Corporate finance specialist and wealth planning advisor WH Ireland (LON:WHI) gave investors a double blow today as it issued a share issue at a large 30% discount to the market price and also warned of widening losses in the second half of the year.
Predictably the share price has declined to below the level of the share issue:
This is another case of a company being worth a fraction of what it used to be. Listed since 2000, the share price almost hit 200p in 2007, but since then collapsed to 37.5p five years later. Since then it has had a slow recovery and was pushing 150p a year ago. Today’s price drop has taken it back close to the all-time lows.
WH Ireland offers a wide range of services to both individuals and businesses. Wealth planning is exactly as it says, with advice being given on taxation and investments, the equivalent of which is given to corporations who may be interested in capital markets or mergers/acquisitions. Back before the explosion of internet share dealing, the majority of which is execution only, a broker may have been like WH Ireland who would also offer other complementary services for a fee.
Despite this impressive sounding line-up of services, WH Ireland has remained a small company. Many corporate services are monopolised by the top banks, and fees due to them are only a fraction of assets under management. In the past few years the company has also struggled to turn a profit. Today’s market cap is a mere £14m.
The warning comes in a morning RNS entitled ‘Proposed Placing’, which states:
The Company is pleased to confirm it is carrying out a fundraising to raise approximately £5m, before expenses, by way of the issue of approximately 11,000,000 new ordinary shares of 5p each (“Placing Shares”) at a price of 45p each (the “Placing Price”) (the “Placing”).
The company may be pleased but I can bet investors are not! From the last interims, we can see that only on the 20 September there was another placing, which raised £2m. Given that this only covered their losses, perhaps it is no surprise that they are back for more.
Reasons for the placing are as follows:
Following a broad review of the Group’s likely future regulatory capital requirements and in particular, the Group’s regulatory capital buffers, the Directors believe the Placing will ensure that the Group has sufficient resources in place to satisfy the FCA’s present capital adequacy requirements.
In addition, completion of the Placing would increase the Group’s core tier 1 capital ratio, which is a key measure of the Group’s financial stability and strength for market regulators and investors, as well as contribute to the Group’s working capital.
The Directors believe that the Placing is the most cost effective and certain method to raise funds at this time, avoiding the significant costs and uncertainty associated with a public offering requiring a prospectus.
We also have a profit warning:
Following the announcement on 6 February 2019 (the “Trading Update”), trading conditions have remained challenging for both divisions and the Directors do not believe that there will be any improvement before the end of the financial year or in the immediate future. The Board now believes that operating losses will be substantially higher in the second half of the year when compared to the first six months. In addition, since the Trading Update, the Directors have also identified additional exceptional costs, some of which are the result of the ongoing transformation strategy of the Company, which they will look to provide for in the final results for the year ending 31 March 2019.
This is bad. Exceptional costs were already higher than budgeted in February, so even more costs have been found.
No guidance is given for these losses, but looking at the first half of the year, losses after exceptional costs was £2.45m, so all in all, a very poor year.
There are few research notes going around on WH Ireland, but it is clear that Stockopedia hates the stock, awarding it only a rating of 9. This excerpt from the accounts (2013 to 2018) gives an idea what has been happening with the share count:
Shares have gone up by almost 6m in the past 6 years, which have allowed the company to maintain its cash pile at a relatively static level. Today’s announcement of the share issue though will greatly increase the share count to over 40m. The main reason behind this is the reduced share price. Interestingly, the book value has been decreasing here over time, but the shares traded at a discount to that for most of the time.
That said, WH Ireland has been in the throes of transformation itself, which was supposed to end this year but looks like dragging on further. It is NOMAD (nominated advisor) to over 80 small companies in the AIM market – almost 10% of the total, and offers a comprehensive suite of financial services with over £3bn of assets under management.
With such a flow of business it may be a surprise to know why this business has struggled, when many other companies that deal in stockbroking are consistent profit makers. A research note (available on Research Tree) gives a genuinely interesting account on the fortunes of the company, specifically in regard to MIFID/MIFID II:
The new regulatory standards (with, or without, the higher levels of customer service
paperwork that is now considered “de rigeur”) have required vastly expensive investments in
computer systems and will require more in the future, giving a major advantage to the larger
companies who can spread a slightly higher central cost over a far larger pool of clients,
creating economy of scale in a “people” business. After Brewin Dolphin wrote off £30m on a
contract for new bespoke software that failed to fulfil its purpose, it has been crystal clear
that for medium-sized firms developing such a system is an unacceptable risk, even if not
completely beyond the firm’s financial capacity.
No doubt that the recent period has been a painful one, with plenty of changes needed, exaggerated in WHI’s case by changes to management.
The accounts look stable, with a small tangible asset position. The net cash position has been maintained in the past few years with the share issues.
A look at the accounts show the fundamental problem here, there is not enough revenues being earned to cover the costs. Furthermore a reduction in corporate broking volumes has further affected problems as this is the more lucrative activity. Unfortunately for both divisions the company has (Wealth/Corporate) there does not appear to be any improvement in fortunes on the horizon.
It may be quite obvious to see where the proceeds of the new share issue are going, which is not for acquisitions, but to strengthen the balance sheet position. Sadly, having a placing may seem like a bit of a broken record to shareholders, and assuming another big loss this year, it could be the case that more money is required next year.
In the shape of no news it is difficult to see the rationale for investing here. The saving grace may be the corporate work, and a flurry of activity on AIM would greatly benefit WHI. With the possibility of even more dilution the risks are quite high. 2/5.