Thursday 24 December 2015

Morning Mumble: What a year! How do you spell Christmas?

Good Morning,

It's been a pleasure and thank you for the many words/thoughts. 

We shall endeavour to post some musings over the Christmas break, what with various items taking priority EMC has taken a back seat. We had our first 'proper' scoop in the western hemisphere the other day, a pleasure and 24hrs before the rest!

The lack of reporting on the "convention" of base metal traders meeting this weekend to discuss...purchasing more metals. One might also need to consider that some out of the money traders will look to take the losses, but at least some Christmas cheers for those long. Expect some adjustments in stockpiling and the reporting of such numbers. (EMC: China Base Metals)

Here's hoping everyone enjoys the festive break and gets some 'R&R.' Li is heading to Macau this year, obviously gambling and the like; who'd have thought it!?! We should feel privileged some declined such opportunity in Macau and are UK bound. No doubt laden with anything duty free like thinking they've got a 'real bargain.'

Yesterday was a proverbial bath with Oxus's failure in their arbitration outcome. The mystery is how Richard Shead kept the RNS professional in light of what some consider a failing in a legal process. 

There will be Oxus update in the new year, but don't expect too much. The monies awarded should cover Calunius's costs, albeit little left over. One would be very surprised if there was an appeal save of course for a curve ball of showing complete incompetence by one of the panel. Is that possible? 

This was not a case of quantum but of reliability of the facts...something that an entity may be able to argue quite cleanly. Fit for practice springs to mind....albeit taking no shine off a stellar year as prudence always suggests taking profits along the way, the beauty of these types of arb type cases. 


We shall await the "trading updates in January!" One cannot help but wonder what the level of inventory in the shops implies for their bottom line. We note the contributors to EMC retail opportunistic survey finding healthy levels in most stores with very few non-food items being sold out (The largest number of contributors we've had - thank you!). 


Does Christmas now start with an E(commerce)?

All the best and Merry Christmas, Fraser

Tuesday 22 December 2015

Morning Mumble: Concha & some base metals + Glencore's Chinese Zinc Premium

Good Morning,

After abuse for over a year relating to Concha, its a poignant time to remind parties of: EMC: Concha - CHA Cha cha (No known links to Cuba) & congratulation to non-holders of CHA & Kefi. The market is finally pricing things in? It's about the money for now...but one to run away from.

The lack of reporting on the "convention" of base metal traders meeting this weekend to discuss...purchasing more metals. One might also need to consider that some out of the money traders will look to take the losses, but at least some Christmas cheers for those long. Expect some adjustments in stockpiling and the reporting of such numbers.

Glencore (GLEN) may not have to update the market on their Zinc pricing but it has not gone unoticed they've reduced their Chinese premium considerably, albeit tightened the band, it's still down. Previously $160-130/t to $125-110/t. Strangely in line with Korea and Hindustan producers.

Atb Fraser

Monday 21 December 2015

Morning Mumble: Should we set up a due diligence Firm of Randgold? + Plus Other News..

Good Morning,

What does it say for the risks of management when companies are prepared to consider joint ventures on assets that are uneconomic? Of course regular readers will remember the EMC: Volte Face Randgold Resources from September... after: EMC: Randgold preferred Fed Arb play. 

To quote:

Whether its Elephant country or not (FT), prudence dictates purchasing a decent asset with a better outlook than Obuasi. Good money after...As a reminder, PWC's Mining Taxes and Royalties (PDF)s  and an article (Ghana Chamber of Mines) that AngloGold Ashanti's might want one to quickly forget.  

Disappointing waste of time on RRS and perhaps losing ones mind! When investors thousands of miles away from the mine can assess the benefits or lack of in investing in Ghana, concerns should prudently be raised. More later...

It would appear Randgold needed to spend significant time and perhaps money conducting due diligence to form the same opinion as EMC. Today, they give an update on the Obuasi Gold Mine. Over to Randgold (Bold Italics and Underline are additions):

Jersey, Channel Islands, 21 December 2015

On 16 September 2015, Randgold Resources Limited (Randgold) and AngloGold Ashanti Limited (AngloGold Ashanti) announced their intention to form a joint venture to redevelop AngloGold Ashanti's Obuasi mine in Ghana, subject among other things to the completion of satisfactory due diligence by Randgold and the agreement of a revised development plan.  After undertaking a due diligence exercise into the mine and the redevelopment opportunity the mine affords, and following the work undertaken on the revised development plan, Randgold has determined that the development plan will not satisfy Randgold's internal investment requirements.  Accordingly, Randgold has decided to terminate the investment agreement entered into with AngloGold Ashanti, with immediate effect.

Chief Executive Mark Bristow said Randgold remained committed to creating real value for all its stakeholders by continuing to invest substantially in its exploration programmes with their proven record of success as well as by investigating potential growth opportunities presented by the market.

What due diligence was needed to formulate the same view as here?? Randgold can now throw in the towel and purchase Amara Mining’s (AMA), Yaoure Project, whom recently gave an update on grade and resource.  

In other news, the AIM loses a director whom had sat on a few boards…one such company, BacanoraMinerals Ltd. Perhaps entities were finding their proverbial taps cut off…same for AfriAgPLC, InspiritEnergy (INSP), EvocutisPlc and RareEarth Minerals. Apologies if they weren't all covered…

We have not ignored the marco news, or iron ore moves, China’s woes with imports/exports, BHP Billiton issues and other areas, merely time rationed. Its interesting to note there are subsidies for purchasing cars if you “live in a rural area.” As migrant work forces are considered as living in Rural Areas, the mainstream media may need to wake up and consider the significance of such a stimulus…bringing forward more purchases by near 3 years!

Atb Fraser

Monday 14 December 2015

Morning Mumble: Tribal (TRB) the tone continues...China, Lonmin (LMI) & Amur's Christmas Present.

Good Morning, 

Machine gun like this morning...

Tribal Group (TRB) - EMC coverage from October. The suspicions we had two months ago have proven accurate and they’ve certainly thrown the kitchen sink in…To quote:

One has a suspicion that the Chief Executive search hasn't gone as seamlessly as thought. What is the debt position of the company and more so....see bold (additions from EMC) that should be thought provoking. There are some positives, we didn't need to highlight the entire announcement. That's Tribal's third strike on the bases of profits/performance updates and as such the caveat of caution applies, expect a kitchen sink approach upon appointment. 

Its Rights Issue and Move to AIM, Tribal have now made the statement that so many before them have ignored. Standard Chartered (STAN) and Lonmin (LMI) both casualties of the same approach, waving a flag for the Rights Issue? The finances are dire…With that in mind and a whiff of smoke and fire, its time for the market to acknowledge the facts and stick the knife in. So expect averaging down, running or avoiding…

The Chinese retail sales and industrial output figures were a surprise, with the shift to consumption growing in pace, there’s time over Christmas to consider the implications for the wider markets. What the implications are for the non-performing loans, negative equity and the overall indebtedness of the Chinese commodities sector and associated industries. China’s Premier and Executives know full well the problems brewing in the mining provinces and the discontent that is brewing.

With Christmas upon us, the rally is likely to be muted as the realities of trading updates and profit warnings increase the anxiety on the visibility in earnings. Albeit, it is the week of celebration and joy, with interest rates being increased in the US on the 16th December. With that China has linked their currency to a broader basket (FT) …but are the rate hikes in the US priced in? The rate cuts and stimulus so far in China appears to be helping the economy, expect more from China post the US interest rate hike.

2016 will present a very different mix of opportunities in the markets, both in the commodities space and retail. With the FTSE hitting the 6K target for near Christmas it’s time for a reality check. Oil and Base Metals will pretty much determine the global markets over the coming weeks…and going into 2016. M&A should now be considered...essential. 

Lonmin (LMI) thank their shareholders… the shareholders are unlikely to be releasing a similar RNS to the management? With the confirmation from the Public Investment Corporation of South Africa (PIC) being stuffed with a 29.99% holding. With so many changes in the PGM space the industry still needs to shut in capacity. LMI’s efforts will assist but we estimate the sector is over supplied by near 650K ounces per annum. With the Russian Ruble weakness it’s not likely to reduce anytime soon.

With the season of goodwill upon us, we wish Crede Capital Group seasonal tidings. It would appear Crede are also in a festive mood, as AmurMinerals announced today.

Atb Fraser

Monday 7 December 2015

Morning Mumble: Hiatuses and...Ken's Mare (KMR) Equity for shareholders? Anglo + De Beers, Glencore and some news about a former Jam Tomorrow Employee Rurelec & Questions for their NOMAD.

Good Morning,

Very busy - although amusingly, there were suggestions we had visited the dark side and started working for a long-only fund! Chance for a recap later this week on the pertinent issues from the 22 November to present, although nothing much has changed, save for news driven events.

Iluka Resources sensibly announced the long-awaited termination of discussions with Kenmare Resources (KMR) - it’s wise for parties to read the RNS. Those followers will be unsurprised by this "news.” 

KMR equity holders have the opportunity to participate in the dreams of the future. So to sugar-coat the dire state of the KMR’s financial position they have announced plans for an investment by State General Reserve Fund (SGRF), a further capital raising, and balance sheet restructuring

Over to KMR (bold, italics and underlining are additions):-

SGRF, a sovereign wealth fund of the Sultanate of Oman, has approved in principle an investment of US$100 million in the firm placing via one of its subsidiaries, subject to and conditional upon, inter alia, agreement of a subscription agreement, agreement of arrangements with the Group's project lenders on the Group's capital structure, procurement of commitments from other shareholders in respect of an additional minimum US$75 million capital, necessary Kenmare shareholder approvals, and finalisation of a prospectus.

Wait….continue reading:

Moma is a world-class asset that encompasses a large, long life ore body. Total invested capital exceeds US$1.2 billion, with the mine producing more than 7% of global TiO2 feedstock supply - being the largest merchant producer of ilmenite globally.

Having invested capital that exceeds $1.2B, and producing 7% of global TiO2 feedstock, it would appear the management are going to hang around to run the next stage of the "KMR turnaround story/saga." This is despite being in charge whilst a transformation of a once multi-million pound company into a small cap with a £12M valuation took place. One has to wonder what the board’s remuneration and bonuses have been over the years in comparison to the returns for shareholders. 

The question that those supporting shareholders should ask is, “are the management right for the future?” If the past is an indicator of the future, prudence would be to have a fresh start with a clean sweep. Those whom played the KMR pub quiz last year on FTML, will no doubt be aware of the dire performance for shareholders.

What’s another $175M in the grand scheme of things? Will the prudential be putting up any ‘wonga’ into the fundraiser? More to the point, is $175M enough?

There remain a number of material matters that need to be agreed to enable Kenmare to deliver the planned capital raising and there can be no certainty at this time that they will be achieved. Kenmare welcomes the indicated support from SGRF and appreciates the support of key shareholders.

We’ll watch from a distance, although if one was short, prudence would suggest closing on the news today. KMR Net Debt must be around $315-332M by EMC estimates.

Continuing with a theme of shareholder value and with some amusement for those following the debacle at LGO Energy. Judging by the latest announcement they’re off to find and/or recognise shareholder value with  a strategic review. 

LGO also update the market on the Trinity Exploration no-deal on the Tabaquite Block by issuing 41,487,776 to Trinity Exploration. Trinity’s statement on Tabaquite Block, Trinidad ends with: 

The decision to cancel the SPA has been considered as part of management's overall assessment of means to better realise the value and future potential of the Tabaquite Block. 
  
We have Glencore (GLEN) updating the market this Thursday. NH and David Sheppard at the FT ran with something a bit more positive, “Glencoreexpects to cut debt ahead of schedule.” - Sensible and common-sense discussion about GLEN's earnings forecasts in the current environment. Pay attention to the terminology used on Thursday, one suspects there may be a few statements coming from the back foot.

Sadly for GLEN's workers Collinsville coal mine in north Queensland, 180 workers are to lose their jobs. Is this an admission of the dire state of the coal industry? It certainly explains why Mick Davis is taking his time with X2 Resources, perhaps to Rio's annoyance. 

In the weekend press we had Anglo American allegedly slashing their dividend (again and again), talk about echoes – news must be thin on the ground! Anglo’s investors’ day tomorrow (08th Dec). We can no doubt look forward to all the positives of a diversified miner and what this offers investors, whilst struggling with depressed pricing.

With Anglo’s subsidiaries either under water in terms of operational costs (Kumba Iron Ore/De Beers), lacking flexibility in CAPEX (Minas Rio) or needing to deleverage the balance sheet. The future doesn't look rosy. Anglo is now realising the hard choices it has to make and the limited flexibility. Quite why they have not pressed the equity raise/capital injection button is anyone’s guess. Surely they'll want to get in there before all the others?

We note that De Beers have sold Kimberley Mines in South Africa to Petra Diamonds and Ekapa Mining for a rather low sum. If one looks at the capital De Beers spent on Kimberly and the plant etc…it gives a rather good indication of the amount pressure to monetise what assets they have/can sell.  An article from May 2015, makes for an interesting read… Engineering News - De Beers inviting bids for life-extending takeover of Kimberley Mines. Was the USD to South African Rand/ZAR near $1:ZAR5 in 2002/3?

For those that have followed a company Rurelec that we consider jam tomorrow, its not often one gets validated in their views so quickly. Over the weekend attention was drawn to the following announcement on Independent Power Corporation PLC.  See the previous commentary here (EMC) when the IPC was "spun out" or Rurelec to allegedly save costs.

Questions:
a)      When did the Independent Power Corporation PLC, Peter Earl and Anglo Kazakh TransAsian Pipeline Corporation Limited commence discussions? We may be able to update on this shortly...
b)      Was this before or after the spin off?
c)       Was the NOMAD consulted on the “spin-off?”

See the original announcement and terminology 19th June 2015 - Director Change (Peter Earl) leaving & IPC. Then see the replacement, Spinout of Subsidiary. Albeit it’s somewhat immaterial as the horse has already bolted.

Atb Fraser.

Sunday 22 November 2015

Weekend: Juridica (JIL) and Burford (BUR)

Good Afternoon, 

Juridica (JIL) - in June we saw no benefit in holding. We believe in the third party litigation model but saw limited to no upside in Juridica, preferring Burford Capital (BUR). It's prudent to take some profits on Burford with 90% over two years not to be sniffed at. 

EMC: Juridica from June:

Having taken profits and dividends in both Juridica (JIL) and Burford (BUR) today's portfolio update was negative on the bottom line. Measured in NAV, JIL is valued after today around $150M (ish) without checking. Consequently, the stock correctly repriced the stock 88 pence.

With some volatility in JIL at the moment, it’s hard to justify any share appreciation based on the NAV. As a result, a disappointing 17% return over near 3 years on this investment, allowing for today's sale with no further holding. Better than most bank returns but disappointing. Time will tell whether its wisdom to hold Burford (BUR), performing better over the 3 years with a better blend of small dividend and share appreciation (50%) ish.

Juridica are contemplating winding things up - they appear not to have the size or traction to absorb losses after the portfolio update (16 November 2015). Juridica provided case funding of $3.5M and are likely to receive around $2M ($6.9M below case valuation). They state they’re considering an appeal but…

The corporate review of operations was a little surprising (18th November 2015) – it appears JIL had discussions with some shareholders. They state they envisage no further investments will be made and elude to a potential a change in business purpose or operations in a different sector – finance? SME lending? Biotech? Who knows...? Also a wild card of there being some form of tie up between Burford and Juridica - although unlikely.

The Board announces that the Company will not make new investments (other than for funding existing investments in the Company's portfolio where such funding is reasonably required to realise maximum shareholder value).

Will seek to return capital to shareholders in the most appropriate manner, following the completion of investments.

Comprehensive review of all its cost and fees structure, with the objective of reducing the ongoing costs and fees of the Company given the investment approach set out above.

We feel Juridica’s fair value is around £62.5m lower end (57p ish) to £67.5m top end (61.5p) - although there could be some benefits from higher than expected return on certain cases and/or cost savings if no further investments being made.  

Atb Fraser

GBPUSD Exchange rate used £1:$1.52 / Number of shares 109.98m

Saturday 21 November 2015

Weekend: A quick run through...'onest guv' (Coffee) - Sirius Minerals (SXX), Vale, BHP Billiton (BLT) - Dividend Cuts, Anglo American (AAL) , Kaz Minerals, Drax (DRX), Clarkson (CKN), Royal Mail (RMG) SunEdison (SUNE) & Finally JMAT

Good Afternoon,

Another manic week with various bits of news coming out - a speedy run through of what can be remembered:

Sirius Minerals (SXX) - It would be laughable if it wasn't true - from memory Israel Chemical (NYSE: ICL) via Cleveland Potash Boulby Mine raised concerns/objections regarding the application or process for SXX's York Potash polyhalite mine. 

ICL inform the market of the refocusing at the Boulby Mine and will mine polyhalite. With some amusement, ICL have trademarked a brand called Polysulphate – amazingly derived from polyhalite. ICL is listed NYSE and with limited upside, what reasons are their to hold the stock.

Vale / BHP - The trade was the debt at Samarco owned by Vale and BHP Billiton (BLT) - They have been compelled to undertake further emergency tailings dam work. The damage and overall cost implications are unknown although perhaps affordable, the market now should price in a real cut to BLT's dividend. The price has risks...even for Vale, whose leverage is phenomenal but the price is now about right. How will one sleep at night not being short Vale?

South32 (Short32/S32) – updated the market. The same however cannot be said for Anglo American (AAL). AAL own 40% of the venture where they have yet to notify their shareholders of Samancor manganese joint venture issues.  Anglo deem it appropriate to update on the changes to their senior management and ignore the woes of their 40% stake in SamancorCR. 

From South32, the joint venture's South African mines will remain closed until the completion of the ongoing strategic review. Production was suspended following a fatality at the Mamatwan mine on 2 November 2015. 

SunEdison (NYSE: SUNE) - The idea of SUNE being a car-wreck was pooh-poohed when we raised the question "why was SUNE valued near the same as Solarcity?” Our view was that there was limited equity value left for shareholders in SunEdison. In contrast others believed in the solar expansion of the world. 

The markets may be right about solar longer-term, but not with SUNE - they expanded fast, attempted to hold on to projects rather than sell them and have significant leveraged. It's an all too familiar story of elastic expansion that may not snap, but is likely to be a shadow of its former self. 

Despite some inference we had lost the plot in June, July and August, we were vilified by the price action on Friday where SUNE's ability to access capital and outlook has finally been realised. The price still is unappealing but there's no reason to hold the stock unless a white knight can be found. We know it's not Blackstone, they came out and said they weren't considering it on Wednesday (Reuters). 

SUNE's second quarter results released in August only confirmed what the market should have acknowledged debt vs earnings and over-expansion is a recipe for...What are the implications for the yieldco's? Another over-expansion similar to the Chinese co's of yesteryear. 

Barrick Gold (NYSE: ABX) continues to flogs four mines to continue reducing debt. It makes one wonder why they bothered in the first place - See Mining.com Barrick Gold. Their need for cash is keeping the short-interest happy in Acacia Mining (ACA) - from memory ABX still have 64% in ACA and with the significant overhang, would you be a buyer?

Lucara Diamonds in Canada (TSX: LUC) - not only found 1111 Carat Diamond where the share price was muted but then LUC recovered two more diamonds including a 813CT stone. We missed the price action due to travels but what took the market so long to react positively?! Certain traders...tut tut. 

Anglo Pacific (APF) - companies apparently have efficient with their IR - last weekend we had reports in the press that Rio Tinto were threatening to close their Kestrel operationsdown if they did not get approval for Kestrel. APF, by the silence, obviously do not consider the ground water issues in Australia significant enough to update the market on the future prospects of Kestrel. Perhaps the market will be honoured of an update within the Q3's due 26th November 2015 this week coming. 

Kaz Minerals (KAZ) - luckily for them they have a Chinese contractor whom appears to be very flexible. KAZ have been granted a reprieve with some can kicking of liabilities by Non Ferrous China (NFC). Over to KAZ, (bold and italics are additions):

Under the revised terms, $300 million of construction costs which were scheduled to be paid in 2016 and 2017 will be settled in the first half of 2018. There is no change to the overall amount payable to NFC or the project budget of $2.3 billion. Aktogay remains on track to commence production from oxide ore in 2015 and production from sulphide ore in 2017.

Oleg Novachuk, Chief Executive, said: "The deferral of $300 million to 2018 provides KAZ Minerals with additional liquidity during the construction and ramp up of Bozshakol and Aktogay. This agreement also demonstrates the strength of our relationship with NFC and continues our strong track record of securing support from our partners in China for these strategically important copper projects."

We maybe have a different understanding of the term additional liquidity to others, however the directors think it's a positive - John Mackenzie bought 5000 sharesAndrew Southam purchased 99,238 shares and Simon Heale (and connected parties) purchased 77655 shares. Perhaps they feel the purchases will be beneficial and a sign of a recovery in their company - hmm What additional liquidity is there?!?!

Coal - The UK Government came out with all coal power stations Technica - coal power plants to close 2025. This doesn't bode well for the industry as a whole nor prices where similar policies are impacted on global prices. Mick Davis / X2 might just be better suited to other projects, but one suspects they smell a bargain on some Australian assets. 

Are Drax (DRX) viable? With risks associated with their subsidies and the general outlook to biomass. Having met with a few private companies recently involved with ports, the outlook certainly isn't encouraging with some owners looking to sell. Implications for HSP (Hargreaves Services), albeit it should be cash generative even allowing for RedCar Steel closures. What is the read across to Associated British Ports and Clarkson's (CKN) etc....etc...

Cliffs Natural Resources (NYSE: CLF) - continued with their views on dumping in the US by China as well as announcing they are temporarily idling iron ore pellet production at its Northshore Mining operation in Minnesota by Dec. 1, 2015. Another company where this is no reason to hold the stock until anti-dumping measures are enforced. One suspects there's others issues at stake so it's going to take longer than the companies under pressure hope for. 

Royal Mail (RMG) - came out with better than expected results. The sector outlook remains competitive and consider RMG, in the absence of significant change, to be a dinosaur. The industry, like most sectors,  is cannibalising their own margins in the search for dominance. Not specifically aimed mail and courier companies - but there appears to be a thirst for expanding into space at the cost of all. See DX Group (DX.) trading update and UK Mail (UKM) half yearly report whom both showed the competitive nature of the market.

Johnson Matthey (JMAT) – Interim results were undoubtedly better with the added bonus of further savings (£30M). The news from JMAT’s Emission Control Technologies division (ECT) was waited for. There have been few/little indicators of how well the diesel market was performing after the current VW issues (whom just increased the number of cars with emission woes).  Our belief that the diesel demand would fall has so far proven incorrect with Europe doing well – more so it appears to be expanding.

There has been continued commentary around NOx emissions from diesel vehicles and speculation as to whether diesel's share of production in Europe may decline.  The proportion of diesel vehicles produced in Western Europe was stable at 51% in our first half (H1 2014/15 50%).

We did not properly consider that lower PGM prices would be so beneficial to the working capital levels.  Nor the true read across from the NOx issues that are a hot topic as a result of VW’s actions. JMAT, like Umicore (EBR: UMI), informs us that 6B + NOx requires additional catalyst technology and increases sales per vehicle for Johnson Matthey by around 20%.

JMAT's Dividends will be hugged in a shrinking market. (bold italics addition- An interim dividend of 19.5 pence per ordinary share has been proposed by the board which will be paid on 2nd February 2016 to shareholders on the register at the close of business on 8th January 2016.  

The estimated amount to be paid is £39.6 million and has not been recognised in these accounts. The board is also recommending a special dividend to shareholders of 150.0 pence per ordinary share which will be paid on 2nd February 2016. JMAT could have utilised the sale proceeds better, one would hope they’re in the process of one or two acquisitions before the 2nd February.

Have a good weekend, Atb Fraser

Monday 16 November 2015

PM Bolt-On: Exclusively Majestic Wine (MJW) - you may need coffee.

Good Evening,

Majestic Wines trading update came in better than expected - fear not, it’s still not great but with the 'strategic review completed' the market has bought into the story. Despite Majestic Wines stating the obvious:

This transformation will take time and require significant investment, so we expect profits to fall before they grow again. However, we are certain that it is the right thing to do for shareholders, customers, staff and suppliers.

The structure of Majestic's pre-Naked Wines meant MJW should have been able to develop a Business to Business (B2B) and an e-offering without having to acquire Naked Wines. Majestic had an established network and logistics already in place – it did not have to spend £70M.  

Majestic's web-based expansion plans are putting shareholder returns at risk (dividends), with the majority of free cashflow likely to go towards customer acquisition - why is the market buying into this? With the company guiding to no dividend until July 2018 at the earliest, there's no urgency to put equity at risks unless you are a true believer in the story. 


EMC's believes in the short-to-mid-term that online wine, text for wine and all web-type-wine-entities offer limited upside. The method of acquisition and enticements do little to promote customer loyalty; resulting in higher costs and ironic reduced loyalty rates. The market appears to subscribe to the "hope value in this being a profitable web based offering", we do not.  

These types of marketing strategies are a bet on a customer relationship lasting long enough to recover the initial outlay and make a profit. Examples of enticements being a free case of wine, £40 off a case', or sign up to paying a monthly fee for discountsHas the market not seen this before - including offering rewards for recommending friends

The best of the results are normally in the summary, we'll handover to MJW (bold, italics and underlining are additions) and cover some of the balance sheet later:
  • Underlying H1 trading encouraging at Majestic Wine whilst strong growth continued at Naked Wines.
  • Thorough strategic review now completedchallenging medium term target announced today along with key new initiatives and updated short term cost guidance.
  • New management structure and team in place and working well. 
Are Majestic management losing sight of the value of Majestic retail by chasing revenue with Naked Wines? The challenging medium term target implies there's going to be a revolution in online wine sales and the Business to Business (B2B) arena. Established players are very adept at dealing with challenges. We believe there is a good argument for a Majestic (brand specific) web offerin - where customer acquisition costs could be cheaper than if the Naked Trader brand or format was used and with brand loyalty.  

There's undoubtedly value in expanding the B2B offering, but the question remains, why expand within an already competitive online market place? What is Naked Wine's edge in the market place? 

If Majestic asserts that Naked Wine's will be the go to virtual shop for online wine, one has to consider the competition - Laithwaites and Virgin Wines (This is Money). In an already competitive market, we now question whether growth will be profitable enough to warrant the investment and the suggested valuations (we have avoided stating shareholder returns at this stage).

Analysts with rose tinted spectacles might like to consider the following: Googled for you -search wine (Search 1) and Googled for you - online wine (Search 2). Please note the positioning of "Majestic's" in Search 1 compared to Naked Wines in Search 2. More so LaithwaitesVirgin Wines  and Tesco all come in above Naked Wines in Search 2. The very position of Majestic in search two (online) questions why there was a need to pay £70M for Naked Wines. EMC ignored the advertisers as well, albeit these are as poignant. 

We note the change in director’s responsibilities and some amusing KPI's with a challenging set of three year targets up to 2019 (see further down). 

Over to Majestic with their Three year transformation plan highlights (ECM's additions are italics, bold and underlined):

  • Underlying H1 trading encouraging at Majestic Wine whilst strong growth continued at Naked Wines.
  • Thorough strategic review now completed, challenging medium term target announced today along with key new initiatives and updated short term cost guidance.
  • New management structure and team in place and working well.
  • Announcing today a new strategy to deliver sustainable, volume led earnings growth and improved return on capital
  • Targeting over £500m sales by 2019. Key performance indicators to demonstrate progress are also published today
  • Good progress made on structure, team and key initiatives
  • Key elements of the plan include:
  • Absolute focus on disciplined investment to generate returns on investment - measured as annual recurring EBIT generated as a % of investment outlay - above our target of 25%
  • Change of emphasis from opening new stores to new customer recruitment to drive higher returns from the current level of investment spend
  •  Total UK store target reduced from 330 to 230, currently 211
  • Reviewing the existing store network for opportunities to unlock value
  • Reinvigorating sales growth in mature Majestic Retail stores with a new and simplified pricing policy (including no minimum purchase) and improved customer experience in store and on-line
  • Continuing to expand the fast growing and successful Majestic B2B business by winning additional accounts
  • Continuing to expand the fast growing and successful Naked Wines businesses in the UK, USA and Australia
We concur with B2B focus and customer relationships managers (CRMs) that have perhaps been underutilised to date. In essence, Majestic will be making the current estate work harder and this is always a positive for shareholders. However, these positives may be offset by Naked Wines that has to acquire customers at a cost - one cannot help but wonder if all the key metrics and words utilised sound a little "Hello Fresh" like in the KPI format (below)

Likewise, reducing store footprint and/or limiting expansion when growing the B2B is somewhat of a contradiction. The ability to deliver and compete would surely be a benefit of further expansion. There is also a marketing opportunity within the B2B that would cost significantly less than the Naked Wine concept that entices customers with a free case of wine or similar etc.

Majestic's KPI's     

Segment
KPI
Current level
Significant improvement by:
Majestic
Customer retention
45%
H2 FY17
Retail
Product availability
67%
H2 FY18

Store manager retention
77%
H1 FY18

Wine quality
TBC
H2 FY18

Proportion of 5-star service ratings
85%
H1 FY17
Naked
Number of Mature Angels
269k

Wines
Net Growth in Mature Angels
+29k


Retention rate of Mature Angels
66%


Growth investment in Mature Angels
£1.2m


Return on Investment in New Mature Angels
112%


Note: Wine quality at Majestic Retail will be measured in future by customer ratings. No current data is available.

Questions;
  1. How does Majestic's measure customer retention? 
  2. What is the retention measured against - Active Customers? Does it mean incentives are offered to customers to stay? 
  3. With a 45% Retention Rate - does one assume then that it is a 55% churn rate? 
  4. Will all these retention numbers be stripped out per operating divisions? 
  5. How does one check in a shop-based business if someone is a returning customer – store customers are notorious for forgetting to bring their loyalty cards.
  6. Product availability? Does this mean Majestic's has to carry sufficient stocks to not be out of stock? Or simply have wine for sale? Being out of stock is only a bad thing if it means a lost profitable sale – what is customer behaviour – do they substitute; or return; or have deliveries to their home? 
  7. Are the Majestic stores out of stock because the model relies on limited volumes of attractively priced wine to bring the punters in? Without explanation and analysis ensuring sufficient stock could be a Majestic own goal.
  8. Store Manager retention - is the limited opportunistic research we've conducted correct, that Majestic are haemorrhaging their talent at significant cost to training?
  9. 5 star customer service based on what platform for reviews?
  10. Are Mature Angel customers who leave kept on the books for a period of time "just in case they re-join?" Or is their no motivation for Angels to return.
  11. Retention of Mature Angels – as per the KPI table - in the cycle of achieving the status of a Mature Angel, does this mean 55% churn/exit before becoming an Angel. Once qualifying, is there an expectation of 35% of Mature Angels exiting. What is the cost to the company for a customer to attain the status of Mature Angel? Or for that matter, the cost to customer?
  12. Growth Investment in Mature Angel? Is the KPI the amount the customers have paid in or the amount the company has spent?
  13. What's the difference between Naked Wine and any other offering? 
  14. Do supermarket models offer less value? We disagree and consider Naked Wines model to funding and monthly payment a hindrance to customer on-boarding and choice. Supermarkets including the discounters challenge the model not just on price and margin but more importantly convenience. 
  15. Is the Naked Wine's "customer monthly payment/crowd funding" model the way forward rather than a hindrance? The customers shall decide over time - perhaps it gives some sales outlook and reliability in forecasting
  16. Comparatives are hard to find in LFL wine offerings but there are remarkably similar themes. The main benefit being, one doesn't have to pay monthly or become an Angel "to obtain a discounted price" at a supermarket or off-licence. We feel this type of offering / marketing gimmickry may work, in the short term
  17. A KPI of "average revenue per customer" or "average basket price"- like Majestic used to report would be beneficial. 
We should at least loosely consider Majestic’s results:

  • Net debt and liabilities are currently near £25M – with the aspirations of expansion there is a real likelihood this will increase as marketing/customer acquisitions continue apace.
  • All is not lost though - debt is sufficiently serviceable if operational performance remains stable and/or improves in 2 of the four divisions.
  • We rate Majestic Wine retail division and consider the commercial division B2B to be of significant future value as it has yet to be fully developed. We can draw possible similarities in the B2B space between Conviviality (CVR) and Majestic's in the future and the potential of such an offerings - perhaps even M&A to command better margins. 
  • Ley and Wheeler (L&W)– we acknowledge that L&W could be developed further with the possibility of added to other divisions with the bolt on of specialist fine wine business.
  • We have already mentioned the reduction in new store roll out (CAPEX) - one suspects will be directed towards marketing.
Today confirmed the belief that dividends are toast for the foreseeable future – Majestic suggests they intend to return the dividend in July 2018. This validates our belief that Naked Wines does not fit the Majestic model and will be a drain on profitability longer-term.

The hype of the 'internet of things' is not a model we invest upon within the wine space. Retail clothing yes (BooHoo etc…), but wine has so many other competing factors including supermarkets and their discounting cousins. Simply, why add another 'point of sale item' to your weekly/monthly shopping - hobbyists perhaps but the average consumer........? 

Businesses should be viable and as such, Naked Wines needs to prove itself significantly more to warrant us buying in Majestic. If investors feel there are rewards in buying the stock based on two divisions and hopes of an web-based wannabe Goliath (Naked Wines) + specialist fine wine business – then today will no doubt present as an opportunity over the longer-term. 

We do not deny the webcast was well received by the market – however we remain unconvinced. We feel the strategic review was unchallenging and has not gone far enough improve the outlook for Majestic Wine on many levels. Validated in part by the Majestic statement:

We are excited and confident about the future, but I must emphasise that these plans will take time and require investment, which means that we expect profits to fall before they return to growth from a low point in FY16.  We anticipate that our strong cash flow will enable us to invest as needed while continuing to deleverage and restoring the dividend in full by 2018.

In our view, they have not answered how they will manage the supermarket threat to margins (conventional or discounters); or how they will shift consumer perception of their offerings and how the value of Naked Wines is justified. The outlook for Majestic may be changing, but currently there are insufficient indicators to warrant us being a buyer; we have been negative since the acquisition of Naked Wines. 

The benefits of the economic moat Majestic previously had have been eroded - this we felt insulated Majestic's offering with the 6 bottles minimum purchase. This helped establish Majestic’s brand and offering over years and was devalued in an instant; other options were available and should have been explored.

We believed the two models do not fit together for investors. A good percentage of shareholders would have invested on the basis of a very different concept. Expect those in Majestic 1.0 (dividends and modest growth) to sell into any strength of Majestic 2.0 (web-based hopes and expansion). 

Atb Fraser

Sunday 15 November 2015

Weekend: Tous pour un, un pour tous + A Fad of Things, Property, Retail and Wines!

There's no good in the actions of those in France! So it’s limited to - Evening, rather than ‘good evening’.

Tous pour un, un pour tous! Sympathy and thoughts go out to the families and friends of all those affected by the senselessness that occurred in France.

We are losing count of the profits warnings and revisions in guidance on a global scale – especially industrials. The trade this week was Rolls Royce (RR.) where the interimmanagement statement echoed the woes of Fenner et al. A general theme about earnings and outlook that will continue for the foreseeable future (over to Caterpillar after the JCB layoffs).

Themes from the previous week continued all the way through and are now the reality (Weekend's EMC - NFP & Weaklings) - deflation is hurting earnings and causing a nervousness in guidance. Those companies that are leveraged whether in oil & gas, manufacturing, services and support are all starting to acknowledge "the world's largest customer(s) are changing / have changed their appetite." 

In the US the likes of FitBit (NYSE: FIT) is beating the trend (currently), with what we here consider a gimmick formulae. FitBit need to overcome a common theme of fad utilisation with their products, which are often used for not much longer than that of a gym membership - circa 3 months (EMC research) there after being destined for a drawer. 

We have to acknowledge one reader’s wife’s commitment to use her for an eternity! Although if you’re stuck for a present for your beloved, you too can do your thing for wearable revenues! Wearable tech undoubtedly has mileage across the sector, but with competition, what’s in it for shareholders? Those reliant on one arm (scuse the pun) of the sporting sector are limited in their traction, where they’ll have to compete with the likes of Nike+ etc.…

For some investors, they have been rewarded with the Fossilacquisition of MisFit, but for others it’ll be a cycle of confetti issuance for equityraisings a la FitBit.  There is perhaps a hope of being acquired rather than having to justify being a viable business that warrants a decent valuation.

FitBit’s placing (and discount) was expected and the price is understandable when one has a quick look at the accounts. Innovation costs money, especially where there’s a theme of a “fad of things” emerging. The EMC considers FitBit to have an over reliance on novelty and gimmickry that drives sales – Christmas is upon them where they should do well. We will not comment on Fitbit inventories levels, receivables and trade payables, they appear to be insignificant to investors – but not those that bought into the equity issue.

Rocket Internet (ETR: RKET) call these “proven winners” (Rocket Internet terminology from the lengthy CMD) - but we have HelloFreshbeing withdrawn (FT). Bringing into question the valuation of Rocket’s “proven winners.” The market is getting wise to the actions of companies, especially those that issue discount vouchers like confetti pre-IPO.

Within the commodities space we have the Icahn’tseries of Freeport McMorran (NYSE: FCX). When a major investor tries to bet against the global outlook; one should pay attention. The market is changing, oil will stabilise as will copper, but significant bets against a global trend are often unwise (in the short-to-mid-term). We note the two brokers that criticised our approach - being 40% down from our commentary, are we not validated?

We also have trends occurring in retail space in the US that have yet to present themselves fully in the UK - albeit consumption has been brought forward by Help to Buy (H2B) scheme. This is propelling the results of the house builders, but with a muted response from the market Inc. BarrattDevelopments Trading Update (BDEV), RedrowAGM Statement (RDW) and GreatPortland Estates (GPOR). This Tuesday (17 Nov 2015) sees British land (BLND) reporting half yearly, a stalwart that shouldn’t be ignored.

US retail space are admitting the need to entice consumers with discounts and showing the price-sensitivity in the market – evidenced in part by Macy’s and NordstromQ3 Results. Big ticket items impacting on retail - Walmart, Nordstrom and Macy's all showing a similar story. By big ticket, we mean houses, cars, home refurbishments and extensions, electronics and smartphones – yes this is a retail driver in China as well (missed by most!) and will have consequences to this.

In the UK these themes have already hit the likes of Kingfisher, Travis Perkins, Speedy Hire, HSS and as a wildcard Halfords. Two companies in that list haven't helped themselves either (Speedy & HSS), but we'll save that for those accounting gurus with more time on their hands. 

Retail will also be hurt by the rise in student debt, where there is a suspicion that student registrations rose because of the recession rather than a yearning trend to improve oneself. The student leverage and consequences mean that a few generations are going to skip a housing purchase until later in life.

If society loads a student with debt the consequences will impact an entire generation, especially where wage growth is slowing or deflationary. Student Fees on the increase, student loans on the increase…remind yourself of the purpose of education?

Pearsons (PSON) education is showing the realities of the market place. See PSON interimresults graph for a trade plan courtesy of Bloomberg ™® and one shrewd trader.












We have Majestic Wines (MJW) reporting tomorrow - with the trading update from Conviviality(CVR) – have they cannibalised MJW’s margins? Majestics have erased their economic moat of six bottle minimum purchase – we will start to see the implications of this tomorrow and average spend.

Some poignant questions for Majestic Wine’s – if the removal of the 6 bottle limit didn’t impact on revenue, will it maintain them longer-term? What is the customer acquisition costs of Naked Wines? Are Majestic’s in a declining space where novelty type drinks are on the increase? We have insufficient data for a conviction trade. We won’t comment on their limited response from IR either and will maybe comment further tomorrow. …

Atb Fraser


In trading or taking a view, the impact of being laid off, made redundant or hurt by the actions of some idiots may appear to be ignored. These are never forgotten, including the implications for the families.