Hi,

Regulars may recall that we discussed a stock called Accident Exchange (ACE) some time ago, when it warned on profits & the share price collapsed from somewhere around 400p to nearer 200p, well it has since continued collapsing & now is 60p/share.

I've held & indeed bought more shares all the way down, and believe this share now represents astonishing value & could easily double from here, hence me wanting to flag it up to everyone.
Plus there is a short-term catalyst - namely that a £50m Convertible Loan issue is due to complete tomorrow, Tues 8 Jan 2008. I believe a positive RNS that the Loan issue has completed could well trigger a large rebound in this share, as it's fallen way beyond what is reasonable & logical. Plus it is a highly volatile, fairly thinly traded share, so we've seen before how just 100-200k shares traded either way can move the share price 10p or more in a day.


So here's a quick recap on the situation, as much as anything to refresh my own memory !

Market capitalisation = 61p/share * 71.1m shares in issue (per Hemscott) = £43.4m

This is around par with NTAV, which stood at £43.6m at 31/10/2007

Accident Exchange operate a large fleet (around 5,000 vehicles) of courtesy cars, which they provide on a like-for-like basis to drivers who were NOT at fault in an accident. The guilty party's insurance company is legally obliged to pick up the tab, usually after a lengthy process of delay & negotiation. The average hire period is about 25 days.

ACE operates mainly at the prestige end of this market.
Competitors are the larger (but mostly mainstream cars) Helphire (HRR), on a current PER of 11 times forecast earnings for this year. Also there is a smaller rival called Bristol & London, who compete with ACE at the prestige end of the market.

ACE's most recent full year (adjusted) EPS was 18.2p for y/e 30/4/2007, up a whisker on the previous year. So the historic PER is a startlingly low 3.4 !!

Clearly there have been problems, or the PER would not be so low, but I believe the problems are more-or-less fixed now, which should see the PER rise about 3-fold, to come into line with Helphire, once the stock market is convinced that the issues are resolved. So a potential 3-bagger here, in my opinion.

What went wrong ? Several things, in no particular order;

1) The major problem during 2007 was a legal challenge by some insurers, on a technicality of ACE's contracts. This dragged on throughout 2007 & led to an increasing difficult in cash collection, because insurers simply put all cases on hold until the legal challenges were resolved either way.

The legal challenges have now been won by ACE, and (according to their conference call with analysts after the recent Interims) management now see the effect of this reversing (i.e. the debtor book should now be loosening up & turning into cash).

ACE have also taken a much more aggressive stance with insurers who refuse to pay, and at the date of the conference call (3/12/2007) ACE had £50.2m of its debtor book in solicitors hands (out of a total of £86.0m).
Management stated that the threat of litigation is as effective as litigation itself, so cashflow is now improving.

2) Fleet utilisation rates during 2007 were sub-optimal, but this was felt to be largely unavoidable. What happens is that ACE sign up (say) Audi dealerships, and are then required to buy a large fleet of Audis as hire vehicles - because they have to supply an Audi to an Audi customer. But it may well be the case that referral volumes from the Audi dealers are not that great in the first year, so a lot of the Audis sit idle, affecting profitability.

However, these factors unwind in year 2, as the fleet is better matched to actual volumes. And encouragingly, the rapidly rising turnover (up 47% at the interims) in the last year has been from existing dealer relationships maturing, and not new signings. Basically this is a big growth market, and if anything ACE are probably getting too much business for them to handle. So another reason why, once the difficulties in 2007 are ironed out, that ACE could well be re-rated as a growth stock again.

3) Following on from the legal challenge mentioned earlier, ACE suffered increasing cashflow problems during 2007, as the debtor book refused to turn into cash until the legal issue was resolved. They got round this by offering bulk discounts to insurers to settle a large number of cases. But obviously that hits the P&L.


Therefore the Interim results to 31/10/2007 were pretty uninspiring, showing adjusted profit before tax down from £9.4m to £8.6m. But hardly a disaster, considering all the problems they had.

Net debt was £37.2m, almost all of which had arisen due to the slower payment by debtors, due to the legal challenge. That excludes finance lease obligations, and net debt rises to £125.3m if you include them - but of course you then also have the asset value of the cars to offset.

People will look at debt in different ways here, but my view is that the company carries some debt to finance its fleet of cars, and its extended debtor book, all of which is just revolving debt offset by assets. Therefore, provided you include the interest cost in the P&L, the debt can essentially be disregarded.

The key number that matters is the profitability of the company after interest cost & the resultant cashflows. And I think the company should be valued on the basis of a multiple of earnings.

But other investors might look at things differently, that's up to you.


Back to results for the full year ending 30 April 2008. This should be seen as a difficult year, with major disruption to the business because of the legal challenge. Despite that, the 4 covering brokers still have full year profits coming in between £15.6m - £21.5m (remember the mkt cap of this business is only £43.4m !!)
That equates to EPS between 14.1p-20.7p, for a current year PER of between 2.9 to 4.3

You don't need me to tell you that's too cheap.

Interestingly, all 4 covering brokers also include divis of between 3.0-4.5p for this year, giving a forecast divi yield of between 5% and 7.3%. Very nice if correct, although there's no guarantee the divis will be maintained.


What has really clobbered the share price in the last couple of months, aside from general malaise on AIM affecting practically everything, is that ACE have rather blundered the latest refinancing.

They refinanced back in the summer (just before the credit crunch) with a £45m senior debt facility provided by Morgan Stanley. However, due to the ongoing effect of the legal enforceability challenges (which were only resolved in late September), it became clear that a further fund-raising would be needed late this year.

So on 3/12/2007, same date as the Interims were released, details of a new £50m Convertible Loan issue were publicised. My view is that the market has totally misunderstood this loan issue & seen it as an emergency fund-raising. Hence the share price has been pole-axed.

But listening to the conference call, management said they are "very confident" about getting the convertible loan note proceeds. It's being arranged by Morgan Stanley again, and appears to be a done deal. But we should get an RNS tomorrow (or today by the time you read this) confirming it all.

The new loan notes carry 5.5% interest payable twice a year, which is a lot cheaper than ACE's existing borrowings, some of which will be paid down from the new loan proceeds.
The convertible loan notes are structured as a premium redemption loan, i.e. at the end of the 5-year period, holders receive 126.3% of face value. So the total yield is 9.75% p.a. over 5 years.

However, again the market has possibly missed the likelihood that the redemption premium won't be paid, because by then the share price will be so much higher than the 107p conversion price, that the loan notes will actually get converted into shares in 5 years time & the redemption premium will be foregone by holders in preference for the ordinary shares being (say) 300p+ by then.


Conclusion - IMO Accident Exchange have resolved their problems during 2007, and an imminent RNS confirming the new £50m loan facility means the company is strongly financed for the foreseeable future.

Therefore, growth can resume, earnings should resume an upward trend, and cash collection should be very much better.

That puts them on a heading to attain possibly 25p EPS in 2008/9, put it on a PER of say 12, and you have a price target of 300, or 5 times the current price.

Given the 70% dilution from loan conversion in 5 years time, it would be prudent to work to a lower price target, but I have in mind 200p as a sensible level.
That's assuming no further problems emerge of course, no guarantees there !


If the loan note RNS is issued as planned today, then I reckon these are a screaming buy, and it's not often I use that kind of language, but that's the way the numbers look to me.

Usual disclosure - I hold a long position here, DYOR, etc.

Regards, Paul.

Hi,

One other point that I forgot to mention, is that Accident Exchange (ACE) shares have consistently appeared in the list of "most stock on loan", published in Shares mag, this week it's tucked away on the bottom right of page 13.

20.9% of ACE's shares are apparently out on loan (usually, but not always shorting activity [since you need to borrow the stock first in order to short sell it])

The thing with shorting, is that if the stock is called in by the lender, then you have to buy in the market, regardless of price. Someone on advfn has worked out that there is over 100% of ACE's free float on lend (if you exclude mgt holdings, and people like me).

So if the shorters need to cover, they are in a big fix here.
Well, it's not a question of if. Short positions have to be closed at some point.


A major bear squeeze is on the cards here. If the Convertible Loan note refinancing goes through later today.

These shares will go through the roof imminently, in my view.

You heard it here first.

Cheese, PP.

Good morning PP !

whilst you are waiting, I expect you know the answer to this question. I have seen a few grumbles on the DWD board recently and have drawn the conclusion that second hand values of expensive cars are declining significantly. Is this correct? How does it affect ACE's assets?

manzanilla

Sorry about all the drunken posts earlier. I couldn't help it, because I was drunk.

Nice to see "normal service" being resumed [albeit a little later at night or earlier in the morning....was this due to over-running engineering works?] ;-)

Happy New Year!

ee

Hi Paul,

Great write-up, not one for me though.

But I was wondering if your 20.9% of ACE's shares on loan figure is correct. I do not have access to Shares magazine, but looking at the ADVFN financials page http://www.advfn.com/p.php?pid=ukfinancials&btn=sf_ok&sf_symbol_select=LSE%3AVOD&symbol=LSE%3AACE

There is a section titled 'Crest Data 31/12/2007' which shows:-

On Loan 6.14 m
On Loan as % in Crest 20.46 %

In Crest 30.00 m
In Crest as % in Issue 42.18 %

In Issue 71.14 m
On Loan as % in Issue 8.63 %

The "On Loan as % in Crest" figure of 20.46% is very close to the 20.9% you mention, so I was wondering if the figure in Shares mag is '% in crest' or '% in issue'?

Regards
Mick

Hey Mick,

Your loss.

The "On Loan as % in Crest" figure of 20.46% is very close to the 20.9% you mention, so I was wondering if the figure in Shares mag is '% in crest' or '% in issue'?


You better check in shares mag, I'm not doing your donkey work for you, you lazy swine !!!

Cheese, PP./

Hi Paul,

I was only pointing out a possible discrepancy in the 'on loan' figure you quoted, which could make a big difference in the potential short position.

It could be 21%, or it could be 9%.

I already said 'not one for me', but other readers might take the figures without checking.

Regards
Mick

(p.s. I notice post #103743 has gone while I write)

Hi,

Jolly good, all done & dusted;

http://www.investegate.co.uk/Article.aspx?id=200801081206193102L


Regards, Paul.

And there's more...

Interim divi of 1.0p.

http://www.investegate.co.uk/Article.aspx?id=200801081208373116L

Regards

Dave

At the half year, interest was barely covered 2x. Whichever way you look at it , interest on the new bond will have to be provided in the financial statements at 9.75%, which is substantially above the current rates and will erode interest cover even further.

A business model that means fighting insurance companies, that have deep pockets and banks of solicitors, for every penny remains very risky. With such high gearing, this could go bust.

Not for the faint hearted!

With such high gearing, this could go bust.

absolute rubbish.

Morgan Stanley have funded this up way beyond the day-to-day needs. That is what this £50m convertible loan is all about - don't you see ? Morgan Stanley are funding ACE to whatever level they need to take on the insurance companies. That's the whole point.

So a PER of 3 does not grab you then ???

Its not just about low PER. (I seem to recall that Independent insurance traded at around a PER of 3 before it went bust).

Are you saying that Morgan Stanley funded this and has now arranged the convertable bond to get rid of the debt on their books, ie by selling it on?

I note from the press release that the bond will be for £50m, £4m goes on cost, £5m to repay existing debt and £41m will be new debt (to finance working capital). At half year they had net debt of £125m. Total debt will therefore increase to around £166m. That equates to a debt/equity ratio of 244% and is 3.8x the market cap.

The foward PE of 3 presumably also does not take into account tha additional £5m in interest cost on the bond and the £5m cost of raising the bond. Given that the company only made £4.5m profit at the half year stage, I don't see them getting anywhere close to the required £21m pretax for the year to get to a forecast PER of 3.

Sorry, I am not trying to be difficult, but every story has two sides and only by looking at both can you make an informed decision.

Another issue is that if the loan note is convertible at around a pound, and there are 71M shares now, 50 million will mean high dilution to the share price (although of course it means that the price will be over a pound and the actual debt won't have to be repaid),

Does look interesting, even though there are exceptional costs this year, next year could be good,

K

Kenobi,

the rns states that the conversion price will be £1.073, but if the actual shareprice is below the reference price of £0.8977 over the last 15 days, the price will be adjusted to reflect this. The actual average price was £0.7088. This means the conversion price will be adjusted to around £0.8506 (20% premium), less the 1p dividend and any further dividends.

That would mean an even greater dilution.

G

Been here before and that was in a bull market, not at all intersted!

Make more in the banks!

Good luck to all who are in it though sometimes it's nice to be wrong!

Grogger

Geovest - think you will find the conversion price is based on the 1st anniversary of the settlement date as under:

The Conversion Price will be reset on the day after the first
anniversary of the Settlement Date (the “Reset Date”) if the average
of the volume weighted average prices of the Ordinary Shares on
the London Stock Exchange for the 15 dealing days immediately
prior to the Reset Date (the “Reset Reference Price”) is less than
the Reference Share Price of £0.8977.

Regards - Derk

Derk - sorry, my mistake - you're absolutely right.

Second hand car values are on the slide:

http://www.am-online.com/news/view_article.asp?el=1&art_ID=42895930

The price of the average three-year-old car could drop by £400 this year due to the gloomier outlook for the UK economy in 2008.

400 for an average car three year old cars, high end nearly new cars will and are being hit much, much harder.

I used to work for a competitor of ACE. When I started some 6 years ago the share price was languishing around 70-90p mark following similar litigation with the Insurance Companies.

When I left the company last year the share price was around the 360 - 400p mark. I would not be surprised to see similar results here.

Cars are bought at a discount for volume. They make money when they are used and make money when they are sold. (Well thats the theory as I was informed by accounts).

I cannot see this going bust as has been suggested notwithstanding I do not believe the litigation is entirely complete. You see...ACE have only evidenced and, the court has accepted that the agreements are sound. There is still the question of quantum of damage. ie What is correctly and lawfully outstanding and how quickly does it need to be paid to prevent further damage to the insurer. Therefore, the insurers will no doubt pay 70 - 80% of the debtor book value through negotiation fairly quickly.

I have no intention of trying to do the maths on this one as I will only prove that lawyers and calculators must be made illegal and any one of us trying to use one should be ...you decide! :-)

Just a view on this folks. Suffice to say, disclosure...I have bought some and intend to buy more as funds allow.

Regards
David

Hi Geovest,

Just coming back to you somewhat belatedly on the points you made re Accident Exchange;

I note from the press release that the bond will be for £50m, £4m goes on cost, £5m to repay existing debt and £41m will be new debt (to finance working capital). At half year they had net debt of £125m. Total debt will therefore increase to around £166m. That equates to a debt/equity ratio of 244% and is 3.8x the market cap.


I actually mentioned the debt position in my original post.
It's really how you look at the debt, and this does matter a lot.

You've chosen to highlight the £125m net debt figure at the half year. I actually highlighted the same figure AS WELL AS the more important net debt figure of £37.2m excluding finance lease obligations.

Since the finance lease obligations are simply finance agreements for the fleet of 5,000+ cars, they can effectively be disregarded providing the interest cost is included in the P&L, which of course it is.

The difference between the two net debt figures disclosed by the company in its Interims of course roughly equates to the value of the fleet, which is shown on the balance sheet as an asset, but you've ignored that !

I do think you need to draw a distinction between structural debt (e.g. hypothetically a term loan for £100m repayable over 10 years, which was used to buy a subsidiary), and revolving credit to finance a fleet of cars.

Most people would consider these to be entirely different scenarios. The hypothetical £100m term loan is clearly debt that has to be repaid from earnings, as well as having interest charged on it.

But in ACE's case the (roughly) £88m in finance lease obligations is not really debt that has to be repaid in the same way at all. It's actually just the funding cost of the fleet of 5,000+ cars. The debt disappears on a rotating basis as the cars are sold. This debt does NOT have to be repaid from earnings at all. That's an absolutely key point here IMO. The debt is repaid from the sales proceeds of each car that is sold.
Therefore, as long as you include the interest cost in the P&L, it's entirely sensible to disregard the finance lease obligations, which reduced net debt to just £37.2m at 31/10/2007.


The foward PE of 3 presumably also does not take into account tha additional £5m in interest cost on the bond and the £5m cost of raising the bond.


The recent conference call from ACE mentioned that there will of course be higher interest charges, but this will be offset partly by repaying some existing debt which is charged at a higher rate of interest.
Plus of course they will earn some interest on the cash balances (since ACE is now likely to have quite a substantial operating cash balance now the £50m convertible loan has gone through, especially as the backed-up debtors from the legal challenge are now turning into cash as well).

Bear in mind also that the arrangement fee on the convertible loan will (I think) be amortised over 5 years, so it's not a full hit to this year's profit.


Given that the company only made £4.5m profit at the half year stage, I don't see them getting anywhere close to the required £21m pretax for the year to get to a forecast PER of 3.

Couple of points here - firstly ACE's business is seasonal. Since far more people crash their cars over the winter months, H2 is much stronger than H1.

Secondly, the figures I was quoting were based on adjusted profit (adjusted for amortisation of intangibles, share based payments, and exceptionals). So H1 profit on that basis was actually £8.6m, and not the £4.5m which you quote.

I think your £4.5m is the profit AFTER tax, exceptionals, etc. So basically you're picked up the wrong figure there.

As mentioned in my original post, the forecast figures I was working from were recent forecasts from 4 different brokers, whose adjusted EPS estimates range from 14.1p to 20.7p for this year (ending 30/4/2008).
The oldest of these forecasts is dated 17/12/2007, and since the convertible loan was announced 14 days before that, then it is reasonable to assume that all 4 analyst estimates should have taken into account the costs of the convertible loan.

One point I will concede is that 2007/8 has been such a year of turmoil for ACE, mainly due to the legal challenge & associated cashflow problems, that I wouldn't get too hung up on what the exact profit figure for this year is. But the point is, this company is on the mend, and it's the 2008/9 figures which should show a very good improvement - especially as there is still loads of organic growth in this sector (only a small proportion of people who are entitled to a credit hire car actually claim one, according to an old note from Numis, but this is changing as dealers are paid commissions by ACE, Helphire, etc, to recruit customers).

The main thing I'll be looking for is what management indicated should happen in H2, namely improving cash collection now the legal challenge has been defeated, and improving margins from better fleet utilisation.


Sorry, I am not trying to be difficult, but every story has two sides and only by looking at both can you make an informed decision.


Absolutely right, I value your input - the real value of these Boards is when one's opinions are challenged & it makes you re-check your facts & figures.

But you've not actually come up with anything that has undermined my initial paper on this stock, despite perhaps presenting your response as if you had (presumably why you got 65 Recs for your post ?) !! ;-)


Regards, Paul.

Hi,

Couple of other points that I've picked up from peoples replies about Accident Exchange.

Resale value of vehicles - agreed this is a risk factor, and could trim earnings if UK goes into a significant Recession. However, ACE increased their depreciation charge to the P&L from 20% to 22.5% last year, and since doing that the disposal values have almost exactly matched book value.

As someone else pointed out, ACE are buying vehicles in bulk, hence getting big discounts. If resale values deteriorate, this would simply be adjusted through getting bigger discounts from the manufacturers.
Bear in mind that hire car fleets (e.g. Avis) buy so cheaply that they can afford to rent out a supermini for virtually nothing, because they actually book a profit on the vehicle when it's sold. ACE are in the same sector, although it's probably not such a great effect for them because they have a smaller fleet, and operate mainly prestige vehicles.


Debtor book - it's a part of normal business within this sector for there to be disputes over the amount invoiced by ACE to the insurer. Therefore ACE make an across-the-board provision of 10.2% for settlement discounts. They explicitly stated in the recent conference call that this provision is greater than the amounts they actually have agreed in settlement discounts, even during the very difficult period in H2 of calendar 2007 when the insurers were withholding payment awaiting the outcome of the legal challenge against ACE's contracts (which of course ACE won).


So now that ACE are properly funded, they clearly have far greater bargaining power with the insurers over settlement discount, and the bulk discount deals that were done in calendar 2007 purely to generate cashflow are no longer required. In fact ACE can now (and are) playing hardball, having placed over half their debtor book in the hands of a panel of solicitors. This is extremely effective in resolving payment issues according to the company.


Credit hire vehicles is a juicy margin business - operating margins can be in the 20-30% range, which is a fantastic margin. But the flipside is that you have to wait 3-9 months for the insurance company to actually pay, so part of the deal is effectively that companies like ACE act like a bank, funding the cost of the vehicle over an extended period. That goes some way to justifying the fat margins that they charge.

Some people have suggested that the GTA (agreement between insurance companies & credit hire companies on tariffs) is breaking down, but ACE stated that rates for prestige cars (where ACE mainly operates) are seeing "double digit rate growth" at the moment.
Also, it's a lengthy process to renegotiate with the insurers, which is ongoing. ACE believe that the insurers are "fatigued" by other issues right now, principally the massive claims for flood damage in 2007, and vehicle credit hire is relatively low down their list of issues right now.


Bear in mind also that there are NO covenants attached to the convertible loan, and it's unsectured. So this is a very safe form of funding.
In addition, ACE are not expecting to have to repay any of the £50m in 5-years time, since the assumption is that it will all be converted.

Since the convertible loan carries a redemption premium of around 26% (from memory), this means that nobody will convert any of the loans into shares unless the share price is around 130p-ish.

So dilution is not an issue at all below about 130p/share, or around double the current share price. So yes there will be dilution in 5 years time, but frankly who cares, because I doubt any of us will hold the shares that long anyway.


Absolutely key point here - yes this business has had a torrid time in 2007, but the issues are now (IMO) resolved, and 2008 should see a major recovery in the company's financial performance & hence share price. It may not happen overnight, but I believe these shares will be much higher by the end of 2008 than they are now.

Regards, Paul.

Paul,

Unconfirmed comments/rumours on FTs Alphaville this lunchtime that Helphire has approached ACE with a bid. No other information save the comment of a sharp fall in HHR's SP yesterday prompted a ..we know no reason..plus a positive comment on trading.

ACE currently up 9.51% @ 71p / 72p 932Ktraded - which I guess you know:-)

SG

Not holding

Hi Paul,

I nearly missed your post as I thought the thread was dead, but I will try to deal with some of the issues you raised.

But in ACE's case the (roughly) £88m in finance lease obligations is not really debt that has to be repaid in the same way at all. It's actually just the funding cost of the fleet of 5,000+ cars. The debt disappears on a rotating basis as the cars are sold. This debt does NOT have to be repaid from earnings at all. That's an absolutely key point here IMO. The debt is repaid from the sales proceeds of each car that is sold.

I’m sorry, but borrowing money with the obligation to repay at some point in time, makes it debt, irrespective of the way or timing of repayment.

The £88m finance lease agreements is money borrowed to purchase income-producing assets (cars in this case). This is no difference to for example Lavendon buying mobile lifting platforms to hire out to contractors, or many other businesses. The bottom line is that that you borrow money, pay interest and at some point have to repay the loan. That’s debt!

The argument of “That’s not really debt” has led to the demise of many companies (and is the root cause why the UK population is drowning in debt)

The debt is repaid from the sales proceeds of each car that is sold.

The sales proceeds would not be enough to repay the debt, its now worth much less than when you bought it.

The recent conference call from ACE mentioned that there will of course be higher interest charges, but this will be offset partly by repaying some existing debt, which is charged at a higher rate of interest.

They are only using £5m to repay existing debt according to their statement. – Won't make much difference.

Couple of points here - firstly ACE's business is seasonal. Since far more people crash their cars over the winter months, H2 is much stronger than H1.

In the last financial year the figures for Pre-tax profit before exceptional and amortisation were: First half: £9.4m, Second half: £9.5m, Full year £17.9m.
H2 seems to be weaker to me! I stand by my assertion that results will be substantially below forecast.

As mentioned in my original post, the forecast figures I was working from were recent forecasts from 4 different brokers, whose adjusted EPS estimates range from 14.1p to 20.7p for this year (ending 30/4/2008).

I don’t really trust broker forecasts most of the time, but in the case of distressed situations I never trust them. Most of them have a vested interest one-way or the other. I normally do my own estimates, but in this case I regard it as a wasted effort as there are too many other negatives.

But you've not actually come up with anything that has undermined my initial paper on this stock, despite perhaps presenting your response as if you had (presumably why you got 65 Recs for your post ?)

Obviously there are 65 Fools that disagree ;-)

Resale value of vehicles - agreed this is a risk factor, and could trim earnings if UK goes into a significant Recession. However, ACE increased their depreciation charge to the P&L from 20% to 22.5% last year, and since doing that the disposal values have almost exactly matched book value.

I agree that the increase in depreciation rate to 22.5% was a good move, but Pendragon reported substantial further weakness earlier this year. We’ll see what the impact is.

Bear in mind that hire car fleets (e.g. Avis) buy so cheaply that they can afford to rent out a supermini for virtually nothing, because they actually book a profit on the vehicle when it's sold. ACE are in the same sector, although it's probably not such a great effect for them because they have a smaller fleet, and operate mainly prestige vehicles.

Have you looked at results for Avis over the last 5 years. They have managed to increase sales from, £747m to £897m, but profits declined from £64m to £7m, with a drop of 50% last year.

Not only do ACE operate a much smaller fleet, but it is also spread amongst various manufacturers. Avis optimises discounts by concentrating models and suppliers.

Also, it's a lengthy process to renegotiate with the insurers, which is ongoing. ACE believe that the insurers are "fatigued" by other issues right now, principally the massive claims for flood damage in 2007, and vehicle credit hire is relatively low down their list of issues right now

This a lack of insurance company knowledge. The ACE issue is handled within the motor departments and the floods are mostly within by the property departments. Insurance companies don’t get “fatigued” by issues, dealing with issues is what they do 247.

In your initial write-up you also quoted:

ACE have also taken a much more aggressive stance with insurers who refuse to pay, and at the date of the conference call (3/12/2007) ACE had £50.2m of its debtor book in solicitors hands (out of a total of £86.0m).
Management stated that the threat of litigation is as effective as litigation itself, so cashflow is now improving.

Again, this is not how insurers operate. They have no fear of litigation, they do it every day. Especially as they are not just fighting a single claim, but something that can potentially impact on the long term cost of motor claims.

I don’t know how far this issue is from any form of agreement, but you can accept that the insurance companies will not roll over. It may be settled soon, but it could also dragged on for years.

Paul, we can carry on knocking this back and forth, but frankly I’d rather spend my time on companies that present good upside and limited downside. That is the main reason why I don’t like ACE. Yes it may have a 100% potential upside, but it also has a 100% downside risk and that’s not good odds in my book. I am not trying to convince you that you have made the wrong decision on this, but for the benefit of other Fools, I am raising some issues of concern. Everybody must do their own research and come to their own decision.

Anyway, it was good to exchange views with you; we don’t see enough of you in the pub lately.

Regards, George

But you've not actually come up with anything that has undermined my initial paper on this stock, despite perhaps presenting your response as if you had (presumably why you got 65 Recs for your post ?)

Obviously there are 65 Fools that disagree ;-)

That's not at all obvious. People rec posts for all sorts of reasons, including for instance "that's excellently argued and made me think again, even though I ended up deciding I didn't agree". And I reasonably often find myself reccing posts arguing both sides of a debate, because both are arguing their case well and adding to my understanding of the issues...

IMHO all you can reasonably infer from a post getting a lot of recs is that lots of people appreciated reading it. Not agreement with or approval of the contents, not that they like the poster, just that they liked the post.

Gengulphus

Gengulphus,

Obviously there are 65 Fools that disagree ;-)

That's not at all obvious. People rec posts for all sorts of reasons

I'm sorry, but you misunderstood. I did not infer (or at least didn't mean to) that the 65 people recc'ing the post agreed with my view. Paul said that my post did not come up with anything that undermined his original post. My response was to say that that abviously 65 other Fools thought otherwise, ie did present an alternative case, not that they agreed with my view.

IMHO all you can reasonably infer from a post getting a lot of recs is that lots of people appreciated reading it. Not agreement with or approval of the contents, not that they like the poster, just that they liked the post.

I wholeheartedly agree with this as it reflects the spirit of the Fool.

As I've said in my original post, we must always look at both sides of the case, only then can we come to an informed decision.

Regards, George

I have always had reservations about using anecdotal experiences to influence share selections , but I will offer my experiences of ACE just before Xmas.
A lorry reversed into my fairly expensive car when I was stationary. The driver was very monosyllabic and did the absolute minimum to sort out the paperwork etc. There were no witnesses.
I spoke to my broker who immediately recommended me to get on to Helphire. She also mentioned that lorry drivers had a reputation for changing their story afterwards.
I then spoke to my dealer who said it was a " no fault claim" and promptly recommended ACE and even arranged for them to ring me. This they did and were very pushy , repeating at regular intervals " at no cost to you" in a sing song voice ( but English).
I have some experience of working with motor insurance firms , and bearing in mind my broker's comment about some lorry drivers , I was concerned what happened if the cost of my claim was not regarded as " no fault" and whether this could lead me to end up paying for the car hire. I got no sensible answers , only that it was not possible to put in writing to me that in no circumstances could I be required to pay anything and repeated " at no cost to me" again.
I finally decided not to hire a vehicle but I can see why they have collection problems with insurers when they are so pushy to hire out cars without fully checking the background of the claim. They took the word of the dealer ( who is getting commission ) that it was a no fault claim. It looks currently as if it is my word against the lorry driver , so it is probably not going to end up as " no fault"
I do not hold ACE or any other competitor and probably never will. You either love their keen " go for it" business model or you don't.
NDP

Hi,

Just a quick update on Accident Exchange (ACE). The rally on completion of their £50m refinancing was rather short-lived, and of course since then markets as a whole have completely tanked, so these shares are now back down to recent lows of 56p.

I spoke to the company today, and have to say the conversation was very reassuring. Basically the big problem was cash collection (because insurers spent most of 2007 challenging the enforcability of some of ACE's contracts in the Courts), but now that ACE have won the legal challenges & raised £50m in fresh cash, the debtors are now paying up apparently.

There will be a trading update at some point in March, which should allay the market's fears.

Debtors - some people had reservations about this, but not only are debtors now paying up, but they are also collecting in more than book value - they make a provision of 10% for settlement discounts, but are only actually giving 8% discount overall now.

New broker notes due out imminently & also doing Institutional presentations, so management are on the case in terms of drumming up some interest in the shares. They are aware of the major shorting issue, but haven't managed to get to the bottom of it.

Fleet utilisation now much improved.

Not concerned about second-hand car values, as they are achieving successful disposals. New & more profitable disposal routes have been opened, including their own online auction site, running successfully for 2-3 months now.


All in all management are very happy with things & upbeat about the company's prospects. Winning new business back from the competition (who apparently took advantage of ACE's problems in 2007 to bad mouth them to customers !).


If you take a 12-month view on this stock, I will be absolutely amazed if we have not doubled our money or more, given the current ridiculous rating of 3 times earnings.
And the fact that this stock is defensive - totally unaffected by any Recession which may or may not be coming.

This stock is a screaming buy at 56p in my view.

Regards, Paul.

Hi Paul,

Thanks for raising ACE as a share idea on this thread back in January.

I've been watching ACE since you posted here, and couldn't resist making an investment today. At a share price of 49p, the long term financial situation reorganised and AFAICS sorted out, court issues/wranglings all in the past and conservative forcast EPS of >15p, the shares are valued by the market as though the company are about to go bust.. I just don't believe it. Unless I'm missing something that the wider market has seen the valuation is now just plain daft IMO.

Cheers and good luck!
Tom.

Hi Tom,

You're right to flag up this one (Accident Exchange - ACE), as the share price has collapsed to a level I considered unthinkably low, it's 49p. That valuation is plainly absurd, although it has to be said that the price has fallen to such an extreme low, that even Bulls such as myself are wondering if there is something horrible lurking below the surface.

But from speaking to the company, my understanding is that things are progressing well since the £50m fund-raising in Jan 2008, the company is now more than adequately funded & making progress with collecting in the backlog of debtors caused by the legal challenges (which ACE won) in 2007.

There is a trading update due out on Monday or Tuesday, and I shall be visiting the company shortly afterwards, so should be able to update members here at some point shortly.


The PER is now down to 2-3 depending on which broker forecasts you like most. The dividend yield is something like 7% (and the divis were maintained at the Interims, although reduced a tad on last year, but I've allowed for that in the 7% yield).

Sure there is debt, but that's never bothered the market before. And ACE's debt is long-term, secure debt, e.g. the £50m convertible is a 5-year (from Jan 2008) deal, unsecured, with no Covenants. The debt relating to the vehicles is irrelevant, since it's rolling debt that is freely available from hundreds of providers, and is simply repaid when the vehicle is sold. As long as you include the interest cost in earnings, then you're right to ignore it.

Plus there is a £45m Morgan Stanley facility, some of which they repaid from the convertible loan issue.

People don't understand this sector IMO. What happens is that they have an extended debtor book, say 9 months (because that's how long insurers take to pay up), and clearly that is required to be financed somehow. So you have rotating debtors, financed by rotating creditors. As long as the interest cost is accounted for, then the debt itself is irrelevant.


The reason this stock is so cheap, is because it's been shorted on a colossal scale (it's in the top 10 most stock out on loan, with over 20% loaned out & presumably short), and becuase the City leaked the news of the fund-raising in Dec 2007 & have hammered the shares ever since (from 150p to 49p since the fund-raising was begun in Dec 2007).
Also, Helphire (HHR) a larger competitor (mainstream cars vs ACE's prestige cars) has put out disappointing figures recently, and that certainly had a knock-on effect for ACE.

OR, there is something more sinister underlying things, and the company is not telling the market about bad things to come. I don't believe this is the case, but when a share drops to a PER of 2, you have to consider the possibility that something is seriously wrong !!!


Anyway, I've bought some more, and believe that the trading update on Monday or Tuesday will show evidence of an improving situation. IF that's the case, then these shares will go up like a rocket, as it's illiquid at the best of times, and when the huge short position is eventually closed, it's anybody's guess where they will get 20% of the company from at all, as about 70%+ of the stock is tightly held by management & Funds & long term PI's like me.

Let's see what happens.

Useful broker notes are here;
http://www.accidentexchange.co.uk/plc/research.asp


Cheers, Paul.

Sure there is debt, but that's never bothered the market before. And ACE's debt is long-term, secure debt, e.g. the £50m convertible is a 5-year (from Jan 2008) deal, unsecured, with no Covenants. The debt relating to the vehicles is irrelevant, since it's rolling debt that is freely available from hundreds of providers, and is simply repaid when the vehicle is sold. As long as you include the interest cost in earnings, then you're right to ignore it.

I did hear a story (on a TV finance/investment slot - can't remember which one) that a lot of people are expecting that sort of rolling debt to become harder to refinance and a lot more expensive, so maybe some panicky people are deserting companies that are financed that way, without looking at how far out their current deals take them? (And with an illiquid stock, on top of the shorting, it might not take many deserters to have an effect?)

Alan
(bought some a few days ago)

Hi Oscroft,

You said (re ACE);

I did hear a story (on a TV finance/investment slot - can't remember which one) that a lot of people are expecting that sort of rolling debt to become harder to refinance and a lot more expensive, so maybe some panicky people are deserting companies that are financed that way, without looking at how far out their current deals take them? (And with an illiquid stock, on top of the shorting, it might not take many deserters to have an effect?)


You could be right, who knows ? But with ACE at the moment, I don't think the market actually has a view.
I think what is happening, is that potential buyers are waiting to see what the trading statement says on Monday or Tuesday (it has to be released by 19 March), whilst on the other side there is an unrelenting seller, who is just constantly dumping stock onto a market with little or no Bid.
Therefore the share price is collapsing.

We don't know who the seller is, or why they are selling. But they look like either a forced seller, or a shorter. It could be a combination of these. And it should be noted that Credit Suisse recently announced they were offloading stock, so could well be continuing with that.

Put these together, and it doesn't necessarily form a "market view", it just forms a short term combination of buying/selling pressures from a handful of market operators.

The market view will surely emerge when we have up-to-date information from the company on how it is trading, next week. And my money is on a big & rapid rebound in price next week, but I could be wrong. DYOR as usual.

Regards, Paul.

Hi Paul,

Put these together, and it doesn't necessarily form a "market view", it just forms a short term combination of buying/selling pressures from a handful of market operators.

Thanks for the thoughts - I expect you're right about the short term situation.

And my money is on a big & rapid rebound in price next week

And a modest amount of mine too :-)

Cheers,
Alan

Interesting - some questions

considering selling my porsche. the tax now is going to be over £400 AIUI. I suspect might be a few CO2 emitters less on the roads. ACE's customers. I might even get a Prius so I can smile smugly and sanctimoniously like those Guardian readers. Presumably then less prestige cars, with more competition for the business - reduced profitability?

Note mentions LIBOR sensitivities too, which has spiked recently.

I didn't understand what the further litigation of the X and A referred to?

The note states 45% are settling pre court, 33% pre after proceedings, but that leaves 22% over which they have to litigate. That must be expensive, and presumably costs are taxed so that not all is recoverable? The Edison note states the "financial forecasts for further litigation is very difficult to forecast"

Hi,

Well Accident Exchange have issued their IMS today, but given what the markets generally are like today, I don't suppose anybody is interested !

But here it is anyway;

http://www.investegate.co.uk/Article.aspx?id=200803170702062084Q


Positives seem to be;

- fleet utilisation tons better, up from 52% to 63%
- sizr of fleet has actually dropped slightly, despite rental activity being 11.9% up on previous quarter
- loads of headroom on borrowing facilities
- cash collection improving

Negatives seem to be;

- cash collection not perhaps improving as much as expected
- large amount of debtor book still in Solicitors hands - want to see this turning into cash
- mix of mainstream/prestige business has moved by 3% due to one large referer, so lower margin (but offset by improved fleet utilisation refered to above)


With the stock price this low, the negatives all seem priced in already, but none of the positives are.

Once markets overall recover their poise, I'm still hoping for a delayed bounce here, although the statement probably contained too much general blurb, which rather dilutes the message on the improvements.

Daniel Stewart have put out a summary which says something along the lines of progress made, but more to be done, which sums it up nicely. Stock still looks insanely cheap to me.

Regards, Paul.

Bit of a Zulu moment today. Steady. Steady. I'm waiting for the moment, but I've still not taken the plunge.

Steady...

Sub 40p is starting to look very attractive.

cheers
DL

In hindsight my entry at 49p doesn't look too clever, and I certainly didn't expect a 20% fall in such short order off the back of the IMS - wow! :(
In fact I had hoped to make a fairly quick turn with a 6/12 month view, but starting to think this is perhaps one to tuck away and forget about.

Operating in these markets is certainly an educational experience :)

Tom.

I'm starting to think all my shares should be tucked away and forgotten abput.