As far as I can ascertain, the latest share price sell-off is down to an announcement made by the company on Friday morning regarding the relocation of its operations to a resplendent Grade II-listed property, Eastleigh Court, near Warminster. The property is located 20 miles from the city of Bath. Thalassa has taken a 10-year lease on 10,000 sq ft of office space at Eastleigh Court. This is hardly 'new' news as the company had already announced its planned relocation in a trading update in July.
However, what would appear to have unnerved some investors is that Eastleigh Court was purchased by chairman and 12.5 per cent shareholder Duncan Soukup on 11 July through his own company Eastleigh Court Limited, so is a related party transaction through Aim rules. There was no mention of this separate transaction in the July trading update, nor for that matter in Thalassa's half-year results in mid-September. In fact, it only came to light in Friday's RNS announcement that confirmed that the company had entered a 10-year lease on the property on Thursday, 1 October.
A related party transaction
The property had been marketed by property firm Knight Frank in February this year at an asking price of £1.25m and the estate agent had invited final bids for the property by a deadline of 25 April. The National Trust had previously used the 13,400 sq ft premises as offices. In other words, Thalassa will be paying £120,000 of rent for a 10-year lease on around three quarters of the freehold property.
The directors, other than Mr Soukup by reason of his interest in the property, consider that the terms of these leases "are fair and reasonable in so far as its shareholders are concerned". They consulted with WH Ireland, Thalassa's nominated adviser, when making this decision. Graham Cole, a non-executive director of Thalassa said: "We are delighted to have entered into the leases on this new campus which was chosen after an extensive search throughout the South West of England. The location and proximity to major transportation hubs will be key to attracting new staff and to maintaining the company's growth over the coming years."
That may indeed be the case, but the obvious question shareholders will be asking themselves is why didn't Thalassa simply buy the property itself? The company had a low yielding cash pile of £13m at the end of June, so assuming the property did go for close to the asking price of £1.25m, then Thalassa had ample funds to make a purchase. Alternatively, a property purchase could have been part funded on a commercial mortgage whereby the interest payable would have been significantly less than the £120,000 annual rent bill Thalassa is now faced with. Moreover, shareholders and not Mr Soukup would have benefited from any upside in the property's value.
It's also fair to suggest that the value of the property with the benefit of a tenant at the aforementioned rent is worth considerably more than the £1.25m asking price now that Thalassa has signed a 10-year lease. That's worth thinking about because Thalassa could have alternatively bought the property outright and then marketed the freehold on a sale and lease back agreement in the property investment market. That way the company could have made a profit from the purchase simply by signing a 10-year lease at a £120,000 rental and one that would have benefited all shareholders, and not just Mr Soukup.
Poor communication
To say communication from the company has been poor on this matter would not be an understatement, so it’s hardly surprising that investors have been unnerved post Friday's announcement. Furthermore, although the directors feel the related party transaction is fair, the fact that Thalassa has a cash rich balance sheet, and undoubtedly access to mortgage finance, raises questions about this transaction even if the property is the ideal place to base Thalassa's operations.
I am not comfortable about this at all, and would understand if other shareholders felt the same way. So although Thalassa's shares are trading well below book value per share of 131p, and net cash accounts for half the share price, I feel it is going to take some considerable time to repair the damage caused by the nature of the Eastleigh Court transaction, coming so quickly after the revenue warning. That's perhaps one reason why the shares are now trading on 11 times earnings estimates for 2014. In the circumstances, I have decided to cut my losses and exit the holding with market makers offering to buy them back in the market at 114p.
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
