Small Cap Value Report (Mon 18 Nov 2019) - HAT, IQE, CMH, MIRA, LWRF
Good morning!
Today, I'm provisionally looking at:
- H & T (LON:HAT) - FCA review of unsecured lending business
- IQE (LON:IQE) - trading update
- Chamberlin (LON:CMH) - interim results
- Mirada (LON:MIRA) - interim results
- Lightwaverf (LON:LWRF) - strategic review
H & T (LON:HAT)
- Share price: 275p (-26%)
- No. of shares: 40 million
- Market cap: £109 million
(Please note that I have a long position in HAT.)
What an unpleasant way to start the week! H&T has been one of my largest positions for a long time. It reached 25% of my portfolio before I finally reduced the size of the position in August 2017, selling coincidentally at around the current share price.
Thankfully, I had no plans to sell any more H&T shares, so this news doesn't bother me all that much - I can continue holding it until the costs of this FCA review have been digested.
The FCA has singled out H&T for a review of its unsecured loans business:
This review is focussing on H&T's creditworthiness assessments and lending processes for HCSTC loans, in light of changes to the Consumer Credit Sourcebook (CONC) rules regarding affordability assessments implemented in November 2018 and the Dear CEO letter issued to all HCSTC firms by the FCA in October 2018.
Background
Some investors avoid this sector entirely, for ethical reasons. Personally I don't think that bank overdraft charges or credit card fees are any better from an ethical point of view - but perhaps that's a debate for elsewhere!
From a practical point of view, and considering the sector as a whole, it has been wise to avoid the short-term lending space. The regulatory environment is making it almost untenable.
Normally, if a borrower defaults on a loan, this is considered to be an unfortunate situation for both the borrower and the lender, who have both miscalculated what the borrower was able to achieve.
But when this happens in the world of short-term unsecured lending, borrowers are considered to be the victims of predacious lenders. This is reflected in huge legal liabilities on lenders, who can be chased for compensation for seemingly trivial and subjective reasons such as not speaking "sympathetically and positively" with a defaulter.
Wonga is long gone. The Money Shop collapsed this year, under a pile of compensation claims. Albemarle Bond has shut down. And QuickQuid is gone, too, under the weight of compensation claims and with its owners citing "regulatory uncertainty". The compensation payouts will have been welcomed by many customers, but the firms which paid them out are now finished, and won't be back.
H&T's position
I've been aware of the risk in this sector, and was consciously happy with H & T (LON:HAT) because it did not have a major exposure to HCSTC (high cost short-term credit), informally known as payday lending. I was hoping to avoid a day like this, but even worse - with the share price dropping 50%+, say.
If you scroll back to this year's interim results, H&T's average monthly net loan book had increased by over 20% to £20 million. But the proportion of its loans that fell under the definition of HCSTC were just 36% of this book, down from 50% in the prior year.
I was also encouraged by this statement in the interim results:
Our historic approach to affordability and creditworthiness ensured we were in a positive position to be able to meet all new requirements with minimal changes to our policies or procedures. In November 2018 the FCA's new rules and guidance on assessing affordability and creditworthiness in consumer credit came into force....
Unfortunately, this doesn't match up with what the company says today:
The review is ongoing and will result in changes to these policies and procedures surrounding H&T's provision of unsecured HCSTC loans. The Group has ceased all HCSTC unsecured lending, at least temporarily...
What on earth?
Let's be clear: in August, the company said that it was able to meet all new requirements with minimal changes. But now, it says that its policies and procedures need to change.
I don't wish to be too dramatic about this, but it's a shocking difference in just three months.
Therefore, I'm not surprised to see the share price fall by more than it seemingly should for purely quantitative reasons. There is a question mark over the company's ability to predict regulatory action - other companies in the space have been unable to predict what the regulator would do, so maybe it's inevitable that H&T would have difficulty, too?
And there will be concerns about how long this issue could drag on, and how the costs could mount up. And as I wrote on Twitter this morning, it's an unfortunate distraction when management should be focusing on the successful integration of the 65 acquired Money Shop stores.
Conclusions
At the time of writing, the fall in market cap is worth almost £40 million.
This reflects both the immediate costs (compensation claims/fines/review costs) and reduced profitability in future periods, without any short-term unsecured credit product.
But I must applaud H&T for the clarity they provide in helping us to quantify the problem:
In the year to December 2019 H&T expects that the proportion of revenues in the HCSTC unsecured lending segment is less than 4%...
H&T is looking at the HCSTC unsecured lending practices over the past 6 years as part of this review. The average HCSTC unsecured portfolio over the period has been £3m with a peak in December 2016 of £4m and has now reduced to £3m. There were total customer interest payments of £24m over this period. Revenue less impairment over this period totalled £11m.
You might not agree with me, but I think that these numbers are all very small in the context of H&T's overall business. Revenue less impairment from short-term lending has averaged less than £2 million per annum, and has not been rising since 2016.
Therefore, while this is a blow, I doubt that it is a terminal problem. Let's consider the company's financial situation:
- June 2019: net debt of £11.6 million
- July 2019: used £8.6 million of banking facilities (and a strongly supported equity raise) to buy and fund Money Shop stores.
- September 2019: used £8 million of existing cash and banking facilities to buy pledge books from Albemarle Bond.
In the absence of free cash flow from trading, these developments could have pushed net debt to £28 million, and that's before the company gets slapped with customer redress payments.
Fortunately, the rest of the business continues to trade in line with expectations (according to today's RNS), and these expectations were upgraded in September.
Therefore, I would hope and expect that the company's ongoing profitability will enable it to handle this issue, without coming back to the market for fresh equity. It says in today's RNS that existing financial resources should indeed be sufficient for any customer redress payments.
For the record, EBIT of £19 million is forecast for the current financial year, rising to £22.8 million next year (before taking into account the withdrawal from short-term credit).
I'm a little tempted to increase my position size, but am most likely to neither buy or sell any shares in this business. It is now just 8% of the portfolio.
Just goes to show that you can never get too comfortable, when owning shares in a highly regulated business. Perhaps I have under-estimated this risk in the past - but I'm still a big fan of H&T.
IQE (LON:IQE)
- Share price: 53p (-19.5%)
- No. of shares: 793 million
- Market cap: £420 million
Cardiff, UK 18 November 2019: IQE plc (AIM: IQE) the leading supplier of advanced wafer products and material solutions to the semiconductor industry, announces the following trading update for the full year ended 31 December 2019.
There have been high hopes about this one for a long time, but anyone who bought into it since mid-2017 is unlikely to have done well (so far). This year, it has been an unlucky victim of the events surrounding Huawei's relationship with the US.
In June, the company announced a sales miss for 2019. Revenue would fall somewhere within the wide range of £140 - £160 million (versus previous consensus forecast of £175 million).
Today, we learn that it is struggling to meet even these reduced expectations. Revenue will fall somewhere between £136 - £142 million.
Visibility sounds poor. There are only six weeks left in FY 2019 (slightly over 10% of the year), and yet the company still needs a >4% margin on its full-year revenue forecast. Could we not expect a tighter forecast than that, at this very late stage? Does it not already know what orders it will be working on in December?
The company says there is a forex tailwind of £3 million, and this is included in the new guidance.
So without that tailwind, I presume it's fair to say that revenue guidance would be £133 million - £139 million? And that would fall fully outside of the previous range.
So revenue is down compared to 2017 and 2018, despite all the heavy investment that has taken place. Today's RNS refers to "general diseconomies of scale associated with operating at low volume in some sites", and forecasts an operating loss for the current year.
My view on IQE has been consistent, I think: while I would never claim to be an expert in its technology, I've always thought that its financial performance looked very ordinary.
I said in May: "why would you want to buy a capital-intensive manufacturer from Apple's supply chain at a multiple of 26x, when you can buy Apple itself at 14.5x?". In June, when the share price dropped as low as 44p, I said that it made a more interesting candidate for a short sale, rather than a long idea.
Operations
Photonics - "consistently strong" volumes with the Company's largest customer, "underlining IQE's lead position for epi-wafers in this supply chain".
Wireless - "continued low volumes of orders and reductions in inventory by our major RF chip customers in the US".
Capex - I've noted previously that the company was headed for a net debt position. Fortunately, its debt facility has been increased to £57 million. Net debt is forecast to end the year at up to £20 million, as capex plans are reduced.
Outlook
The outlook for 2020 includes a seasonally weak Q1 and continued supply chain transitions in the wireless market. Beyond Q1 2020, IQE is cautiously optimistic about a return to growth... the Company expects total revenue will return to moderate growth in 2020.
My view
It won't surprise anyone that I remain sceptical when it comes to this share's valuation. As far as I can discern (bearing in mind that I'm not an expert in this technology), it's a heavy manufacturer that plays an important role in a few supply chains, but doesn't appear to have much pricing power. And there is no sign of much/any revenue growth in the short-term.
On that basis, I would value it around book value, or more realistically at a discount to book value, to reflect its poor track record when it comes to profitability.
For the record, book value at June 2019 was £298 million. Excluding intangible assets. this reduces to £175 million. I would guess that a reasonable valuation is somewhere below this.
Stockopedia agrees that there is little to say in its favour, and calls it a Sucker Stock.
Hopefully I've got this completely wrong, and it works out well for shareholders despite all of the above!
Chamberlin (LON:CMH)
- Share price: 23p (-10%)
- No. of shares: 8 million
- Market cap: £2 million
This small engineering company reports revenues down 26%, an operating loss before restructuring costs of £1 million, and a "major downsizing of operations".
Net debt at £6.1 million, as I'm sure you can tell, is multiples of the market cap.
Outlook - "the combination of higher revenues and a significantly lower cost base is expected to give rise to second half operating margins of approximately 3%, with a consequent reduction in net debt."
My view - it has been listed for a long time, and has very admirably refrained from diluting shareholders during that period. But if it's not going to grow from this very small size, can a listing really be justified?
Mirada (LON:MIRA)
- Share price: 140p (-12.5%)
- No. of shares: 9 million
- Market cap: £12.5 million
Interim results: replacement and clarification
Mirada had a bit of trouble reporting its IFRS 16 numbers this morning. Hopefully all sorted now.
This company makes software for digital TV operators. It has been around for 20 years, and has well over 100 employees (163 according to Stocko), but it has very rarely produced a profit for its investors. This is not forecast to change until 2021.
The interims show an EBITDA profit of $1.96 million, but this includes a $1.7 million gain from a disposal.
Trading is in line with expectations, but the share price is down, anyway.
Sales pipeline is described as "very healthy". The company has "considerable confidence" in the future.
My view - it is extremely difficult to analyse Mirada's prospects. The shares are only for the brave.
Lightwaverf (LON:LWRF)
- Share price: 3.7p (-7.5%)
- No. of shares: 121 million
- Market cap: £4.5 million
Strategic Review including formal sale process
This "connected homes" business reported a nasty profit warning earlier this month.
While today's RNS puts a brave face on things, it sounds to me like it is basically throwing in the towel.
Here's part of the explanation given:
"..the Company would benefit from additional finance from a financial or larger corporate partner in order to support the Board's growth plan. Whilst the Company has been able to raise equity finance to support its development, the Board believes that the recent fundraisings have taken up more of management's time than desired, relative to the amounts raised and this has adversely impacted growth.
My view - no change to my view that widows and orphans (and probably lots of other people, too) will feel a lot safer not owning any shares in this. It gets the mandatory Sucker Stock warning from Stockopedia.
All done for today. Thanks everyone!
Graham
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40 comments
Here are Edison's comments on IQE's trading update:
https://www.edisongroup.com/wp-content/uploads/2019/11/IQE-Continued-impact-from-supply-chain-disruption.pdf
"IQE’s reduced guidance for FY19 revenues of £136–142m (vs £140–160m previously) reflects primarily the greater than anticipated disruption to its major US wireless customers as a result of the US/China trade war. There is good evidence to support a recovery in the medium term:the qualification of products and tools in the Asian supply chain for both 3D sensing and wireless RF is encouraging, while exposure to 5G remains attractive. However,the timing of a recovery is difficult to gauge and with Q120 expected to be seasonally quiet we downgrade our FY19 and FY20 revenue estimates by 5.3%and 15%respectively, with FY19 EPS reduced from a 0.5pprofit to a 0.8ploss and FY20 EPS reduced from2.3p to 0.3p."
Thanks for your candid view on HAT. I have added to my position on the basis the fall is overdone for the potential impact of such a small % of the total book........................Let's see.
I do agree with the conflict with the statement 3 months ago.trust you will be having a word with them.
Consort Medical (LON:CSRT)
Recommended offer for this company today at a decent premium to the closing price on friday (40% ish)
The price now sits at 1040p compared to the offer price of 1010 - so i am guessing the market thinks there is the chance that someone else may also bid for the company.
Note although the price is at a decent premium to the friday share price - the price friday was pretty much at a 5 year low - so it is kinda just putting things back to where they were before the earnings trend started to take a nosedive.
On the basis that the company had a low valuation pre today i kind of think if this offer does fall through i guess the shares will be back down 20%+ - so i am minded to sell up albeit i think i may give a few days for a counter offer to turn up.
anyone any thoughts on this one?
Thanks for the report Graham.
I'm a former holder of H&T, having sold in the summer. I never liked the unsecured lending, particularly the impairment charges below. The impairments amounted to over 50% of the revenue. If I understand this correctly, it's NECESSARY to charge a fairly steep interest rate in order to cover all the impairments. So if the regulators want to stop the high interest rates, then they will most likely deprive consumers of access to loans in this segment.
Regulators should ensure they get the right balance between protecting the consumer and ensuring freedom of choice. I've been on the wrong end of too much regulator interference with issues like pension transfers and spread betting accounts.
The pawnbroking business seems way better than this.
Thanks for the input, jonesj. I'm in H & T (LON:HAT) primarily because of its extremely strong position in pawnbroking, which is still responsible for nearly half its gross profits (H1 result). And then the gold purchasing, scrap and retail segments (which have very strong synergies with pawnbroking) are responsible for another 17% of gross profits.
The other segments are a bonus, but in my view are not the main event.
H & T (LON:HAT) may well be a bargain at current levels, but the uncertainty created by the FCA investigation, in terms of financial and reputational risk and the time it may take to resolve makes it difficult to make a positive investment case. There is also the volte-face regarding the need to implement changes to policies and procedures in respect of HCSTC as highlighted by Graham that saps ones confidence in management.
So all in all I have decided to sell my holding at a small loss and will look to deploy the funds in other stocks where I have more confidence. All best to Graham and others who continue to hold
Jonno, agree with your strategy - have done exactly the same. No smoke without fire as they say and I can't face any more conflagration in small cap stocks!
You might also have added Cattles to the list. Not a great sector for investors?
Indeed - not a great sector. Thanks for adding Cattles to the list!
Before anyone gets too hung up on the 10% "expropriation" of all UK companies with more than 250 employees as envisaged by Labour's Inclusion Ownership Fund, bear in mind that part of its announcement in September had a let-out: the proposal would be subject to consultation (and so presumably suitably amended) before anything is presented to Parliament.
As proposed, it contains a number of practical and legal difficulties - but its aims of increasing productivity and social justice are something that all political parties agree with.
In fact, these aims could be achieved within structures that already exist. A bit like Brexit really - coming up with what sounds simple, but which hides a lot of complications that could prove damaging...
Anyone thinking that this Labour leadership has anything in common with previous versions, or thinking that it would be amusing to see their ideas implemented is making a big mistake. Labour is now dominated by genuine believers in Marxism (read some of the material from Andrew Murray, lifelong member of the Communist Party, now special advisor to Corbyn). They despise the centrist approach of previous Labour leaderships. Many of them were expelled by previous Labour leaderships.
They have been trying their whole lives to "break capitalism". Why give up when they finally gain power? I don't think markets would hang around to see if their policies are limited to their manifesto.
The plus side is that this risk is already partially reflected in prices, so this offers scope for potential gains.
Thanks Graham and others, for your thoughts on H & T (LON:HAT).
Separately some videos! piworld are starting to release company presentations from Mello. This page will be updated as they are published.
For now we have the Belvoir (LON:BLV) presentation by the CEO, Dorian Gonsalves. This franchise throws off a 6% dividend, has various revenue streams, (letting, sales and more recently financial services). Dorian has aspirations to get it to £100m market cap. Let's hope the market agrees as the story progresses.
And, Polar Capital Global Financials Trust (LON:PCFT) presentation by Fund Manager, Nick Brind. An excellent overview of the financial sector, and why Nick thinks it is currently undervalued; towards the end he outlines Polar Capital Global Financials Trust (LON:PCFT) as a potential investment to benefit.
Finally, NOT Mello! Tremor International (LON:TRMR) has been somewhat of a marmite company. Here is their tech demo given at finnCap last week. Now, we are able to see under the bonnet of what Tremor International (LON:TRMR) offer to advertisers, their demands, and how the tech delivers; hence, what drives TRMR's revenues. If you follow Tremor International (LON:TRMR) or are interested in Ad Tech this is a must watch
If the FCA are all over HAT it could well get expensive, time consuming and messy. Whatever number we think is appropriate I suspect when the music stops it will be x4.
H & T (LON:HAT) RNS today demonstrates the risk from 'false friends' - businesses that look strategically adjacent and easy add-ons but aren't. Their core pawnbroking (lending on an asset) probably has a high overlap in terms of customer socio-demographics as their lending to HCSTC. But at an individual level I bet they are very different. H & T (LON:HAT) Staff 's expertise is in recognising genuine valuable assets and spotting fakes to reduce risk - not in interrogating bank statements and customer cashflow, required in unsecured lending to sub-prime/non-standard borrowers. H & T (LON:HAT) is learning that super high interest earnings may deliver a high RAM (risk adjustment margin after impairments) BUT ALSO require a lot of expensive overhead to avoid regulatory non-compliance.
In contrast, I think HAT were super smart in picking up on the cheap the 113 pledge books from Albemarle & Bond (A&B) going bust at end of Sept 19.
So, if you believed in H & T (LON:HAT) for the long run at the 320-395p level ie range over the last 12M, today is bad news but maybe an opportunity to pick up a massive market leader in its niche (pawnbroking) who has just received a very expensive lesson to not deviate from its core.
The 25% reduction today has wiped out roughly £36Mn of market value. This compares to revenue gained in total from HCST loans of only £11Mn according to the RNS. Assuming most of these loans were appropriate, that means the share price fall is big vs expected redress bill, even allowing for extra legal costs and internal loss of focus. (It is a big mistake to have issued the RNS without some kind of estimate range of potential cost of remedy, even if this was necessarily wide.)
What the share price might therefore imply is that the market now thinks that HAT's planned profitable expansion into unsecured lending is ended. However, as HAT's RNS stated, it was already pivoting into 'Medium cost' lending ie typical APRs of 49% and longer terms. This is a much more sustainable area of lending with a lot of latent demand so I think this may be a n over-reation.
Certainly, if I did not already hold 2 specialists in this area already, I would consider buying.
(I hold NSF no face to face branch based lending and MCL, no 2 in Home Credit, NSF is 3rd)
I suspect that HAT had to issue the RNS when it did - as the news had a material impact on the company's profitability. - even though it was unfortunately not yet able to quantify that impact with figures.
To digress from H&T (I have no position), I have been contemplating the possible impact of a Labour election victory, and what to do about it.
I checked the odds over the w/e. Cons 4/7 to have an overall majority, 7/4 a hung parliament, and 25/1 Labour to have an overall majority (33/1 in places). I suspect Labour will lose many traditional voters who either support Brexit, or dislike Corbyn, or
both.
If a portfolio of £100k suffered a 10% fall, then a £300 bet on Labour at 33/1 would almost cover the fall. For a £1 mn portfolio a £3000 bet would cover the fall.
Would this be just throwing good money away? Is the hypothesised 10% fall way too low? Are there cheaper ways to hedge?
Of course, bookies do not always get it right.
The hit you take will depend hugely on what you're invested in.
If you're in water, BT and Royal Mail 10% would probably be way too low given the renationalisation intentions.
You could short the index via IG or similar as an alternative. Cost would depend on how long it was open and how tight you put your stop.
In addition, if you held the water co's etc. you could put an individual short sale on those to protect from the potential large loss.
As dmjram has said, the effect is likely to be highly sectoral. Potentially nationalised investments are likely to get a hard hit initially, at least. But the impact across the board is likely to be a lot less than some are predictiing - as has been the case when previous LP govts have been elected.
'But the impact across the board is likely to be a lot less than some are predicting'
Let's not forget the pledge to transfer 10% of the shares of all companies with > 250 employees to an 'inclusive ownership fund'. That will affect share prices across the board. I'm not sure if or how McDonnell intends to compensate existing shareholders.
It does seem to me that the proposed expropriation of 10% of the value in companies infringes every shareholder’s rights to own property, rights protected by the Human Rights Act. If you want a laugh, try asking canvassers or leafletters for the Labour Party how this will actually work in practice.
Ricardo
It does seem to me that the proposed expropriation of 10% of the value in companies infringes every shareholder’s rights to own property, rights protected by the Human Rights Act.
Noting the the HRA is a target for reform by the Conservatives post Brexit: https://www.parliament.uk/busi...
Anyway, Clifford Chance has published a review of the impact of the measure and the drawbacks. Leaving aside the immediate financial consequences it would be incredibly amusing to watch this slow-motion car crash of a retrograde policy being enacted ...
https://www.cliffordchance.com...
timarr
Hi Timarr,
Thanks for the Clifford Chance article which is very good and exceptionally clear.
I appreciate that it is the Tories who want to change the HRA but I doubt they would repeal it in full. Nor are they likely to implement expropriation of property - I hope!
Apparently in this mornings Times newspaper Corbyn ‘will seek to soften the blow of moves to make companies put 10% of their equity into “inclusive ownership funds” by pledging that a portion of the £700 million raised in dividends’ to train apprentices. A quick look at some numbers behind this proposal demonstrates that this is typical Labour party obfuscation. Under the proposal Employees get a maximum £500 in dividends, though shares held the “inclusive ownership fund” can’t be traded so are effectively worthless, apart from the future cash flows of £500. The balance of any dividends goes to HMG. Assuming policy fully implemented and looking at just one company, that XR hated high yielding oil company BP, the numbers look like this (based on Stockopedia information)
Current shares in issue: 20.3 billion (US billion Shares)
10% = c. 2 billion
Estimated dividend per share per annum = £0.30
Total dividend paid = £0.30 x 2bn = £600m
Dividend available to employees £500 x 73000. (approx employees) = £36.5m.
Balance taken by Corbyn/McDonnell = £563.5m per annum! - and this is just one FTSE 100 company.
Even allowing gradual introduction of 1% pa this would be £56m for HMG in year 1. Multiply that by all the listed businesses with over 250 employees and the number must be way over £700m in year 1. By year 10 it will be many billions going to HMG. Except it won’t be because the end result of this lunatic policy if ever implemented is that companies will not pay dividends and seek relisting in other jurisdictions which in turn will damage the ‘workers’ pension funds. That’s after their existing shares in any employee share schemes have dived in value because of this Marxist theft of 10% of company shares. Not to mention the damage to their pension fund. Quite simply it is yet another tax on business dressed up as a bung for employees.
The argument could be that things are already reflected in the share price.
The effects for some companies would be significant, but the chances of it happening are very low indeed.
I did similar in 2016, I backed Brexit on the referendum (although odds were around 10/1) as a possible hedge against house prices. As it happened it probably didn't make much difference, a correction did not really occur immediately (although it is fair to say it is happening now).
33/1 of a labour majority seems like poor odds to me. I think the chances of Corbyn commanding an overall majority are virtually nil.
I think it is more likely than 33/1, given how dirty and unpredictable UK politics has become. I sincerely hope not though!
Just consider it as an insurance premium. I will be taking out 'insurance' by buying out of the money PUT Options on the FTSE-100. For example DEC FTSE 6500 PUTS are currently trading at 4.7 per point so 100 points worth costs £470. If Labour don't get in they'll expire worthless. If Labour do get in the payout will depend on how low the FTSE-100 goes but if it hit 6000 you could potentially net £50k. The FTSE may in fact go much lower as it would be a huge shock to the market in which case the payout will be commensurately higher.
The advantage of this approach (like your betting option) is that your downside risk is fixed. The problem with just shorting the index is where you place your stop as there will probably be a lot of volatility in the index on the election night.
Hi Henry, I am considering this approach but I am finding it difficult to figure out the best way of buying such an option. There seem to to be various brokerage platforms but these don't seem suitable for a straightforward purchase of an out of the money PUT options. Any suggestions welcome.
The 33/1 is probably bad value ,and does not cover you against the more likely risk of a minority Labour coalition. There's a bit of 45/1 for a Labour overall majority on Betfair's exchange - better value even after commission [ I hold no shares in Betfair's owners Flutter ].
Last HAT annual report has this:
In line with the strategy of providing larger loans over longer terms at a lower interest rate, our 49.9% APR product launched in May 2017 now represents £1.2m of the book as at 31 December 2018. This product is designed to provide a “near prime” option for our best customers. Due to these initiatives, 59% of the personal loan book is now not ‘High Cost Short Term’ (HCSTC).
It does sound similar to Wonga, where they in breach of the lending criteria. That was expensive: they had to write off debts for customers, repay interest and fees on previous loans and other remediation costs.
One thing about this and RFX is that profit per branch is rather small, imagine that there might be pressure to keep things ticking over resulting in cut corners.
Well it seems that IQE (LON:IQE) are dunking me in the bath again on weak revenue. (Managed to avoid the Woodford debacle but not this one).
The irony in some ways is that the accusations of dodgy accounting made by Muddy Waters and others have not turned out to be true. The need for capex to expand capacity was not the problem that a number of people thought (for some reason capex is frowned upon far more than very high marketing spend). The markets for VCSELs (facial recognition, LiDAR, etc.) and 5G (both infrastructure and handsets) are getting going at a reasonable rate now and companies further down the supply chain appear to be doing well, so that’s not it either, even allowing for the problems caused by USA v China trade issues and the Huawei boycott.
No, what’s going wrong appears to be that IQE are simply not gaining the orders anticipated. This throws the whole market analysis repeated many times by the company in presentations into doubt.
Did the management know this already and have misled the shareholders? Or, were they just over optimistic?
On a brighter note, if you bought in in December 2016 when Graham N reviewed it then you’re probably still in the black.
A last thought is that what we may be seeing here in part is caution on the part of the new FD. I.e. He would rather dampen down expectations as far as reasonably possible in order to be able to present numbers at least in line and possibly above expectations in the future to break the cycle of bad news. (Wishful thinking on my part perhaps).
re IQE (LON:IQE), I don't think the new FD is kitchen sinking. The largest part of IQE's revenue and profit comes from Gallium Arsenide wafer for the smartphone market, this is at the bottom end of the supply chain and historically has always been hit hard and late by industry destocking. In the current cycle this has been exaggerated by Trump sanctions - i.e. US chipmakers have stopped ordering, but there has been a time lag as tools have had to be qualified for Far East chipmakers, with a consequence of heavy overall destocking. At least, that is the story the FD is telling, and it sounds plausible to me. It doesn't change forecasts of something of the order of £200m revenue for 2020, and at a market cap of around £550m is starting to look reasonable value.
(fwiw, have held this for a long time.)
I think the analysis by Graham on Iqe (LON:IQE) is a bit unfair, in the part where he asks why should we buy a company in a middle of a supply chain?
You buy if that company can be a market leader in component and have pricing power to eek out a decent margin.
Example is Volex (LON:VLX) all they do is make power cords, the type you plug into your laptop, kettle, etc. Unsexy? Yes. Just a supplier to big companies? Yes. But look at their financial performance over the last few years.
Hi dahokolomoki
I have no knowledge ofIqe (LON:IQE), but know a little about £VLX.
Yes they do make power cords, including power connectors for electric vehicles where Tesla is currently the largest customer. However they also make complex wiring assemblies for various applications such as date centres, medical equipment, factory automation and vehicle telematics. Operating margins in complex assemblies are currently some 3.5% higher than the power cords division and revenues are growing quickly; up 33% over the last half year.
https://www.investegate.co.uk/volex-plc--vlx-/rns/half-year-report-of-volex-plc/201911140700083470T/
Volex (LON:VLX)
Jonno - I agree - seems to me that Volex is managing it's position in the supply chain whereas IQE (LON:IQE) is not - and may well not be capable of doing so.
I would really like to see IQE succeed, but, when they succeed seems to be forever pushed out into the future.
"Example is Volex (LON:VLX) all they do is make power cords, the type you plug into your laptop, kettle, etc. Unsexy? Yes. Just a supplier to big companies? Yes. But look at their financial performance over the last few years."
Isn't the financial performance over recent years dire? Net earnings over the last 6 years is negative, as is free cash flow. And the latest profit margin is very thin, suggesting they're price takers and reversion to previous poor performance not something in their control?
H & T (LON:HAT) pretty nasty RNS this morning. Could prove to be pretty nasty PR for the company. Potentially a hefty fine coming their way coupled with a loss in revenues from their short term loans business
Bit of a shocker from H & T (LON:HAT) - share price down almost 20% - is this an over-reaction or perhaps imply something worse?
Looking at the share prices there does not seem to be any read-across for Ramsdens Holdings (LON:RFX) although I thought they were in the same business. Having a quick skim through the latest annual report there is no mention of unsecured loans - presumably all their loans are against an asset?
Perhaps a buying opportunity?
The FCA is conducting a review of the High Cost Short Term Loans at H & T (LON:HAT). The company has (temporarily at least) stopped these loans (around 4% of revenues) and says that if any redress for prior loans is necessary it would expect to be able to meet them out of existing resources,
My morning smallcap tweet: Consort Medical takeover
Consort Medical (LON:CSRT) Chamberlin (LON:CMH) IQE (LON:IQE) Lightwaverf (LON:LWRF) Westminster (LON:WSG), Mirada (LON:MIRA), DWF (LON:DWF)
(CSRT) rec offer of 1010, a 39% premium.
Chamberlin (CMH) H1. Guides FY small loss, excluding the restructuring cost of £0.7m. F/C is for tiny profit.
IQE (IQE) cuts FY rev guidance to £136m- £142m from £140m - £160m. Expects mid-single digit adjusted operating loss. Blames weak RF sales. "Capex will be towards the bottom end of the previous guidance of £30-40m and the net debt position at year end is expected to be between £15m to £20m."
LightwaveRF (LWRF) struggling tech tinpot hoists For Sale flag because "recent fundraisings have taken up more of management's time than desired, relative to the amounts raised."
Westminster Group (WSG) formal signing of contracts for security screening at Ghanian port close to being finalised.
In line: Mirada (LON:MIRA) DWF (LON:DWF)