More thoughts on NGE Capital, Mayne Pharma, and Crowd Mobile

I originally intended this as another scuttlebutt post but commentary on Mayne and Crowd quickly got too in-depth, so I pivoted. Might have a formal scuttlebutt post in the next couple of weeks.

Here are some thoughts on a possible pump and dump in Crowd Mobile, the regulatory environment at Mayne Pharma, and my surprise when I discovered two friends of mine had actually met David Lamm years ago:

Edit: I have made a small addition to the end of the Crowd Mobile piece below, if you’re interested.

Mayne’s regulatory woes

Now, the reason Mayne shares have fallen so far is, I think, a combination of the perception that the Teva acquisition is a dog (which I addressed in my Buy thesis), and the regulatory issues. There is a huge, entirely correct movement to crack down on pharma shenanigans in the USA, but my view on regulation in general is that Mayne is small enough to sneak beneath notice. For example it sells opiates (a hot issue), but not many. It does however sell methylphenidate (think ‘Ritalin’; similar in effect to amphetamines) and butalbital (a barbiturate) which are drugs of concern and account for 17% of GPD revenue. Methylphenidate is chronically overprescribed in the USA (for ADHD especially), which is a key issue but change is hard to achieve in this area and on balance I think risks to these sales are low.

Mayne also gets new patents for ancient generic drugs (another key issue) by changing their formulation, but only has ~3 drugs (its Specialty Brands Division). Plus many of its reformulations (e.g. turning a tablet into a gel, or a delayed action tablet) can convincingly be argued to add value. Thus I think the company will avoid notice, but broad-based reform (if any) will still have a potentially serious impact on its future if Mayne loses the ability to reinvent drugs in this way.

There are also Mayne-specific problems where the company is accused of manipulating the price of Doxycycline Hyclate tablets. Mayne sells both a generic version of these as well as a specialty brand, ‘Doryx’. As I understand the accusations, Mayne won’t avoid notice here because it and Mylan were at the time (I think) the only generic suppliers of Doxycycline. However, as I hinted at in my thesis, the regulators are going to have a tough time proving wrongdoing. It’s not hard to match prices without colluding if there is only a small number of suppliers – and this sort of ‘soft collusion’ is not necessarily illegal.

Revenue is unlikely to be severely impacted (though I note the company has already mentioned legal fees and a possible sales impact, implying prices may be falling). This is because generic Doxycycline sales account for less than 4% of Generic Product Division (GPD) revenue (it’s not even mentioned):

source: Company prezzo, click to enlarge

There are several nuances to the regulatory aspect as there are Mayne-specific (eg doxycycline price fixing) allegations and larger industry concerns (patents, overprescription etc). My overall view is that Mayne generally avoids the attention of regulators over the next few years, and maybe even benefits from the fast-tracking of patents and generic approval. Mayne also stands to benefit from the shocking leverage present in the sector – many players are tapped out and may have to divest drugs, especially if interest rates rise. Mayne has relatively modest debt and with any luck can benefit from forced selling. In my initial thesis I wrote that I would prefer Mayne not to acquire and to focus on generating cash, but that would be a missed opportunity if there are quality portfolios coming on sale at forced divestment prices. I would prefer to see management go for bite-sized acquisitions – another Teva-like would be a warning.

So I may have to amend the thesis somewhat. Mayne is historically an acquisition machine and they’ve done pretty well, but I maintain a generally jaundiced view of debt and acquisitions. Fortunately I have not paid through the nose for the uncertainty.

A pump and dump in Crowd Mobile? 

An anonymous account that 10foot has just discovered on Twitter, @stockswami, has stated his belief that there is a pump and dump underway in Crowd Mobile shares. Now, firstly, swami is an anonymous account and the author appears to have a strong agenda. He is perpetually calling out tiny ASX companies, regulators, and various market players accusing them of stock manipulation, incompetence and a garden variety of other things. On balance his critiques seem well worth listening to, but readers should approach all anonymous accounts (including this one) with a critical eye.

This alleged pump and dump interests me because 10foot owns shares of Crowd Mobile (ASX:CM8). I have never been in this situation before and I was originally quite sceptical because Crowd Mobile is an established business and does not seem like the usual piece of shit that individuals try to manipulate. However, if I tie together a few pieces of disparate information it is possible to see his point.

I’ve commented previously on Crowd CEO Carosa’s salary package as being pretty outrageous (~2% of market capitalisation last year, due to the equity awards). Carosa also makes additional money via Crowd Mobile contracting with his companies Dominet and DJ Carmichael, a brokerage firm of which Carosa is a director and 5% shareholder. Multiple reports from Carmichael feature on CM8’s website. On their own, none of these connections are problematic, plenty of executives make money, both morally and immorally, by contracting to their companies at fair or unfair rates.

Next, Crowd Mobile seems quite self-promotional. I was surprised to see a little while ago that both CEO Carosa and Crowd Mobile shared my purchase thesis for Crowd both on Twitter and on LinkedIn. Company promotion is not unusual among small caps and I figured that if the CEO was comfortable publicising my criticism of the company and his salary, then by inference the company has nothing to be worried about. However, by inference, we also saw that the CEO was handed half a million in equity last year at low prices, so if you took the cynical view and wondered who gets paid the most if the share price goes higher….

Heuristic: Strongly promotional companies are usually better off avoided as they can be more concerned with looking good than actually doing the work required to achieve their goals.

Then I spotted this article yesterday which made me consider the possibility of a pump quite strongly. It is a blatant puff piece that nevertheless does a pretty good job explaining the investment opportunity and the company’s future opportunity in digital influencing. If you read the disclosure “S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity…”.

Paid or unpaid? Did Crowd pay for it? Did DJ Carmichael (the broker) pay for it? The more important question is, what should I do in this situation? I hate market manipulation with a fiery passion and I don’t want anything to do with a company that may be manipulating/ being manipulated.

(As a side note, I have noted that 10foot companies typically enjoy a 7%-10% rise in the weeks after I buy them, which is concerning although I am uncertain if it’s anything to do with me. Something to keep an eye on.)

Should I sell just to clear my conscience? That would result in potential financial loss (or missed gains) for no reason on the fear of a pump that may not exist. No, the solution is one which I originally got from Howard Marks: Have a firmly held view of intrinsic value and make your judgement based on that information.

I have a fair opinion of what Crowd Mobile is worth in a range of circumstances, depending on the rate of growth in Q&A and decline in Subscription. If overall cash earnings stay flat, my view is that Crowd is worth more than today’s prices. I won’t say how much more in case it spoils my ability to sell – I haven’t fully thought out my exit strategy as I wasn’t expecting to need it for a couple of years yet. But consider yourself forewarned, there is a good chance of me selling in the near future if my estimate of intrinsic value is exceeded. Something to keep an eye on.

Edit: I re-read this post and realised I sounded very negative on Crowd in this, which was not my intention. I think Crowd is an OK company coming out of some tough times, that was convincingly undervalued when I bought it. Obviously, I have little reason to complain if somebody campaigns its share price higher for me.  I don’t have any specific belief that the company is doing anything wrong, but I can definitely see how someone might construe that people are attempting to pump its share price. I am staying the course and will be making my investment decisions based on the company’s progress and my estimate of its intrinsic value.

David Lamm and NGE Capital

A friend of mine told me recently that he and a colleague met David Lamm years ago, though Lamm wouldn’t remember them. If they recall correctly it was as he was looking for initial investors for Kentgrove Capital, his private fund. They distinctly remember a discussion among themselves afterwards where they openly wondered if Lamm would be around long enough, as an independent fund manager, to become a fixture in the Australian investment industry. This was not a reflection on Lamm himself – just their thoughts on how difficult it is to get started as a fund manager. Both were openly stunned when I told them that Lamm had returned 15.6% p.a. over the past 7 years at Kentgrove, progressed to buying an LIC, and was also one of the major shareholders in Godfrey’s.

Obviously they don’t have a clue about Lamm, or they would have invested in his fund. But I’m wondering if their initial doubts and subsequent respect (both friends have independent records of significant, sustained outperformance) could suggest that Lamm has ‘got what it takes’ to succeed where many managers have failed. There seems to be a definite ‘hill’ with fund managers whereby, if they get to the other side, they’re probably going to be around for the long haul.

Obviously I want to invest with a winner and, just maybe, Lamm is one of those.

I own shares in NGE Capital, Crowd Mobile, and Mayne Pharma.  This is a disclosure and not a recommendation.

Do you have a preference for reading multi-topic longer pieces like this one, or would you have been more engaged by individual pieces on Crowd Mobile and Mayne? Please let me know your thoughts via comments, email, or twitter @10footinvestor as I’m currently working to improve the readability of the site.

9 Replies to “More thoughts on NGE Capital, Mayne Pharma, and Crowd Mobile”

  1. Nice Blog Mate, keep up the good work. A couple of thoughts for you.

    On Crowd Mobile, I know the twitter account you speak of and I actually like what that guy does endeavouring to keep companies and management in check. However he does at times read between the lines and make some assumption to drawn conclusions. Crowd has some sharp fund managers on their register who would have no doubt sat down with management on multiple occasions and asked all the right questions. So I would be inclined to give more weight to that than the twitter posts and if those managers are comfortable I would be also.

    NGE. Can you tell me what their management fees and performance fees are? The fact that I had a quick look and couldn’t find anything easily tells me that they are probably paying themselves a fortune. LIC’s are great at not displaying their fees clearly, they also use the old show their performance in NTA when at discount. But when at a premium they will show it in Share price rise instead. As for performance, looking at the way they structure portfolios with large concentrated positions means it is very likely that it came with its fair share of volatility and therefor not as good as it would appear on its own.
    Funds that are kicking ass and have good track record tend to display proudly all the information you need. The fact that people who new him had no idea what he had been up to, is a negative for me. This LIC vehicle came about in a strange way as the shell of an previously failed company and I really don’t like the lack of transparency.
    Whilst something trading at a huge discount to NTA is always tempting their needs to be a catalyst for that gap to close, otherwise at the end of the day it is just another fund. In which case the most important things are The fees and the risk adjusted returns. What are they charging and what is their performance fee would be the paramount questions for me.

    1. Thanks Andrew, these are some great thoughts. I guess the main thrust of my thoughts on Crowd Mobile is that there are usually smart people with convincing arguments on both sides of any trade, and without a sound rationale for why I hold an investment, I am at risk of being swayed unreasonably.

      As to NGE, I have not seen them publish their fees, but expenses are high and with that, a significant discount to NTA is necessary/ justified. I also notice today that they are reporting results based on NTA like you say…that’s something I’ll keep an eye on.

      I know what you mean about the lack of transparency. I took the optimistic view that with a small team it would take time to get set up, and that disclosure would improve over the year. That seems to be happening, with NGE setting up a website and gradually improving their disclosure over recent months (see the more detailed prezzo of their holdings in…June?). I also figured that a backdoor listing was cheaper.

      Still, you’re right, the risk of high fees and lack of disclosure should be fairly high in my mind. I see today actually that they’ve added a contact form to their site, so I will shoot them an email and see what they say.

  2. Firstly, note I do own some shares in NGE but it is not a large position for me and I do have plenty of reservations about Lamm and the high costs for such a small LIC.

    Just in terms of the question on fees, I believe NGE is different to most LICs in that it is internally managed so you won’t find an IMA for example with a set base fee and performance fee. At a glance I am expecting costs with running this LIC may amount to a bit over 4% annually of the NTA. Obviously, this is a big handicap to overcome. Having said that, they are currently outperforming the ASX by about 25% in 2017. Other small cap LICs with these returns often suck out about 5% largely from performance fees anyway. I think technically there are no performance fees with NGE, but Lamm may be able to double his $240k package in a good year. Not a bad gig given he is doing funds management work with Kentgrove so you could argue it doesn’t take a whole lot of extra effort to find half a dozen stocks to put in NGE.

    You are spot on Andrew so many LICs are very “creative” with the way they choose to report performance figures. NGE will certainly have volatility with its numbers given its highly concentrated approach.

    I don’t have an issue about the way in which NGE was formed. Just seemed like a sensible play from Kentgrove via a backdoor listing like 10foot pointed out, a cheaper way to do it. Lamm also thought there was some hidden value initially with some prospecting licences in the shell company. The May 30th presentation this year was a big step in the right direction regarding disclosure. Its early days though and I do have concerns in this area like Andrew mentioned.

    Tough to see a lot of catalysts to bridge the gap of the NTA discount so it’s a fair question about what is likely to change. If one of their stocks became a 4 or 5 bagger that may help the management expense ratio of the fund a bit. Maybe Lamm can find a few big investors to do a placement of shares at only a very small discount to NTA that may help all the shareholders. I think Lamm’s brother is quite successful in the industry for what it’s worth.

    If 10foot has any other info from the people who know Lamm it may help. E.g. is he especially greedy in nature and likely to shaft minority shareholders or perhaps not the case and will treat them fairly? A lot comes down to this and I wouldn’t know. If I am wrong on some of the above comments about fees etc please set me straight!

  3. Hey Steve,

    Well there you go! market cap is too small so they conveniently pay themselves a salary to make more money. 4% WOW! Being an LIC this is a closed fund the only way to raise the market cap and reduce expenses is increase NTA through profits, but you can be sure if in 5 – 10 years that happened and they can make more they will change to a traditional management fee structure.
    No Institutional investors are going to participate in a raise for a fund charging circa 4% and holding a super concentrated portfolio that they can easily replicate themselves.

    Have you noticed that Kentgrove doesn’t show up on any mainstream fund comparison sites? Why, my guess is because they charge way too much and are far too volatile due to their portfolio construction. Rather than advertise they just pick up the odd investor that falls in their lap and is willing to pay up.
    The best way to know what their intention with NGE is would be to look at what Kengrove fees are. They are 2% & 20% What The! Are we in 1989? No one charges fees like that anymore, Perhaps the absolute best of the best kick ass Long Short / Market Neutral Fund, but certainly not for a Long only Concentrated swing for the fences type fund.

    Also I heard that Kengrove owns NGE in their Fund.. So what, they pay them selves a salary to run NGE and then pick up performances buying NGE in The Kengrove fund?? This whole thing is very smelly.

    I think the pertinent point at the end of the day is, we probably all stumbled across this name because of the huge discount to NTA. But that is unlikely to change. So the question to ask is if there was no discount would I ever consider giving this manager my money and the answer for me is not in a million years.

    Hey 10 foot, did you end up emailing NGE? I would be very interested to hear how they try spin this thing, If you can get a reply that is.

    1. Thanks for your thoughts guys. Andrew I got too busy and forgot to email them, however I have just sent an email to NGE now about their costs, will see if I hear back. I don’t want to get ideologically locked into a position by coming up with rebuttals for your criticisms, which are all well thought out + justified. However with the Kentgrove thing my view is that it is essentially all Lamm’s domain, perhaps with a few significant private investors invested alongside + backing him. If Kentgrove’s a private fund (it is) I wouldn’t expect to see it on a fund comparison website.

      As to the Kentgrove owning NGE as well, I agree that’s a bit odd. However it does support the idea that alignment between Lamm and shareholders is reasonable, because if NGE fails (+ doesn’t justify its costs) both Kentgrove and NGE will be dragged down. I think Kentgrove has a lot to lose with its investment record looking like it is, and in general, knowing what I know, I’m happy to invest alongside Lamm. (I will keep a keen eye out for the warning signs you’ve mentioned). About the discount to NTA, that’s primarily a free bonus for me if it narrows (likely wouldn’t represent economic fundamentals). With a 4% mgmt expense ratio p.a., arguably a 20% discount to NTA, or even more, should be the normal state of affairs.

  4. Thanks Andrew, like 10foot says, I also welcome hearing all the negatives about this as an investment and don’t want to just blindly discount them all. There are genuine concerns about the valid issues you raise.

    Over 4% is a huge drag for sure. I see some other small LICs on the market with expense ratios of about 2 to 2.5% BEFORE very generous performance fees. Effectively with modest outperformance over modest hurdles expected I think you could say their MER’s are probably effectively over 3%. 8EC, KAT, GC1, RYD (there maybe others) could be in this ball park and they seem to be able to trade with a discount of more like 10%. Maybe intos didn’t supply these other small LICs with all the capital but there might be high net worth individuals prepared to punt on a good small cap manger. Those I just mentioned are not even that special performance wise. Should NGE therefore be at discounts of 25-30%?

    I agree those Kentgrove fees are WTF! However, it does possibly highlight that their investing ability is perhaps better than those examples I mentioned. The Kentgrove performance figures are listed after fees numbers and maybe these are dodgy. Is it credit to Lamm or the Alter family office? I think you can’t deny though that Lamm’s investments in the last couple of years have been pretty good. Getting NGE at a bargain in the first place, KAR, GFY, MDL, he has made a good start anyway.
    Can we replicate the portfolio? Possibly can to a large extent now, although they do have a private equity exposure. But difficult to replicate their entries into NGE, KAR, GFY, MDL where they seemingly sourced some large positions but informed the market after the price had already gained.

    I won’t disagree there is an element of stench. Still after fees performance is what goes in the pocket, and they will probably say they have created value on that basis when 10foot emails them. Good to hear the counter arguments though Andrew.

    1. Well let’s be honest…you do have a strong agenda. Good call on CM8, you do good work. And thanks for the feedback, will be sure to run my next purchases through the SwamiFilter first!

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