Boohoo directors buy in after audit woes flatten shares

Boohoo directors have swooped in and capitalised on a fall in the fast-fashion retailer’s share price, as the company continues to suffer from fallout related to working practices in its supply chain.

Boohoo said at the start of this week that it was searching for a new auditor as PwC, its auditor since 2014, prepares to end its work for the retailer. Boohoo shares fell by a fifth following its announcement, and remained under pressure as speculation mounted over the identity of PwC’s successor. PwC declined to comment on its motive for ending its relationship with Boohoo.

Boohoo also would not answer questions about a report that suggested it had been rebuffed by a number of major audit firms as part of its search for a replacement. The situation is reminiscent of Frasers’ hunt for an auditor last year, after Grant Thornton decided not to seek re-election for its audit. The retailer was subsequently unable to secure the services of any of the Big Four accounting firms, and officially went without an auditor for a short period. Frasers, then known as Sports Direct, eventually appointed mid-tier auditor RSM.

A spate of director purchases disclosed the day after Boohoo’s audit revelation have helped to steady the share price. Chair Mahmud Kamani has bought £729,210 in shares, taking his position in the company to 12.5 per cent. Deputy chairman Brian Small has bought £25,020 in shares, while Catherine Catto, the wife of chief financial officer Neil Catto, has purchased £14,999 in stock.

The dealings have allowed Mr Kamani in particular to increase his stake in the company at a time of concern over its governance and related share price volatility. Boohoo shares surged in September after it published an independent review into its supply chain failings, but the company must do more to win back the confidence of investors, who have endured a rocky ride of late. Finding an auditor joins revamping the supply chain at the top of Boohoo’s list of priorities.

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Judges Scientific focuses on the scientific instruments sector with sales typically driven by long-term growth in higher education. But the group has suffered from the recent Covid-19 disruption to research projects around the world.

Amid the closure of universities, cancellation of scientific conferences and industrial customers trimming their capital expenditure, Judges’ organic revenue shrank by 12 per cent year-on-year in the six months to June 30. Conditions in North America — its second-largest market — were particularly tough, with organic sales dropping by 30 per cent versus a year earlier.

Some resilience to the pandemic turmoil has come from Judges’ “buy-and-build” M&A strategy, with recent acquisitions limiting the overall decline in first-half revenue to 7 per cent. The group purchased Moorfield Nanotechnology — which makes instruments to cover material with thin films — for £2.3m in December and Heath Scientific — which specialises in devices that measure the heat released during chemical reactions — for £7.3m in May.

It has now followed up those two deals with the £2.6m acquisition of Korvus Technology which, like Moorfield, manufactures coating instruments. The majority of Korvus’s sales are to universities and broker Liberum believes it will add a modest £500,000 to Judges’ adjusted operating profit next year.

Against this backdrop, chairman Alex Hambro recently offloaded 2,000 shares worth £103,500. No reason was given for the transaction although Mr Hambro has retained 62,000 shares, equivalent to just under a 1 per cent stake in the company. Judges’ shares are currently sitting slightly above the 5,175p price at which Mr Hambro sold, at 5,200p.

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The share disposal was announced hours after news of the Korvus acquisition on October 19. We don’t see the disposal as a red flag, but there is concern over how long it will take Judges’ end markets to recover. It remains unclear when Covid-19 will abate and recessionary conditions will maintain pressure on customers’ capex budgets.

Analysts envisage a slow earnings recovery with consensus forecasts still below pre-pandemic levels in 2022. But the balance sheet is in good trim — the group was sitting on £8.2m of net debt at the end of June, equivalent to just 0.5 times cash profits (Ebitda). This should enable further acquisitions to help bolster growth and Judges has identified more than 2,000 potential targets in the UK alone. It also increased its interim dividend by 10 per cent — a rare feat in the decimated income landscape — suggesting the shares are worth hanging on to.



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