By Tom Winnifrith | Wednesday 2 November 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.
It is just over a year since my pal David Lenigas, listed Leni Gas Cuba (LGC) on ISDX. It has subsequently undertaken a reverse takeoverof Knowlton Capital on 12 July 2016 to obtain a listing on the Toronto TSX Venture Exchange. Following the recent publication of its results, I decided to have a butchers. To be fair to Lenigas, he has made one cracking investment. But the overall picture is ...mixed.
On 10 June 2016, also the date of publication of the RTO Document, I wrote an article entitled “Leni Gas Cuba – Why you should accept the Knowlton Capital Offer and then sell (if you can)”. So how good was my advice? Yesterday LGC Capital (as the new enlarged entity was renamed) hit a 52 week low on 1 November 2016 of 4.5 cents per share down from a 52 week high of 31.31 cents per share on 10 June 2016 when the deal was announced
Let’s have a look at LGC’s results for the nine months ended 30 June 2016. They are dire. LGC incurred a loss of £2,352,260. Even after adding back share based payments of £537,860 and reflecting an unrealized gain on its holding in MEO Australia of £450,499, the decline in opening net assets was a dreadful 33%.
Yes, there were one off listing costs of £328,750 and RTO costs of £149,154 but administrative costs excluding these items were still £1,292,238 or over 30% of opening net assets of £4,095,778 in the nine months. No investment manager can generate a decent return carrying this level of cost. Nor did the run rate of expenses show a material decline in the last three months.
Leaving the MEO Australia and Petro Australis oil related investments to one side for a moment ,how did the other business perform:
LGC Capital’s share of the Cuban Travel business amounted to a profit of £5,473 and the admittedly new Rushman sports joint venture incurred an initial loss of £8,091;
The Groombridge Trading venture recorded a loss of £53,770 for LGC Capital’s 50 % interest. The Directors determined not to reflect this loss because it would reduce the investment below cost. I wonder if the auditors of LGC Capital will be so accommodating when they audit the full year results; and, in what must be a record between making an investment and then writing it off, LGC impaired its investment in Cuba Professional only made on 1 March 2016 at a cost of £39,183 and recorded a contingent liability for the remaining deferred consideration of Euro 130,000 which it no longer believes is payable.
To give credit where it is due, LGC’s investment in MEO Australia only made in March 2016 is admittedly performing very well indeed with an impressive gain of £450,499 on the initial investment of £722,439 and this only reflects MEO share price of AUS $0.015 as end of June 2016 since when it has appreciated further to AUS $0.03. LGC Capital may also benefit from the Petro Australia investment assuming that it exercises its buy in option although this is an investment in a private unlisted entity and thus not a liquid asset.
Of course investors can buy MEO Australia in the market without incurring the enormous overheads and risks associated with the remainder of LGC Capital. On 10 February 2016 (before LGC made its MEO Australia investment), I wrote that if you were a fan of Cuban Oil why you might want to buy MEO rather than Leni Gas Cuba. At that time MEO Australia’s share price was Australian 1 cent it has now tripled to 3 cents a 300% gain.
None of LGC Capital’s investments are generating meaningful amounts of cash. It is unlikely to recover loans made to associates and joint ventures of £214,965 in the near future given their performance. LGC Capital had net working capital of approximately £576,869 at 30 June 2016 being cash £952,006 plus trade receivables of £53,868 less trade payables of £427,005.
The working capital is just over one quarter’s administrative expenses of £410,681. So unless LGC Capital wants to start selling shares in its best performing investment it will need to raise cash imminently and this TSX Venture quote does not seem to be offering much more liquidity than the ISDX lobster pot.
By way of balance I note that Lenigas has done a couple of other deals post period end but he needs a number of MEO type home runs to start coming in to reverse the share price slide and to start to address funding issues.
Never miss a story.
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