Brexit, and the Finances of the Young

The national media continue to try to turn news into controversy. Their words are often incendiary and designed to provoke debate and therefore attention – as a means no doubt of promoting their publications. So their headlines become “verbal click-bait”.

As most people now read news on the internet, the publishers could be considered as acting as “trolls”. Here is the definition in Wikipedia of an internet troll: “In Internet slang, a troll is a person who sows discord on the Internet by starting quarrels or upsetting people, by posting inflammatory, extraneous, or off-topic messages in an online community with the intent of provoking readers into an emotional response or of otherwise disrupting normal, on-topic discussion…….”

Written words are not the only example. Laura Kuenssberg of the BBC has adopted a similar verbal approach in her reporting. It’s not just Labour party members who should be complaining about her hysterical style.

There were a couple of news items this week that caught my attention in this area. There were several comments on the report issued by the FCA on family finances. The report indicated that half of UK adults were “financially vulnerable” and that those in their 20s and 30s were reliant on borrowing (personal loans and credit card debt). It reported that one fifth of 25-34 year olds have no savings at all with many struggling to pay bills. But this was interpreted by some of the media as the new “generational divide”.

But was it not always so? I certainly don’t recall having much in the way of savings at the age of 30 and lived from month to month, sometimes using credit card debt. In other words, I doubt that the situation has been changing over time; although the elderly have become better off lately due to rising state pensions I am not convinced the young have been getting poorer. But the media like to put a “spin” on any news item to grab attention.

As the report shows, the elderly do have more savings as one might expect but they are not evenly distributed. One amusing statement in the report is “A high proportion of retirees do not know how much savings they have”.

It’s a report well worth reading although rather long at almost 200 pages. Here is one useful titbit of information from it: “Around one in five (22%) 45‑54 year olds hold a stocks and shares ISA and the same proportion hold shares or equities directly”. It would have been good to obtain more detail information on that but it just shows there are a lot of shareholders out there.

Another example of media hysteria is the reporting on the Brexit negotiations. Will it be a hard or soft Brexit? Will the bill be £20 billion or £100 billion? Are Tories threatening to quit if there is any compromise, or revolt against the rule of Theresa May? Will Jeremy Corbyn scupper the whole affair by underming the Bill going through Parliament to support it? Who really knows, but it all makes for good headlines.

The Financial Times has become one of the leaders in scare mongering over Brexit with regular articles of a polemic nature by Martin Wolf and Simon Kuper on the topic. The latest example was by Martin Wolf in yesterdays FT. Now I have never thought much of Mr Wolf’s opinions on financial matters since he supported the nationalisation of Northern Rock, but his latest article (headlined “Zombie ideas about Brexit that refuse to die”) is pure hysteria. I don’t mind the occasional editorial opinion piece on Brexit, or some reporting on the potential technical difficulties if not slanted, but this piece was just propoganda in essence. It pointed out all the difficulties associated with a “hard” Brexit where no trade deal is agreed beforehand, but that is well known and most folks do not think that is likely. It certainly did not give a balanced view of the arguments for or against Brexit and what our negotiating stance should be. In reality there is likely to be a compromise of some kind – that is what politics usually ends up being about – compromise after compromise. Indeed it is one of the frustratations of anyone in the political world that achieving revolutions, rather than compromise, is not just difficult but exceedingly time consuming.

It is certainly regrettable that the Financial Times, since its takeover by Nikkei in 2015 has become much more politicised, and there is less factual reporting and more opinion. Perhaps it is just pandering to the views of most of its readers (the London-centric financial players and international businessmen) but if they expect to influence politicians or the wider community they will be disappointed.

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

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Interesting AGMs, or not – Rosslyn and Dunelm

This morning I attended the AGM of Rosslyn Data Technologies (RDT) for the first time. I picked up some shares in a deeply discounted placing that qualified for EIS relief a few months back. One has limited time to research a company on offer when a placing comes up. It looked sound enough at the time although the historic financials did not impress. Prospects looked better after an acquisition although this company has been around a long time without becoming a shooting star. Bearing in mind the software sector it operates in – a somewhat niche area – I doubt it will show rapid growth either although the analyst forecasts I looked at before the meeting (from a single broker I gather) suggests a substantial rise in revenue and breakeven in the current financial year – partly from the merger no doubt.

Incidentally in case anyone from HMRC is reading this bearing in mind the current review of VCT/EIS tax reliefs, I would just like to say that I would certainly not have invested in the placing without the attraction of EIS tax relief. I considered the valuation at the placing price only “fair” and with the risks apparent, it would not have been attractive without the tax relief.

But at AGMs of small companies like this one, it is possible to learn a great deal. I will just mention a few things – there may be a more extensive report on ShareSoc’s web site later.

The Chairman was absent in the USA (not usually a good sign), so another of the directors, Barney Quinn chaired the meeting, and well. He read out a prepared statement (not issued in an RNS oddly), saying there had been good progress and they had been focussed on integration of the businesses since the start of the year. He mentioned the securing of a major partnership with D&B (see Annual Report).

I queried the very high debtors (accounts receiveable) which were about 6 months of revenue. Apparently this is due to work in progress on projects being recognised as revenue but not yet billed to clients (which tends to be on completion). To my mind, it’s still excessive though.

It seems to be taking some time to develop the market for the products/services and it seems their broker is currently reconsidering their forecasts and I suspect the existing ones are optimistic from what was said in the meeting – but we may soon see no doubt.

Anyway I learned quite a bit about the business and the management seemed to be competent on a brief acquaintence but a couple of long-standing shareholders turned up late for the meeting and said some negative things about the progress and valuation of the business. The company could really do with some more media coverage if they were to attract more investors and another shareholder suggested ways they could do so.

So it’s always good to attend AGMs, but one I will not be going to is that of Dunelm. This year it is Stoke at 9.30 am on the 21st November. Last year it was at a similar inconvenient and early time in Leicestershire.

A couple of year’s ago I attended their AGM in London (again at an early time), and complained about the remuneration arrangements. Have the more recent AGMs been deliberately arranged to avoid private shareholders like me from attending? I would not be surprised if that was the case. So I have voted against the Chairman, against the Remuneration resolutions, and against other directors also for that reason. It really is not acceptable for the directors of companies to pick inconvenient dates, times or locations for General Meetings.

I don’t object to going to Stoke but I do object to having to get up at 5 o’clock in the morning to be sure of getting there on time. But if anyone lives closer, and would like a proxy appointment from me to attend the AGM, let me know.

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

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On-Line Estate Agents & Crowdfunding

I was watching the BBC television news last night when a story appeared on the wonders of a 19 year old who was already alleged to be worth £10 million after developing an on-line estate agency called Doorsteps. Yes it was great free publicity for the company.

Bearing in mind the continuing debate among investors about listed company Purplebricks (PURP) I thought it was worth a quick look. Purplebricks has a stock market valuation of £950 million despite rising losses. Will the business model work, particularly in the USA where it needs to be successful to justify the valuation? Nobody knows.

Some commentators have suggested that there are few barriers to entry into the on-line estate agency business (i.e. anyone can get into it as evidenced by the fact someone still at school did so).

A traditional estate agent will charge several thousand pounds to sell an average house (but you only pay if they do so). Purplebricks charges £1200 in the London area, and £850 elsewhere. But Doorsteps charges only £99!

Doorsteps raised £390,000 from investors via crowdfunding platform Crowdcube at a pre-money valuation of £12 million from over 490 investors. But if you look at who owns Doorsteps it is a company called Upside Capital Ltd that was only incorporated at the end of December 2016. Not exactly a long track record then is it.

Will Purplebricks put traditional estate agents out of business, or will Doorsteps put Purplebricks out of business? I suspect the answer to those questions will be a complex one but I’ll have a stab at it.

Firstly can Doorsteps conquer the market while still charging so little? Bearing in mind that they will have high marketing expenditure, still need to employ local “agents”, and pay management, admin and IT overheads, I rather doubt it. With few barriers to entry, there will no doubt be other entrants offering to do it for £95 rather than £99. Result, lots of companies with little business individually and all losing money. Who might win out on that race to the bottom is anyone’s guess. For investors it looks like an area where you are likely to lose money irrespective of which horse you back.

This myriad of low-priced entrants might also damage Purplebricks business model, who in addition already have other competitors such as Yopa, Tepilo, Housesimple and Emoov operating at different price points. It’s beginning to look like a market which has grabbed the public’s, and investors, imagination and which will soak up enormous amounts of capital as the companies all try to out-spend each other to grab market share.

One interesting aspect is the ease with which Doorsteps managed to raise money on Crowdcube. Crowdcube have over 400,000 registered users and the few hundred who invested in Doorsteps probably put in a few hundred pounds each. In effect they were punting on an investment in a private company (and hence with limited investor protections), on a company with no track record, and with an inherently risky business plan.

I fear that the crowdfunding approach to raising capital from investors as evidenced in this example will lead to a lot of disappointed investors in due course.

But having said all of the above, it is very clear that the estate agency market is changing rapidly. Some people won’t wish to pay upfront to sell a property, but others may be happy to take the chance of “no-sale”. Paying £1200 on the chance that a sale will be made and quickly may be attractive to some house sellers, particularly when their past experience of traditional agents may not be great (estate agents have a reputation for sharp practice over many years). So if Purplebricks can establish a good reputation (which has yet to be proven), and spend enough to grab a decent share of the market, they may establish a sound business, but how profitable it will be is anyone’s guess. In addition, traditional agents will react to do more on-line offers at lower cost as some are already doing. One can see that this market will become a price battleground as there seems to be little differentiation between the differing on-line competitors. That’s a recipe for low returns on capital and poor returns to shareholders in the long-term.

When the product being offered is the same, service and reputation will be a key differentiator I suggest in this market. Competing on price alone looks like a dubious business strategy however.

Note: I have held Purplebricks in the past but do not do so presently because the more a company is debated on bulletin boards and by share tipsters the less attractive an investment it tends to become. It just leads to irrational speculation, both up and down.

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

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HBOS and Lloyds Legal Case

This week sees the start of the legal case in the High Court by investors in the Lloyds TSB over the acquisition of HBOS – opening submissions are on Wednesday and it’s scheduled to run through to March next year. Anyone can attend these hearings of course but I think it will take a very patient person to sit through all of it. I have submitted written evidence on behalf of the litigants (represented by Harcus Sinclair) but it seems I am unlikely to be called for cross-examination by the defence which is somewhat disappointing.

I cannot comment further for that reason, but the claim is in essence based on the allegation that relevant information was not disclosed in the prospectus that was issued at the time in 2008 when investors in Lloyds TSB approved the deal. Lloyds reject that the claim has a sound basis, but the cross examination of former directors Sir Victor Blank, Eric Daniels and Truett Tate should provide some excitement and will no doubt be assiduously reported upon by the press. The directors who signed off the prospectus are of course defendents in the litigation as well as the company.

This is a similar case to that of the Royal Bank of Scotland (RBS) litigation which was recently settled before it got into court, which is the way these matters often end up. Sky News has reported that Harcus Sinclair have offered to settle the case but that has been rejected by Lloyds. As in the RBS case, legal costs on both sides will no doubt be enormous.

Lloyds Banking Group are also involved in claims over the activities of management in HBOS (particularly in the Reading branch) which has resulted in the conviction of several people for fraud. The FT Magazine ran a very good, and lengthy, article on this subject in their October 7th edition. In summary this was where people exploited the fact that businesses in financial difficulty, who were dependent on loans from the bank, via consultancy fees and other strategies extracted large sums of money or gained control of businesses from the original owners. Large numbers of business owners lost their companies and in some cases were forced into poverty as result. This disgraceful episode was very similar to the activities of the Global Restructuring Group at RBS which I covered in a previous article, but will not be raised in the current legal proceedings. Lloyds are compensating the people affected, at least to some extent.

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

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Obituary – Steve Marshall

The Daily Telegraph ran a lengthy obituary on Steve Marshall today, who died recently at the young age of 60. It covered his financial career in a not particularly complimentary way although some might say he took on a lot of difficult positions.

He first came to public prominence when he became CEO of Railtrack after Gerald Corbett was forced to resign, despite having minimal experience of the railway industry. Railtrack was part of the former British Rail that had been privatised and then ran into a number of problems. Indeed the financial difficulties seemed to escalate under Marshall and the company had to be nationalised (Marshall promptly resigned) as it was on the verge of bankruptcy according to the Government. Shareholders got some compensation but only after a fight. The business was renamed Network Rail and is a rather peculiar private “not for profit” company. If Jeremy Corbyn ever gets elected, he may change the status and ownership yet again.

Steve Marshall was an accountant by training and served as finance director of Thorn EMI before his stint at Railtrack. The Telegraph mentions the disappointment of some bondholders in Thorn EMI when the company was sold to Nomura.

After Railtrack, Marshall took on the role of troubleshooter being involved with Queens Moat Hotels, Delta, Torex Retail, Balfour Beatty, Biffa and Wincanton. The Telegraph has nothing positive to say about any of these roles.

I had some contact with Marshall when I represented shareholders in Torex Retail. We were so concerned about the actions of Marshall, and the company’s banker’s (RBS) after the company ran into financial difficulties due to an accounting fraud that a requisition for an EGM to remove him and the other directors and replace them was submitted. There was a good chance of winning the vote. This was pre-empted when Marshall promptly invoked a “pre-pack” administration – a good example of the dubious nature of such transactions.

There were other offers on the table to that from the buyer preferred by the board and RBS but they were ignored. I never did understand why, but it was certainly plain that the interests of RBS seemed to take priority over that of the ordinary shareholders. It has of course subsequently become apparent that RBS treated many of their customers who got into financial difficulties and got involved with their “Global Restructuring Group” in the most appalling manner – see the internet for lots of examples of how money was extracted and business ownership coerced.

So in conclusion, are there any investors who gained from Marshall’s activities in the companies with which he was involved? Now is the time to speak out if so!

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

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Accrol and Pricing Power

I won’t be the first to comment on the events at Accrol (Kate Burgess covered it well for example in this mornings FT), but the surprise suspension of the shares from AIM on the 8th October caught a lot of investors by surprise. The latest announcement this morning said: “The Directors believe that the current challenges facing the Company relate largely to FY18 and are likely to have less of an impact on the Company’s trading performance in FY19. The Board are therefore confident that, whilst there can be no guarantee, a solution will be found to the Company’s short term funding requirements. The Directors continue to review the position and, as part of this review, the Company is engaging with its major shareholders and its bank.” 

To paraphrase the above, “we’re in a hole, our bankers are unhappy and we are talking to everyone about a way out but it may all come good in the end”.

To remind you Accrol (ACRL) is a company that listed on AIM in June 2016. The full year results published in July 2016 were very positive, but the Chairman also mentioned the following: “The listing has reduced the Company’s debt burden….” and “The listing also provided a partial exit for the founders, the Hussain family, and NorthEdge Capital who invested in Accrol in July 2014. The family will continue to support the management team as external consultants and I would like to thank both the Hussain family and NorthEdge Capital for their support and commitment”.

On the 7th September, the company announced the appointment of Gareth Jenkins as CEO to replace Steve Crossley “who is leaving the Company and stepping down from the Board with immediate effect….”.

On the 8th October, the company warned that profits were down, margins had fallen, debt was rising and the dividend was under review. In addition, it warned about a possible large fine over a Health & Safety issue that was apparently not disclosed in the listing prospectus.

Accrol processes paper rolls into toilet paper, paper hankerchiefs and kitchen rolls. It sits between the large paper mills and the large retailers who are their customers for “own-label” products. Now having looked at the prospectus back in 2016 it appeared the company was growing rapidly, albeit debt had been high, but I declined to invest in it. That was not just because I am very wary of all IPOs – these are events where the sellers have more knowledge of the product being sold than the buyers. For investors it’s rather like buying a used car. Is that newly polished vehicle a good runner, or is it a tired beast with hidden problems in the chassis? Only the seller really knows.

In addition, the company is “puffed up” to look attractive to the investors who take up such initial public offers. So my tactic is even if I like a company based on its prospectus, I would probably leave it for some months, or even years as good companies will likely remain so, to see how it fares as too many IPOs, particularly AIM ones, run into problems quickly. But there were several other aspects that concerned me about Accrol.

In this case, one of my other concerns was how defensible were its profit margins. In essence the pricing power of an intermediate processor, buffeted between the big supermarkets and the paper manufacturers is bound to be low. They may simply have been making hay while there was a surplus of paper being produced (paper production requires large capital investment, rather like steel mills, with long lead times on new plant so production volumes are lumpy as more capacity is built, or older inefficient plants are closed down). Paper is also a commodity product subject to the vagaries of commodity pricing.

This appears to be the source of their current problems, apart from the little (maybe big) issue of a possible large regulatory fine that will impact their cash substantially. Is this going to be another case where the investors launch legal action over the failure to disclose all the relevant facts in the prospectus one wonders?

Is my analysis of this company sound, or have I missed something? As Kate Burgess said in her article, “management will have a lot of explaining to do to investors” as will the Nomad no doubt (Nomad is Zeus Capital). With the shares still suspended, which always annoys investors and frequently leads to worse news in due course, there is not much investors can do at present.

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

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Theresa May’s Speech, Housebuilding and Organ Donation

Theresa May’s speech to the Conservative Party conference was indeed a debacle in terms of presentation. But the content was worthy of more analysis.

The shortage of houses, particularly in the South-East of England, is a persistent and major political problem. Young voters have great difficulty in finding accomodation, while the old profit from rising (and unaffordable to the young) house prices. This leads to divisions in society that populist and left-wing leaders can exploit.

So what is the Prime Minister and the Government going to do about it? They have promised to spend another £10bn on the “Help to Buy” scheme which has improved the share prices of the housebuilding companies I own already. This may well enable some people to buy houses that they could not otherwise manage to do, but it is also likely to increase house prices rather than reduce them.

In addition, she has committed to spending £2bn to fund more affordable housing with measures to ensure councils release more land for housing, and encourage developers to actually build more homes.

These are positive moves, but it’s only tackling one end of the supply-demand equation. One of the core problems is over-population in the South-East and a concentration of business activity in London, which creates a need for more housing, more social infrastructure, more transport, and more land use that simply cannot be satisfied quickly enough, if at all. Rapid growth in population, driven partly by immigration, is one cause that needs to be tackled if this imbalance is ever to be rectified. And a policy to redistribute economic activity more broadly across the country would make a lot of sense surely.

One little reported item in Mrs May’s speech was the announcement that the Government is to make a presumption in favour of organ donation legal. So instead of an “opt-in” system, you will be required to “opt-out” if you do not wish to become an organ donor.

As a kidney transplant patient myself, I view this as a positive step forward to increase the number of donations. As Mrs May said in her speech, 500 people died last year because of a lack of suitable donors. That particulary affects heart donations, but even kidney disease patients have a much shorter life expectancy on dialysis as against having a transplant. The economics are that transplants are cheaper than dialysis, and the quality of life much improved. So I hope this measure will go through unimpeded.

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

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