Concha - Woefully Overvalued

http://www.concha-plc.com

It is not often the case that a company's share price rises by a double digit multiple on very little basis, but that is exactly what seems to have happened at Concha, an investment company formerly known as Hot Tuna, which decimated shareholder value. However, investors who held through the share price transformation have essentially been given a lifeline as the share price has soared to levels not seen until several years ago - the 1,451% price increase over the past year is not a mistake. Put simply, on very little visible basis, Concha has turned into one of AIMs most woefully overvalued companies. There is no visible investment case that is even remotely attractive at current share price levels and whilst momentum is currently with the company, this bubble could burst at any moment.

Technicals



The technicals of Concha have been particularly interesting to watch since this is likely to have provided some of the momentum behind the share price movements - after all, momentum breeds momentum. What also helped the rise was the share price itself - share prices at pennies and fractions of pennies are particularly prone to sharp rises as speculative investors tend to regard these are being 'cheap' even though that is not correct. It is more about perception and there is definitely a link (a wrong one) between very low share prices and value. Nonetheless, that will have aided the share price rise as it tends to attract speculative investors. The majority of shares are in the hands of retail investors.

However, as per the volumes, there have been relatively large volumes traded. The volumes in early 2014 are not significant given the very low share price, but the more recent volumes are and there appear to be notably large trades processed on a daily basis. This does slightly damage the sell case for Concha as it suggests that there are movements ongoing away from the public eye, but a recent RNS from Concha is enough to alleviate that concern.

"The Board of Concha notes the recent movement in its share price and makes the following statement.  We know of no reason for the recent rise in the share price, Concha is an investment company and its stated aims are to evaluate and invest in a broad range of technology, media, sport and social media sectors.  The Company evaluates a number of potential opportunities on an ongoing basis and should the Board decide to make an investment we will make further announcements as and when appropriate."

It's also important to recognise that such visibly ridiculous valuations tend to correct eventually, regardless of the reason propping them up. For example, if there is a background buyer (for whatever reason), it will eventually be the case that they cease purchasing the stock. Interestingly, one private investor surpassed the 7.5% mark in terms of stock holding over the course of the rise, which does suggest some level of background accumulation, but there have not been any more recent RNS' to that effect. Understanding these aspects of the technical situation is highly important in Concha's case, hence why it makes sense to discuss it at length.

There are three powerful pressures that mean that the bubble is prone to burst:
- There are a significant number of latent shareholders from when Hot Tuna was the trading company, who will no doubt seek to dispose of their shares when possible. The sharpness of the rise means it is likely that many have not been able to do so yet, or are waiting for momentum to fall
- Momentum traders will exit the stock on initial signs of the technical case fading. Two previous bullish consolidation patterns would have kept these traders interested in the stock. Whilst valuations at between 1.5p to 2p were still far too high for what Concha have, the market capitalisation was not particularly high in terms of absolute values
- There are a substantial number of warrants in issue that will likely continue to be exercised at sold down, given that their exercise prices are far lower than the current share price (between 0.35p and 1.2p). Since the 18th June alone, circa £0.51m was realised to Concha from the exercising of warrants. 260.7m warrants are still outstanding. This is a powerful downward pressure given the attraction of being able to immediately secure huge profits at inflated levels

Quite why these three factors have not halted the share price movement in its tracks before the past fortnight is unknown, and that is yet a further risk to the Sell case. Once again though, it's easy to fall back upon the fact that Concha denied knowledge of any reason why the share price rose in the manner that it did, and that the fundamentals of the company remain weak. Lastly, it's imperative to look at the short-term price movements to try to discern whether momentum remains strong, and that is shown in the chart on the right. The price action over the past couple of weeks has been strong, so it is prudent to manage any Sell position relative to that strength by using a fraction of the portfolio allowance. A stop on a further fraction at 4.20p is also sensible.

Operations

Calling something overvalued without looking at the operations of the company is always dangerous - exceptionally high growth stocks can attract very high valuations that may seem ridiculous, but may turn out, a number of months/years down the line, to have been perfectly reasonable. Thankfully, in Concha's case, there is no debate to really be had. Concha is an investing company so it invests in other companies and may eventually complete a reverse takeover whereby a private company gains an AIM listing through Concha's shell. Before covering the operations, it's interesting to put Concha's valuation into perspective using a couple of other fairly well known companies.

- Prezzo: Owns 245 Italian restaurants across the UK. Supposedly Concha is worth 19% of Prezzo's £310 million market cap. I.e. You can own 5 Concha's or Prezzo
- Costain: British construction and engineering group that turned over half a billion in revenue in H1 2014. Costain's enterprise value is circa £156m. Supposedly Concha is worth 37% of Costain's enterprise value. I.e. You can own just under 3 Concha's or Costain
- Moss Bros: Men's clothing chain with sales of ~£56m in H1 2014 with 133 stores. Moss's enterprise value is circa £69m. Supposedly Concha is worth 84% of Moss Bros's enterprise value. I.e. You can own just over 1 Concha or Moss Bros
Whilst these comparisons are fairly irrelevant on a standalone basis and without looking at Concha's portfolio of investments, it does give a series of comparisons to think back over when reading what Concha does have, and to see whether you would opt for the Concha's or the alternative businesses.

To recap, Concha was born out of Hot Tuna, which was a surf and fashion company that was eventually disposed of for less than £1m in January 2012. The company then under AIM rules became an investing company - this is a sector that tends to represent companies that became defunct and the assets, disposed of, as was Hot Tuna's case. The change in sector was accompanied by both board changes with Mark Battles appointed Non-Executive Chairman, and a re-financing with £270,000 injected into the business. This is where it becomes interesting.

In March 2012, Concha started its new era by providing £750,000 as a short-term loan facility to private company, Churchill Media Ltd. The rationale provided was that it would reap a better return than keeping the money in deposits and the company also announced its intention to seek an acquisition in the media and technology industries. However, it was noted that "One of the companies in which Churchill has made an investment is in one where M Barney Battles is a minority shareholder."

Whenever there is a conflict of interest such as that, alarm bells should start ringing. In any case, the loan was stated as being repayable no later than January 2013. The next announcement from Concha was to announce that Chris Akers was taking over from Mark Battles - Chris Akers notably transformed previously AIM listed Sports Internet Group from a start-up company to a circa £300m company when it was sold just over a year later to BSkyB. Admittedly that was during the dot-com bubble, but it is still an excellent achievement, but it was the departure of Battles that overshadowed his appointment, since he had only joined the company earlier in the year. That was followed up by an announcement that the loan to Churchill Media had been extended, which was yet another serious red flag.

Then in February the company was suspended by AIM for failing to make an investment into a company, as per AIM investment policy rules. Quite frankly that reflects very poorly on the outgoing management team. During the suspension, Concha acquired 40% of Moshen Ltd - Moshen was an app developer, and investors will know that it is a graveyard sector for listed companies where cash burn tends to be extreme is unsuccessful and raising cash can be extremely difficult. Alongside that acquisition, the company raised £850,000 at 0.35p to finance the deal, undertook a share consolidation and issued a raft of warrants.

Chairman Chris Akers commented: "The Board of Concha is very pleased with its acquisition of 40 per cent in Moshen.  Moshen is experiencing significant revenue growth and has developed a strong existing client base and future pipeline. We hope this will be the first of a number of investments and look forward to updating the market on future investments in due course."

At the time Moshen was generating revenues of £1.1m and an EBITDA loss of £0.25m plus it had net liabilities - the price paid for 40% looked ridiculous. In the meantime (while suspended), the Churchill loan was further extended towards September 2013 with Russell Backhouse appointed as Finance Director. Investors were treated to a further placing and acquisition in August 2013. The acquisition concerned a 30% stake in "The Works", a sports media events and design agency whose customers include both the NBA and UEFA. Ultimately, a value was put on the 30% of the company at the time, and that was to the tune of £400,000, which looks about right given that The Works generated profit-after-tax of £131,777k on revenues of £1.08m during the period given. Revenues are not likely to be recurring, to the valuation looks sensible although a higher value than £400k for the 30% could be argued. However, yet more warrants were issued, including some given to Russell Backhouse. Concha was finally restored to trading.

Further to this, Concha noted that it had invested a further £253k into Moshen during equity raises, and that the overall position in Moshen was taken up to 41%. The announcement also had information regarding the Churchill loan: "Concha has commenced a dialogue with CML regarding its ability to satisfy repayment of the loan either in cash or through an exchange for interests in investments held by CML or its associates.  Concha is undertaking a review of CML's investment portfolio and assets, and expects to make a further announcement in due course." In other words, Churchill was not in a position to repay the loan, so Concha was seeing whether it could take the payment in Churchill stock or stock in Churchill's investments. 

The Concha tale took a further twist when they invested £100,000 into PixCom Ventures Ltd through a convertible loan, and well-respected UK investor Nigel Wray took a 12.9% stake in Concha through investment vehicle Euroblue investments. That occurrence is a further deterrent to the sell case, but took place at far lower share price levels, so the current valuation is extremely difficult to justify.

The unravelling of the poor investment decisions announced earlier came to fruition in late 2013. Firstly, in August, the company noted "Concha has uncovered apparent financial irregularities which indicate asignificant working capital shortfall within one of its investee companies, Moshen Limited." and that a significant creditor claim was supposedly undisclosed at the time of investment, which put Moshen into financial disarray. To cut to the chase, one month later Moshen entered administration, Concha lost its entire ~£870,000 investment and the first car crash of an investment was finished. This suggests that the board, which included Chris Akers who is still at the helm, failed to properly appraise the company, and the board members in particular, who potentially kept the financial problems under wraps.

Then in October, just a month later, Churchill failed to repay the loan and a notice of default was issued to them. The second financial failing had been unearthed. One of the few remaining directors of Concha, Marcus Yeoman, tended for his resignation in December, leaving Backhouse and Akers as the remaining directors. To add insult to injury, a further £0.2m was raised in December at 0.2p. Since that point, two new directors have been appointed, which somewhat alleviates the problem: Gordon Watson (highly experienced) and Peter Read (good experience in the past).

The above coverage of events demonstrates the appalling series of events that both the old and new board have put investors through. The collapse of the Churchill loan, overpaying for Moshen, the collapse of Moshen and the lack of real underlying financial progress can only be disappointed as seriously disappointing. That is what makes the share price performance utterly unjustifiable and detached from reality. The track record of Concha to date is nothing short of disastrous.

Financials

Is there anything to justify a market capitalisation of £57.7m? Not at all. Concha still has its investments in The Works and PixCom Ventures whilst pursuing resolutions to both the Moshen and Churchill problems. Since the holdings in these companies are investments, close to nil revenues are booked on the income statement, whilst G&A costs (if symmetrical) will run at circa £400,000 per annum.

The one thing that the share price run has done is allow Concha to boost its balance sheet as warrants are exercised. As at the end of 2013, investments were booked on the balance sheet at a value of £454k with a small level of net payables and cash of £93k. Being generous and assuming that 95% of the £2m placing proceeds were direct to the company, net proceeds stand at £1.9m. Adding up all the warrants that have been exercised to date, we can form a basic valuation for Concha based on the trading assets and the cash balance. This is shown in the table below.

Simply adding up the values, Concha has an intrinsic value of circa £2.9m. It's the scale of overvaluation that is the critical point as it is possible to attribute higher values to both The Works and Pixcom stakes. Although updated and further financial details for these two stakes are required before being able to confidently generate accurate valuations. In any case, even doubling, tripling or quadrupling these valuations, and the running total ends at less than £5m.

Another method of valuation may be to apply a premium-to-cash-and-investments based valuation. Even using a 100% premium, the running total only stands at approximately £5.8m, which is roughly a tenth of the current market capitalisation. By any valuation method, Concha is woefully overvalued and it's impossible to justify without making an exceptionally large leap. That leap is that Concha makes a transformational acquisition or reverse takeover. That takeover will require financing though, and that would only succeed in further raising the market capitalisation - in other words, Concha will have to buy an early-stage Ebay replica at an excellent price to justify the current valuation.

That seems inconceivable, not least because the Concha shell is not attractive. Any serious and large business would want to make a fresh start with an exchange listing, rather than reversing into a seriously overvalued shell company, with a terrible track record and some level of stale shareholders. The biggest risk to the downside case is that Concha uses overvalued paper to initiate a significant acquisition. However, as above, that will only boost the market capitalisation further and the potential takeover target will realise that the current valuation is ludicrous. Therefore, if shares are used as a makeweight, the number of shares issued, hence the valuation of the target, will likely be much higher than is 'fair' in order to compensate for the additional risks. No takeover target will accept Concha paper at 'fair value' at the current point in time, plus the cash balance is not significant enough to support a major acquisition. Any small acquisition will likely be met by an underwhelming response from the market as well.

Concha still is looking for acquisition opportunities, noting in June that, "The Board is pleased to confirm that it continues to make progress in identifying meaningful investment opportunities in our chosen areas of technology, media and communications. Whilst there can be no guarantee that one or more investment opportunities can be concluded successfully, the Board remains confident of creating shareholder value through Concha and looks forward to providing further updates in due course." Potential sports-based corporate acquisitions are touted as being a possibility, but the problem remains - Concha is woefully overvalued.

Trading at 20x the 'Running Total'

Despite the promises of the board to generate shareholder value, it will be incredibly difficult to do so from current levels since at these levels Concha is trading at 20x the 'Running Total' that was defined earlier, which suggests that the share price is overvalued by a clear margin. Upon looking at the assets being valued at circa £2.88m at a base case scenario, it is inconceivable that that Concha is worth one fifth the value of Prezzo, one third the enterprise value of Costain or roughly 15% under the enterprise value of Moss Bros. These are successful businesses with years of delivery under their belt in terms of fundamental progress, yet Concha has delivered the opposite and it is quite frankly ridiculous that Concha's bubble has inflated to a market capitalisation of almost £60m. Momentum remains, so it is prudent to keep a Sell tag to half a new full slot and to evaluate price movements in the near term. This bubble is nearing a significant pop.

UPDATE (20/10/14) - As per my initial review, I commented that "it is prudent to manage any Sell position relative to that strength by using a fraction of the portfolio allowance". Whilst I did then proceed to scale up the position to a full slot, the price action has continued to be strong with an ascending triangle pattern forming. On that basis, I have quartered the stake back down to 0.25 of a full slot. That said, Concha remains woefully overvalued and I will not hesitate to increase the short position when the buying pressure shows clearer signs of failure. There is nothing remotely fundamentally appealing about the company, with the exception of a strong technical setup. 

UPDATE (22/10/14) - Final results were released today and showed the lack of any real business. However, the company managed to get away a placing for £4m at 4.00p; I suspect this is with wealthy individuals and definitely not with institutions given the lack of a discount. I also suspect that these wealthy individuals would have invested in Akers rather than the actual business (recall Akers was formerly the Leeds United Chairman). The bearish case remains as strong as ever, although the technical picture is still bullish. I have therefore slice further towards 0.15 of a full slot, albeit I will continue to look for signs of the share price 'topping'. Now 0.10.

UPDATE (23/10/14) - I have increased the stake back up to a full slot today at 6.375p. Given the weightings involved, (6.375*0.9)+(4.20*0.1), the new average is 6.16p. Short positions in the market have been increasingly rapidly today alongside the unjustified rise, and I make it that the enterprise value is now circa £83m, which is quickly frankly ridiculous. As before, I will very closely monitor Concha's activity given the momentum and there's no room for complacency

UPDATE (27/10/14) - I have moved Concha from Sell to No Rating at 5.20p for a ~15% profit. Waiting for the technical situation to become clearer

15 comments:

  1. Thanks for sharing

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  2. Ha ha, Brilliant! I would much rather have 5 Conchas than a Prezzo because of a bad eating experience there and now it is 6 Conchas so all is well. ha ha. Insane valuation even for aim

    CraigJ

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  3. Bonkers valuation. Who are the mugs buying this stock...?

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  4. The mugs are the ones the ones with the insight...and foresight I must say. Whilst the rest of us are contended to bitchin about what could have been!

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  5. How on earth do you get a short on Concha? Ig markets wont allow.
    Shaun

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    1. I think with great difficulty lol. cmc?

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  6. Spreadex had to investegate but they got a borrow so i could out a short on.
    Shaun

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  7. Good morning, i just wanted to say again great write ups, i'm particularity interested in this recent Concha one.

    It is ridiculously over valued. So much so that it seems to me to be one of those rare occasional golden nuggets that you 'just know you are right' on. A dead cert if you will/extremely high conviction if you will.

    I imagine its the timing of (if you can actually obtain the short) that is the hardest part. Any idea when you would go full slot - perhaps if price goes below recently low of 2.9?

    Thanks,
    Shaun

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    1. Hi Shaun,

      Thanks - it is ridiculously overvalued and a sticking point is that if there is a large background buyer, for whatever reason, they don't have unlimited cash. The spread over the past few days has opened up to as much as 10% at times, which suits the downside case over time.

      Timing is exactly the point, as whilst momentum is there, any sharp drops tend to be re-bounded off as there are too many traders and retail investors involved. I was actually planning to initiate the other 50% in the unlikely event that is manages to continue upwards past 4.2p - it'll be used when it shows signs of topping. So it's a backstop rather than a position addition in the event it falls lower.

      It was similarly surprising with CarpetRight at around 550p, which I initially had a short site position on. However, I removed it to free up space for other ideas, and it began to fall thereafter - now it is sub-400p with the 'forces of support' seemingly gone. Just takes patience sometimes

      El1te

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    2. I understand your CPR comparison but even there with Carpetright there was a story that perhaps given an economic recovery and housing boom ......CPR might benefit and regain former glories. Concha has no such former glories, it has nothing. I want to bet the farm on this one but am wary of yet even more extreme market inefficiency where the price might continue upwards. £10m market cap is ridiculous, £25m yet more ridiculous, £55m we are in cloud cuckoo land. Who could possibly be a background buyer? Surely its just momentum traders?

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    3. True, although CPRs share price responses to profit warnings and future earnings estimate revisions usually ended in the share price increasing, which is very odd. However, as I noted in the original review, I believed that was because there were too many stale retail shorts and shares out of circulation because of Lord Harris. The inefficiency is very true and that is why I only put a fraction of a slot into it - it's better to be cautious in the event that the valuation does get worse so as clearly ridiculous a valuation it is, restricting exposure is important. The problem is that Concha is becoming increasingly illiquid too.

      I do however agree that momentum traders are largely to blame - a link to my review was posted on the Concha LSE.co.uk bulletin boards, and the quantum of clickthroughs was very high. That's an interesting piece of proof that retail interest is seemingly high, even at the current valuation. That said, there are some very large trades being processed on the buy side - unfortunately, it's nearly impossible to tell why that is! Importantly, overvaluation doesn't tend to hang around forever

      El1te

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    4. I am in the same place, I have been trying to short concha but with virtually no luck. IG won't allow a short on it. City Index, Saxo and Barclays do not list it at all. If people are buying it, then why cannot anyone short it?? Current price 3.82

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    5. Same! But IG have it on and off. Spreadbetting companies try to block shorting when they think they will lose. They are doing the same with £1.7BILLION company Just Eat. It should be shortable. IG might flick the switch but concha is so volatile that shorters shoul be careful. It looks like el1te is managing that with only a 0.50 slot

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  8. Ok so Final results showing £4m raised at 4p. Who bought the new shares....is anyone with £4m that silly? There are even warrants for 8p lol. So Concha have plenty cash to keep the lights on, but the £65m market cap is otherwise underpinned by hot air about looking to invest in a 'racy' sounding media/tech company. Its interesting to note that all the major shareholders are nominee accounts. Where does the SP go from here..... will the tide turn if the SP retreats t below 3p and all those that have bought in from 3-4p upwards panic, sell and momentum trends downwards? Im fascinaed at such a gravity defying share. Shaun

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    1. I reckon that Akers and Co. have enough 'millionaire' friends whereby he can just say that it will be a good investment, and they invest! There is no way institutions are involved as the valuation is crazy, so look for Holdings Rns' to see if there are individuals who took up the placing. I reckon that's the only way such a placing was possible, and at such a poor discount (for the bearish case).

      No real assets bar cash, and an underlying value of circa £7m now, yet a market cap of nearly 10x that figure. Difficult to call this one, but this valuation is ridiculous. As stated before, unless they invest in a mini-ebay, then any investment will fall flat on its face. Tricky to call though

      El1te

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