Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

B.P. Marsh & Partners - Enrichment of Directors and staff but not outside shareholders, an AIM rip off!

I recently had a look at BP Marsh & Partners, the AIM quoted financial services investment company.

I have reach the conclusion that there seems little point in this financial services investment group for outside investors as it appears to be managed solely for the benefit of its overpaid staff.

A browse through the interim results for the 6 months ended 31st July 2006, which were announced on 25th October, reveals an investment business that had staff costs of £754k and other operating costs of £426k in the 6 months. I’m not sure if there are any float costs in these numbers but even if one strips them out the costs on an annualised basis look outrageously high. Importantly there was also no mention of dividend intentions or the like.

Putting things into perspective, B.P. Marsh had net assets of £44.9m at the interim stage, including cash of £7.4m left from its AIM fund raising.

The business model appears to be one of providing financing of last resort (I presume it is last resort given the terms of the financial arrangements) to financial services businesses and predominantly those in the insurance sector. Investments are seemingly held for the long term with several key investments having been made back in 1994 and 1995.

Given the rich terms of the financing arrangements, which simply go towards supporting B.P. Marsh’s exorbitant operating costs rather than any return to shareholders, exits are clearly not that desirable to the board-that is, unless they can find another suitably desperate business in which to invest!

Comparison can be made to the investment trust sector.
A look at F&C Global Smaller Companies unaudited Preliminary Statement of Results for the year ended 30 April 2006 reveals a business that had investments of £238m and net asset value of £227m. The trust’s share price had risen 62% in the year and the NAV had risen by 51%, an outstanding performance. The trust had also increased its dividend in the period by 25.7% and also instigated ongoing share buybacks-just what one would expect. The management fee charged during the period for managing this large book of small cap investments was £1.2m. Other costs (which I assume were actually payable to the trust’s administrator and not the manager) were £1.1m. All in all, the gross expense ratio based on year end net assets appears to be c1.40% (the reported expense ratio based on average net assets is 0.69%) and the actual management fee only represents 0.53% of year end NAV. This compares with B.P. Marsh’s gross expense ratio of what looks like something in the region of 5% (Wow!), with minimal dividend distribution and no share buy backs.

Annual management costs of c£2m for an investment portfolio of c£35m are quite staggering and the high fees being generated from investments are simply being mopped up by the operating costs with little available for distribution to shareholders.

In the absence of realising profits on their investments and returning money to shareholders in the form of dividends what else is there for outside shareholders to look forward to in the short term.
With Mr Marsh holding 58% of the equity and other Directors controlling other key stakes there is little hope for outside shareholders. I actually question how this business managed to attract any outside shareholders in the first place as it simply appears to be supporting its board of directors.

More good news for Ocean Power Technologies - a great concept

Good news today from my wave power investment, AIM quoted Ocean Power Technologies, as it announced that it has been awarded a grant of $1.2 million (£641,000) through the Scottish Minister's Wave and Tidal Energy Support Scheme.

Funjds has been awarded for the construction, installation and in-ocean demonstration of OPT's latest 150kW PowerBuoy(R) design, the PB150.

Under the project, the PB150 PowerBuoy will be installed at the European Marine Energy Centre (EMEC) on Orkney where it will be grid connected through one of EMEC's wave energy berths.

The PB150 is the latest in OPT's PowerBuoy product offering. Once fully demonstrated at EMEC, the Company intends to deploy the PB150 in projects currently under development in Spain (it has good links with Iberdrola), Southwest England, France and the USA, as well as for projects the Company is looking to develop in Scotland and other countries.

This appears to be another vote of confidence in OPT’s technology. Let’s hope that others start to take notice because this certainly comes across as a compelling concept.

RAB Special Situations –the hidden value (or hope springs eternal)

I had another insight into the hidden value in many of RAB Capital’s investments recently through a quick read of the offering document of Zeehan Zinc, an Australian (Tasmanian) mining minnow that is seeking to raise c£10m and be admitted to AIM this month.

Up until 30th June 2006, Zeehan had clearly been struggling. For the year ended 30th June 2006 the group incurred a net loss of AUS$3m and as at 30th June there were net liabilities of AUS$2.8m-insolvent in my book! Operating cash outflow in the year ended June 2006 was AUS$1.9m. This was a business in need of support-and fast.

Who better to go and see than RAB Capital, a big supporter of the junior miners.

RAB rode to the rescue and on 2nd August 2006, RAB Special Situations (Master) Fund Ltd (via Credit Suisse Nominees) subscribed for 9,760,000 shares at a price of A$0.25 per share for a total subscription of £1,000,000, securing 14% of the share capital. At the same time a total of £4m was injected to support the business.

Naturally, there were conditions attached to the RAB subscription agreement. If at any time up to Admission (Admission is the key to hitting the first jackpot) the Company issues shares at an issue price lower than the subscription price paid by RAB, the company must offer to issue to RAB the same class of shares in the share capital of the Company, at no cost to RAB enabling RAB to maintain its percentage portion of the aggregate total issued shares of the company, immediately prior to the issue of the lower price shares.

The next target is obviously to drive on to AIM admission and seek further funding from other, less astute punters, (including some of the larger London institutions) to support the development of the business. After all, the £4m really only satisfaied short term requirements.

Since August 2006 the Company has grown in value (although I don’t know how as nothing really appears to have happened) and the group seeks admission to AIM at a price equivalent to cAUS$0.65/ share-that’s not a bad return for RAB for a short term bridging loan!

However, the key is now to get this issue away and the best way of achieving this is for RAB to support it. By lending a little extra support it will also encourage others to come on board as well and effectively lock in its return (in the short term at least). Who knows there might even be positive news on the operating front soon!

I might be wrong but I assume that prior to AIM flotation RAB’s investment remained accounted for at cost. On float there would be immediate uplift in the valuation which will be to the benefit of the various RAB funds and consequently help lift the management fees and the performance fees, all to RAB’s benefit.

As I see it, this happens without anything actually being achieved in the underlying Zeehan business. I agree that RAB help provide some much needed capital at a vital time, however, should investors really be supporting the AIM issue at the equivalent of AUS$0.65/share, when there is no real difference in the value of the business since August.

From a corporate finance perspective (and for me RAB is there in a corpoprate finance capacity), the real beauty of the commodities game is that hope lingers on and rings the same bells for generations of investors/speculators. The same piece of land has probably featured in many a miner’s dreams.

In the case of Zeehan, ore exploration and extraction was undertaken in 1980 by a member of the current management team and prior to that back in the late 1800s and early 1900’s base metal mining was undertaken in the region.

The next step for RAB is surely to be able to make a slow and dignified exit over time, without anyone really noticing that they have gone. Not easy when you hold over 10% of the share capital. There is bound to be some kind of lock in, but no doubt this allows a degree of flexibility.

I wonder how many more Zeehan’s there are out there for RAB and indeed how many that may never make the grade and get to AIM.

Europol – another rip off for investors?

I received information this morning on a pre-IPO offer that, on first glance, looked quite interesting. However, once again I was left with the impression that someone (notably the promoter) was trying to dupe an unsuspecting public.

The opportunity was the Offer for sale of Shares in Europol International plc (‘Europol’) being made by Arc Equities Limited. o

According to the literature that I received, Eurpol are apparently ‘industry leading vehicle repossession specialists’ operating throughout the UK, Northern Ireland and Eire. Apparently they are experts at what they do and their clients enjoy ‘the most successful cash recovery service in the business’. A look at the Profit and Loss account for the period of 7 months to 30th April 2006 reveals that the group lost £108,754. The Balance Sheet at 30th April 2006 indicates shareholders funds of only £25,398 and accumulated losses of £223,541. If they are the industry leaders, those in second and third place can’t be doing too well!

As they are also seeking to attract new shareholders I can’t understand why they haven’t produced more up to date results. I can only assume that these are even less appealing.

The documentation reveals that ‘certain existing shareholders’ are offering for sale 3,484,019 shares (c25% of total equity) at an offer price of 33p /share. The current total value of the company is therefore assumed to be c£4.5m. Now that’s a fairly impressive valuation for a business which in a previous existence actually went into administration.

On further investigation I discovered that the ‘certain existing shareholders’ include Arc Fund Management who have been shareholders for approximately 18 months and acquired their shares at 30p/share. Although this would hardly represent a meteoric return over an 18 month period I can’t really see how the value of the business has actually increased over that time. Furthermore, the Balance Sheet at 30th April (I still can’t get over that date!) implies that Europol is desperately in need of new funding as soon as possible.

Looked at another way, if the investment was such good potential wouldn’t Arc being hanging around a bit longer. Perhaps the fee that Arc Equities (a subsidiary of Arc Fund Management Holding) is earning on the offer will more than compensate for the lost returns on this compelling investment.

The Chief Executive spent 15 years working in the UK music industry –what’s that got to do with vehicle repossession I wonder! The Chairman, Chief Exec and FD also sold shares at 15th November 2006 at 33p-clearly they aren’t too confident in the future.

The last section of the offering document headed ‘General’ contains some more interesting bits.

The estimated amount of expenses of the offer which are payable by Arc Equities but will be reimbursed by the selling shareholders are stated to be £140,000.

Arc Equities will be paid commission of 25% of the net proceeds-now that’s what I call a good fee, especially when no value has been created.

We are also told that the accounting reference period will end on 30th September 2007, so it looks like we will have to wait see if the losses have been quelled.

The small cap note produced by Company Eye, the so called ‘small company specialists’ simply regurgitated the information contained in the offering document. An objective opinion would have been welcome.

I can’t see anything to commend this investment in its current structure. Perhaps the underlying business has potential but with the Directors and current shareholders already exiting it’s hard to believe this is the case, in the short term anyway.

Pixel Interactive Media - needs to do more to impress

Pixel Interactive Media, which joined AIM last July, issued a positive trading update this week prior to entering its close period, anticipating that pre-tax profits would be ‘slightly ahead’ of broker expectations for the year ending 31st December 2006. As is usual for a company of this size there is only one broker who is expecting anything!

Pixel appears to have made good progress over the course of 2006 although a look at the share price graph and you would be forgiven for thinking that it had issued a profit warning! The shares floated at 32p and rose as high as 51p in August only to trickle back down to the current price of 32p.

This bullish statement from the house broker in reaction to the pre close statement clearly didn’t have the desired effect with the shares dropping further.

Pixel does appear to be making good progress but the suggested valuation, with due regard to the business risk associated with this size of operation, in this rapidly changing space and in this location does merit a substantial discount and, contrary to what the broker suggests, a PER of 17x for the current year doesn’t sound too modest to me.

Understandably it’s also one of those businesses that many investors have a tough job really getting to grips with.

In the absence of sensational updates with the potential of huge returns in short time it is evident that the private investor (which has an influence over stocks of this size) just isn’t interested in a Hong Kong based minnow plodding along in a rather sensible fashion.

It’s all about risk vs. reward and there are plenty of other micro caps to look at that promise much more and are closer to home.

With a lack of sensational advancement and news of ‘substantially exceeding’ expectations (as opposed to merely ‘anticipating’ exceeding), in my humble opinion the current price in the current climate is therefore probably about right.

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