Small Cap Value Report (Weds 14 Oct 2020) - BOO, WGB, SYS1, WATR, ANG, RFX

Good evening/morning. I’m posting this first section about BOO (I hold) early, on Tuesday night, while it’s fresh on my mind, and so I can get this out of the way and concentrate on small caps in the morning.

Agenda (Weds morning) -

Walker Greenbank (LON:WGB) – Interim results

System1 (LON:SYS1) – Trading update

Water Intelligence (LON:WATR) – Trading update Q3

Angling Direct (LON:ANG) – Interim results

Ramsdens Holdings (LON:RFX) – Trading update

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This was a BBC investigative programme, aired on Radio 4 at 8pm on 13 Oct. A reader kindly flagged this up to me, so I listened to it amp; took notes, which follow below. It mentioned Boohoo (LON:BOO) (I hold), hence my interest. If BOO doesn’t interest you, then please move on to the next section. I’m not entering into any discussion about why I cover BOO. I cover it, and always will. End of!

NB. As I hold shares in Boohoo (LON:BOO) I’m not impartial. I’ve formed a view on the Leicester supply chain issue, and obviously as I’ve bought more shares in BOO, then my view is that the recent share price weakness is a buying opportunity, and the supply chain issues do not in any way impact the value of the shares long-term. The company has recently reported record trading, despite the best efforts of the media to tarnish the brand.

My view remains this: BOO has admitted there are failings in its Leicester supply chain, and has already announced extensive ways to rectify the situation.

This is roughly what the Radio 4 programme said (main points I jotted down whilst listening to it, together with my comments). Apologies for any errors or omissions;

Leicester supply chain – allegations

• Separate investigations by journalists Paul Kenyon amp; Ashley McCartney, who narrated the programme.
• Evidence of money laundering amp; VAT evasion (systemic fraud, endemic) in the Leicester garment factories, which supply some of the UK’s fast fashion retailers. NB all factories are independent companies, not owned by retailers. No evidence that retailers are aware of illegal practices.
• Spinney Hills district of Leicester LE5 is powerhouse of fast fashion manufacturing – supposedly 1,500 hidden “dark” factories operating in secret, with VAT fraud key to the “impossibly low prices” they charge.

Case study – Mr Nagra, Rose Fashions

A civil action which blew the lid on dodgy practices in Leicester garment manufacturing industry

Select (High Street retailer with 170 shops) was the customer. They did not know a VAT scam was operating, and they paid full price, including VAT, unaware that Rose Fashions Ltd was generating fake invoices at inflated prices, through shell companies.

Shell companies were set up, typically had a lifespan of about 2 years. Never filed accounts, and were struck off by Companies House for failing to file accounts. Left behind large VAT liabilities, unpaid.

This was not explained at all well, but the VAT fraud seemed to involve fake invoicing, with surplus, never to be paid VAT. being withdrawn in cash, by the crooks, and then disappearing.

Double accounting, by manufacturers, one set of books for the taxman, and different, secretly coded cash books, to keep track of reality.

Mr Nagra ripped off another businessman, hence how this came to light in civil court case.

Judge said Nagra was a liar, and made him bankrupt.

NB No suggestion that Select knew anything about the VAT fraud. Select refused to comment.

Another example given of TNS Fashions, which folded in 2017, owing £1.7m in unpaid VAT. Sole Director banned for 7 year. Had supplied BooHoo. When queried, BOO said they had never dealt with the company. BBC then told BOO it was an unauthorised subcontractor of another company. BOO recognised name of other company, and severed all dealings with it. BOO appointed a supply chain auditor in 2019.

HKU Trading Ltd provided as another example of a shell company with 2 year life.

Shell companies used for VAT fraud look odd, because they immediately commence trading on a meaningful level, but don’t have any staff or premises costs. So clearly bogus (but how is anyone meant to know that, since they haven’t filed any accounts?)

Rose Fashions supplies (ominous music starts) PrettyLittleThing, operated by, yes the same Kamani family which owns BOO. BOO then terminates relationship with Rose Fashions, when wrongdoing comes out.

Exploitation of employees in Leicester factories

NB, This is general to the Leicester factories, supplying fast fashion retailers.

Bulgarian woman interviewed via a translator. Says she amp; husband live in cramped living conditions. Is paid about £6 per hour, below minimum wage. Was paid £2.50/hr initially. Frightened to speak out. Came to UK for a better life.

HMRC

Supposed to be policing tax payments. Needs to ask tough questions. Under-resourced?

HMRC claims success, having done 25 VAT investigations in Leicester garment sector, recovering £2m. Suggestion this is only tip of iceberg?

Retailers

Auditing supply chains more. They say to suppliers, renegotiate if prices are too low, don’t break the law.

My view

An interesting programme, but rather muddled, and poorly explained in parts.

No smoking gun re the retailers, in fact it seems they were paying in full, with full VAT, unaware that some suppliers may have then been using a web of shell companies to execute a VAT fraud.

Flaw in the logic of this programme, is that it claims retailers are getting artificially low supply prices of garments through suppliers almost being forced into committing VAT fraud. But then it later says that suppliers are spending their VAT fraud loot on £100k cars and lavish lifestyles for themselves.

What the programme failed to point out, is that retailers can get lower prices by sourcing from abroad, and air freighting into the UK. Because labour in places like Bangladesh is a fraction of Leicester, at only about 50p per hour. Leicester is used because it’s convenient amp; quick, not because it’s cheap.

VAT fraud occurs in many industries. It’s a rubbish system, full of holes. You cannot blame the end customer, who has paid in full, if a supplier improperly accounts for their own VAT, unbeknown to the customer. Therefore the whole basis of this programme seems spurious to me.

I’m starting to wonder if deliberate, or maybe subconscious racism is starting to play a part in the hounding of the Kamanis at BooHoo. After all, they’ve built a fantastically successful business, becoming billionaires, being British-Asians, and flash with their cash, maybe there’s a bit of jealousy or even subconscious racism, creeping into some of the reporting? We had a similar situation with Sir Philip Green. I went through 15 years of BHS filed accounts, and found no wrong-doing. But he’s flashy, arrogant, Jewish, so the press took great delight in presenting a largely false picture of his business dealings at BHS. For example, there was no pension deficit when he was legitimately paying out large divis from profits. The pension deficit arose due to UK Govt policy to slash interest rates in 2008-9, which made liabilities balloon. There were no divis after that, and he did everything possible to save the business, but BHS was overwhelmed by low cost retailers emerging, like Primark, and of course the internet. Look at the Telegraph article last weekend, hounding Mahmud Kamani, and contrasting his enjoying a birthday party in Istanbul, with low paid machinists in Leicester manufacturing items for BOO’s websites. Why should’t he enjoy a birthday party for goodness sake? You can almost hear the envy (or worse) dripping from the pen of the low paid journalist writing that piece – which again contained nothing new.

One of my readers here made a very good point in yesterday’s SCVR comments – that re-hashing articles about BOO is a good way to get page impressions, hence ad revenues online. So perhaps this story will just run amp; run, as desperate journalists try to seek page views?

As for short sellers – remember that they are deliberately trying to provoke fear amp; panic selling, in order to trigger a short term spike down in share price, for their personal financial gain. I respect short sellers that expose frauds like Globo or Quindell, but I have little time for those who attack good companies, in order to trigger a brief spike down in price, for their own quick bucks.

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