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Patisserie Holdings - let them suspend CAKE

By Chris Bailey | Wednesday 10 October 2018

Disclosure: I own shares in one or more of the stocks mentioned. 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.

Just when you think you have seen almost everything the market could throw at today that Patisserie Holdings (CAKE) shares are suspended after 'the board of directors of the Company...has been notified of significant, and potentially fraudulent, accounting irregularities and therefore a potential material mis-statement of the Company's accounts'. Well we know what majority shareholder and Chair of the company Luke Johnson will be coordinating for the next few days, if not weeks and months…

As it happens I do not own shares but I talked positively about them here and - irony of ironies - by the time the internal ShareProphets rule of waiting for 3 days post an article publication had rolled off, the shares had popped up again. The second irony is that the other company I showed love to in that piece (Whitbread's Costa Coffee division) is being taken out at a big premium by soda behemoth Coca-Cola. Anyhow if you followed up the thoughts on the former in any shape or form, my apologies - and I can only hope you were stuffed to the gills with the latter.

This one is a shocker at multiple levels. I clearly do not know what specifically has gone on to induce Luke Johnson to put out a quote such as the one above but I note one news organisation putting out a pretty detailed piece with a £20 million ticket attached to it. This is a material sum of money and suggests to me that issues and problems have been brewing more for the medium-term than just in recent months. The CFO rightly has been suspended because even if he is not involved (and I have no information on this so innocent before being cited as guilty), you need new eyes on all this.

If I had to speculate then my instinct would be that a small mis-step - maybe an outright fraud or maybe just a slightly below hopes trading outcome - was covered up and it just grew and grew and grew, Bernie Madoff style. And in the end anyone who did this ultimately could not cover it up. What I find intriguing however is that something like the Bernie Madoff fraud led to results that were just too smooth and too opaque to be realistic. I must cite an interest here as my very first job in the City was at a hedge fund analyst where we exited our holdings in Madoff vehicles - much to the chagrin of our underlying investors - because they were super opaque. By contrast when I looked through the Patisserie Holdings disclosures...they made sense to me. I could see the cash flow cycle, I could see a logical expansion plan and day-to-day (and the core point of my article linked above), I could see its busy locations in London and close to where I live.

One valid push back would be - a la Madoff - it was all too good to be true. I am not sure about that. The world and its economy certainly has exhibited some strange and interesting trends over recent years. The UK has been much more shabby but I could point to plenty of even retail names which have traded well, taking advantage of shifts in consumer spending patterns towards online and experiences. However certainly the scope for the numbers to be smoothed versus the underlying reality does exist...but this is where you rely on the senior executives and the accounting function, both internally and externally.

I see someone elsewhere has already observed '(T)he discovery of a black hole in its accounts could raise awkward questions for the company's auditor, Grant Thornton, at a time when the Government has placed the level of audit quality in corporate Britain under unprecedented scrutiny'. Too right. You have to be humble to tame the markets and accept when you have got things wrong. I now want to know what actually went on at Patisserie Holdings to learn how to spot it another time. Over to you Mr Johnson and the rest of the board...

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