April 2017)

I therefore conclude based on the content of the RNSs that the company is not in a closed period and the CEO is privy to no inside information not yet released to the market. John Zorbas is therefore able to exercise his options.

Let’s just beat this to death though – lets look at mandatory closed periods regarding the publishing of the financial statements, I.E. MAR Closed periods; the company has a year end date of March 2017, it therefore must publish its final accounts by September 30th 2017, so assuming like last year URU publishes on the deadline, the closed period then would start from Sept 1st 2017. URU may decide to publish the final results earlier, but we can safely assume there is not a closed period at time of writing, i.e. April 2017.  The Half year report for the period for September 2016 was published within the deadline here in December 2016. This rules out a MAR closed period.

What are the general implications for Directors of MAR?

In general it can be very difficult for Directors to be able to buy or sell shares in the open market or exercise share options. This may be particularly true for rapidly growing companies, those who report quarterly or those where lengthy material commercial negotiations are taking place. The simple reason is that the company may be in a closed period for very long periods of time in all of those scenarios. This is why you will often only see director deals popping up straight after results are issued or after other material RNS.

What can shareholders read into Director buys and sells?

Director Buys can be both a buy and sell signal. Small director buys are frequently ways to spoof the market. It is worth considering the context, clearly a £10,000 purchase for a director earning £200,000 is minor but this does not necessarily mean it is a spoof, but if the company is cash strapped then it could be a spoof to support the share price into an equity raise.

Director Sells can be a sell signal, if a director with his/her knowledge of the company wishes to sell then you could read this as a vote of no confidence. Small sells though are often made to settle tax liabilities, particularly if the director is issued and exercises options at the same time. If the company reaches an all time high and the directors start to make material sales then the story could be different of course.

SUMMARY

Directors cannot deal in the shares, exercise options or other financial instruments in the companies where they are board members during a closed period.

Director buys and sells outside of this period are not automatic buy or sell signals to other shareholders and should be taken in the broader context of the situation with the specific company concerned.


Disclaimer – I have no conflicts of interests regarding any companies mentioned in the post. This means no positions long or short nor any other financial or non financial incentive for publishing the post. I will not initiate any positions in the next two trading days from the date of the post being published.
 
This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

How to avoid compulsive portfolio monitoring. Making use of Price Alerts, RNS Alerts, Limit Orders and Stop Losses

I am starting to get quite a few emails from new investors who want my opinion on various topics, so I thought I would cover a few ‘beginner pieces’ over the coming weeks, hopefully putting together a few blog posts which stock noobs can find accessible.

One of the things I have started to finally perfect in my 10th year in the stock market is just checking into my portfolio 1-2 times a day. This is still too much in my opinion but this is way down from the 15-20 times a day I used to check during the early years. Why is this so important? A key part of being a successful Investor or trader is having discipline, the more times you check in on your portfolio the higher the chance there is of trading on impulse rather than trading on clear rationale. I share four handy ways that can reduce the time you spend in front of your share portfolio and hopefully lead you to make better trades as well as saving time…

1.Price Alerts

There are numerous price alert services which will email/text/push you when a certain Buy or Sell price is reached. If you have done both your fundamental and technical research then you should have very clear price targets in mind. This is where the risk/reward favours a buy or where the stock becomes overvalued and you may want to consider selling, or at least derisking.

By far the best price alert service I have seen is through the IG Index Stockbroking account, a screenshot of which is below:

IG Alerts

The service allows unlimited price alerts on any stock (you don’t need to own the stock already), which can be set for BUY and/or SELL prices. Each time a target is met IG will alert you within the trading platform, but perhaps more useful an email notification and/or a push to your Phone or iPad.

I prefer price alerts as I tend to trade manually as sometimes some further rational thought is required before placing the trade, but you can also automate this step too…

2. Stop Losses

I will assume that you are an inexperienced investor and therefore using a typical execution only Retail broker, i.e. one who places orders through a specialist Retail Service Provider (RSP) Market Maker. Most retail brokers allow you to place Stop losses which can help you to manage your risk and deal automatically on your behalf. I won’t get into how to use stop losses as part of a risk management strategy in this piece, I will aim to cover this in another post. A stop-loss though is where a number of shares defined by you is instructed to be sold at a price defined by you. The price you set though will not necessarily be the price the stop-loss is executed – more on that later. Here is what a typical stop loss order screen will look like, using Hargreaves Lansdown as an example:

Screen Shot 2017-04-13 at 11.49.15

As touched upon above, a stop-loss is not a guaranteed to achieve the sell price you have determined or even be executed at all. This can happen for a number of reasons, but here are the three most common:

  1. During periods of volatility the market may move quicker than the market maker can accept your order. This could also be where the price quoted by the market makers is not the real price and trades are being negotiated manually.
  2. Even under less volatile periods a stop loss can fail to execute at your desired price if there are limited buy orders available at the level you wish to sell. This is realistically only likely in the smaller stocks, normally where you are dealing in larger sizes but sometimes even smaller sizes (c£1000) can be an issue in very illiquid stocks. Pay attention to the Exchange Market Size which can be found on the London Stock Exchange site, example here. The EMS is the number of shares a market maker under normal conditions is obliged to deal in. If your stop orders are for a number of shares higher than this, then there is a chance the stop loss may fail or not achieve your stop price.
  3. When news is released, the market may ‘gap up’ or ‘gap down’ as orders are placed in the market on SETS. On stocks where market makers are present, i.e typically smaller stocks which use the SEAQ platform, these market makers may set their buy price at a level significantly below your stop loss.

The end result, the stop loss may be triggered at a level materially below your stop loss. You should think of a stop loss as an instruction to stop, not a guaranteed stop. This is why I rarely use stop losses or Limit orders as I like to take some time to understand the price action before executing. I therefore tend to use price alerts, but stop losses can be useful to limit risk where you are unable to get online for extended periods.

Some brokers, such as Barclays StockBrockers also offer trailing stop losses, which are very useful if you want to lock in profits, as the price moves up the stop loss position also moves up. For example:

You buy a stock at 100p with a trailing 10% stop loss, i.e at 90p. The price increases to 150p and your stop therefore increases to 135p. The share price then falls to to 134p and the the stop is triggered at 135p.

Note – all of the same issues  as above are still valid with trailing stop losses, but one way to avoid some of them is to place orders directly at the exchange, using Direct Market Access (DMA) and skipping out the middle man, i.e. the market maker. I will cover this in detail in a further piece but this allows orders to be filled with more precision, but is too advanced for this post.

3. Limit Orders

Limit orders work in a very similar fashion to stop losses and there are two types of Limit orders, BUY and SELL orders. A BUY limit is where a Buy order is triggered when a price falls to a level as determined by you. A SELL limit is an order to sell a stock once the sell price reaches a certain limit.

Most retail brokers will not execute if the limit order price moves against you between the instruction triggering and a quote being received from the RSP:

Say a BUY order is placed to purchase a stock at 200p. The share price falls from 210p to 200p and the order is placed, however there is a wave of other BUY orders from other market participants at this level, which means very little stock is available to BUY at 200p and the Buy price moves to 201p before your order can be executed. The BUY order is not executed and returns to pending.

This buy order will not be dealt and with most brokers will return to pending. Do check with your individual broker though how they deal with Limit orders.

4. RNS Alerts and other Market News

Regulatory News Service (RNS) is the platform where all UK companies must release price sensitive news. Clearly macro news and other newspaper rumours can also impact the share price also, the most convenient and free way to receive this information instantly is via Vox Markets. You will receive notification pushed to your phone or desktop as soon as a company you follow releases information or is covered in any of the major newspapers. This free service should help you avoid continual checking of news feeds and just sit back and wait for a notification. There are also similar services, such a Investigate which will email you on the release of a company RNS.

SUMMARY

Placing some reliance on the above tools should reduce the time spent staring at your portfolio. My suggestion is to use the time instead to do so research on your portfolio or on some of those companies on your watchlist. Or even dare I say it go out and get some fresh air!

Barclays CEO reprimanded over treatment of whistleblower. Bonus is cut, but is this enough?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


Barclays (BARC) is no stranger to controversy and has been mired over the last decade in what seems like a relentless list of scandals. PPI, FX and LIBOR rigging are the most recent to bring the bank into disrepute and the company this morning added another to the long list. Barclays advised us that the bank and specifically CEO Jes Staley were under investigation by both the FCA and Prudential Regulation Authority (PRA) regarding the culture and controls in place regarding whistleblowing disclosures.

Barclays in its release advised the market that “members of the Board received an anonymous letter and a senior executive received another anonymous letter raising concerns about a senior employee who had been recruited by Barclays earlier that year”. The two letters also “raised concerns of a personal nature about [this] senior employee, Mr Staley’s knowledge of and role in dealing with those issues at a previous employer, and the appropriateness of the recruitment process followed on this occasion by Barclays.” These letters were to be formally dealt with under the bank’s whistleblowing policy and the compliance function became involved. The letters was also escalated to Jes Staley, CEO of Barclays.

It is worth noting that anonymous whistleblowing is generally not preferred by companies. It is often difficult, if not impossible to provide feedback or be able to seek further evidence to properly investigate the claims made. However, a good whistleblowing policy should encourage employees to make anonymous disclosures over remaining silent. Companies should therefore always respect anonymity of disclosures, to fail to do so runs the risk of being perceived as persecuting the discloser, which would naturally discourage further whistleblowing from the workforce.

In an effort to clean up the behaviour of the industry, the need for disclosure within the banking industry has been the recent focus of the FCA and RDA. New rules were released in 2015 which require firms to formalise certain procedures in their policies, including employing a whistleblowing champion, with the aim of increasing the acceptance of disclosure. The FCA at the time was quoted as stating “individuals working for financial institutions may be reluctant to speak out about wrongdoing for fear of suffering personally as a consequence. Mechanisms within firms to encourage people to voice concerns – by, for example, offering confidentiality to those speaking up – can provide comfort to whistleblowers”

Barclays admitted this morning though that it had failed to respect an anonymous disclosure, and had attempted to reveal who was behind the disclosures referred to above. The RNS suggests that CEO Staley personally attempted to do so, outside of established governance practises, which I assume means trying to deal with the matter individually, rather than allowing the compliance group take the lead. The wording of the release also suggests that Staley went to some lengths to unmask the discloser, he “requested that GIS [IT team] attempt to identify the author of the first letter following which GIS contacted and received assistance from a U.S. law enforcement agency in identifying its author… this attempt by GIS was unsuccessful in identifying the author and no further steps were taken to do so after that.”

The release includes no information on the merit of the claim or the procedures taken to investigate the claim. It appears though that CEO Staley completely disregarded company policy and potentially fell foul of the FCA rules too. It is stated by Barclays that Staley felt that “letters were an unfair personal attack on the senior employee” and with Staley personally named this no doubt motivated Staley in defending the claims to protect his own reputation and that of a close colleague. We don’t know the specifics of the case, but the wording could suggest the disclosure concerns an ex JP Morgan employee, where Jes Staley forged his successful career in banking. Staley has subsequently poached a number of former colleagues he worked with at JP Morgan to head up senior positions at Barclays.

I’m not suggesting for a moment that the disclosures had any merit, it could be a disgruntled employee who missed out on a top job filled by one of Staley’s former JP Morgan colleagues, but in my view this is irrelevant. I have worked in a similar large corporate environment and became privy to the various claims made by employees under the whistleblowing policy. All claims were investigated, but many were correctly concluded upon by senior management to be personal, speculative and unfounded, as indeed may (or may not) have been the case here. There were though a handful of disclosures that were extremely serious and this is what Barclays risk jeopardising going forward. I am not suggesting to give employees a carte blanche, which could lead to the misuse of the whistleblowing policy and drown out cases with merit. Employees who have deliberately disclosed false or unfounded claims should face the consequences, but only reasonable steps should be taken to identify any wrongdoing to protect the system.

Staley’s punishment for now is determined as “a formal written reprimand” and “a very significant compensation adjustment will be made to Mr Staley’s variable compensation award”. But is this enough? Jes Staley earned £4.2m in 2016 of which his annual bonus was £1.3m and thus reducing his bonus is unlikely to give any particular hardship. As CEO the buck stops with Staley and it his responsibility to promote the correct culture throughout the organisation, which starts at the very top. Stakeholders will be asking many questions this morning, amongst them; when the CEO is perceived to have conducted a witch hunt on one of the firm’s employees, then what example does this set to the organisation? Was there also a conflict of interest in Staley’s motivation to address the disclosure? Does a modest financial penalty really send the correct message? All Barclays employees received a video spelling out the bank’s policy on protecting whistleblowers last year (per the annual report), could it be perceived that it is ‘one rule for one and one for another’, indeed would a less senior employee have been sent packing?

There is no doubt Staley has succeeded in bringing more focus and discipline to the bank and he appears to be steering the company away from the rocks, which in a way makes this episode even more disappointing. Staley in a letter written to the firm’s employees this morning assured them that he felt he was protecting a member of his team against a ‘smear campaign’, but as commendable that loyalty is, he has almost certainly let personal feelings get in the way of his professional duty towards his employees at large. The board though is behind Staley and ‘has concluded, that Mr Staley honestly, but mistakenly, believed that it was permissible to identify the author of the letter.’ This in my view though remains a very serious lapse of judgement on the part of Staley. The improvement of the ethics and culture in banking has been the priority on the industry’s agenda over the past few years and this makes it at this time even more unforgivable to have made this error, irrespective of whether it was an ‘honest mistake’.

This incident also comes at a time when Barclays is still dealing with various litigations where foul play is alleged. The question that many will be asking is whether cases like this morning’s persuade employees to turn a blind eye to integrity issues. It is hard to believe at this time that Barclays will be able to improve the behaviour of its bankers when members of the board fail to lead by example. The last thing the board and the industry needs at this time is for the perception of only applying the rules when it suits senior management, i.e. the promotion of good governance and culture to the junior bankers, but failing to apply the rules when they put the board or their close allies at a disadvantage.

The board has jointly concluded with the company lawyers that Staley should retain his position, but it may take the FCA many more months to reach a conclusion on the seriousness of the matter. Mr Staley will though face his first challenge as early as next month, he is up for re-appointment at Barclays Annual General Meeting on 10 May 2017. At the moment I suspect shareholders will look beyond this ‘error’ and focus on otherwise good operational delivery, but failure to deliver in the future could make his position very difficult indeed.


Disclaimer – I have no positions in any of the stocks mentioned. ShareInvestors.co.uk requires me not to deal in this stock in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

March 2017 – Running Tip P&L

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


In the interests of absolute transparency I record all my share recommendations and produce a P&L in % terms on an ‘Inception to Date’ basis. Unlike a lot of ‘tipsters’ my trades also include a % adjustment for bid/ask and transaction costs.

I will also continue to state my positions at the end of all company specific articles too.

MARCH 2017 ROLLING P&L

Here is the summary as at 31st March 2017. The average stock tip has delivered 22% return Inception to date, with 88% of my 27 tips in profit. On an annualised basis the average tip is 363%.

The principle detractors are is my short call on Sterling Bonds (SLXX) and longs on Ovoca Gold and Berkeley Energia (OVG). On the longs I currently on Ovoca Gold ‘under review’ as I made a critical mistake in not fully reflecting on the size of the director holdings, which indeed give them a blocking share. This means poor performance is tolerated and chances of shareholder activism are limited, I have had no response from the board despite my best efforts to contact them despite by best efforts. The share price is still significantly below book value but it is hard to see a catalyst for a re-rate towards fair value when the board refuse to pull their finger out of arse…

Regarding Berkeley Energia (BKY), the market was spooked by a bearish broker note, the exit of BlackRock as a share holders (likely following the research note) and the lack of further financing news for the completion of the mine. My understanding is there is no huge rush to complete financing as there is plenty of money in the bank to get ‘spades in ground’. I plan to do another blog piece in April looking at BKY in more detail, but with the shares back below 50p this could be a buy, especially with the promising exploration news.

Regarding Sterling Bonds; I have seen nothing to indicate that my belief of a due correction is incorrect.

2017 03 Trading

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Gym Group Flexes Biceps to secure maiden Profits. Buy on this news?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


Gym Group (GYM) has been on my watchlist for well over a year, at which point it seemed a very expensive valuation for a company struggling to break even. The share price though has been slowly been falling back after this period of punching well above its weight. The company recently reported an impressive set of final results for 2016, making its maiden profit since IPO, so is it now time to take another look?

QUICK FACTS

Gym Group listed on the main market in 2015 and claims to be a disruptive health and fitness group offering gym memberships nationwide at around 90 clubs. Members are not tied into contracts and its gyms are open 24/7 and thus the group offers a more flexible service to suit modern lifestyles. Memberships start from £10.99 a month and they come largely without frills, some gyms do though offer classes on top of the DIY equipment though.

Quick facts as at 17th March:

Current Share Price 172p
All Time High 280p – 21st April 2016
52 Week Low/High 168p – 26th December 2016
280p – 21st April 2016
Market Capitalisation £220m
Enterprise Value £226m, includes Net Debt £6m
Fully Diluted Market Capitalisation £221m, some options outstanding
PE/EPS 38 / 4.46p based on 2016 results

GYM Historic Share Price

THE MACRO STORY

Gym Group is trying to carve a position out as a disruptive low cost alternative to the traditional gyms that have dominated until now. The traditional model is to sell a yearly contract valid for a single club, big players are Fitness First, Virgin Active, David LLoyd etc. This traditional model tends to work well for middle class gym bunnies with a predictable routine and money to fund the often expensive fees (if not paid by the corporates they work for) but less so for those who don’t want to/can’t commit to a long term contract. The only alternative until recently has been the public/municipal facilities which often allow users to pay as they go. My own experience of council facilities though is like most things municipal, funding is the issue. The municipal leisure centre I visited for example had equipment which was probably last upgraded when Arnold Schwarzenegger was at his prime.

There are currently 6,400 gym/combined gym facilities in the UK of which the low cost sector represents just 7%, this being dominated by three players of which Gym Group is one. As shown in figure 1, the company represents just 1% of the total clubs in the UK, so there is a large potential market if more punters can be persuaded to be switched from the traditional to the low cost model.

MARKET
Figure 1 – Source: Leisure Database Co 2016, Gym Group

It is worth noting that the total UK gym and fitness market has only been growing by around 2.5% a year though in recent years, we have reached ‘peak gym’. This is a mature market defined by fierce competition between the participants rather than a growing sector carrying participants. So like a finely sculptured Gym bunny, participants need to be lean as barriers to entry are fairly low and potential to innovate arguably limited. Competition is mainly defined by price, location and quality.

The budget sector though has a clear competitive advantage on price, you might make the comparison between EasyJet and British Airways. In the aviation industry it was eventually price that won leaving a smaller number of companies to fight for the premium sector. I’m not saying the same pattern will definitely emerge in the gym sector, but it might. The way I see it is that exercise is not fun, so i’d rather pay as little as possible for the privilege. There are still plenty of premium niche operators popping up though and class exercise is a big thing at the moment, underwater yoga is ‘a thing’ now apparently for example. We can probably conclude that budget operators won’t take all of the share in the sector, but I feel it is the time for health and fitness groups to put themselves in one camp or the other, of face the risk of being squeezed out of the market altogether.

TO THE COMPANY…HOW HAS GYM GROUP PERFORMED UNTIL NOW?

The Net profit for the company was £5.71m based on the 2016 results, which compares to a market capitalisation of £220m. This gives a PE of 38 and looks pricey at first glance. Gym group though is (hopefully) a growth stock and we must look more to the future rather than the past to find a sensible valuation. We’ll get to the future later but let’s take a quick glance at the last few years first.

It has certainly been a challenging 5 years since inception. Prior to 2016 the one off costs associated with new clubs and gaining a stock market listing has meant that whilst revenue has continued to grow, the operating margin has been poor, which is illustrated in figure 2. On top of the Pre IPO financing required was expensive which meant losses at a Net profit level were even higher. This meant that the group has to the end of 2016 total retained losses of £27.9m.

The green shoots are emerging though, the company though has just posted a 10% operating margin for its full year 2016 results, which includes depreciation. The company has even managed to chalk up its first net profit too, at £5.2m after tax. The management statement is brimming full of confidence and indicates that management have gained control over its cost base, improved contribution towards head office costs, eliminated material exceptional costs and begun to see the mature gyms in the portfolio contribute good profits.

revenue
Figure 2 – Source: Gym Group

At a PE of 38 though does justify the share price? This does look expensive at first glance, but the cashflow statement is where the excitement is, the company is really starting to make significant progress in generating cash of which the development in the last 5 years in illustrated in Figure 3. The Cashflow from Operations for 2016 was an impressive £24m, almost 5 times the net profit. The reason for this disparity between cash and profit is that Gym Group is a fairly CAPEX intensive business and much of this has been accounted for in prior years and is now hence a sunk cost.  These assets are still being depreciated through the P&L which explains the large gap between cashflow generated and reported profits.

Given this disparity between cash generated and earnings lets take a look at the market capitalisation compared to Cashflow generated from operations in Figure 3, this method which I refer to as PCFO (Price:Cashflow from Operations) gives a figure of just 9, so all of a sudden this proposition starts to look like a very attractive business indeed, particularly if controlled growth levels can continue at this pace. This is a very different story to many of other companies on high PEs.

cash
Figure 3 – Source: Gym Group

Free Cash Flow, i.e. after you subtract the cashflows from investments is also positive at around £2m. The cashflow from operations is being put to use making investments in the fit out of new gyms, of which 15-20 are expected to open in 2017, which will hopefully boost the cash generated from operations further in future years. The £2m or so free cash left over was enough though for the declaration of the maiden dividend, which will return £1.3m to shareholders through a 1p dividend (including interim). This places the company on a dividend yield of 0.58%, hardly competitive but management have indicated this will be progressive. So let’s take a look at how the company can potentially boost this return in the future?

WHAT DOES THE FUTURE HOLD FOR GYM GROUP? 

Management have included guidance to analysts for 2017 which includes the opening of 15-20 new gyms with £25m of expansionary CAPEX required to achieve this. This is inline with the last three years expansion levels. I have used the analyst guidance as well as my own assumptions to project earnings and cashflow out for the next 10 years, based on being able to open 17 gyms a year. This would take the company to 276 gyms by 2027, more than double those committed to by the end of 2017.  Figure 4 shows the results:

forward
Figure 4 – Source: ShareInvestor Estimates

In summary, if Gym Group can keep control of costs and maintain the current growth rate then we are looking at some very attractive earnings and even more attractive cashflows, with my projections indicating £40m of Cash from Operations and £20m Earnings within 5 years, this would place the company on a very lean PE of 10 based on the current share price. You might be questioning whether the target of 17 new gyms a year is achievable, especially in a mature market. This and the other ‘derailers’ we will get on to later, after we look at how my projections value the company today…

WHAT IS A FAIR VALUE FOR GYM GROUP?

My own risked valuation is 223p per share, which gives a potential upside of 30% from the share price. I expect this target to be reached within 12 months barring any disappointing trading updates. Broker targets issued since the results are 250p-275p.

My valuation is based on a 10 year Discounted Cashflow with a Discount Rate of 10% (opportunity cost of investing elsewhere) and Terminal growth of 2.5% per annum. This gives an unrisked NPV per share of 310p. I have then applied a 30% margin of safety to take account of the riskiness of cashflows, which is subjective but feels about right for this company. For the anoraks my full workings to the valuation are here which shows in detail the assumptions used and the historic data too.

WHAT ARE THE SUCCESS FACTORS/RISKS TO THE VALUATION?

The critical factor as touched upon already is gaining and retaining market share, which is a function of the following:

a) Key Management

As always a company is only as good as its management Team. The board is chaired by Penny Hughes, former president of Coca Cola GB and Ireland, she has had a host of non-executive positions including Vodafone, RBS and Reuters. CEO is John Treharne and founder of the group and has three decades in the leisure industry. Heading up the numbers is CFO Richard Darwin, a Chartered accountant and counts two previous CFO roles at Essenden Plc which was taken out by Private Equity in 2015 and Paramount Restaurants before that.

Management have a stacks of smaller scale leisure experience and chaired by Penny with extensive major corporate experience. Management also own 5% of the company between them, helping to align shareholder interests. Final credit to management is the very clear reporting to shareholders and detailed guidance.

b) Winning and Retaining Customers

For 2016, the company reported approximately 5,000 members per gym which together with a tight control on costs generated a respectable operating margin of 10%. But what happens if customers desert? I have run the following sensitivity analysis which shows how sensitive the number of members in each club is to the overall valuation. A 20% spread increases the valuation 300% based on the opening of 17 gyms a year. The reason for this is fairly simple, much of the cost base is fixed so every member counts and contributes towards this cost base. Rather surprisingly if gym group were able to open just 5 gyms a year but achieve 5,500 members per club then the valuation is around 360p per share compared to 310p for 17 gyms a year but just 5,000 members per gym. The analysis is fairly simple but the message is also clear, quality over quantity. So return to the above concern about whether the company is able to grow at 15-20 gyms a year in the long term, my analysis suggest it isn’t essential to create value, as long as the locations it does choose are in locations with a high potential number of members and leases can be secured at a good price (more on costs laters) .

GYM Sensitivity Clubs and Members
Figure 5

We also discussed above about the market not growing much overall, Gym group therefore needs to compete head on. Interestingly though Gym Group claim that 34% of new joiners have never used a gym before. Whilst this is obviously positive it seems to be at odds with the overall sector data, unless we believe low cost is the only driver of growth in the sector. Fundamentally though to retain and attract new customers is a function of mainly price, location and perhaps to a lesser extent service in this low cost segment, although not unimportant.

Starting with service, the group counts over 10,000 reviews in the last year at FeeFo, an online survey company. The score is currently 4.4/5. This is a very good score, unfortunately the competitors do not have a feefo score, nor are there sufficient reviews on alternative services such as Trust Pilot, so we can’t compare. Nonetheless if Gym group can sustain or improve the service level without much investment then I have no concerns in this area at present.

Moving on to price, the good news here is that Gym Group currently have the lowest headline rate of any of their major competitors. This is despite a major presence >30% within London, where rates commanded are often higher.

GYM Market Competitors
Figure 6 – Source: Gym Group, Leisure Database Company

Pressure may increase as competition increases, but this will be an issue largely in areas where there are other low cost gyms present. There is a limit to how far customers will travel to visit a gym to save a few quid. That is not to say the gym group can set the price where it has no competition, another alternative is for consumers to switch non gym related activities or even revert back to the couch. Let’s take a doomsday scenario and look at how a drop in headline membership rates may impact the valuation…

c) Driving Revenue and Controlling Costs

I’ve ran another sensitivity which shows the effect of increasing/decreasing revenue and costs. This again is a fairly simplistic sensitivity which assumes a one off increase/decrease in cost/revenue in 2018 and inflationary increases thereafter. It is based on 5,000 members per club with 17 new clubs opened per year.

The conclusion? It is not catastrophic for a 5% increase in costs and 2.5% decrease in revenue, this would equate to a 200p unrisked NPV per share, but it certainly would mean the shares are fully valued today. On the flipside increasing revenue 2.5% and decreasing costs yield and valuation of over 400p per share. The company has increased headline rates by 3% for 2017 and it will be interesting to see how this affect membership levels and whether this will flow through overall revenue per member increase also.

GYM Sensitivity Costs and Revenues

d) Funding

The balance sheet is in good shape and I project that current plans for growth can be funded organically. There may be a need to dip in and out of borrowings through troughs and peaks, but the group currently has £30m of undrawn borrowings out of a total facility of £40m. The £10m currently owed is due for repayment in 2020 and there should be no issue with repaying or refinancing this facility when that time comes.

There should also be no need for any equity financing based on organic growth and I expect this option only to be pursued if a highly accretive acquisition presents itself or a major move into a new geographical market.

ANY OTHER CONSIDERATIONS?

The only other thing to note is the recent exit of the private equity (PE) backers with their 30.5% share. This has unnerved some, but is completely normal for PE to exit once a company becomes stable. So far we have seen disclosures to suggest that 50% of the shares disposed of has been acquired by Merill Lynch and what I understand to be High Net Worth German Investor Daniel Crasemann, with his Barralina vehicle. In total after the PE exit around 56% of the shares are with institutions with disclosable positions.

SUMMARY

BUY – Initial Price Target – 217p, 26% upside

I like businesses that are simple and fairly easy to understand and it doesn’t get much more simple than this one. The maiden profits are a positive step and the outlook for 2017 looks positive. It remains to be seen whether this trend can continue but the risk/reward looks appealing at present. The focus should continue to be on high quality locations and working hard to maximise the number of members per club. The major risks are the low barriers to entry, a slow growing overall market and the pressures of competition that this will bring. At present Gym Group has the lowest headline rates and excellent service so has a solid footing to protect and increase market share, if and when the competition intensifies.


Disclaimer – I have long positions in Gym Group equal to 1.5% of my NAV. ShareInvestors.co.uk requires me not to deal in this stock in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.