Mirabaud's Toby Clothier is one of the rare skeptical analysts who questioned Wirecard before the German payments firm came under regulatory scrutiny. He told finews.asia what tipped him off.
Toby Clothier, when did you and your colleague Neil Campling set a target price of «zero euros» on Wirecard?
At Mirabaud GTS [Global Thematic and Strategy], we actually prefer to have «Buys» or «Sells» on stocks until they are no longer interesting, instead of price targets where «events» can get in the way. We made an exception with Wirecard, in April 2019.
Why?
Many reasons but ultimately it came down to a vast array of red flags suggesting that their licenses would eventually be removed because they were in breach of the terms of engagement with either regulatory authorities or card issuers, or more likely both.
«Surprised Wirecard still has a license»
Without regulatory permission or partner status with Visa or Mastercard, it is literally impossible for a payment processor to function. In fact, they have been in breach of several Visa and Mastercard pre-conditions already for a few months. We are genuinely surprised they still have an operating license.
What about Wirecard’s banking license?
The same applies to the bank. There are dozens if not hundreds of complaints, breaches, instances of funds disappearing. Their activities seem to lead to much unhappiness on the part of all those that they deal with.
Others on the sell-side were euphoric about Wirecard stock, with targets as high as 265 euros. Was there pushback from clients who missed out on the stock’s rise in 2017 and 2018?
Our first note coincided with Wirecard’s admittance to the DAX in September or 2018. We did not feel that the stock would stand up to the greater scrutiny that membership on Germany’s blue-chip index brought with it.
You and Neil Campling have been vocal on other big fraud cases. What do they have in common?
Almost all have ended badly. Some are quantitative – high gross debt, a large percentage of CEO's compensation in stock, and strange trends in margins, for example.
With Wirecard, certain «soft» factors also seem to have jarred you.
One of the more qualitative observations is the tendency of the CEO to use certain buzzwords repetitively in an attempt to create subliminal messaging around the product. Often attempts to sound scientific can back-fire – the result is just nonsensical gobbledygook.
You ended up counting how many times Wirecard CEO Markus Braun used the word «strong».
There were several conference calls where he said «strong» over 40 times. Other favorites included «AI,» «fintech,» and «B2B2C.»
«Saying 'ecosystem' every ten seconds doesn't make fintech»
Whilst this can create the aura of sophistication, saying «B2B2C» and «ecosystem» every ten seconds does not make you a fintech, especially when you’re spending just five percent of sales on research and development. They spent just 100 million euros on research and development, versus $2 billion by rival Paypal.
What’s the lesson for investors in fintech stocks?
We are reluctant to give investors lessons on anything. What has worked for us in the past is that if the CEO's comments are riddled with buzzwords and make absolutely no sense to us, there is likely a big problem somewhere.
Why does fintech lend itself to fraud?
Mainly due to the ethereal nature of the product and the large numbers involved. A fintech with poor controls and a compliant, absent, or even incompetent auditor is a perfect breeding ground for frauds of this kind.
The company’s CEO of ten days, a compliance lawyer, says Wirecard’s fraud should have been detected relatively easily. Why did it take years?
It is a mystery, but there were several clear warning signs. In 2019, EY Singapore put a Disclaimer of Opinion on their accounts in Singapore, Wirecard’s regional headquarters, for 2018 and all previous years, and stopped working with them.
«Investors believed the company – not the warning signs»
The Singapore police have been investigating them since February 2019. The «Financial Times» in particular has been pointing out many strange features of the company for five years. An external legal report commissioned by Wirecard itself contained dozens of alarming details. Investors however chose to ignore all of these warning signs and instead to believe the company.
Toby Clothier is head of Mirabaud Securities’ Global Thematic and Strategy team in London. He and Neil Campling, head of the Swiss bank’s technology, media, and telecoms team, were rare skeptics of Wirecard before an accounting scandal at the German payments firm blew open last week. Clothier and Campling have worked together for nine years: at Mirabaud for the last two, and previously at aviate Global LLP.
