Fool's Eye View

[ September 22, 2000 ]

Digging into Wiggins

By Maynard Paton (TMFMayn)

Carburton Street, London -- Everybody should know about the dangers of blindly following stock market pundits. But unfortunately, for some investors, the lessons may have to be learnt the hard way.

Take Wiggins Group (LSE: WGG), the property developer. The investment "story" behind Wiggins concerns its "PlaneStation" operation. Essentially, the group acquires, develops and then operates out-of-the-way airports. The plan is to eventually create a network "that will add up to more than the sum of the individual parts". The group's operation at Manston, Kent, is the centrepiece of a 4-strong international airport group.

If you peruse the Wiggins discussion board, you'll quickly see that the company has constantly been a tipster's favourite. With all of the glowing attention given to the company, I obtained the last couple of annual reports to see what all the fuss was about.

However, from briefly looking through the company's latest accounts, I quickly discovered that I don't share any of the tipsters' enthusiasm shown towards Wiggins. Quite the opposite, in fact.

Dangerous words

Similarly to patientman, I "could not believe the first few pages I read from the Chairman's statement", either. But unlike patientman, who after reading the annual review, anticipates "a red Ferrari, a couple of dolly birds and lots of other things money can buy you when you become rich," I can only visualise investment ruin. Why?

Because the latest Chairman's statement (covering the year ending 31st March 2000) includes this phrase:

"We have recently been in discussions with The Financial Reporting Review Panel who raised issues about the assumptions we had made in relation to certain items reported in our accounts for the year ending 31st March 1999."

Early recognition

The above discussions with the Review Panel stem from the company's agreement with MEPC (LSE: MEPC) to help develop 350 acres at Manston. Under the terms of the contract, MEPC wasn't obliged to develop any part of the land. As and when MEPC chose to "draw down" and develop parts of the site, Wiggins would be due a payment.

But in the 1999 accounts, Wiggins recognised the full transfer of 150 acres to MEPC, generating revenues of £15m for itself. For the latest 2000 accounts, Wiggins had intended to report the transfer of the remaining 200 acres, equating to £20m. These two declarations would have been fine had MEPC taken up its option for the full 350 acres. But the 350 acres were far from all being in MEPC's hands. Essentially, Wiggins was reporting income that it just hadn't earned.

Enter the Review Panel and a restatement of Wiggins' accounts. The 2000 annual report now recognises the Manston revenue as and when the land is taken up by MEPC. The financials from prior years have been restated accordingly, and as we'll see, the overall adjustments are significant.

And there's more...

The participation of the Review Panel in drawing up Wiggins' 2000 accounts also highlighted another past reporting misdemeanour.

Wiggins bought a 174-acre site at Fairfield, Hertfordshire in 1993. Contracts for the sale of this land were entered into with various housebuilders during 1997 and 1998. Subsequent planning inquiries and the resubmission of planning proposals have meant the land has still to be sold on. And until satisfactory planning approval is gained, Wiggins won't receive a penny from the housebuilders.

So, it's very illuminating to find Wiggins now declaring this in the latest set of accounts:

"The recognition of revenue from Fairfield in earlier years has been reversed and that recognition of revenue has been restated in the Accounts for the year ended 31st March 2000."

So even before Manston and MEPC, Wiggins was recognising land-sale revenues in its accounts years before the final completion of the relevant contract. And not only that, but Wiggins still continues this dubious accounting practice today, albeit in a watered-down form.

Old habits die hard

External planning consultants are now said to be "virtually certain" of the go-ahead for the development at Fairfield. With the Planning Inspector also "indicating" that final planning permission will be granted, Wiggins now finds it "appropriate" to recognise the Fairfield profit in the accounts for the year ending March 2000.

Remember, Wiggins will only ever be due any proceeds from the Fairfield project when final planning permission has been granted. And it's "anticipated" that the final planning approval for the Fairfield site will be made next month...

Unsurprisingly, Wiggins declares that the revised Fairfield accounting treatment is "appropriate... but has not yet been resolved with the Panel".

Accounting for growth

Here are the Wiggins financials, before the Review Panel intervention...

Year to 31st March     1996    1997    1998    1999    2000

Turnover (£m)           5.9    18.7    11.2    21.8    49.8
Pre-tax profit (£m)     1.0      4.9     5.1    12.1    25.1
Earnings per share (p) 0.2      0.7     0.6     1.2      2.9

Year to 31st March     1996    1997    1998    1999    2000

Turnover (£m)           5.6     1.6     3.6     0.2    49.8
Pre-tax profit (£m)     0.8    (6.0)   (3.8)   (4.4)   25.1
Earnings per share (p)  0.2    (1.1)   (0.6)   (0.6)    2.9

In short, the accounting changes forced upon Wiggins have, at a stroke, caused £45m of revenues and £36m of pre-tax profit to disappear from the four years up to 1999.

But the accounting restatement gives Wiggins a second bite of the profit cherry. After originally recognising the profits too early, but subsequently adjusting the historical records appropriately, Wiggins is now free to recognise all the income for a second time, but this time on the correct basis.

Thus the results for 2000 now include £31m of turnover and £25m of pre-tax profit, relating to the revised (and still somewhat dubious) accounting treatment of the Fairfield project, that had originally been accounted for pre-2000. The remainder of the "disappeared" turnover and profit will be recognised in the years to come.

Indeed, it appears the Review Panel's accounting changes couldn't have come at a better time for Wiggins. If the changes hadn't been implemented, then Wiggins would have only reported a pre-tax profit of £25,000 for 2000. Unless of course, it had another source of income up its sleeve....

Summary

The summary is simple. Any company that has to perform accounting adjustments on this scale has to be treated with extreme caution.

For Wiggins, Foolish investors should forget about dreaming about future revenues from Manston airport. Instead, the issue of management credibility is far more important. Their consistent inability to prudently report the company's financial health should be the only warning needed for Fools to stay well away from the company.

Where Next?

Wiggins discussion board