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Yolo Leisure – why are the shares off 18%, and at a discount to NAV of c. 65%

By Nigel Somerville, the Deputy Sheriff of AIM | Tuesday 6 March 2018

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 can’t say I know alot more about Yolo Leisure & Technology (YOLO) than I’ve learned in the last hour or so, but on no news the shares are near the top of the ADVFN losers leaderboard at -17.65%. I wonder why.

Perhaps it is simply because it is an investment company with a market capitalisation of just £1.5 million – in other words it is subscale. Not even a boardroom of Warren Buffetts would make this a decent investment once plc costs have been paid out!

I note from the FY17 results RNS (to Sept, released in December) that the company clocked up a stonking profit of £726,000 – worth 0.18p per share. With the stock at just 0.35p per share, I can’t see that dragging the stock lower!

But profits are a matter of opinion – what about cashflow? Here we see an outflow of £247,000 from activities, including gains on disposals of investment, and £2.27 million paid up for new investments and receipts from investment disposals. So much for a cash profit, then! But this was offset by the company rattling the tin and issuing £2.58 million worth of new shares.

Those shares were issued at 1p a pop in November 2016 – and are now worth about a third of that figure. Ouch!

But the net assets per share were reported as being  1.02p per share – a stonking premium to the current share price. I still don’t understand why the shares are down, then!

Looking at the balance sheet, we see a few bits of payables and receivables – and £683,000 of cold hard cash. So it isn’t running out of cash.

But I do see that the company says it wants to raise more cash. No doubt this is to hand over to the bunch of Warren Buffetts so as to make thumping profits for shareholders.

The thing is, if the net assets really are a penny a share and the shares are trading at just 0.35p, what is the sense in raising more capital at that price? And that brings me to the AGM notice which was published yesterday morning. Here we find that the company is proposing a capital reorganisation because the shares are trading below par – so the company can’t issue more confetti until that is addressed.

But with net assets of 1p a share, and a share price of 0.35p and plenty of cash in the bank, why would you want to dilute existing holders to high heaven? Indeed, one would imagine a fundraise involving a trip to the bucket shops for the sort of cash it hopes to raise (except it won’t have to go far, for its Broker is Peterhouse). But that would mean raising cash at a discount to 0.35p.

So perhaps we have an answer after all - it's placing ahoy! The only thing is that surely the directors wouldn’t want to raise cash at such a steep discount to net assets either.

If, of course, they believed the numbers – and that brings me to the investment portfolio where we see £264,855 of “Level 1” investments (those whose value can be marked to market), which were uplifted in valuation by £93,000 during the year. Against that there are £3.6 million of “Level 3” investments (whose value is determined in whole or in part using valuation techniques based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data). I think Warren Buffett refers to that as mark to myth.

With that in mind, I turn to the Auditor’s Report, which tells us:

Risk Area: Going concern The company is dependent on generating cash inflows from management fees, alternative sources of finance and the realisation of investments in order to meet ongoing overheads and other expenditure, including new investments. Should the company be unable to generate such cash inflows to meet obligations, that cannot be met from existing cash resources, there is an increased risk that the company may cease to be a going concern.

Ouch! And with reference to valuations of investments:

Risk Area: Valuation of investments The company holds unlisted shares and securities for which there are no quoted market prices and which require valuation techniques to be used which are not based on observable market data. Accordingly, such valuations are subject to judgement by the directors.

Think Warren Buffett…

Now in both cases it appears that the Auditor was satisfied that the challenges it raised were answered and so the audit is signed off as clean. As such, it is perfectly possible that the shares are a screaming buy.

But perhaps I'll stick to Warren Buffett's investment rules to guide me:

Rule 1: Don't lose money

Rule 2: Don't forget rule 1!

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