Drastic Drop in Chemring Share Price - What Happened?!

Halloween's around the corner but trick or treaters in scary costumes isn't what shareholders of Chemring should be afraid of...

Recent reports show that the pre-tax profit for Chemring was only two thirds of what it was originally expected to be and that their underlying operating profit forecast was cut down to £16m from about £33m. Since the start of the Iraq war in March 2003, Chemring has experienced rises to their share price until March 2011 but then this has fallen significantly by approximately 80% since then. Analysts are also suggesting that the warnings about their expected profits would also contribute to the decrease in share prices. From the graph below you can see the sudden drop in the share price between the 26th and 27th of October.

A cause for these negative effects on the profits was that there have been delays to their contracts. A contract with the Middle East worth about £100m had to be delayed until next year and Chemring was hoping that this contract would compensate for their other issues.

What is the main problem for Chemring though?! Why are they facing these issues? The answer is simple...the company had taken on more debt than they can handle. Modigliani and Miller (1963) suggested that a company should take on debt but only as much as you can! The theory is that this would increase the company's value in the future. I believe Chemring did try to follow this theory to a certain extent because a large amount of their debt was due to high borrowings between 2007 and 2012. The money went towards the acquirement of 11 other businesses so technically, in the long run this should benefit the company, but I believe they took on more debt than they should have although it was for a good investment.

Although high levels of gearing would decrease the overall cost of finance, it is not always possible with high levels of risk. A company with high levels of gearing have high debt so the financial distress costs associated with this becomes higher as well. I believe that this is the issue Chemring is currently facing because their net debt is between £155m and £165m with their interest costs for 2015 are expected to be about £15m. 

High gearing levels are also risky for the shareholders which would explain the sudden drop in the price. Chief Executive Michael Flowers stated that the company has restructuring plans in place but it is a slower process than expected due to the high levels of debt in the company. A large amount of time has been contributed towards managing this debt and the opportunity cost has been the operational movement and growth opportunities to the group. Chemring has a plan to raise £90m through a rights issue next year and all the money from this would go towards the debt and the capital structure of the company.

Despite all the problems they are currently facing, Chemring remains optimistic about the fact that they will recover in 2016. It would be a slow recovery but due to the ongoing international political situations in the Middle East (they would need more robust defence and security measures) the company claims that they would have higher returns.

If a company takes on a large amount of debt, the business would require high returns. The issue for Chemring is that they have high debts but they are not generating the returns needed right now. Another important factor that they should have considered is what a reasonable amount of debt would be for them. It depends on various factors such as the type of economic conditions as well as the time period - I believe that what's acceptable in one era may not be acceptable in the other.

What do you think? Let me know in the comments below!

The Madoff Hustle - how did he pull it off?

"Everyone wants something for nothing, you just give them nothing for something..."

You hear about scams and think “I’ll never be stupid enough to fall for that!” but the number of people who are looking for something in return for nothing is crazy. I believe this was the belief people who trusted their savings with Bernie Madoff had.

Madoff is responsible for one of the largest financial cons in U.S. history. What was surprising was that he was one of the last people on Wall Street people would expect to be arrested. He was the chairman of NASDAQ market at a certain point as well so it was clear that he had the trust from a lot of people. The number of people affected by the scandal was countless and it is hard to estimate how much money he actually stole.

Madoff was clever with his scheming - people parted with their money because he was exclusive. He would meet potential clients and tell them that he wanted them to be  comfortable with him before they invested their money. He came across as a nice and honest man. He did not promise investors a high return, but a steady one instead. He was basically telling his clients that they would receive a certain return each month at a very low risk.

The scheme collapsed because it became too big for him to handle. During the credit crunch, clients started to contact him asking for their money back. Madoff tried to reassure them that everything was fine and that the returns were still steady - some people were given this assurance a week before he came out as a fraud.

How did he fool people for so long? The answer is simple - he provided statements that looked so legit that even accountants such as Richard Friedman believed them. People received these each month so they had no reason to believe that there was anything wrong.

Did he do this on his own? Personally, I do not think he could have pulled off such a huge scam on his own. His wife Ruth, was the bookkeeper...surely she knew that he was keeping the money to himself? And what about his brother Peter who ran the office on a day to day basis or his niece Shana, who was the compliance officer of the company and was in the office for the majority of the time? Both his sons - Andrew and Mark who were in charge of the trading section - must have suspected something. At some point, they must have realised that the company was not doing any trading at all...their job title was basically pointless!

Harry Markopolos discovered that Madoff was running a massive Ponzi scheme. He informed the U.S. Securities and Exchange Commission (SEC) numerous times in 2000, 2001 & 2005 about this but was ignored by them...surely they should have investigated the situation then and saved a number of potential investors?! The scheme has left widows with penniless and retired men have had to go back to working in part time jobs just so that they can make ends meet. The video focuses on Willard Foxton - his father William, was an ex-army Major and had survived a number of things but shot himself in the head after losing his life savings of £35bn. This is just one example of how the scandal has affected families.

In the end, Madoff confessed everything to both his sons and it was them who turned him in. On the second anniversary of Bernie Madoff's arrest, Mark was found dead - he had committed suicide by hanging himself.

How did a middle class boy from Queens turn to one of the world's biggest fraudsters and leave so many people penniless? 

Madoff's investment sounded appealing but should people have really put all their money into one investment. Consider Harry Markowitz's theory - he suggested that people can reduce their risk through diversification. Instead of investing in a single firm, they should have a portfolio of investments. If the Madoff victims had not been so optimistic and eager for easy money, they should have looked more into the market and invested in a variety of different firms instead of putting all of their life savings into the hands of Madoff. Sure, there are plenty of opportunity costs involved in investing in a variety of companies such as losing out on potential returns, but I believe it is better to remain safe rather than sorry with certain scenarios - specially those involving retired people's life savings.

What do you think? Let me know in the comments below.

Until next time!

Will Glencore survive the crisis they are facing?

"Glencore must stop bleeding now!" - Christopher LaFemina (analyst at Jefferies).

Four years ago, Glencore introduced the biggest flotation in the history of London Stock Exchange. Their message to the investors was clear - the company was unique compared to the others in the industry. However, today the company does not seem to be much different from its rival, if not worse. The market has been fluctuating and unlike its competitors, Glencore also has a large amount of debt. Investors have been doubtful about how the company is planning on paying this off hence the volatility in share prices.

The company has been reported to be one of the worst performers in the FTSE 100 index over the past year with their share price falling approximately 72%. Their share price decreased by about 30% on Monday during the last week of September - this was their largest reduction in the company's history which has happened in a single day. However, as a quick crisis management action, the company released a statement to their employees stating that they had a "strong liquidity profile" and were able to recover a large proportion of what they had lost on Monday. This suggests that the shareholders has a technical approach when dealing with their shares - they buy shares when the market has improved and sell them when it is declining. I believe that this is a sensible approach for those who are not risk takers.

Glencore has also been receiving some criticism about their business model but their have been different opinions on this. Some executives of rival companies believe that this is not true and that the main problem lies with their poorer quality assets. The company has been around for quite awhile now and it is not possible for them to survive this long without a good business model so I do not think that they should be making drastic changes to their business model. I believe that the main problem lies with the misleading figures in the financial statements.

In my opinion, one of the essential aspects for a company to be successful is to have the right financial statements. Understating the debt so that the figures look good is never a good idea. Management can convince themselves that they do not have a debt problem and they would also be providing false information to their investors. One of the Glencore investors suggested that the management team could not have predicted the current situation because they were not aware of a balance sheet problem. It could be that the management did not realise that they had a debt issue in the company because of the misleading figures in their statements. Considering all of this, one of their current targets should be to make the balance sheet look better.

As of June 30 2015, their net debt reached about $26.9bn which was about 2.7 times their annual earnings. This is a higher ratio compared to its competitors and the company should have been aware of the consequences. Glencore has already taken actions to rectify this and have launched a $2.5bn equity-raising as part of their plan. They are aiming to reduce their debt by about $10.2bn which should make their balance sheet look better and hopefully build up the confidence of their investors. The company is predicting that their share prices would increase once they manage to reduce their debt.

One of the key things to remember is that this was not a plan for the senior managers to make money while the company faces its downfall - this has been the case for some businesses in the past and it is essential that the stakeholders know that this is not the case. The value of Mr. Glasenberg's stake is $7.6bn lower than what it was earlier and the company is working on plans to recover from the current problem.

When investing in companies, I think it is better to use the portfolio theory and spread the risk so that if one investment goes downhill, you are not losing all of your investment.

Let me know what you guys think in comments below!

Hereford Furniture: Sir Digby Jones helps a family-owned company with over 40 employees.

"British manufacturing is something we should be proud of!" says Lord Digby Jones. This may be why he has decided that his next task would be to help Hereford Furniture - a family owned business who was doing fairly well until making a loss of £80,000 last year. Digby believes that there is a market for different types of furniture but in order to beat the market, Hereford Furniture will have to increase the efforts they are putting in.

There are a few key problems Digby planned to solve during his time working with the company. One of the 'nagging points' for Digby was that Hereford Furniture was focusing on three things - manufacturing, retailing and importing. His question is - can the business succeed in all three? MD Mike Muxworthy responds with 'Why not?'

Digby argues that Hereford Furniture may not have the specialist knowledge for all three areas they are focusing on. It may be better for a business to focus on the area that they have the most knowledge in; this might give them a better chance at being successful. This is what Digby believes that Hereford Furniture should do.

Another issue that Digby wants to tackle is the problem of branding. The company wants to be recognised as a household name but they do not display their brand on any of the furniture they sell. Digby's question is "How can you hope to build a brand when you by your actions value it so little?" Hereford Furniture aimed to introduce a new brand known as 'Hereford by Design' which would only be sold to companies who agree to sell it under the brand. The question is, is this the right brand for the company who wants to catch the attention of their customers?

The team met with Emma Bridgewater and presented their new ideas to her - taking the current range of furniture and upgrading to a premium so that they would have additional features but how were they going to make something that Emma would not look past? How can they have a 'buy me effect' on the customer? In addition to this, Do Emma and Digby think that Hereford by Design is actually good enough to go to the market? Emma suggested that the company should offer a variety of colours.


Digby believes that Hereford is not the right word if they want customers to be talking about them. It only lets the customers believe that the furniture is functional and that they would get the value for money but where is the uniqueness which will push the customers towards actually making the purchase? Louise suggested a Danish word - Hygge - which was about social interaction and being home and wanting to be there. Digby agrees and suggested that this was the right idea for the new brand. Hygge gives the company personality and Digby believes that people will question it since there is no definition in English for it.This is an ideal way for them to increase brand awareness.

To improve the efficiency and effectiveness of the company, Mike informs the shop floor staff that they are going to cut a lot of ranges - approximately 49 out of every 50 products - and that they need to get the customer to order what they actually manufacture. Digby thinks that it is important for the business to have accurate forecasts and Kate agrees since she thinks that they are seeing the benefits of the new model but have no way of actually showing them on paper. Mike argues that it is a family business and that they do not necessarily need forecasts. An accurate forecast would be beneficial to the company since this would show them the financial implications.

Another problem Digby aimed to solve is the way the shop floor staff worked. Communication is key for them to increase their productivity. Some employees believed that they do not normally work together so a team building exercise was arranged for them. For them to maximise their productivity, the shop floor team would need more of these. Team building cannot be done in a day!

Small and medium sized businesses are important for the community because these companies are the ones who would hire that one extra person to solve unemployment in their economy. Therefore, it is important for businesses such as Hereford Furniture to continue their business.

What do you think? Let me know in the comments below.