Neil Woodford received a double dose of bad news on Friday morning. Haulage firm Eddie Stobart Logistics (LSE: ESL), in which Woodford is the largest shareholder, announced its shares would be suspended while accounting problems were investigated.
Meanwhile, the Woodford Patient Capital Trust (LSE: WPCT) said that after revaluing one of its largest holdings, the trust’s net asset value will be cut by 3.4p per share.
Here, I’ll explain why today’s news could mean investors in the Woodford Equity Income fund will face further delays getting their cash back. I’ll also look at Patient Capital Trust and explain why I’m staying away, despite the stock’s discounted valuation.
What’s gone wrong at Eddie Stobart?
Eddie Stobart’s famous lorries are green and red. But shareholders are likely to be seeing only red after today’s news. The company says that after reviewing its half-year accounts with its auditors, it needs to apply “a more prudent approach” to certain accounting items.
Among the changes that will be made are fresh assessments of “the recoverability of certain receivables.” This suggests the group could be forced to write off some significant bad debts.
The impact of these changes is that adjusted operating profit for the half-year will be “significantly lower than anticipated.” Chief executive Alex Laffey has been replaced, with immediate effect.
Stobart is not yet able to provide updated figures, so its shares have been suspended to prevent a disorderly market. An amended set of accounts is expected to be ready in “early September,” when we can expect the shares to start trading again.
Bad news for Woodford
As I’ve said, Woodford is Eddie Stobart’s largest shareholder. His fund’s 22.9% shareholding was worth about £60m before today’s news, following a stock sale I estimate at £5.8m in early July. Stobart shares are likely to fall heavily when they return from suspension in September.
Woodford may find it difficult to find buyers for further large chunks of stock. I think these problems could add to his difficulties in reopening his Equity Income Fund in early December, as currently planned.
Patient Capital cuts valuation
Woodford’s other problem child is the Woodford Patient Capital Trust, which invests in early-stage companies. These are mostly loss-making businesses, hoping to commercialise new technologies or medical treatments.
Valuing investments of this kind is difficult and valuations are subject to regular revisions. That’s what’s happened today. In a statement this morning, the WPCT board said the trust’s valuation of Industrial Heat, a firm that aims to harness “cold fusion”, would be cut.
As a result, the WPCT net asset value will fall by 3.4p per share. The last reported net asset value for the trust was 78.96p, on 21 August. Today’s update suggests NAV could fall to about 75p when it’s next updated.
The Patient Capital Trust share price is currently about 42p. Although this represents a discount of nearly 50% to NAV, I think there’s a real risk further revaluations are likely over the coming weeks. In my view, WPCT looks like a potential value trap and remains a stock to avoid.
