7:59 cut – BUR, HUW, RGD, STAF

Burford (BUR) – “Illegal Market Manipulation”

Aggressive language and legal threats against short sellers continue to be a red flag at this opaque litigation finance company. Today they claim manipulation of the share’s order book on 6th and 7th August.

On first glance it appears the cited trades are entirely consistent with a disorderly market as would be expected for a very highly rated share (edit: vs NAV) following publication of such research.

It certainly seems very unlikely that Muddy Waters themselves would be involved in manipulation of the order book. Likewise it would be very unwise for Muddy Waters to have used the period between the planned 8:00am issuance and 8:53 actual issuance of research to further sell shares.

It seems most informed commentary has settled on the opinion that a fair price for Burford is close to its net asset value, of which the published NAV represents an upper bound.

Helios Underwriting (HUW) – Possible buy back

Helios was started as a quoted vehicle for direct investment into the Lloyds insurance syndicates. I looked at the company a couple of years ago and concluded that they had overcomplicated what should be a simple situation with gearing and re-insurance contracts and that they were now more a play on the valuation premium of Lloyds syndicates rather than direct exposure to uncorrelated underwriting gains / losses in the insurance market.

As such I am not surprised to see large share price swings and differing opinions between the company and the market about their valuation.

Real Good Food (RGD) – Extension to loan notes

The food manufacturing company has been selling off its operating businesses and settling legacy issues. It is currently left with two profitable businesses: Renshaw / Rainbow Dust (cake decoration), and Brighter Foods (ingredients).

Various loan note redemption dates are being extended from 30 June 2020 to 17 May 2021. This confirms that an additional 7.5% will become due at redemption as well as interest over a longer period.

Stockopedia show £37.2m of enterprise value versus £7.22m of market capitalisation (edit: subsequent disposals and settlements will not have greatly changed this). Although the equity still has some option value, this company is now effectively controlled by its creditors. De-listing in order to reduce overheads would appear to be the entirely logical next step (edit: if the remaining operating businesses are not disposed of first).

I don’t have much opinion on the company’s prospects, but if I thought they were good then I’d be buying the loan notes rather than the equity, for example through Downing Strategic Investment Trust, which continues to trade at a discount to NAV.

Staffline – Resignation of Auditors

The [edit: belated news of the] resignation of the auditors can come as no surprise after the FY 2018 audit severely criticised management actions and lack of co-operation but Chris Pullen remained in place as CEO. Under these circumstances and the background of increased focus on plc audits and auditors, it seems unclear why any auditor would wish to be involved. Perhaps that explains why they have not yet even attempted to start the “process” for finding a replacement. I am hopeful that today’s statement will bring forward the resignation of Chris Pullen.

I recently took on a medium-sized speculative position based on a possible takeover precisely because believe that the company is worth considerably above the current market price with different management in place. [edit: I bought at 147.1p. I just sold at 151.2p. I may well be tempted back in at a lower level and/or once Chris Pullen has resigned]

[edit: As at 08:35 Neither I nor their financial PR company can find the Auditors Resignation Letter that they claim to have posted to their website. I have asked for this to be remedied. However this is likely covered by the audit report starting on page 62 of their last annual report, which is essential reading.

Despite my opinion that this the resignation was inevitable, the share price movement today (down 7.4% at the time of writing) suggests that today’s news was considered material by the market and should not have been delayed by 7 working days. The audit report implies that this is by no means the first instance of delayed disclosure, as I have previously highlighted.

I would once again caution readers that (according to the above auditor’s report and lack of any subsequent statement) the HMRC review remains ongoing and there is a significant risk that the liability could be significantly different from that included in the FY 2018 results. Furthermore, it seems likely that HMRC will issue a press release once the matter is resolved and this publicity risks further issues with customers, suppliers and politicians.

Regretfully it looks unlikely that I will be able to attend the AGM.]

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