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First Derivatives - it is smoke & mirrors - keep selling

By Lucian Miers | Thursday 8 November 2018


Disclosure: The author has a short position in one or more of the shares 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.


Reading the interims of First Derivatives (FDP), purveyors of smoke and mirrors to the gullible analyst community, the questions continue to stack up. 

It is useful with companies such as this to completely ignore all management metrics such as EBITDA, operating cashflow, operating margins etc and look at the things that matter. Here are a few of them;

  • Profit after tax is LESS than £6 million 
  • Retained earnings on the balance sheet are DOWN 
  • Net debt is UP (£16 million to £24 million) and on top of that there is a whopping current liability (£40 million) to buy out the minority interest in Kx systems which inexplicably includes £9 million in dividends AFTER completion of the deal has occurred. The company expects the banks to provide this funding and it’s interesting to know what further security they will seek (they have already unwisely lent £24 million against £8 million of tangible assets).
  • Costs are growing FASTER than sales
  • Free cashflow is LOWER
  • It CONTINUES to spend money it doesn’t have on investments and loans in start ups to whom it wishes to sell product (sounds a bit like vendor financing to me).

 So we have a company the market values at £900 million with £8 million in tangible assets whose £7 million pre-tax profit in H1 is significantly overstated because, as I have explained before, it doesn’t include any allocation of the payments to the minority interest which fall in H2 and are not, as they should be, disclosed in the income statement.

First Derivatives is an accident waiting to happen and I don’t think it’s going to wait that long. The share price is a joke. I remain short and you should be too..

This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website  ahead of a big new shorting piece from Lucian this week - click HERE


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