UK Edition
We’re breaking from our usual Friday routine this week – normally it would be the Income Portfolio’s turn – because of a development at one of our inheritance tax stocks a few days ago that may have worried some readers.
The company is Naked Wines, the former Majestic, and it announced to the stock exchange on Monday that its shares had just been made available to investors in America via a trading platform called OTCQX Best Market.
This was potentially alarming news for savers here who held Naked’s shares for the IHT break because one of the conditions for that break is that the company concerned cannot have its shares traded on two exchanges.
Naked Wines’ announcement said nothing about this – in fact many firms are reluctant to enter into any kind of discussion about their shares’ qualification for “business relief”, the official name for the tax break, because the rules are complex and in any event qualification can never be certain for a particular individual because it depends on the company’s circumstances at the time of his or her death, not at the time the investment is made.
We decided to check the significance of the new trading facility with Investor’s Champion, whose Aimsearch service assesses the likelihood of Aim stocks to qualify for the IHT exemption.
Investor’s Champion says in its view, trading of a company’s shares on a platform such as OTCQX would not be deemed a “listing” by HMRC. Had Naked Wines given its shares a secondary quotation on the New York Stock Exchange, for example, it would have counted as a second recognised trading facility and the IHT break would have been lost.
The strange, counterintuitive thing is that even an Aim quotation does not, in HMRC’s eyes, constitute a “listing”. This is why qualifying Aim shares can come under the business relief umbrella along with more obviously unlisted assets such as small family businesses or farms. Listed assets, in this sense of the term, do not qualify for the IHT break.
Hence we can rest easy that Naked Wines’ shares should continue to qualify for the inheritance tax break.
Should we continue to hold them? They have gained 82.5pc since we added them to our Inheritance Tax Portfolio in June 2018. They fell sharply last month after Naked’s annual results were published, although they have since recovered.
We first tipped them in November 2016 after a conversation with Thomas Moore, who holds them in his Aberdeen Standard UK Income Unconstrained fund.
He said this week: “Investors were a little thrown last month by Naked’s decision to increase investment in growing the business, pushing back the timing of its breakeven. But its management and some of its biggest shareholders are based in America, where its strongest growth prospects are, and giving priority to growth over quick profitability is very much the American way – it’s just not so well appreciated by investors on this side of the Atlantic.”
Those growth prospects are significant: prohibition-era alcohol distribution rules make incumbent wine retailers vulnerable to disruption, and Naked’s 4pc share of the market – and 20pc of the direct market – in a couple of states shows that its strategy can work.
“Investors may have to lengthen their time horizon and any business is harder to value in the absence of current profits,” Moore says. “But Naked could end up as a very substantial player. I would say the US opportunity for Naked is enormous – there is so much ‘white space’ to go for.”
He adds that customer numbers are rising and they are each spending more on average, while costs are growing more slowly. The proportion of customers retained from one year to the next is likely to fall from more than 80pc towards 75pc because inevitably some who signed up during lockdowns will leave, but the effect should be temporary.
“Naked has lots of cash; it still has the windfall from the sale of the Majestic chain of shops,” Moore says. He says he expects 20pc-a-year growth in sales over the medium term and operating margins of 10pc.
“If it is successful in the US it could well be bought as this is a business that would be hard to develop from scratch,” he adds. “Even Amazon would struggle – a lot of detail is involved in getting this right. I am pretty relaxed that Naked Wines is in a good place.”
Questor says: hold
Ticker: WINE
Share price at close: 836p
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