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Is Globo Plc A Value Trap Or Value Play?

Over the past few weeks, Globo (LSE: GBO) has become one of AIM’s most controversial companies. However, this isn’t the first time that Globo has attracted criticism. The company has been under fire for years now regarding its accounting policies. 

But after the release last night of a report from Quintessential Capital Management, which claims that a large portion of Globo’s business has been fabricated, it now looks as if Globo is in serious trouble. 

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The company has requested that its shares be suspended following the scathing report as management needs some time to put together a conclusive response to the accusations made.

Quintessential claims that there is:

“…overwhelming evidence suggesting the existence of what appears to us a large-scale conspiracy to deceive investors and creditors through pervasive and systematic accounting manipulation.

What’s more, analysis suggests that more than half of Globo’s business is spurious:

“While a minor portion of its business is authentic, the results of our investigation strongly suggest that at least 60% of Globo’s turnover is fabricated. The company’s alleged activities, in our view, suggest possible criminal behaviour and to cause its total demise if exposed.”

These are very serious accusations, and shareholders should be extremely concerned. There have been few cases where such damning claims have been made and the company has pulled through. 

Red flags

It seems as if the City has been wary of Globo for some time. The company’s recent failure to find buyers for a high-yield bond was a big red flag.

According to pension fund managers, the demand for high yield bonds has surged recently as the yield on more secure sovereign issues has continued to decline to record lows. With this being the case, it was pretty easy to see through Globo’s excuse that market conditions had prevented the company from selling its high-yield bonds. 

Further, since 2009 Globo’s revenue has grown at a compound annual rate of 35.3%, making it one of the fastest growing companies in London. But despite this growth Globo’s valuation has remained depressed, a strong indication that the City didn’t believe the company’s growth story. 

What’s next? 

Unfortunately for Globo’s existing shareholders, it looks to me as if the company is a value trap. It is rare that a company survives a bear raid like the one that was launched on Globo yesterday. The company’s reputation now lies in tatters, and even if management can prove that Globo isn’t a fraud, it’s going to be difficult for the group to find business partners going forward. 

Still, if Globo’s accounts are to be believed, the company had over €100m of cash in the bank at the end of June. This cash cushion will give the company some wiggle room, and the financial firepower to mount a comeback. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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