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.

BROKER NETWORK (AIM:BNH)– a classic case of where boring is best and where it’s best to ignore short term price dips that arise for no apparent reason

Broker Network, the general insurance brokers and insurance network provider and a company I visited in Harrogate back on Wednesday 2nd March 2005 (share price 114p, market cap c£16m) has received a takeover approach this week .

Following my initial review the shares fell as low as 85p in October 2005 causing me to question the wisdom of that early enthusiasm. However, the fundamental story remained very strong, the valuation looked fair (it hasn’t looked quite so attractive of late!) and management delivered the goods time after time.

It seems to present an excellent example of how it is best to ignore short term share price falls that have arisen for no apparent fundamental reason, other than short term traders running for cover, and concentrate on the key fundamentals. Management, notably Chief Exec Grant Ellis, have done a great job building the network and mopping up some quality general insurance brokers along the way. It’s also a business in the sort of sector (insurance broking isn’t something to get the pulse racing!) that most high growth investors would avoid like the plague – 400% in two and a half years doesn’t sound too bad!

Following the news the shares have risen a further 8% to 512p with some now talking it up as high as 575p. I was beginning to get concerned that the price was starting to look a bit rich but clearly others are thinking differently.

Broker Network has been a popular stock with many of the IHT planning portfolios so keep on eye out for some very happy mature citizens this weekend!

Darling Man’s proposed tax changes and thoughts for AIM – in short, I see the classic Labour back track on the horizon

The Investor’s Champion’s view on the Darling’ Man’s proposed tax changes and the impact on AIM – in short, we see the classic Labour back track on the horizon!

It’s hardly worth mentioning the so called increase in the IHT threshold – most estates of value will already be benefiting from £600,000 through basic Will planning so that was a classic Labour fudge!

What is of more interest currently is the proposed abolition of accelerated taper relief on capital gains tax and the thought that management of AIM companies with holding a material number of shares might be tempted to sell some of their shares before April 5th. Once the proposed rules change they will be paying tax of 18% as opposed to 10%.

I can’t see this happening, at least not in any size, and outline my thoughts below. Furthermore, I actually think the Darling man could tone down the proposals, however, even if this doesn’t happen let’s have a logical look at things.

Mr Blogs (sorry to all you Blogs’ out there, but I had to choose someone!) the high flying Chief Exec of AIM Company with a material stake in the business could be attracted to sell a good chunk of his shares to make an 8% tax saving (18% vs 10% currently).

- Looking for the home run

If Mr Blogs is a material shareholder in the AIM company and has been working like a dog (strange phrase as my dog has no intention of ever working!) to grow the business he will be focused on the end game, the big exit, ‘Blogs acquired by Google’, or something on those lines! Why sell when there might be big riches in the future! If he does decide to sell the potential in the business suddenly doesn’t look that attractive, so other shareholders will be inclined to get out as well (they’d be mad not to) with the result that the share price drops like a stone. In trying to save a paltry 8% tax Mr Blogs will see his wealth actually decline a great deal more.

- Lack of liquidity comes to the rescue for once

It’s virtually impossible for material shareholders of small AIM companies to sell their stakes in the market without other shareholders becoming very upset. Mr Blogs will be forced to have a chat with the company’s broker who will go out looking for some nice friendly institutions willing to buy his material stake. Nice and friendly aren’t actually two words that come to mind in this instance, as the institutions will know full well what’s going on and once again that 8% tax saving will disappear as soon as you can say ‘Not tonight, Darling’.

- Large institutions are restricted in their AIM exposure

Many of the large institutions are governed by the house rules which often prevent them holding too large a percentage in AIM quoted companies, so don’t think they’ll come to rescue and be able to load up.

The private equity boys might be the best game in town though they will strike a very hard bargain that probably won’t be of much interest to Mr Blogs.

- A contrarian consideration

The best course of action could be for Mr Blogs to hold tight and, if he thinks the business is looking good, actually go on the offensive and acquire a few more shares. As business gets better and better and the cash starts building up, Mr Blogs might push for the dividend to be materially increased, drip feeding small chunks back to him. Finally with all that lovely cash, increasing market share etc, Google and the private equity boys see something of real value and come in with the big one – picture vision of Mr Blogs in striped trunks sitting on his yacht!

- Big losers

In short, I believe that if senior management of AIM companies initiate material sales of shares held in their companies the share price of the company will fall off a cliff (another euphemism for you to enjoy), and they will be the biggest losers. Furthermore, it will also be a good indication that the shares aren’t of much interest anyway.

As is always the case, good companies will rise and the poor will be found out sooner rather than later. Investing in AIM should be all about investing for growth and tax benefits are simply there as an added bonus.

- Overseas companies and management suddenly look more attractive.

It’s also worth remembering that the proposed tax changes only impact UK tax payers. As an added hedge, AIM investors may therefore be more inclined to look at overseas AIM companies or those companies where senior management aren’t UK tax payers. I can’t see Mr Wong (apologies as well to any Wongs out there!) in China getting upset about tax changes in the UK.

- So here’s the trade


Poorly performing, cash absorbing AIM companies, whose shares look grossly over valued (and over hyped) and where management have been selling down their holdings.


Profitable, cash generative, high growth AIM companies where management have been buying shares or where management holding a material number of shares aren’t UK tax payers – there aren’t that many of the latter!

…..but that’s what investors should be doing anyway!

DEBTMATTERS - is it the beginning of the end or simply the end of the beginning?

Debtmatters’ trading statement painted a fairly gloomy picture on the group’s IVA business while the market appeared to paint a gloomy picture on the future of the business as a whole.

IVA case acquisition costs have risen sharply in the face of rising competition and IVA conversion rates have worsened due to hardening creditor attitudes which have impacted on margins – in short, the banks didn’t like the IVA boys making too much money so they have started to apply a little extra pressure!

During September (that was only last week!) Debtmatters started to see certain creditors seeking to modify IVA proposals such that on Debtmatters' cases, average nominee and supervisory fees would be reduced. The impact of these additional changes on the IVA business means that should these fee modifications become the norm then Debtmatters would not be able to deliver IVAs profitably i.e. Debtmatters’ IVA business doesn’t appear to have a future.

The group has therefore decided to suspend all direct advertising on TV, radio and through the press and the IVA division will be scaled back, with staff being redeployed into other areas of the business as appropriate. At least they have acted quickly!

However, is it really as bad as the 72% fall in share price and resulting market cap of sub £5m now suggests. Here are some thoughts.

In theory they could simply shut the door on new IVA business, leave the market to others (and my word there is certainly a market out there!) and simply collect fees from those existing IVAs they are currently administering.

As at 31st March 2007 Trade and other receivables were £15.3m. Ignoring business between then and now and even allowing for a whopping 25% default rate which would effectively write off c£3.75m from the debtor book it still leaves c£11.5m to come in over the next few years.

Having raised c£3m in July 2007 debt levels should be at more manageable levels; assuming they haven’t sunk too much into the Debt management business.

For the 9 month period since acquisition to 31st March 2007 the Loanmakers business added £11.8m to group turnover and £2.1m to group profit before tax. The house broker estimates that the Loanmakers business will bring in EBITDA of c£3.5m for the full year.

The Loanmakers business was acquired for an initial consideration of £10m cash, back in June 2006 plus up to £9m of earn out.

Ges Ratcliffe the Chief Exec subscribed for 686,030 shares at 113p (with the shares at now at 18p, that’s a bit of a short term hit! Alright, he’s not exactly short of a bob or two having already made a bit of money when he placed 6 million shares at 330 p / share back in June 2006

The debt management business has some promise but is in its infancy and they’ve only got one client as far as I know. So not a lot for the short term here.

Finance costs for the full year ended 31st March 2007 were £450,000 and amortisation costs were c£250,000.

You’ve got that troublesome short seller whose also been playing around. No doubt he’ll be back in there buying at some stage and conveniently forget to tell anybody.

It still looks like there’s a lot to play for.

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