Telecom Plus (TEP) held their AGM yesterday (12/8/2015). The company provides a complete range of utility services – gas, electricity, broadband, fixed line and mobile phones via a “club” concept promoted by a network of self-employed (mainly part-time) distributors. They offer competitive pricing and an efficient operation (I am one of their customers as well as being a shareholder). The share price of this company has gone from near 800p up to well over 1800p and back down to below 800p over the last three years. This was driven by over-enthusiasm by investors followed by disillusionment when forecasts were adjusted down and the accounts restated due to energy debtor write downs. So there were clearly one or two concerned shareholders in the audience.
One said that the new CFO comes in and ceases the “creative accounting” that inflated past profits to which Mr Wigoder, the Chairman, said he categorically denied there had been any creative accounting. It was a relatively small amount which had not been increasing year on year as a proportion of revenue. But he accepted that “we got it wrong”. He said it was not a problem that was unique to the company and there was no basis to question debtors they had on the balance sheet. The shareholder responded that the profit reported was not a true profit. They should have looked at this issue each year.
Michael Pavia, Chair of the Audit Committee, also spoke on this subject. He said it was one of the most difficult matters they dealt with, and not just in this year but also in previous years (implying the directors were aware of possible issues therein before the new CFO arrived). But they now have a new CFO and new auditors, he said.
Shareholder Gerald Roberts asked what proportion of the shortfall was paid by the main gas distributors and what by the retailers – the answer given was all to the latter. Mr Roberts said that may be good for his National Grid shares which got a laugh. Mr Wigoder says nobody really knows where the losses occur.[Comments on this issue: I have seen worse accounting write-downs and the explanations given were reasonable. I don’t believe there was any deliberate creative or false accounting taking place. The company has taken vigorous steps to counter criticism by changing the CFO and the auditors. The underlying credibility and profit margins of the business are only marginally affected].
Another issue raised was the rewriting of share options for the CFO and other staff after the above events. PIRC had recommended voting against the Remuneration Report and the Chair of the Remuneration Committee and they got only 80% in favour as a result.
There is a full report on the Meeting here and the justifications given for the above by the Chairman.
Camkids (CAMK). On the 10th August this Chinese AIM listed manufacturer/distributor of children’s clothes made a most peculiar announcement. They have terminated three of their distributors, but the really odd thing is that they are not only buying back stock from them (for RMB285 million) but also paying other compensation totalling RMB70 million. Plus they are repurchasing another RMB80 million of stock from other distributors. This is likely to wipe out most of their cash holdings and the profits for the year will also mainly disappear as the announcement indicates there will only be “a small operating profit for the year ending 31 December 2015”. The share price has collapsed further when it was already on a downwards trajectory leaving the market cap at only about £4m. The prospects for this company now appear bleak and these events totally undermine the credibility of the management.
Is this a case of creative accounting where the past sales to those distributors were fictitious? And why do they need to pay compensation or buy back stock? It certainly raises a lot of questions which we may or may not get answers to in due course.
I last wrote on this company in March 2014 after seeing a presentation by two of the non-executive directors. I rated the company using the ShareSoc AIM company Scorecard and pointed out that they failed on several grounds. Board meetings were also clearly problematic at the company as not everyone spoke English and not everyone Chinese so interpreters had to be used. In conclusion I said that “The fact that Camkids is based in a remote country with historically lax standards in the business arena does not help either and for the private investor who cannot easily meet the key players [the Executive Chairman] and converse with him in English, it’s surely one to avoid”.
You can’t say you weren’t warned, but the apparent profitability of the company and low p/e ratio sucked in many investors. Yes it does help to meet the management at AGMs (difficult to do that at Camkids as they were held in China and you needed to speak Chinese), or wherever else you can do so. These events further undermine the general view of AIM listed Chinese companies. It’s going to be a long time before they can re-establish some credibility among investors.
Telecom Plus is an example of how meeting the directors and hearing what they have to say gives a lot of reassurance on events that may look odd at first sight. I would have a lot more faith in the accounts of Telecom Plus than I do in Camkids. But I still disagree with the Chairman of Telecom Plus on the merit of rewriting share options, whatever the circumstances.