Undervalued companies are being left at the mercy of predators, says TERRY MURDEN
If you’re feeling confident, then count yourself lucky, though you may have investors who don’t share your optimism in the battle against those pesky headwinds. Maybe they are struggling to make sense of an economy in which there’s a lot of talk about business ‘resilience’ in the face of cost pressures while others are clinging on in the hope that the new trading year doesn’t turn out to be their last.
Statements coming out of some companies do seem to be laced with a touch of bravado, perhaps not wanting to scare customers, suppliers, investors or employees about the real state of their finances and their prospects.
It’s been reflected is some of the year-end results being announced by public relations companies which, after all, are employed to put lipstick on a pig. Reading articles in some of the business news media it would appear the PR firms are providing good value, with reports of ‘strong growth’ and ‘surging profits’ even at companies whose accounts clearly show either a fall in profits or even a huge loss.
Stock market companies can sometimes be guilty of putting a gloss on their performance but the regulations force them to be honest about what is really going on. Some Scottish firms that floated on a wave of optimism are now trading at markedly lower valuations, some for good reason, while others argue that investors are undervaluing them to the point of leaving them vulnerable to predators.
As for the laggards, retail has had a torrid few years and even being chaired by high street stalwart Peter Cowgill, who led JD Sports, has not halted the decline of Quiz Clothing, the Glasgow fashion chain. In July 2017 it raised £102.7 million in an IPO on the Alternative Investment Market at a price of 161p per share. After another gloomy update, the shares ended the week at just 5.5p, valuing the company at £6.6m. Panmure Gordon expects a full year loss of £4.9m.
As recently as September, Artisanal Spirits Company, owner of the Scotch Malt Whisky Society, announced that it remained “confident that we are on track to deliver growth in line with full year expectations”.
On an underlying basis that may be the case, but in the short term there appear to be some obstacles in the way. Its upward momentum was halted in an update this weekend which revealed that weaker-than-expected sales in China and a disappointing programme launch meant it would miss full-year revenue targets.
While one of our daily newspapers thought the story was more about hitting a membership milestone, investors took fright and the shares fell by 21% before closing 15.7% lower. At its IPO on AIM just two years ago ASC’s shares were priced at 112p, giving it a value of £77.96m. At Friday’s 48.5p close its market cap has halved to £34m.
That said, Artisanal is one of those that look to be suffering short term problems, rather than structural decline, Another is Linlithgow-based telecoms testing firm Calnex Solutions. It was valued at £42m at the placing price of 48p when in 2020 it became the first Scottish firm in two years to join the stock market.
It has traded as high as 197p, but a recent tightening in the market has led to forecast warnings and the price has fallen back to earth. Even so, at 62.5p it still represents a gain for those who bought in at the IPO.
Cloud computing firm Iomart, which has grown through a programme of bolt-on acquisitions, has just added another under its new CEO Lucy Dimes who admitted to Daily Business that her predecessor had suffered a “difficult time”. The shares are down on the week, though they are nearer their year high than low and Ms Dimes insists the company is now on the front foot.
It may feel it is being undervalued, as does the boss of Edinburgh software company Craneware, Keith Neilson. In an interview with Daily Business in October he said: “We have driven up revenue and Ebitda but the market cap is half its peak. Some of it is within our control, but there is very little liquidity just now. A reason for being a public company is to get M&A capital but I am not sure the London market will supply that for a little while.”
Among the larger Scottish quoted companies getting a bit more slack from the markets is Weir Group whose new margin targets excited investors into marking up its shares in a rare moment of positivity. Of course, its contribution to economic activity in Scotland is a shadow of its previous presence. While The Herald still likes to refer to it as a ‘Glasgow engineering giant’ it now describes itself as an international mining technology company employing just 150 people in Scotland, mainly in its West Regent Street offices in the city and in a research centre. It has no manufacturing facilities in Scotland.
The big winners of the week were the shareholders in Smart Metering Systems, another Glasgow based company, whose board is recommending a £1.3 billion offer from US private equity firm Kohlberg Kravis Roberts. Investors are being handed a 40.4% premium on their holdings, though this follows a year-long decline in the share price, so those who bought in at the turn of the year will see only a marginal gain.
A key message here is that many companies feel they are being undervalued by the prevailing conditions and that is making them vulnerable to acquisition, particularly by private equity firms which are taking advantage of current sentiment to grab a few bargains.
Miriam Greenwood, who chairs SMS, said as much by stating that the firm’s growth potential has not been reflected in the share price. Given the opportunities it sees ahead, she said that raising the “significant additional funding” it needs “may be challenging for SMS as a publicly listed business”.
No surprise, therefore, that firms like SMS, which are growth businesses, are succumbing to those with deeper wallets.
Terry Murden held senior positions at The Sunday Times, The Scotsman, Scotland on Sunday and The Northern Echo and is now editor of Daily Business