By Cynical Bear | Wednesday 18 May 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I find Octagonal (OCT) such a frustrating stock as, at the heart of it, there appears to be a decent business that can throw off cash and that potentially looks undervalued using standard valuation metrics but while the CEO and major shareholder, John Gunn, continues to use its bank balance as a personal investment piggybank, I have to leave it well alone.
By way of background, Octagonal used to be a Lenigas-related investment company until an RTO in the middle of last year of Global Investment Strategy (“GIS”), a financial services business primarily in the global settlements and custody space. Unlike many Lenigas-related businesses, GIS actually makes money, the recent post close trading update stated that, for the year ending 31 March 2016, GIS will show decent growth and generate revenue in excess of £4.2 million and EBITDA of approximately £1.1 million
The market value of Octagonal today, despite coming off 4% today, is £6.6 million and although one needs to add an unknown plc cost base to the GIS numbers, it doesn’t feel like a particularly overstretched valuation, particularly as the business has additional cash and other investments on its balance sheet. One could easily make a case for adding it to one’s portfolio.
But, and there was always going to be a but, there is a major issue and that is the fact that the CEO, John Gunn, behaves as if GIS is still his sole plaything to do with as he wishes rather than the sole operating subsidiary of a plc of which he is CEO.
Tom has already written a piece on Inspirit Energy’s placing yesterday (HERE) but it was the following paragraph that grabbed my attention:
“John Gunn, the Company's Chairman and Chief Executive Officer, is Chief Executive Officer and 52.44 per cent shareholder of Octagonal Plc ("OCT"). Global Investment Strategy UK Limited ("GIS") is a 100% owned subsidiary of OCT. GIS will be investing £50,000 in this placing by subscribing to 10 million Placing Shares and will also receive 5 million Warrants.”
That is just plain wrong.
Octagonal is not an investment company; it is a financial services business trading via its main subsidiary, GIS. If the business has any spare cash it should be investing in its technology or in marketing to continue the growth in the business, or even finding ways of giving it back to its shareholders if the Directors really can’t think of anything to do with it. It shouldn’t be investing it in businesses in a totally different industry, particularly not in a business in which the CEO is also CEO or in other Lenigas-related companies.
Such a shame as with a different CEO / shareholder base, this business could make a nice a little investment, but, for me, it’s currently uninvestable.
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