Stocks of German fintech company Wirecard AG (OTCPK:WRCDF;OTCPK:WCAGY) have been hit substantially after a series of negative news coverage alleging severe irregularities within the company's operations in Asia. The stock has lost more than 40 percent since the series of reports started making it the worst performing member of Germany's DAX index (DAXXF) so far in 2019.
The renowned Financial Times reports that the Asian division of Wirecard has been engaged in numerous irregularities. At the center of the scandal seems to be a senior manager by the name of Edo Kurniawan, who allegedly forged contracts with customers as well as fictitious transactions in order to gain licenses from regulators in Hong Kong. The newspaper also cites a report by Singapore law firm Rajah & Tann, which was hired by Wirecard in order to investigate allegations brought forward by an internal whistleblower. Furthermore, the Financial Times claim to have access to documents proving that senior Wirecard managers Thorsten Holten (head of treasury) and Stephan von Erffa (head of accounting) had knowledge of the matter.
Wirecard has announced its intention to take legal actions against the Financial Times which's reports the company denounces as "unethical."
But wait, have there not been similar allegations before? And did they not turn out to be entirely unfounded? As I have written previously, the company has been accused of a number of irregularities in the past. Those included money laundering, facilitating illegal gambling and corruption. The company has also been accused of manipulating its balance sheet before. The often obscure figures behind them regularly failed to deliver prove of their allegations. There have even been investigations of potential market manipulation by German prosecutors several times.
So why should this time be any different? First I would like to direct your attention to the fact that while in the past the allegations were published in reports by previously unknown research such as "Zatarra Research"; this time it is a report by the renowned Financial Times, a newspaper that is not exactly known for publishing unfounded rumors and wild speculation without diligent research. A newspaper like the Financial Times would surely not risk its reputation by publishing such report without giving it a good deal of scrutiny.
Also, the Singapore police has raided the local offices of Wirecard. While there have been official inquiries in the past, those where directed the other way. Again the Singapore police is not an organization that is known for starting a formal inquiry, let alone raid offices, without cause.
Wirecard offered its "full cooperation" with authorities. It remains to be seen what will be the outcome of the investigation(s), but it is at least my believe that the probability of the accusations being well founded is by far higher than it was in the case previous allegations against the company.
Of course the idea that the recent events might be "good news" sounds like a cynical joke at first. Yet just let me explain. Yes, if the allegations turn out to be true, Wirecard has a problem. But at least in that case it appears very likely that everything will come to the table in the nearer future. Plus, now investors are warned of the risk.
If, on the other hand, the further investigation shows that there were in fact no irregularities, investors might have the chance to acquire a piece of the now cleared company at a favorable price level. Wirecard has been reporting high growth (revenue plus 45.8 percent in the first half of FY2018) and high profitability (27.3 percent EBITDA margin for first half of FY2018). For the first six month of FY2018 the company reported an EBIT of €194.5 million ($220.5 million at current exchange rates), up 32.5 percent. Under the assumption that such numbers are legit, they are surely impressive.
All in all, I believe that unlike in the past, it seems as if the reports about alleged misconduct at Wirecard may very well be true. Of course in terms of criminal investigation the defendant must be granted the benefit of the doubt. When it comes to investing, however, doubt and uncertainty are risk factors that must be accounted for. In that regard Wirecard seems very risky indeed at the moment. Nonetheless, I will not deny the possibility of the accusations being unfounded. In that case the opportunity might arise to buy at an attractive price. In any case, I think that investors should keep an eye on any further development.
Disclaimer: All research contained in this article was done with utmost care. However, I cannot guarantee accuracy. Every reader is advised to conduct his own due diligence and research.
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