Trained accountant Tim Steer, the Citywire AAA-rated manager of the £704 million Artemis UK Growth fund, keeps a written record of every company he reviews. His report on AO World, the recently floated purveyor of household appliances, is titled ‘Uh Oh World’.
Steer’s worries stem from his background as a forensic accountant. AO World’s prospectus revealed that it had earned £17.9 million in accrued income for the year ended 31 December 2013 from Domestic & General – on whose behalf AO World sells insurance policies for those washing machines.
Steer (pictured) deemed AO World ‘naughty’ for putting such receivables immediately in its profit and loss column, but was more intrigued by what the numbers revealed about how the firm made its money.
In the nine months to the end of February, for example, AO World recorded a profit before tax of just over £4 million. But that was in spite of taking £9.3 million from insurance sales during that period.
‘It makes virtually no money from selling white goods,’ Steer concluded. ‘It does make money on selling insurance.’
There is nothing wrong with that, of course, but Steer noted that a ‘ridiculous’ valuation of £1.2 billion had been slapped on AO World at its initial public offering – 187 times its earnings. That is a lot for any business, let alone one Steer describes as merely ‘an agent for Domestic & General’.
Steer nevertheless found a way to profit from the stock, shorting it. AO World shares have lost a fifth of their value since their debut. ‘When you see gems like this, you want to have a crack at them,’ he commented.
An accountant on Twitter
Yet while Steer is happy to draw on his background as an accountant when assessing companies, he has also turned to more novel techniques recently. Social media, for instance, is a recent addition to his investment process. ‘It is an increasingly important part of understanding companies,’ he remarked.
Steer views social media as more and more helpful while the traditional sources of information on companies become quieter. Companies themselves are more ‘tight lighted’ today, in Steer’s opinion, as they struggle with the burden of closer regulatory scrutiny.
Analysts meanwhile are providing ever less insight, according to Steer. ‘Investment analysts at places like UBS and Merrill Lynch are not as clever as they used to be,’ he claimed. The good ones have found they can earn more elsewhere in the industry, and those who remain typically speak with their companies only around once a quarter.
In contrast, Steer points to an instance when social media would have been far more informative to an astute investor. When the Costa Concordia, owned by Carnival, sank in 2012, an avid Tweeter called Captain Greybeard was on board. This authority on the cruise-ship business posted instant updates on the liner listing and the crew’s panic.
He did so through the night in Europe – but at a time when Carnival was still being traded in New York. ‘The key is to find lots of Captain Greybeards,’ advised Steer.