Ashley House – Reflections on a painful lesson #ASH
Ashley House (#ASH) – Latest share price: 4.1p, market cap £2.5 million
Yesterday, Ashley House plc (ASH), the AIM (and SSX) listed housing and health property developer announced to the market that “the Company has completed on the sale of its 50 per cent interest in Morgan Ashley Care Developments LLP (“Morgan Ashley”) to its joint venture partners Morgan Sindall Investments Limited (“MSI”)”; the transaction being in the sum of £2 million payable in cash. As I write this the share price is circa 4.1p valuing the company at just £2.5 million.
Turn the clock back to 20th June 2019 and readers will recall that I was positive about the outlook for the Group, citing a valuation anomaly and noting that “I’m expecting this valuation anomaly to shortly unwind towards £10 million and look forward to seeing a year end trading statement from the Group sometime in July“. I had been buying stock from 7th January 2019 until 24th June 2019.
Well, investors did get a trading update; in fact they got three.
The first was just 5 days after my article on 25th June 2019 with management noting that financial close on three of their schemes was delayed and accordingly these schemes may possibly fall into the next financial year. Although cognisant of the likelihood for delays, this was frustrating as my prior research indicated that as least one of these three schemes had already started on site and hence by default must have financially closed? This update confirmed otherwise.
The second update came on 5th July 2019 when the company informed investors that the three schemes were still in delay and “As a result the related profit from these schemes will fall into the year to 30th June 2020.” Although this wasn’t ideal, it would provide a great start to FY20 and as momentum seemed to otherwise be picking up with respect to new schemes I was disappointed but unperturbed.
During this time, it had occurred to me that I needed to review in more detail the cash position of the business as the interims announced on 31st January 2019 showed that the Group had just £0.187m of cash as of 31st October 2018, although cash had always been very tight for a number of years and accordingly had always been managed carefully.
The third trading update came on 1st August 2019 and had a sting in its tail:
Despite having invested in the Group on and off since 2013, liking the management team and typically having a high pain threshold for lumpy trading and financially challenged micro-caps, this was enough. I sold my entire holding that week taking losses of between 30-38%.
Over my entire holding period of 6 years, the overall loss is somewhat less painful at 10% although this doesn’t take into account considerable opportunity costs given the bull market over this period.
So what are the lessons learnt?
This won’t surprise anyone but the first has got to be Balance Sheet strength. Specifically, and as noted above, the Group had a history of having a fairly fragile year end cash position (let alone intra-year cash):
- YE2013 – £0.005 million
- YE2014 – £0.10 million
- YE2015 – £0.86 million
- YE2016 – £0.023 million
- YE2017 – £0.09 million
- YE2018 – £0.250 million
This precedent led me to overlook the known adage “Cash is King”. It’s as simple as that. I was blinded by the potential for the Group to deliver on its substantial long-term development pipeline without due cognisance of the perilous shorter term cash position.
The second is Quality/Depth of Research. In short, relying on research without due interrogation, a second reference source or some other form of validation/verification is not good enough. The same principle applies to taking any information from a single source at face value. I’m reminded here of Carl Jacobi’s maxim “Invert, always invert” as popularised by Charlie Munger which although applies more to problem solving, it helps you think about what could go wrong.
The third is Liquidity. At sub £10 million mcap, Ashley House is in clear micro-cap territory and investors in this space have to be aware of the upside and downside risks of investing in such small listed businesses. The upside is that typically such small companies are under researched, may not have broker coverage (research) and access to management may be easier than larger companies so diligent investors can potentially gain an edge. The downside is that the Normal Market Size (NMS) is typically very small and buying and selling can hence be challenging. If you own a large position you may find it almost impossible to sell or it may take many days (even weeks!).
Lastly, is Macro Risk. In the case of Ashley House, their end Client (certainly in Extra Care) was local government who are not necessarily best known for their turn of speed when it comes to decision making. The procurement chain for Extra Care which also includes a funder, developer and operator (with respective legal teams) has the potential to be the proverbial bugger’s muddle. Why invest in a sector where you are pushing against macro headwinds when there are plenty of other opportunities?
I don’t take selling a stock lightly but it was the right decision for me and with the share price down circa 50% since July 2019 I am happy to have reinvested the proceeds elsewhere.
The announcement yesterday of the sale by the Group of their 50% interest in the Morgan Ashley JV seems to me like selling the family silver. Other options to raise cash such as an equity raise would have been equally painful (and dilutive), however, given their position of weakness and it would be interesting to know if consideration was given by management to selling their 33% stake in PHL although it’s unlikely that this would have raised an equivalent amount to the JV sale.
Whilst F1 Modular is operating in an interesting and topical growth area, my ongoing peer group comparisons and research would suggest it’s not an easy market and it will be an ongoing drain on cash for the Group given the relative large headcount unless they can maintain consistent high volumes of work through this operation.
The Group now has a decent cash balance, a new strategy and a low valuation. Perhaps now is a good time to invest?
I will only be watching from the sidelines.