Interactive Investor Acquired

Interactive Investor have announced that they are being acquired by Abrdn, reportedly for £1.5 billion. Interactive Investor have been providing a popular and low-cost share dealing platform for private investors and have been owned by JC Flowers recently. Interactive acquired The Share Centre a few months back and now have about 400,000 clients.

At least it looks like Interactive Investor clients won’t have to learn their way around a new platform as there is a commitment to keep the business as a separate operating entity with existing management and the same pricing while Abrdn have relatively few direct retail clients. Abrdn are a large fund manager though so no doubt we will see the Interactive Investor platform promoting their funds in due course. But any changes might be of concern to existing Interactive clients.

The comment published in the FT is relevant: “The most successful platforms in recent years have been those independently owned, said David McCann, analyst at Numis. He said creeping bureaucracy, lack of management focus and the worst sin of trying to cross-sell products from the parent group to platform customers amount to very real risks for the success of the tie-up”.

That pretty much sums up my view of the likely benefits or disbenefits of this merger although clearly Abrdn have larger financial resources that might help Interactive Investor in an increasingly competitive platform world. But will large company management really understand the needs of retail investors?

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Bitcoin Mania

Two recent events tell me that the mania for Bitcoins and other digital currencies is alive and well, while I am still stuck in the dark ages and prefer to invest in companies that produce something.

On the way home by train from central London today sat next to me were two young ladies obviously returning from doing some Christmas shopping in the West End. They were discussing what to give to young children for xmas. One mentioned that they knew kids who had been given Bitcoins as an xmas present.

Secondly when I was in my local bank last week, someone was in there to transfer cash to a foreign based coin exchange or broker. The counter clerk queried it but let it go through.

The FCA banned the sale of crypto-derivatives to retail customers in October 2020 and later issued a warning to retail investors of the risks associated with other cryptoasset-related investments, stating that those who choose to invest should be prepared to lose the full amount of their investment. But are they really doing enough to educate the general public about the risks associated with such assets? I don’t think so.

 But giving Bitcoins to young children may of course be very educational. They might learn that when something is valued not on any intrinsic merit or future income potential but on what speculators are willing to pay for it then it’s going to be a very volatile asset.   

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Stock Market Investing – It’s a Doddle

An amusing announcement today was by AJ Bell. They are launching a new app-only investment platform to be called “Dodl”. Clearly they wish to suggest that stock market investing is a doddle when I think it is anything but. After 30 years of investing, I still find that some of my new share picks don’t turn into profitable ones. There is no simple formula for picking successful investments, but experience does seem to help a lot.  They should have called the app “Tricky”.

AJ Bell clearly intend to attract new investors by making stock market investment appear simple and fun. To quote from their press release: “Investing needn’t be scary, with Dodl’s friendly monster characters on hand to guide people through the application process, as well as providing information to help people make their investment decisions”. To make it even more attractive the new app offers zero commission trading but there will be an annual charge of 0.15% of the portfolio value for each investment account with a £1 per month minimum charge.

This may prove a competitive threat to other investment platforms and encourage even more consolidation among providers. And it’s clearly a response to the zero commission platforms such as eToro that have been attracting new investors of late.

Is this a positive move? Or will it encourage people to become stock market traders and speculators rather than long-term investors? If you make investment too easy, i.e. to be done at minimal cost and without prior thought or research is that not positively dangerous?

I also feel it could be that these new low-cost platforms might be gaining business without a sound understanding of the real cost of doing business, i.e. they are using it as a loss-leading marketing approach in the hope of making money later. That was the reason many alternative energy suppliers recently went bust.   

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Electric Vehicles, Pod Point IPO and Bulb Rescue Cost

If the Government has its way, we’ll all be driving electric cars (EVs) soon. One of the concerns of drivers though is they might run out of battery power so the provision of chargers is of key importance in driving acceptance of electric cars.

There is clearly a big potential market for chargers, not just in homes but also in public places, at office car parks, supermarkets and other venues. One of the providers of chargers is Pod Point Group (PODP) who recently undertook a public stock market listing (IPO). The prospectus they issued (see link below) gives a very good overview of the market for electric vehicles and the charging infrastructure in the UK.

Pod Point was founded in 2009 and has installed over 100,000 charge points mainly in the UK. There are government grants available (OZEV) for home installations although those are likely to be withdrawn or altered from 2022. The government is also funding from 2022 large on-street charging schemes and rapid charging hubs across England. Meanwhile car manufacturers are focussing on production of new electric only (Battery Electric Vehicles – BEVs) and hybrid models. Some 6.6% of new vehicles sales were EVs in 2020 and by 2040 it is estimated that 70% of all vehicles on our roads will be EVs.

Chargers fall into two main categories – AC and DC with the latter providing more rapid charging. Home charging is typically via slow AC because UK homes do not have 3-phase electricity supplies. There are several different connector types. Pod Point estimate they have 50-60% of the UK home charge points and 29% share of public installations. But there are a number of competitors include BP Pulse. Petrol station forecourts are one location where chargers are being installed but it is unclear where the dominant charging location (home, office, etc) will be in future.

Those people with homes with no off-street parking will need to charge at public locations unless viable “pavement” chargers are developed. London-based Connected Kerb plans to install 190,000 on-street chargers by 2030.

Pod Point owns some installations under commercial arrangements with venue locations and that includes 396 Tesco sites where slow chargers are installed. Is that to encourage shoppers to spend more time in the store while their vehicle is recharging one wonders?

Pod Point doubled its revenue in 2020 and more than doubled its revenue in the first six months of 2021, but still made a large operating loss. The market cap of Pod Point at the time of writing is about £380 million.

How the market for the provision of EV chargers will develop is unclear and there are the usual numerous risk warnings in the prospectus. Government interference in the sector is clearly one risk and when a market is growing rapidly there are often folks willing to plunge in regardless of short-term profitability. The big oil companies are also moving into the sector and might provide significant competition.

An example of the problem caused by misguided Government interference in free markets is the collapse of Bulb which is apparently going to cost £1.7 billion to keep it afloat and ensure customers remain connected to gas supplies. It could be more if the market price of gas continues to rise. The cost to the Government will mean it is one of the largest bail-outs they have had to provide since the banking crisis in 2008, and they are unlikely to get their money back in this case.

As for most IPOs I will be avoiding investing in Pod Point until the company is clearly profitable and its market more established but the company has certainly come a long way in a short period of time. Trying to forecast the future profitability of Pod Point is exceedingly difficult – there are just too many variables.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

Pod Point Group Prospectus: https://investors.pod-point.com/prospectus

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Bulb Collapse, Telecom Plus Results and FCA Globo Action

Yesterday energy supplier Bulb collapsed and was put into Special Administration. Bulb has 1.7 million customers and is the largest of 20 alternative energy suppliers to go bust recently. Most of their customers have been taken on by other suppliers but apparently nobody was willing to take on Bulb’s so effectively the company has been nationalised.

These companies have all been hit by the rapid rise in gas prices while the price cap imposed by Ofgem meant they could not raise their prices to their customers. Established suppliers such as Telecom Plus (TEP) consistently complained that the newer energy suppliers were building a customer base by selling at less than cost and the irrational price cap proved to be their undoing. Forcing businesses to fix their customer prices when input prices are based on market whims is a recipe for financial disaster in any market.

Coincidentally Telecom Plus, which I hold, published their half-year results this morning. They are a likely beneficiary from suppliers disappearing from the market. They reported “Net customer growth in October of over 15,000 and they are expecting around 10% growth in customer base during H2 with double-digit annual percentage growth thereafter”. There is always someone who benefits from financial disasters.

They also made these comments: “Over twenty energy companies have ceased trading since the summer, leaving over two million customers dependent on the safety net provided by the market regulator, Ofgem, to maintain their supplies and protect their credit balances through the Supplier of Last Resort (SOLR) mechanism.  These corporate failures take the total number of suppliers that have exited the market in the past five years to over 50, with further failures expected over the coming months.

Whilst primarily blamed on rising wholesale prices, this catalogue of failures, and the associated billions of pounds of costs that will ultimately be borne by consumers, reflect a regulatory regime that encouraged a clearly unsustainable ‘race-to-the-bottom’ approach to competition.  The resultant price war has eroded consumer trust and caused significant financial detriment, as the cost of these failures will need to be recouped through higher energy bills over the coming years.

Ofgem’s recent open letter to energy suppliers is therefore a welcome statement of intent to reform the regulatory framework towards one that genuinely fosters sustainability, investment, good service and fair competition amongst properly resourced and differentiated suppliers.

It is clear that the retail energy market has undergone a paradigm shift, bringing an end to the unsustainable practices which had become widespread over the last seven years of selling energy below cost to attract new customers, using customer credit balances as working capital, and failing to accrue for regulated renewable obligation payments.

In that environment, it stands to reason that an established, well-capitalised energy supplier benefiting from a sustainable cost advantage that is derived from bringing consumers a highly differentiated ‘all your home services in one’ proposition, should thrive.   As the dust settles on the prolonged energy market price war, we believe we are better positioned than ever to grow our market share significantly over the coming months and years”.

Other news today is a report in the Financial Times that the FCA have filed an action in the High Court against the former CEO and CFO of Globo (GBO). That company collapsed in 2015 after the accounts were shown to be a complete work of fiction with the claimed cash on the balance sheet non-existent and revenue also fictitious. It was a similar case to the more recent one of Patisserie Valerie also audited by Grant Thornton. The FRC declined to take action over the audit of Globo but it is good to hear that after so many years the FCA is finally taking some action.

As a former shareholder in Globo I have an interest in this matter and did provide some information to the FCA but there has been no contact from them since 2019. I am trying to find out more about the nature of the legal action now pursued (there is nothing on the FCA web site).  

Globo well demonstrates the weakness of UK audits, the poor enforcement by the FRC and FCA, the lack of transparency over what they are doing and the length of time it takes for those bodies to take action.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Transport Crisis in London

Both Sadiq Khan, Mayor of London, and Andy Byford, London Transport Commissioner, have warned that unless they get more money from the Government then there are going to be savage cuts in public transport and on major infrastructure projects. The latter might include the required repairs to the Rotherhithe Tunnel, the A40 Westway and A12 Gallows Corner flyover leading to their closure.

Some 100 bus routes face the axe and frequencies may be cut on 200 other routes. Other proposals are no more electric buses, no more step-free stations, no more “Healthy Streets” cycling and walking schemes and no more 20mph zones or safer junctions.

Now some readers might welcome some of those things and clearly the Mayor is trying to scare the Government into providing more funding within weeks. But some of those suggestions like closure of the Rotherhithe Tunnel and the Westway would be disastrous for the functioning of the road network in both east and west London.

How did TfL get themselves into such a mess? It all stems from the policies adopted by Ken Livingstone which was for massive subsidies to buses and commitments for large expenditure on Crossrail and other underground projects. The bus network has certainly been greatly expanded but at a cost that was never justified and Crossrail has been a financial disaster. Over budget, over schedule, and never justified on a cost/benefit basis. The Mayor was relying on income from it to cover TfL’s future budgets which it never has.

Boris Johnson never tackled the problems created by Livingstone when he was Mayor while Sadiq Khan has actually made matters worse by spending enormous amounts of money on cycle lanes, LTNs, and other schemes that have damaged the road network. He has also encouraged the growth in the population of London while the infrastructure never kept up with it despite massive central Government funding.

A report in the Express shows that £515 more per person was spent on transport schemes in London than on the North of England. A new report from the IPPR North think tank has published an independent analysis of transport spending over the past decade. Between 2009/10-2019/20, the North received just £349 per person in transport spending. In comparison, the UK as a whole received £430 per person, while London received a staggering £864 per person. Where did it all go one might ask? On pointless and generally uneconomic schemes not justified by any cost/benefit analysis is the answer.

The daft transport schemes such as the Congestion Charge and the ULEZ have actually encouraged people to move out of London and the cuts to public transport that are proposed will expedite that trend. With falling income from bus and tube fares already caused by the pandemic, the outlook is certainly bleak. But failing to maintain the infrastructure such as bridges, tunnels and flyovers while the Major prefers to spend money on other things is surely a sign of gross incompetence.

London needs a new transport plan where expenditure is matched to income and needless subsidies removed. In other words, people should pay the cost of the trips they take on public transport and free riders should be stopped. But will a socialist Mayor ever take such steps? I doubt it. So London is likely to go into further decline and more people will move out.

But London is at the heart of the UK economy so there is some justification for central Government stepping in once again to reform London’s governance. We need less populism (which generally means hand-outs to win votes) and more financial acumen in the leadership. Certainly the current arrangement where you have a virtual dictator in the role of Mayor and a toothless London Assembly is not working.

The key to improving the London transport network is not to have it all (both public and private transport) under the control of one body (TfL) which leads to lack of competition and perverse incentives. For example, encouraging cycling to relieve pressure on public transport while causing more road traffic congestion and introducing schemes such as the ULEZ to help subsidise public transport while increasing the cost of private transport.

Perhaps we need a new Dr Beeching to put the London transport network back into a cost-effective structure as he did for British Rail. But at least the Government seems to have taken some rational decisions by cancelling the eastern link of HS2 to Leeds. Just like Crossrail in London, HS2 was never justified in terms of benefits achievable and the money would have been better spent on smaller projects. But politicians love grandiose schemes. Reality seems to be finally sinking in on the national scene even if not yet in London.

Roger Lawson

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Two High Fliers Back Down to Earth

This week saw a couple of high-flying digital automation suppliers move back into more realistic pricing levels. On Tuesday DotDigital (DOTD) announced their preliminary results for the year to June. The share price fell sharply on the day and is now down over 25%, possibly prompted by negative comments on Stockopedia.

I won’t go into detail on the issues because this blog post would otherwise be a very long one. But I did attend the results presentation on the Investor Meet Company platform this morning when some of my questions, and others, were covered.

One question raised was about the reporting of “discontinued” revenue from the Comapi business. It was stated that this was definitely closed down completely by June this year so won’t appear in future. There was also concern that SMS business was impacting revenue and profits but it was stated that it was not cannibalising email revenue. But SMS business is at lower margins and there was clearly a spike last year in SMS business (if you are signed up for NHS services you will have realised that they are now tending to use that communication channel which I find quite annoying).

There was a good review of the competitive landscape and it seems there is good growth coming via partners with “connectors” such as Magento, Shopify, Big Commerce and MS Dynamics.

In summary my comment would be that I think this is still a fundamentally sound business which can grow some more, but I would prefer to see the accounts presented in a simpler way. However the share price had grown very rapidly in the last year and in my view was overvaluing the business. It’s now at a more realistic level.

The other company whose share price has taken a big knock is GB Group (GBG). Yesterday they announced a share placing at a price of 725p to raise money to enable them to acquire a similar US business. It looks to be a sensible acquisition. But the share price was at a discount of 17% on the market price and involves substantial dilution of existing shareholders.

Again I would suggest that this has reset the share price to a more realistic level. Retail investors may be able to participate via the Primary Bid platform.  

As I hold shares in both DotDigital and GB Group, these events have not done wonders for my portfolio valuations but I had been reducing my holding in these companies (top slicing) in recent months as the valuations did seem to be departing from reality. They are now back down to earth.

The Covid epidemic has certainly driven more digitisation of processes which both companies have benefited from but the valuations of such businesses have become strained in my view. Can the growth continue at the same rate in the next couple of years? Perhaps so but that is not certain.

Readers should of course form their own view on the valuations of these businesses and not rely on my comments. But they are both key players in the automation of marketing and financial services so are well placed for the future.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The Death of Coal Mining and the Nuclear Alternative

Boris Johnson has said that the Glasgow climate deal is a “game-changing agreement” which sounds “the death knell for coal power”. Let us hope so. My father worked down a pit in Nottinghamshire in his early life and was all for replacing coal power stations by nuclear power. Coal mining is not just a great creator of pollution but is also positively dangerous for the miners.

China is one of the largest consumers and producers of coal and in 2019 there were 316 deaths of coal miners in that country. That was an improvement on previous years but it is still a horrific number.

Nuclear power is considered to be dangerous by some people but in reality it is remarkably safe. For example the Fukushima event in Japan in 2018 only directly caused the death of one person. For a very good analysis of the safety of various energy sources go here: https://ourworldindata.org/safest-sources-of-energy

One problem with nuclear power is that it tends to be produced in plants that have very high capital costs and take many years to build. They are also vulnerable to faults when in operation. This often results in very expensive costs in comparison with coal or gas. But that might be solved by the development of small modular reactors (SMRs) where Rolls-Royce (RR.) has a potential technology lead from their experience in building nuclear reactors to power submarines.

They have recently obtained more funding from the Government and from partners to develop this business – see the Rolls-Royce press release here:  https://www.rolls-royce.com/media/press-releases/2021/08-11-2021-rr-announces-funding-secured-for-small-modular-reactors.aspx

Will that enable Rolls-Royce to recover from the dire impacts of the Covid epidemic on its aero engine business? Perhaps but not for some years in the future I would estimate. Developing new technology and new production methods is always vulnerable to hitches of various kinds which tends to mean that it takes longer than expected.

There are of course alternatives to nuclear power such as wind power, hydroelectricity and solar. But wind power is intermittent thus requiring investment in big batteries to smooth the load and in the last year there was less wind that normally expected in the UK. This has impacted the results of companies such as The Renewables Infrastructure Group (TRIG) and Greencoat UK Wind (UKW).

Which technology will be the winner in solving the clean energy problem is not at all clear but I would bet that coal is definitely on the way out for electricity production although it might survive for use in steel manufacturing. UK coal fired power stations are scheduled to be closed down by 2024 and already the UK can go for many weeks without them being in operation.

Whether you accept the Government is right to aim for net zero carbon emissions by 2050 or not, we must surely all welcome the replacement of coal power generation by other sources.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Crown Place VCT AGM Report and AIC Survey of ESG Interest

I attended the Crown Place VCT (CRWN) Annual General Meeting today via the Hopin platform. This worked well with no technical hitches.

I have held the shares in this company for a very long time. It was one of those VCTs with a difficult history originally when it was formed from three Murray VCTs. After Albion took over management it has had a good track record. Total return in the last 5 years has been 14.0%, 14.6%, 11.2%, -0.6% and 15.9% last year.

Emil Gigov, representing the manager, gave a useful presentation. Like some other VCTs I hold, it has been focussing on late on software, fintech and digital health companies which now comprise 77% of the portfolio (excluding cash) and has been selling off its asset-based investments such as care homes. It is holding a large amount of cash in the portfolio (35% of assets) and this raised a question from the audience. Why so much cash? Answer was primarily because they need to keep that to exploit future opportunities, particularly follow-on investments to existing holdings.

I asked a question which I submitted in writing during the meeting which was: “What do you think of the Chancellors announcement that all listed companies will have to state how they expect to achieve net zero, enforced by regulation?”. But I did not get an answer.

All resolutions were passed with over 90% of support. In summary there seemed to be no contentious issues at this VCT and charges are reasonable (although raised to 2.6% of assets last year due to a big performance fee).

Note that an interesting aspect on the question I posed was revealed in a survey that the AIC has published of private investors. This is what it said: “When asked what was important to them in choosing an investment, respondents ranked ESG as the least important of five factors. Among all respondents, the most important consideration was an investment’s performance record, followed by fees and charges, the fund manager’s reputation, and the asset management company’s reputation.

But one female respondent aged 59 said: ‘In my personal life I do give consideration to these things, I drive an electric car, I have a plant-based diet, I definitely have quite strong feelings about that – but hand on heart when it has come to my investments, the first thing I would look at is returns.’

ESG is more important to women than men, and more important to investors under 45 than those over 45”.

The AIC don’t give the actual numbers who responded so as investors tend to be male and over 45 perhaps this affected the outcome. Such investors are less likely to adopt extreme life styles I suggest.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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COP26, Regulatory Arbitrage and Greenwashing

COP26 finished last week and many readers may have lost interest in the issues it discussed long before it closed. There is just so much one can take from the scaremongers of global warming when most of us have more immediate concerns about health and wealth. But there was one announcement by Chancellor Rishi Sunak that could be seriously damaging to your wealth in the next few years.

This was his announcement that the UK will be the world’s first net zero financial centre. This will not just be political gestures but he is proposing the following to quote from his Treasury statement: “Under the proposals, there will be new requirements for UK financial institutions and listed companies to publish net zero transition plans that detail how they will adapt and decarbonise as the UK moves towards to a net zero economy by 2050”.

“To guard against greenwashing, a science-based ‘gold standard’ for transition plans will be drawn up by a new Transition Plan Taskforce, composed of industry and academic leaders, regulators, and civil society groups”.

In other words, this will not be another “greenwashing” exercise but impose specific obligations on companies. The fact that meeting net zero carbon is an impossible task for many companies in any realistic timescale it seems is likely to be ignored. Even attempting to meet that target will impose enormous costs on companies even those who are not big generators of carbon emissions. If you extend it to Scope 3 emissions (those include all indirect emissions that occur in a company’s value chain) then the reach will affect all sectors of the economy.

This will certainly put the UK in the lead in the attempt to restrict global warming whether you believe it is practical or not. But if such regulations are introduced in the UK one can imagine exactly what will happen as it seems unlikely that other major economies will follow that lead. China, the USA, Russia and India are very unlikely to impose such draconian measures. As many UK listed companies have an international focus they have no great need to be listed in the UK. They could just as easily be listed in the USA or other countries with more friendly or easy-going regulatory frameworks.

You might think this is just an attack on oil/gas and mining companies but it will have a much wider impact in reality. For example, one of the big consumers of oil are ships transporting goods around the world so anyone importing products for sale, such as retailers, would need to persuade the shipping companies to avoid using oil.

One thing is certain. Companies such as BP and Shell may simply consider that it is easier to move their listing to another jurisdiction or accept a bid from a private equity player who does not have concerns about their environmental credentials.

This is what Jeremy Warner had to say in the Daily Telegraph: “However much we might wish it otherwise, oil and gas will long remain our primary source of life enhancing energy. And yet the industry is being driven underground by politicians and regulators too cowed to stand up to the hysteria of the climate change activists. The enemy within is almost as bad as the holier than thou pressures from without; oil company boards, together with those of their bankers, are these days stacked with well meaning do-gooders more focused on bowing to the campaigners than the demands of shareholder value”. If you are a shareholder in BP or Shell (I am not) you may sympathise with such comments.

Such moves of listing may already be evident from the decision of BHP to move to a single listing in Australia rather than the dual listing at present.

Unfortunately with such companies being the bedrock of the dividend paying FTSE-100 companies there are few alternatives for some investors such as big pension funds to choose.

Personally I have been investing in alternative energy generating companies and battery companies because the latest announcements from the Government tell me that the hysteria over achieving net zero is now so widespread that it will have a big impact on the financial world. In addition the Government plans to spend many billions of pounds in financing green initiatives and not just in the UK. We have already contributed £2.5 billion as the biggest donor to Climate Investment Funds. Such funding imposes a heavy burden of taxation which will add to the above woes of companies domiciled in the UK.

The irrationality of the general public over climate change in the UK has no bounds. For the last 30 years the young have been taught in schools an extreme agenda which has also been promoted by the national media, particularly the BBC, and politicians are now pandering to the mood of the public. This scenario is going to make the UK a poor location for investment funds in comparison with other countries. Private investors should surely rebalance their portfolios to have less emphasis on the UK. At least that is the case while the mania continues.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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