Ashley: tax online sales 20pc and jail those who flout it
Keystone Law’s clever business model is driving rapid growth, so the shares’ high valuation could be deceptive, says Russ Mould
RETAIL tycoon Mike Ashley wants to see a 20pc tax levied on online sales and prison sentences for executives who consistently “fiddle” their way out of paying the levy, as part of his plan to save the country’s “dying” high streets.
He said any companies with more than 20pc of their sales generated online should have to pay the tax, which would give local councils more money to help encourage people to shop close to home, such as offering free parking.
“Why are so many stores closing on the high street? It’s not the high street’s fault it’s dying, we all know the answer: it’s the internet, the internet is killing the high street and I would know because I have £400m of internet business,” Mr Ashley, the founder of Sports Direct, told a committee of MPs.
He said 20pc of the high street was not savable, 60pc was in critical condition, while the top 20pc of stores in upmarket places such as Oxford Street and Bond Street were not relevant.
“The vast majority of the high street, therefore has died … The only thing you can do is give them a massive electric shock, it’s very simple … you have to immediately tax the internet, not just the pureplay internet, but everyone, for the good of all.”
He said a tax would result in stores like Sports Direct going on an “opening spree” because it would “make perfect business sense for me to cross-subsidise those stores to keep them open”.
Another measure Mr Ashley suggested was a five-year business rate holiday, on the condition that shops matched every pound of free rates with a pound of investment in shops.
He said councils, retailers, landlords and shareholders needed to agree to make cutbacks. “It would be no free ride for the retailer, the landlord would have to agree for a reduction in rent, and you would need a public company to agree a reduction in dividends. So everyone must put in,” he said. “I know it sounds very socialist, but everyone needs to come together. I am not the crazy capitalist everyone thinks I am.”
When asked by MPs how such a system would be policed, Mr Ashley said harsher punishments for repeat offenders was the only way to stop companies using accountants to “fiddle” the numbers, suggesting a £10 fine for every pound. He added: “In cases of perpetual abuse, bosses should get custodial sentences and that should extend to non-executives as well because people move around on the merry-goround … so you get this short-termism that makes it impossible for a group like this [pointing to MPs] to actually make a difference on the high street.”
Mr Ashley, who has a 29pc stake in Debenhams and bought House of Fraser from administrators in August, said that department stores could modernise by converting some of their space into areas for entertainment, such as gaming, or residential use.
He warned MPs that if radical action was not taken, the high street would not survive to 2030. He began the session of the housing, communities and local government committee fending off criticism over the way he rescued House of Fraser. He was accused of “taking all the assets and none of the responsibilities”, but said this was a “far from fair description”.
“House of Fraser was trading while insolvent for a very long time before Sports Direct stepped up and saved it.”
He also defended use of zero-hours contracts, saying “the vast majority” of Sports Direct employees liked them.
Later, Mr Ashley told Sky News he wants to sell Newcastle United before the January transfer window next year.
IF YOU are in agreement with Dick the Butcher’s plan from Shakespeare’s
Henry VI, Part II that “the first thing we do, let’s kill all the lawyers”, please look away now. But anyone prepared to think in purely practical terms when it comes to their portfolio might like to draw up a brief on Keystone Law.
The legal sector has been a hotbed of stock market activity this year, with Burford Capital still thriving (to the benefit of its 6.125pc 2024 bonds, which this column continues to cherish), the flotations of Anexo and Knights and a major acquisition by Gordon Dadds among the highlights.
Keystone Law’s interim results in September were also worthy of note. Sales rose by 30pc, operating profit gained 42pc and a 2.5p maiden interim dividend was paid. It added 31 lawyers to its books as its rapid
growth and platformbased model saw applicants flock to join this potential industry disrupter.
The platform makes Keystone almost a “virtual” law firm, as lawyers can work more flexibly without having to trudge into an office, and do so with the support of Keystone’s legal network and IT and security framework. The networked model also allows lawyers to refer work to colleagues and support other cases and projects within the firm. Increased staff numbers bode well for future increases in sales, earnings and the dividend, which is also supported by net cash on the balance sheet, the result of Keystone using some of the proceeds of its flotation in November 2017 to pay off debts.
Keystone is probably best suited to momentum and growth seekers, especially as it trades on a full-looking price-to-earnings ratio of 33.8 for the year to January. The risk is that any minor profit disappointment could hit the shares hard, as that sort of rating leaves little by way of safety margin, but there is potential for gain if Keystone maintains its rapid profits growth. If it does, that p/e ratio of 33 will be deceptive as it would start to drop pretty rapidly were the share price even merely to stand still.
Questor says: buy
Share price at close: 381p
Since our initial look at industrial threads maker Coats last year, shareholders have reeled in a 10pc
capital gain, while the FTSE All Share has fallen by 5pc, and banked dividends of more than a penny a share for good measure.
Last month’s third-quarter trading update suggested that the business should reward further patient support, given its strong competitive position and lofty returns on capital.
Weakness in emerging market currencies such as the Turkish lira held back sales on a reported basis but they rose by 3pc on an underlying basis, with the key Industrials segment leading the way with a 9pc increase. The company’s “connecting for growth” cost-cutting plan should help to support profits and its progressive dividend policy come the full-year results in February, even as Coats continues to invest and innovate.
High returns on capital suggest that a forward p/e ratio of barely 14 still represents good long-term value.
Questor says: hold
Share price at close: 80.9p
Our analysis in May of niche lender and fintech play Trufin is off to a slow start, as the shares are around 5pc lower. But last week’s statement that the company is on track to receive regulatory clearance for its banking licence in the first quarter of 2019 is highly encouraging.
This would lower Trufin’s cost of debt and boost the profitability of its loan book, which, at forecourt lender Distribution Finance Capital (DFC), already stands at £100m, helped by major banks’ avoidance of this area.
New client growth at DFC looks promising too, to suggest that loan book growth has plenty of scope to accelerate further. Loss-making small caps are not suitable for all investors but risk-tolerant portfolio builders will welcome the positive news.
Share price at close: 203p
Mike Ashley, the Sports Direct tycoon, goes through security before testifying at the House of Commons