My previous article on the Pirates (Pirates Fail the Sniff Test Part 2) was based on my analysis until March 2017, since then Henry Morgan Ltd (HML.ASX) went into voluntary suspension after the ASX started to ask questions about the related party transactions and NTA figures disclosed. They have remained suspended ever since, pending an audit from BDO Australia.
Readers looking for some background would do well to read Part 1 that highlights my initial concerns, and Part 2, which highlights why I still felt HLM was uninvestable after a 240% gain on an investment in the IPO.
Since then, HML has owned up to Misleading Statements and has finally issued its Annual Report. I have shared below some of the further inconsistencies and what value I would place on the NTA and my view on what price I would consider investing in Henry Morgan.
Background – Why am I writing about a Listed Investment Company that we did not recommend or invest into?
I have had a number of investors question why are we covering Henry Morgan (HML) and Benjamin Hornigold (BHD)? Ie What’s in it for us?
My role as a financial adviser is to look for good investments for my clients, yet for every new investment recommended, there are scores of alternatives I have considered as unsuitable. Showing my analysis allows me to demonstrate the amount of input and work that goes into analysing a company, even when we don’t invest.
Having read some of the investor comments online and engaged in some debate, it is clear that investors have become so enamoured that they are willing to overlook the shortfalls on the promise of spectacular returns, even while the question marks over transactions continue to rise.
The Pirates make an interesting case study for those looking for insight into how to analyse a company. As a result, we have continued to report with the aim of helping investors get to grips with the underlying issues.
Henry Morgan and Benjamin Hornigold issues continue
Following on from the release of the Pirate companies Annual Reports, I have listed below some of the further issues and developments post my deeper look at the Pirates in March this year.
If you feel there are any inconsistencies in my analysis, please let me know. I have tried to piece together the information as well as possible, but in light of the Pirate disclosures being unreliable and often incorrect, it should be expected that there will be conflicting information and you should do your own research.
It should be noted that the majority of issues raised below are around whether Henry Morgan is investing into a Related Party as defined by the ASX. The ASX questioned HML on whether the transactions were related in July and Henry Morgan are of the view that they are not related. Our view is clearly different
Breach of Prospectus? – unlisted securities
In order to provide some context for new readers, Henry Morgan was a listed company launched in early 2016 with the prospectus stating the objective is investing in managed futures. Although the investment mandate allowed a small amount in unlisted securities, the prospectus specifically unable to invest in Unlisted Securities and the manager had boasted a historical return of 99%pa.
The company then seems to have taken the view that it could provide investors with a better opportunity for growth by ditching its successful 99%pa strategy by investing into unlisted companies that look to be related.
This looks to have started in August 16 when HML purchased shares from a related party into an unlisted related party (just formed in July), before finally asking for shareholder approval to invest in unlisted assets in October 16.
Note, HML did not seek permission or disclose that it had or intended to purchase shares from a related party, or invest into a related party. ASX rule 10.1 . CORRECTION 12/12/17 – It should be noted that there is an exception to this where the investment is less than 5% and where the investment is an issue of shares for cash ASX rule 10.3
Subsequent to shareholder approval of investing in unlisted assets, Henry Morgan Ltd purchased further shares in JB Financial Group Ltd (previously known as JB Broking), a related party. Looking at the issue price of parcels and shareholders in JBFG ASIC disclosure of issue prices (March 17) and the initial shareholding in July 16, the shares look to have been purchased from Bartholomew Roberts Ltd, yet another, related party.
Henry Morgan also invested directly into Bartholomew Roberts Ltd. Within a handful of days, Bartholomew Roberts then looks to have bought further shares in JB Financial Group and again within the month.
Addition 12th December 17 – At the AGM held two weeks ago, I asked about the buying shares from related parties. I was told that they (assumed Henry Morgan) hadn’t bought any shares from related parties and that all investments were new issues of capital. This would make sense as to why shareholder approval isn’t needed ASX rule 10.3 (exceptions to 10.1)
Questions over NTA?
Henry Morgan’s Net Tangible Assets (NTA) skyrocketed and raises questions as to whether investment returns are just as a result of the unlisted transactions?
Both Bartholomew Roberts and JB Financial were only formed in April and July 16, the prices paid for shares in these companies seem odd and overly inflated.
JB Financial Group Ltd (JBFG – Previously known as JB Broking Ltd)
Formed in July 16 – Registered Address: 144 Union St, Spring Hill, QLD 4000
Directors: Jarrad Stuart, Peter Aardoom, Michael Martin
Initial shareholders, 20% Henry Avery Partners Pty Ltd (Stuart McAuliffe), 60% Bartholomew Roberts Ltd (John Bridgeman Ltd), 20% Stuart Investment Trust (Jarrad Stuart)
August 16 – HML state they initially paid $50,000 for 300 shares in JB Financial ($166 per share)
Oct 16 – HML then invested $1.2 Million in Bartholomew Roberts (disclosed to ASX 23rd Jan 17)
Dec 16 – HML purchased 235 shares for $6.25 Million (seemingly from Bartholomew Roberts (JB Financial March ASIC disclosure)), were valued at $26,596 per share for a total of $6.25 Million (a 16,000% gain in the share price in 4 months (48,000% pa)) and revalues HML’s initial $50,000 stake at $8 Million.
Note: If my assumption that the purchase from BRL is correct, I would anticipate that no money was added into JB Financial until BRL invested $6.26 Million into JBFG (below) and provided $6.25 Million of profit for BRL. Addition 12th December 2017 – HML stated at the AGM that they did not purchase JB Financial shares from BRL
9th Dec 16 – Bartholomew Roberts then invested $6.26 Million in JBFG for an issue price of $26,667 per share (is this is the money HML just paid Bartholomew Roberts for the 235 shares in JB Financial?)
30th Dec 16 – 72 shares at $26,667 per share ($ 1,920,024). To Bartholomew Roberts (JBL Annual Report)
26th April 17 – The equivalent of 306.5384 (adjusted for share split in March) shares were issued at the equivalent of $55,100 per share (notional value of $10 Million cash and $6.89 Million in shares in exchange for remaining Kings Currency) – Revalues Kings Currency to $35 Mill! (JBFG bought initial 80.6% in Dec 16 for $7.68 Mill)
27th April 17 – The equivalent of 25.6080 (adjusted for share split in March) shares were issued at the equivalent of $58,570 per share (notional value of $1.5 Mill)
25th May 17 – The equivalent of 36.2976 (adjusted for share split in March) shares were issued at the equivalent of $55,100 per share (notional value of $2 Mill)
These 2 disclosures were not submitted to ASIC until August and contradict the holdings disclosed to the ASX as the holdings as of the 26th May
5th July 17 – The equivalent of 649.5348 shares (adjusted for share split in March) were issued at the equivalent of $61,400 per share (notional value of $39,881,436) (In the JBL Annual Report as 5th June) – No Cash paid – This was to purchase related entity RSM, of which 62% owned by Bartholomew Roberts (I would be surprised if the remaining 32% is not owned by a related party)
This transaction was reported in the JBL Annual Report as the 5th June and would place a value on HML’s investment as $33 Million, not the $29 Million reported in the HML Annual Report. I assume this is a typo in the JBL Annual Report and should be 5th July
JBFG Valuation is therefore either $103 Million based on the last issued stock price on the 25th May, or $155 Million, based on the 5th June/July ASIC disclosure or 6th July ASX Disclosure.
Bartholomew Roberts Ltd
Formed in April 16 –Registered address: 144 Union St, Spring Hill, QLD 4000
Directors: John McAuliffe, Stuart McAuliffe, Rosario (Ross) Patane, (Brian Cook was a director 13/06/16 – 07/09/17)
Initial shareholders: John Bridgeman Limited (1 Million shares for $1 Million)
- Issued 2,077,417 shares on 4th October 16 at $1 per share; of which, 147,417 was issued to John Bridgeman Ltd and 1.2 Million issued to Henry Morgan (JBL Annual Report), 730,000 unaccounted for. Of note HML has invested a significant amount in unlisted assets in a related party prior to shareholder approval
- Issued 100,000 shares on 1st November 16 at $4 per share ($400,000) to John Bridgeman Ltd (JBL Annual Report)
- Issued 55,556 shares on 19th November 16 at $9 per share ($500,004) – Looks to be Henry Morgan. A gain of 900% in 6 weeks (7800%pa)
- Issued 214,444 shares on 30th December 16 at $9 per share ($1,929,996) to John Bridgeman Ltd (JBL Annual Report)
- Issued 326,735 shares on 17th May 16 at $9.90 per share ($3,234,677) to John Bridgeman Ltd
- Issued 242,060 shares at 17th May 16 $9.90 per share ($2,396,394) – Looks to be Henry Morgan
Henry Morgan looks to have purchased 1.2 Million shares at $1 per share yet shareholder approval to invest in unlisted assets wasn’t given until the 18th October in addition to the two other parcels.
Adding the parcel issue price with shares issued on 19th November and 17th May, plus 1.2 Mill at $1 per share reconciles with the Annual Report and 26th May market disclosure, but seems at odds that HML only disclosed that they had invested only $1.2 Mill in Bartholomew Roberts on the 23rd January, unless the parcels were on-sold to HML at a later date? Addendum 12/12/17 – At the HML AGM, it was stated that they (assumed HML) had not purchased shares FROM any related entities.
I struggle with the revaluation of both these entities.
- They were formed less than 12 months prior to HML investing into them
- They were both registered using the same registered address as JBL.NSX and HML.ASX
- Their shares were owned by related parties, the Pirate Cartel of companies and shareholders
- Their directors are shared directors/owners of the Pirate companies
- The directors derived their own valuations and in both cases these were increased multiple times in a matter of weeks
- These companies are start ups
- Unlisted companies are only worth what an independent 3rd party is willing to pay
- I struggle to see a non-related party transaction
I’m conscious that a company with little/no assets is only worth the cash on hand. E.g. If I have an idea for a company, (let’s assume it’s a good idea that has merit), I then convince investors to pay $6 Million for shares in my new company, the company is still now only worth $6 Million.
Now, if I spend $2 Mill on implementing my idea, until I can demonstrate I’m able to make money, the business is now arguably only worth $4 Mill (plus possibly a little goodwill). The company is only worth more than the $6 Mill when others (not myself) are willing to pay more for it.
Forecast revenues are worth nothing on a start up and since the increase in share prices look to be to/from related parties based on forecast rather than actual revenues, it would lead me to believe that HML has massively overpaid for its stake in JBFG and BRL.
One of the key issues has been the ongoing Misleading Disclosures from the company. ASIC finally stepped in earlier this year with HML releasing a statement in August 17, correcting a series of disclosures since December 16;
JB Financial Group (with regards to subsidiary JB Broking Ltd, later renamed JB Markets Ltd)
- Dec 16 – HML had stated that JB Broking had an established and profitable broking and foreign exchange arm. This was deemed to be misleading.
- May 17 – On questioning from the ASX as to how the NTA had been calculated, Henry Morgan stated that they had turnover of $96 Million, total staff of 428 employees and 250 contractors. This was deemed this misleading and ASIC stated it was clearly not in the vicinity of $96 Million
As a result, HML went on to provide further guidance in its corrective disclosure to the ASX on the 15th August;
This may lead you to believe that the JB Financial Group turnover was likely to be $10.7 Million. However, I note the asterix.
The asterix nullifies the estimate as it states, “entities… that the Company…. controlled or anticipated controlling” ie the revised figure is likely to be inflated and does not provide you with any information for the purposes of the initial ASX query on how the company was valued at time of purchase. It is also vague on the disclosed turnover for May 17. It arguably gives the impression that the annualised turnover was likely to be $10.75 Mill. Therefore the corrective disclosure arguably fails to correct the initial misleading disclosure as it still does not state what the revenues were on the 26th May.
It also discloses that headcount on the 14th August is now 985 employees and contractors assuming the Genesis Acquisition proceeds, yet a previous ASX disclosure states the Genesis headcount will result in an additional 17 employees. This doesn’t make sense, JB Financial has either increased its “anticipated” headcount (note that we don’t know if it’s the actual headcount) by 110 employees in 3 months or Genesis has? (I visited Genesis Office in Sydney and I’m of the view that 17 is more likely than 127).
Question marks over the recent Genesis purchase
The August corrective disclosure further states that they know of no reason why the Genesis Acquisition would not complete. This also sounds counterintuitive since it is based on a 50% cash payment and 50% in shares in JB Financial.
Considering a question mark remains over the value of JB Financial Group and an audit is underway from BDO Australia to ascertain a value on the underlying assets, I cannot see how the board can state that they know of no reason why the Genesis Acquisition will not complete as planned. Unless of course, the cash value is the real attraction to Genesis shareholders.
Genesis itself is seemingly a related party, Simon Richardson an ex HML director and current director of BHD, was founder of Genesis Proprietary Trading.
Regardless, a disclosure on the NSX states that the Genesis was bought by RSM (another Pirate related party) for $5,747,289
Subsequent disclosure then stated JB Financial had purchased Genesis (I assume from RSM) for $11 Million (half paid in shares), $3.89 Mill in cash (net of debt). That’s a 100% gain in 2 weeks!
The 15th August market disclosure (Agreement for the purchase of Genesis) states an internal valuation of $93 Million for JB Financial, yet $6.14 per share values JB Financial at $155 Million?
Flouting ASX Rules?
We previously highlighted what seem to be ongoing breaches in ASX disclosures;
- ASX rule 4.10.20 requires full disclosure of investments held on 30th June within the Annual Report in either of the 15/16 or 16/17 financial years for the investment company and child entities.
- ASX rule 10.1 requires entities to seek shareholder approval prior to acquiring or purchasing significant assets from related parties. Addendum 12th December 2017 – Exceptions under ASX rule 10.3 allow investments into a related party without approval where this is not a Substantial Asset or where there is an issue of securities for cash. HML stated at the AGM that all investments in the unlisted related entities were capital raises (and would explain why rule 10.1 does not apply)
- ASX rule 4.12 requires HML to inform the ASX of its NTA as of the end of each month. The NTA disclosures are often seemingly haphazard and often not end of month NTA disclosures
- ASX rule 4.8 requires HML to provide a set of audited accounts as part of their annual report. This has not been provided
The ASX questioned HML on the 26th May as to the disclosed NTA – HML’s responses can only be described as odd. Primarily that they had valued JB Financial Group based on;
- a multiple of revenues where an established business model
- or for new investments, a cost based approach or value at which other 3rd party investors have recently invested
In the case of JB Financial and Bartholomew Roberts, the valuation can only be based on the value of other 3rd party investors, but these seem to be either each other or heavily related parties.
*It was later clarified that the $96 Million turnover was forecast revenue, not actual. Actual revenue for 16-17 was $9 Million and a $1.9 Million loss
Incomplete, Incorrect, conflicting disclosures and inconsistencies
- The Henry Morgan half year report states that HML bought $1.7 Mill of BRL shares in 3 tranches, yet the 23rd January Disclosure states they paid $1.2 Million.
- The Annual Report states that HML invested $4.096 Million in Bartholomew Roberts in 3 tranches
- In the same HML Annual Report, this is contradicted with a different purchase price of $4.099 Million
- In its August Corrective Disclosure to the ASX HML stated that it had initially invested $50,000 into JB Financial in August 16, yet the annual report states this as $300. Addendum 12th December – HML confirmed at the AGM that they had invested $50,000 into JB Financial and that the reason the annual report states $300 is because the shares were reconstructed
- HML declared on the 31st August that they would delay their Annual Report until BDO completes its audit of the disclosed NTA. The Annual Report has been released, yet there have been no market disclosures?
- The annual management fees disclosed in the BHD and HML annual reports do not match those disclosed as being charged by JBL. There is a discrepancy of $458 – subsequently explained in a corrective disclosure
- Following on from queries from the ASX, HML and BHD finally released an addendum to the Annual Report in November 17, disclosing the assets held as of the 30th June. However, it contradicts the currency exposures within the annual report (e.g. No Korean Won, Japanese Yen exposures). Notably, by not reporting these investments within the annual report, in doing so, investors have lost protection of KPMG’s audit and ASX rules that protect LIC investors.
- The HML Annual Report does not disclose the unlisted assets held – subsequently disclosed in an Addendum to the Annual Report
- The HML Annual Report does not show any foreign exchange/currency profits or losses – This is unusual for a company trading in international markets
- The HML Annual Report does not disclose John Bridgeman Ltd in the Substantial Holders – subsequently disclosed in an Addendum to the Annual Report
- The Addendum to the Annual Report does not show a holding for Hunter Hall (HHL.ASX). Henry Morgan and related entities had disclosed a substantial holding in Feb 17, yet there were no disclosures of ceasing to be a substantial holder (HHL Annual Report does not disclose HML and related entities as Substantial).
- There are no foreign currency gains or losses
- Furthermore, HML do not disclose the actual securities held, rather a list the derivative margin and gross exposure (akin to saying you hold Australian Shares, but not listing the individual shares). Holdings as of 15-16 remain an enigma other than the asset class of investments
- John Bridgeman’s Preliminary Annual Report disclosures of profits for Kings Currency and JB Alpha shows little resemblance to the Final Annual Report
- Unusually, I also note that the BHD report states that valuation was taken by sourcing prices against a General Ledger and checking ownership using broker statements! I would normally expect to see a Custodian holding stock. Since BHD’s funds are managed by a related 3rd party JBL.NSX, and their broker is related party JB Markets (a subsidiary of JB Financial Group), I am concerned by the lack of corporate governance in protecting investors from conflicted interests?
- Many of the HML and BHD disclosures are late and incorrect, leading to corrective disclosures which are often incorrect. E.g. BHD’s NTA Disclosure on the 18th October did not disclose the date of disclosure or the NTA after tax, this was later corrected on the 20th October and clarifies that this is net of fees $431,632+GST and refers to correcting the disclosure from the 18th November. $431,632+GST are the quarterly fees (inc. Performance fees- paid quarterly) that were paid up until the 30th September (disclosed 13th October).
This is hardly becoming of a manager that you would expect to have a high attention to detail and naturally raises questions of both their corporate governance, overall abilities and whether the NTA is indeed correct.
- Stuart McAuliffe has also reportedly been sued over unpaid taxes with the ATO, in court being sued in January 16 for $600,000 and recently bid for the Gold Coast Titans, stating that he planned on using funds from the Listed Companies he managed.
As we highlighted in our previous analysis, this remains uninvestable, the conflicts in management and seemingly related party transactions are incredible. There look to be many more related party entities investing and selling shares back and to each other. Addendum 12/12/17 – HML stated at the AGM that the investments made were always a new issue and not purchases and sales to new entities
JB Financial Group is now (Sep) valued at over $200 Million having produced revenue of just $9 Million and a loss of $1.8 Million in 16-17. Subsidiary JB Markets/JB Broking’s income looks to be entirely derived from BHD and HML.
Henry Morgan further disclosed that it had derived a value for JBFG based on 14.9 times forecast earnings and had initially intended to float earlier this year in order to achieve that valuation.
Actual earnings are currently negative $1.8 Million. Using the disclosures from JBL Accounts, management had forecast just over $2.6 Million profit had the underlying entities been held for the full 12 months. Using the 14.9 times forecast earnings, this would provide a valuation of just under $40 Million. A far cry from the $155 Million valuation used. The question for management is over what period are these earnings forecast and at what rate are they being discounted to arrive at today’s valuation?
Since the underlying investments look to be related parties, and our expectation of inter-related party transactions, this would arguably need to be heavily discounted.
What about Bartholomew Roberts Ltd (BRL)?
I have no idea on how BRL produces an income. If it has sold its shares in JB Financial to HML in December, the profit can be discounted by $6.2 Million (ie the accounts would now show an overall loss of $3.6 Million for 16-17). There remains an inconsistency here. The JBL Annual Report states that JBFG issued shares to HML, the ASIC share consolidation notice states that HML holds two parcels issued at $1 per share, therefore looks to have been initially owned by BRL.
So what value do I place on Henry Morgan’s NTA
Taking the NTA disclosed in the annual report, $47.6 Million, with a total number of 30,610,140 shares on issue, the indicative NTA is $1.55 per share, a far cry from the last disclosed NTA of $2.18 per share on 30th April.
That’s a loss of $19.2 Million on the NTA in 2 months! This is during a period when unlisted assets were still increasing in value and Benjamin Hornigold Ltd’s (BHD.ASX) NTA was increasing (there is an expectation that the listed investments would be relatively similar among both entities).
However, $43,624,268 is the value of unlisted assets, with a cost base of $10,400,104. If you were to discount the fantastic re-valuations and taking the unlisted investments and JBFG and BRL at their cost base, the NTA is 75c per share.
Our view is investors need to consider whether there is even value at the cost base. Due to the heavily related party transactions and high level of fees charged to HML and BHD, I would not be surprised to see fees charged in a similar fashion to underlying entities. Attributing a zero dollar value to related entities and adding back the deferred tax expense, the NTA would be 40c per share.
Performance fees – The HML Annual Report shows revenue of $41 Million with realised gains of approximately $8 Million and unrealised gains of $33 Million. By revaluing unlisted assets in this way, the manager (John Bridgeman Ltd) has charged nearly $8 Million in performance fees, wiping out the realised gains. Since the Pirate’s ASX disclosures are so poor, we are unable to gauge if any of the realised gains are due to related party purchases and sales.
As a result, we could only consider investing based on “Cash at bank” ($4.15 Million in June 17) of 13c per share. However, the leveraged used within the derivatives positions could easily wipe this out within a month, we would not be comfortable investing in Henry Morgan at any level until there is a change in management and clarification over the revised NTA and related party transactions.
Benjamin Hornigold (BHD.ASX)
Since BHD has always allowed investments in unlisted assets, and management disclosures cannot be relied upon, we cannot be assured that the returns prior to, or post 30th June are not as a result of related party unlisted transactions. This firmly places the NTA as a large unknown and as a result, we would not invest in BHD either.
Addendum 12/12/17 – It was asked whether any of BHD profits were as a result of unlisted transactions and it was confirmed that none of the transactions were as a result of unlisted transactions.
What can investors do?
- Start asking questions from the boards of HML, BHD and JBL? At best, in our view, this is very very weak corporate governance.
- If you have serious concerns, report it to the ASX and ASIC.
- Shareholders also have the option of attending and voting at AGMs. If you’re unhappy, voice your concerns.