FT : Key Wirecard executive travels to Munich from Dubai base

Key Wirecard executive travels to Munich from Dubai base
Oliver Bellenhaus ran unit at heart of alleged fraud from his Burj Khalifa apartment

Oliver Bellenhaus, a Wirecard executive who ran what was supposed to be the group’s largest and most profitable unit before its operations were exposed as a sham, has left his base in Dubai and travelled to Munich.

Wirecard for years told its longstanding auditor EY that CardSystems Middle East — the unit overseen by Mr Bellenhaus, largely from his apartment in the Burj Khalifa, the world’s tallest building — ran a lucrative business outsourcing payments processing to external partners.

Mr Bellenhaus and the group’s vanished chief operating officer, Jan Marsalek, this year briefed KPMG about the arrangements with third parties during a special audit by the accounting firm, according to documents seen by the Financial Times. 

The German group filed for insolvency last month after it admitted that €1.9bn of cash on its balance sheet, including €1.1bn said to be in two accounts in the name of CardSystems, probably did not exist and that it had previously misrepresented the third-party business.

It was unclear why the 46-year-old Mr Bellenhaus, a racing-car enthusiast, had travelled to Germany, where he was a guest at the Andaz Munich Schwabinger Tor on Sunday. He did not return a message left for him at the hotel.

Munich prosecutors are leading a criminal investigation into Wirecard, which is based in the suburbs of the city. They have issued arrest warrants for Mr Marsalek as well the group’s former chief executive Markus Braun and said they are investigating a number of additional suspects who cannot be named “for tactical reasons”. 

Mr Braun reported himself to police last month, was arrested and released on €5m bail. He has denied wrongdoing. He has previously declined requests to comment on his role at Wirecard and one of the partner companies — Al Alam Solutions in Dubai — central to the alleged fraud. 

In October last year, the FT published documents provided by whistleblowers which indicated that the business between Wirecard and Al Alam was invented. The FT also reported that Mr Bellenhaus appeared to be involved in the running of Al Alam. At the time, Wirecard denied any wrongdoing by its staff. 

The collapse of Wirecard, a member of the prestigious Dax 30 index with a valuation of more than €24bn two years ago and widely regarded as Germany’s most promising modern technology company, has prompted a crisis for institutions supervising the group.

CardSystems was the largest individual unit within the Wirecard group, purportedly contributing a quarter of its worldwide revenue and about 40 per cent of profits in recent years, according to documents seen by the FT, but its financial statements were not prepared by a local audit firm. Instead they were overseen as part of the overall group audit by EY in Germany.

Wirtschaftswoche, a German business weekly, has reported that at one stage the small and normally quiet Al Alam office in Dubai was filled with unfamiliar staff, coinciding with a visit by EY auditors from Germany.

Mr Bellenhaus is still listed as a director of Wirecard Card Solutions UK Ltd, responsible for supporting the prepaid card operations of several UK fintech companies, a role he has held since 2012. The Financial Conduct Authority recently froze Wirecard’s UK operations for three days, temporarily preventing customers of companies such as Curve, Pockit and Payoneer from accessing their money.

CardSystems and Al Alam were both placed into liquidation in May. At the time, Wirecard said the Al Alam liquidation was due to “the damage to its reputation caused by its integrity being publicly called into question”, and that the measures would have no impact on its business. The liquidation of CardSystems was “intended to reduce the complexity within the group and
increase its efficiency”, Wirecard said at the time.

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • SBH +14.7% (Q3 revs outlook), HIMX +2.9%

Select Chinese ADRs showing strength after Shanghai closes 5.7% higher:

  • NIO +21.9%, ASHR +9.1%, FXI +7.3%, WB +5.3%, JD +3.9%, BIDU +3.8%, BABA +3.8%

Other news:

  • MESO +9.1% (initiates expanded access protocol for compassionate use of Remestemcel-L in children with multisystem inflammatory syndrome associated with COVID-19)
  • DTIL +6.9% (notified by Gilead (GILD) of its termination of the Collaboration and License Agreement)
  • UBER +6.4% (Bloomberg on Sunday said that UBER was buying Postmates for $2.65 bln in an all-stock transaction)
  • SEAS +4.6% (files for $500 mln mixed securities shelf offering)
  • BDX +4.1% (launches portable, rapid point-of-care antigen test to detect SARS-CoV-2 in 15 minutes, dramatically expanding access to COVID-19 Testing)
  • MYGN +3.7% (announced new collaboration with OptraHEALTH to implement a cognitive ChatBOT named Gene to provide genetic and financial assistance information to prospective patients)
  • MYL +3.3% (secures regulatory approval for remdesivir lyophilized powder for injection 100 mg/vial in India for Restricted Emergency Use in COVID-19 patients)
  • DOW +3.1% (announces sale of rail infrastructure assets at six North American sites)
  • REGN +2.9% (starts REGN-COV2 Phase 3 COVID-19 prevention trial)
  • RRR +2.4% (reports the death of its President Richard Haskins )
  • CVM +1.9% (confirms filing for 613,792 share common stock offering by selling shareholders)
  • APT +1.8% (Texas governor mandates masks)
  • GILD +1.8% (receives conditional Marketing Authorization for Veklury (remdesivir) for the Treatment of COVID-19)
  • HTGC +1.7% (files for 16.5 mln share common stock offering)
  • ABT +1.4% (receives FDA approval for Gallant implantable cardioverter defibrillator and cardiac resynchronization therapy defibrillator devices)
  • EBS +1.1% (signs five-year agreement for large-scale drug substance manufacturing for Johnson & Johnson's lead COVID-19 vaccine candidate; first two years valued at $480 mln)

Analyst comments:

  • TSLA +5.5% (target raised to $1500 from $1050 at JMP Securities)
  • CYBR +2% (upgraded to Buy at Monness Crespi & Hardt)
  • CCEP +1.7% (upgraded to Buy from Hold at ABN Amro)

FT : China semiconductors/SMIC: chip flip

China semiconductors/SMIC: chip flip
Chipmaker’s long-term prospects are not as inviting as the speculative fever suggests

China’s biggest chipmaker Semiconductor Manufacturing International Corporation (SMIC) may not have leading edge technology but it has great timing. Beijing has urged its citizens to buy the local market — which is now at one-year highs. SMIC has targeted Rmb46bn ($6.55bn) for its Shanghai IPO. Not long ago it had hoped to bring in $2.8bn. Its Hong Kong-listed shares jumped 20 per cent Monday. But SMIC’s long-term prospects are not as inviting as the speculative fever suggests.

Markets have put a value on SMIC at nearly $28bn. Beijing needs technological self-sufficiency as the US tightens sanctions on component sales to Chinese companies. Meanwhile SMIC could use the funds to bolster its scale and cut costs. It has boosted its capex outlook to more than $4bn this year.

Yet, more funds will not guarantee SMIC can catch up with rivals. Analysts estimate SMIC to be at least five years behind its global rivals. It still cannot produce the high-end chips that clients such as Huawei need.

Even so, its Hong Kong-listed shares are up more than 310 per cent this year. At 22 times enterprise value to ebitda, they trade at a premium. Rivals such as Samsung Electronics, which makes most of its money from chips, trades at just 4.5 times and TSMC at 11 times.

Demand from Apple keeps TSMC’s sales high while Samsung’s own products support its chips business. Yet SMIC’s biggest client Huawei — about a fifth of its sales — has struggled following US trade sanctions. SMIC also counts US-based Qualcomm and Broadcom as key clients.

The risk of further escalation in tensions between the US and China — and a drop in orders — cannot be ruled out. While revenues from outside China have dropped sharply since 2017, North America still makes up about a quarter of its total revenues. Group top-line fell last year. SMIC also relies heavily on foreign equipment for its production lines.

Massive demand — from retail and institutional investors — for the new Shanghai shares should mean this IPO performs well initially. But once the euphoria wears off, the chipmaker’s structural problems should start showing through. Long-term investors should think twice about paying up.

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • OBSV +11.4%, MESO +11.3%, ASHR +9.1%, NLS +7.6%, FXI +7.3%, MYL +6.7%, EBS +5.6%, UBER +5%, D +2.7%, HIMX +2.4%, LAKE +2.3%, GILD +2.2%, CVM +1.9%
  • Gapping down:
    • APLT -3.3%, HTGC -3.1%, CBAY -2.9%, VXX -2.6%, UIHC -1.9%, ETNB -1.8%, RRR -0.8%, AKRO -0.7%, SEAS -0.6%

FT : Gold miners glitter as spot price nears 9-year high

Gold miners glitter as spot price nears 9-year high
Higher dividends and lower costs help producers to outperform spot price

Gold miners’ share prices are soaring with the value of the precious metal, while increased dividends are helping push these stocks higher still.

The spot price of gold has risen 17 per cent so far this year and is closing in on $1,800 an ounce for the first time in nine years. The commodity, commonly treated as a reliable store of value by investors, has benefited from nerves over the spread of Covid-19 and the outlook for global trade — and rock-bottom yields available on other haven assets.

Gold stocks have done even better, however, up 23 per cent this year as measured by the NYSE Arca Gold Miners index. Standout performers include Canada’s Kinross Gold and Barrick Gold, and US-based Newmont Corporation, all up at least 40 per cent so far in 2020.

The primary market is also vibrant. Recent share sales by South Africa’s Harmony Gold and Polymetal, a London-listed miner with assets in Russia and Kazakhstan, were completed in double-quick time, with the books covered in 20 minutes, according to bankers working on the deals.

“Macroeconomics is playing a part: gold has reasserted its status as a safe asset,” said one banker involved in the $200m Harmony deal. Given the favourable backdrop for gold — safe instruments such as US government bonds are effectively paying investors a negative return — analysts and sector specialists reckon gold and gold-related equities have further to run. 

“With swelling central bank balance sheets, and rates in the US and most major developed economies close to or below zero, we see the macro backdrop as supportive,” said James Bell, analyst at RBC Capital Markets, in a recent report.

At the same time, big producers have also started to crank up returns to shareholders. The total per-share dividend of the five biggest gold miners has risen from $1.50 in 2015 to $3.20 in 2019, according to UK-based asset manager Ninety One.

Bullish fund managers think there is further to go. George Cheveley, a fund manager at Ninety One, said the outperformance “isn’t substantial when you consider the tailwind” from lower oil prices and weaker currencies in producer countries, compared with markets where the metal is sold. “We would expect them to do even better and deliver strong returns.”

Last year, “all-in” margins — which include exploration and other general and administrative costs — for a group of big gold producers tracked by RBC exceeded 10 per cent for the first time since 2012. Mr Bell thinks the miners can achieve 20 per cent this year on this metric.

The banker on the Harmony deal said investors were attracted by the stock’s higher “leverage” to rising prices than can be gained from gold-tracking exchange traded funds. The idea is that a higher gold price on a fixed cost base can drive up corporate profits quickly.

But miners have been criticised in recent years for their profligacy. After the last boom sent gold as high as $1,900 a troy ounce in 2011, producers spent heavily on deals and projects that turned sour when gold prices started to fall.

Since then, the big producers have focused instead on improving their balance sheets. At the end of March, net debt at Barrick Gold, the world’s second-biggest producer, stood at $1.85bn, half the level of a year earlier.

FT : Big Four told to outline plans for audit split by October

Big Four told to outline plans for audit split by October
UK regulator orders the largest shake-up of the industry in decades

The UK’s Big Four accounting firms have until 2024 to separate their audit practices following a severe edict from the accounting regulator that marks the largest shake-up of the industry in decades.

The Financial Reporting Council has issued principles for the operational separation of the audit units of PwC, Deloitte, KPMG and EY. The firms must outline their plans to implement all 22 of its principles by the end of October, and have completed the measures by June 2024.

It is the first structural overhaul of the way the firms operate since a string of reviews prompted by the failure of British outsourcer Carillion. Audit reform has been thrown into sharp focus in the last two years by high-profile corporate collapses such as at BHS, Thomas Cook, and most recently, Wirecard.

The FRC’s new principles require that the firms pay auditors from the profits of their audits, ringfence the finances of the audit division with a separate profit and loss account, and introduce an independent audit board to oversee the practice. The Big Four generate around a fifth of their profits from their audit practices, which have been dwarfed by the rapid expansion of their advisory divisions in recent years.

The requirements are designed to improve audit quality and “audit market resilience” by ensuring that “no material, structural cross subsidy persists between the audit practice and the rest of the firm”, according to the FRC.

“In pursuing these objectives, we will seek to ensure that audit remains an attractive and reputable profession and increase deserved confidence in audit,” it said.

The FRC ruled that profit payments distributed to audit partners “should not persistently exceed the contribution to profits of the audit practice” and said that auditors “should work for the benefit of shareholders of audited entities and wider society; they are not accountable to audited entities’ executive management.”

“Today the FRC has delivered a major step in the reform of the audit sector,” said Jon Thompson, chief executive of the FRC.

“Operational separation of the UK’s audit firms is just the first step on the journey to restoring trust in UK plc,” said Jon Holt, head of audit at KPMG, adding, “KPMG supports operational separation in the UK.”

The collapse of Carillion in 2018 sparked calls for an overhaul of the audit profession and an inquiry into KPMG, which had audited it for 19 years. Since then, the competition watchdog has recommended that the government introduce legislation to break up the Big Four. The FRC is also set to transition into a new, more powerful statutory regulator called the Audit, Reporting and Governance Authority.

Deloitte’s head of audit and assurance Stephen Griggs, said: “We welcome this clarity from the FRC on the principles of operational separation and will continue working with them to develop our plans over the coming months. We remain committed to playing our role in delivering change that embraces audit quality, improves choice and restores trust.”

>>> Europe : Brokers Upgrades & Downgrades - 6th of July 2020 V2(+)

>>> Up
* AB Foods Raised to Sector Perform at RBC; PT 2,200 pence
* Coca-Cola European Raised to Buy at ABN Amro Bank; PT $46.28
* Draegerwerk Raised to Buy at Bankhaus Metzler; PT 90 euros
* HelloFresh PT Raised to 58 euros at Bankhaus Metzler
* Maersk Raised to Buy at Deutsche Bank; PT 9,500 kroner
* Sixt Raised to Buy at Hauck & Aufhaeuser; PT 65 euros (+)
* Topdanmark Raised to Buy at SEB Equities; PT 307 kroner

>>> Down
* BHP Group PLC Cut to Neutral at Credit Suisse; PT 1,450 pence (+)
* Boohoo Cut to Hold at Liberum; PT 350 pence
* DS Smith Cut to Hold at Jefferies; PT 310 pence
* Energean PLC Cut to Sector Perform at RBC; PT 700 pence
* Mycronic Cut to Hold at Handelsbanken; PT 180 kronor
* Sobi Cut to Hold at ABG; PT 201 kronor
* Softcat Cut to Sell at Citi; PT 957 pence
* SoftwareONE Cut to Neutral at Citi; PT 24.40 Swiss francs
* SyntheticMR Raised to Buy at Pareto Securities; PT 310 kronor
* Vetrya Cut to Hold at UBI Banca; PT 4.30 euros
* VITA 34 AG Cut to Hold at M.M. Warburg; PT 15 euros (+)

>>> Initiation
* Cembra Money Bank Resumed Buy at Deutsche Bank
* Fluidra Rated New Buy at Mirabaud Securities; PT 14.57 euros (+)

>>> Call
* AB Foods Upgraded at RBC on Likely Stronger Primark Recovery
* BP, Eni, Repsol in Focus For Potential Dividend Cuts, RBC Says
* DS Smith Cut at Jefferies Amid Virus Costs, Lower Export Prices
* Geberit 2Q Shows Benefits of Geographical Exposure: Jefferies
* Rentokil CFO Departure To Be Taken ‘Relatively Badly,’ MS Says (+)