Up­date: First De­riv­a­tives

The Daily Telegraph - Business - - Business -

Shares in First De­riv­a­tives, one of our In­her­i­tance Tax port­fo­lio’s hold­ings, have fallen heavily this month de­spite an ab­sence of news or up­dates from the com­pany, writes Richard Evans.

In­stead the de­cline was prompted by the pub­li­ca­tion of re­search by a hedge fund that had “shorted” the stock.

The fund, Shad­owFall, said it re­garded First De­riv­a­tives’ shares as over­val­ued.

“We think it’s mas­querad­ing as a soft­ware firm when re­ally it’s a con­sul­tancy or re­cruit­ment busi­ness, which would im­ply that its shares should trade at 12 to 15 times earn­ings, not 30 times,” Matt Earl, of Shad­owFall, told Questor. “We think the shares have a long way to fall – in our view they are worth no more than £20 and pos­si­bly as lit­tle as £10.”

We tipped the shares in Jan­uary at £41.60 on the ba­sis of a con­ver­sa­tion with Harry Nimmo, of Aberdeen Stan­dard In­vest­ments, (we added them to the IHT Port­fo­lio in June at £44.50).

Nimmo ac­knowl­edged that mar­gins tended to be lower in con­sul­tancy than in soft­ware. He said First De­riv­a­tives didn’t sep­a­rate re­sults from its two arms, which would make the busi­ness eas­ier to un­der­stand.

But he added: “I’ve been an in­vestor since 2010 and have no rea­son to be­lieve that the man­age­ment is any­thing other than gen­uine in what they are do­ing. We feel that we know this com­pany well and trust the man­agers.”

He said he saw “no sub­stance” to Shad­owFall’s al­le­ga­tions, which in­cluded crit­i­cism of First De­riv­a­tives’ re­la­tion­ship with its au­di­tors, but de­scribed the hedge fund’s tim­ing as “ex­quis­ite” be­cause shares with high earn­ings mul­ti­ples at­tracted much of the sell­ing in the cur­rent mar­ket cor­rec­tion.

Nimmo is hold­ing on to his shares and Questor’s ad­vice is to do the same.

It is now more than two years since the In­come Port­fo­lio launched – next week we will pub­lish a full up­date on its per­for­mance.

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