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Despite yesterday’s Newsletter dismissing the idea of buying more shares in Arden (LSE:ARDN), it remains a possibility that I’ll buy more in future, so I’ll put it in my watch list at a price of 33.4p.
With that in mind, I’ll quickly run through recent events.
Luke Johnson, the famous entrepreneur, business commentator and champion of start-up enterprise, bought a large stake in Arden in January 2014 at prices above 60p. Then the share promptly halved. In February 2015 he joined the board and was elected chairman in spring 2016.
His leadership is showing through now:
Hiring of new team
He recently hired a team of corporate brokers, lured by an extreme reward-for-success contract. These are people with both institutional client contacts (those institutions keen to find SMEs to invest in) and corporate client contacts (those who might one day go for a bond sale or an equity IPO).
In effect, the new hires are running their own business under the umbrella of Arden. The profits they generate will be split between them and Arden. This team will be rewarded by granting the option buy 3m shares at 36p, enough to give them 8.5% of Arden’s equity. But this only happens if they bring in a very large sum from clients over the next two years (a figure of £10m received by Arden was mentioned as the stretch goal).
Hiring teams of well-connected people rather than buying a rival company has many benefits, not least that with a takeover you are often buying a pig in a poke. Also a merger/takeover could result in high fixed remuneration costs. Arden’s chosen approach has flexibility to incorporate a cost structure that is almost entirely variable.
New senior managers
There has been a remarkable shake up. James Reed-Daunter has stepped down as CEO, to become executive director on the Board and as “senior member of Arden’s Equity Capital Markets team”, the part of the business that offers research and trading services to fund managers as well as market making.
He is to be replaced as CEO by a new hire, Donald Brown, 47, who has spent 25 years in SME broking. Luke Johnson says of him “he has a remarkable market knowledge and a formidable network of institutional clients”. So again, we see the strategy of hiring well-connected people.
Jonathan Keeling, one the founders of Arden, 6.46% shareholder and, until recently Executive Deputy Chairman, will step down from the Board to become Chairman of the Operations Committee.
Stephen Wassall is to move from a Board position of Chief Operating Officer to non-Board Operations Director.
Fraser Marshall and Tim Dainton are fresh hires. Fraser will become head of equities, while Tim will be head of research. They widen, yet again, the contact list in fund management and in SME boardrooms.
The recent fund raising “will provide the Arden management with further financial flexibility with which to grow the company”. This statement from Luke Johnson says to me that there will be more reward-for-success hires over the forthcoming months. The extra £5m provides start-up type capital to allow the new people to become established and fee-generating.
Indeed, in another passage he is more forthright about the fundraising: “allow [Arden] to continue to attract further senior hires and incremental teams into the business”
Cost control
At the same time as hiring people who will be richly rewarded if they create wealth for Arden shareholders the staff remuneration cost-load of the company has been put under downward pressure (of course, the new hires will push up the cost base somewhat even if the main reward is variable).
| £’000s | Six months to April 2017 | Six months to April 2016 | Year to Oct 2016 | Year to Oct 2015 | Year to Oct 2014 | Year to Oct 2013 | Year to Oct 2012 |
| Overall revenue | 2,898 | 2,740 | 5,857 | 5,486 | 7,955 | 10,103 | 9,785 |
| Corporate Finance revenue | 786 | 1,408 | 3,430 | 3,314 | 5,266 | 5,057 | 3,361 |
| Equities Division revenue | 2,112 | 1,332 | 2,430 | 2,172 | 2,689 | 5,046 | 6,424 |
| Profit (loss) after tax | -1277 | -772 | -475 | -2,098 | 103 | 979 | 131 |
| Director’s remuneration | NA | NA | 520 | 544 | 554 | 878 | 905 |
| Total staffing costs, inc. directors | 1,606 | 1,960 | 3,693 | 4,281 | 4,216 | 4,752 | 5,211 |
| Number of employees | NA | NA | 38 | 40 | 40 | 39 | 37 |
| All administration costs (inc staff) | 4,167 | 3,506 | 6,323 | 7,646 | 7,936 | 8,829 | 9,634 |
| Costs other than staff | 2,561 | 1,546 | 2,630 | 3,365 | 3,720 | 4,077 | 4,423 |
In the full year to October 2016 total staffing costs were down £588,000, from £4,281,000 in 2015 to £3,693,000 in 2016. In the latest six month period the total staffing costs of £1,606,000 compared well with £1,960,000, a very nice 18% fall.
Also administration costs other than employees in the full year to October 2016 fell by £735,000, from £3,365,000 to £2,630,000.
But in the latest six months there was a strange unexplained expense “Variable overheads including settlement costs” amounting to £1.23m. I’ve no idea what this is, but its impact is that the good work on reducing staffing costs has been more than offset at the total operating cost level because this number rises by £673,000.
There are some problems, however:
Corporate finance work has continued to decline
Of the six months to April James Reed-Daunter, CEO, said of the loss “due predominantly to the extremely limited delivery of the pipeline of corporate work which fell well short…………………………………………………………………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1.
