BP Results + BEIS Restructure

BP (BP.) produced some great financial results yesterday and the share price rose 8% on the day and is still rising. Other oil companies rose in unison. What I particularly liked as a holder was the improvement in Return on Capital which is forecast to grow to 18% in 2025 and 2030. This is after many years of quite mundane returns when I judge such a metric to be a key factor in any investment decision.

With increasing share buy-backs and dividend increases you can see why shareholders are happy. Their view might also have been affected by the following comment from the company CEO: “It’s clearer than ever after the past three years that the world wants and needs energy that is secure and affordable as well as lower carbon – all three together, what’s known as the energy trilemma. To tackle that, action is needed to accelerate the transition. And – at the same time – action is needed to make sure that the transition is orderly, so that affordable energy keeps flowing where it’s needed today”.

He is in effect saying that BP will continue to invest in oil/gas production while also investing in “transition growth engines” which includes “bioenergy, convenience and EV charging, hydrogen and renewables and power”. Production of oil/gas will be around 25% lower than BP’s production in 2019, excluding production from Rosneft, compared to the company’s previous expectation of a reduction of around 40%. BP correspondingly now aims for a fall of 20% to 30% in emissions from the carbon in its oil and gas production in 2030 compared to a 2019 baseline, lower than the previous aim of 35-40%.

It is good to see that reality has crept into their plans and forecasts. But the company’s results are clearly very dependent on the price of energy whose cost has shot sharply because of the war in Ukraine, There is a worldwide energy shortage and investors should keep a close eye on trends in that market if they hold companies such as BP and Shell.

There was an amusing post on Twitter by Philip O’Sullivan pointing out that the Annual Report of Shell in 1944 was all of 8 pages long – see first page above. Last year it was 359 pages!

That would be a good example for Shell and other companies to follow when annual reports are now way to long and voluminous in most cases. This is partly down to increased regulation and expanded accounting standards driven by increases in bureaucracy emanating from the Government BEIS Department  (“The Department for Business, Energy and Industrial Strategy”). For many years this used to be called the Department of Trade and Industry (the DTI) before politicians decided it was a good idea to rebrand it.

Now the Government has decided to split it up into three new Departments to be called “the Department for Science, Innovation and Technology, the Department for Energy Security and Net Zero, and the Department for Business and Trade”. What the benefit of this restructuring will be is not at all obvious and the name “Department for Energy Security and Net Zero” is a particular oxymoron as aiming for Net Zero is not going to improve energy security.

The downside is likely to be another year of musical chairs for civil servants in these departments when one of the issues is lack of continuity of expertise in specialist areas of government such as company law and stock market regulation.

Shuffling responsibilities does not help.

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

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UKSA Position Paper on Dematerialisation

UKSA has published a “Position Paper on Dematerialisation” – see https://www.uksa.org.uk/sites/default/files/2022-12/UKSA-position-on-dematerialisation-published-2022-12-24.pdf

It covers how the existing nominee and Crest systems operate which is an exceedingly complex topic, and what they would like to see if all shareholdings are dematerialised into the Crest system (and paper share certificates scrapped) as they must be soon.

I have been writing on this subject for over ten years for both UKSA and ShareSoc and the UKSA Paper provides a good explanation of the existing system. The ShareSoc campaign on the issue is described here: https://www.sharesoc.org/campaigns/shareholder-rights-campaign/

As one of the few remaining sponsored Crest members I am very keen to retain my rights that this provides such as being on the share register as a “Member” giving undisputed voting rights and clear communication rights.

But even this is proving problematic at present because companies and their registrars are now forcing payment of dividends via bank transfer rather than cheques. But if I buy a new shareholding they don’t know my bank details which creates a delay while they send me a form to register the details. Indeed the same difficulty arises with the few certificated holdings I have.

I am happy to give up receiving dividend cheques because my local bank is closing in May much to my disgust, but this is a system problem that needs resolving.

In the meantime the Digitisation Taskforce created last July needs to get a move on and come up with some recommended solutions before those of us on share registers all die of old age.

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

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Lessons from Ed Croft from the NAPS Portfolio

Last week I watched a webinar from Ed Croft of Stockopedia on the results of the NAPS portfolio he has been running for the last 8 years, and the lessons to be learned from it.

The NAPS portfolio is so named because it is based on a “no admin portfolio system” using a ranking system to select stocks based on the three main factors of quality, value and momentum. I am a Stockopedia subscriber but I do not follow the NAPS system religiously.

How did Ed’s portfolio perform last year? In summary a return of -15% although it produced +28% in the prior year. The system does tend to focus on growth stocks like my own portfolio whereas the market preferred lumbering value stocks last year. The average over the last 8 years puts it well ahead of the FTSE AllShare though.

There is much you can learn from Ed if you watch the webinar here: https://event.webinarjam.com/replay/47/ylknwbq0i8wt00otwlz

He does an interesting analysis of the benefits of diversification. He says “holding 20+ stocks in a 90+ranked portfolio reduces the risk of outlier downside performance and increases the probability of holding big winners”. I always knew that a large portfolio was beneficial!

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

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Baronsmead VCT AGMs and VCT Prospects

Today (1/2/2023) I attended the two Baronsmead VCT AGMs (BMD and BVT) via a Zoom webinar, partly because of the train strikes today but partly because I did not expect any momentous events or questions to take place, and so it turned out. But they did get a number of shareholders attending in person despite the train strikes.

However despite me registering for the event some weeks ago I did not receive a zoom invite and had to chase that up just before the meeting.

Just looking at BVT results, their total return last year was -19.20% which was very similar to my overall portfolio return. They achieved a similar return on both quoted and unquoted holdings which is probably not surprising because the valuations of quoted companies will have been used as benchmarks for the latter (they claim to be the only “hybrid” VCTs with a mix of quoted and unquoted holdings). Both BVT and BMD run very similar portfolios). The result was much better in the previous year at a total return of 29.3%.

There were 6p in dividends paid last year which equates to a yield of 7.1% (tax free remember).

There were a number of good realisations last year including listed company Ideagen which I also held directly. That achieved a return on initial investment by the VCT of 13 times.  

But the Chairperson of BVT, Sarah Fromson, warned that returns are likely to be more volatile in future due to the change in VCT investment rules in 2015. They are having to invest in more immature businesses in essence.

Voting took place on a poll but on-line attendees could not vote so you had to submit your votes in advance which I did. For example, I voted against the remuneration report as did 1.37 million shareholders because pay in the Baronsmead VCTs seems to be going up substantially.

There were few questions from the audience. One issue that was raised was the fees paid by investee companies for directors nominated by the VCT or Gresham House which seemed to be increasing – now over £1million possibly. It was suggested that having nominated directors on boards assisted with control of the companies.   

Is it a good time to invest in VCTs? I think the jury is still out on that. We have not yet seen the result of the changes to the VCT investment rules and it is unclear whether the investment in more early stage companies will be successful. The valuation of such companies still seems high to me but it may be some years before we see whether the valuations are justified.

However VCTs are still raising funds so they must see opportunities to invest them. There may be a high demand by investors due to the high tax reliefs and good dividend yields but they need to be aware of possible changes to the taxation of VCTs due to the “sunset” clause in the legislation which was mentioned briefly in the BVT AGM.

There may be problems revising the legislation because, as reported in the FT today, the Government has a problem in that it has committed to revoking EU imposed legislation in the UK but has just added another 1,000 pieces of such legislation that have been discovered that will need reviewing. That means the total is now 3,700 laws and regulations to be considered and amended or discarded. That surely shows how bureaucratic we have become of late because of our former membership of the EU and there are so many obscure laws that even identifying them has proved to be a problem!

But the good news is that if they have not been reviewed by the end of 2023 then they are likely to be automatically dropped because of the   Retained EU Law (Revocation and Reform) Bill 2022 which is in the House of Lords at the moment. What that might mean for VCT legislation is not clear.

The AIC held a seminar on VCTs recently and you can see a report on it here:  https://www.theaic.co.uk/aic/news/press-releases/vct-managers-still-seeing-strong-investor-appetite

As I already have substantial VCT holdings I have not been adding to them recently as the returns achieved I do not consider that good (mainly due to high management costs including the hated performance fees) and I would prefer to see how these issues play out. The Government may have made statements supporting VCTs but we need definite commitments and no threats to remove the high tax reliefs on VCTs which is the only thing that makes them good investments.

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

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Should ISA Tax Reliefs be Limited?

The Resolution Foundation have published a report under the title “ISA ISA Baby” which argues that the tax reliefs available on ISAs are too generous and should be limited. I disagree and suggest that the report is slanted by the politics of envy. My detailed comments are:

The Report does point out correctly that the savings rate in the UK is too low and is less than in most G7 countries. It is a particular problem among the low paid or those living on state benefits and results in such people not having a financial cushion to cope with emergencies or temporary problems such as sickness or unemployment. Why is the savings rate so low? I would suggest it is because our social security system is so generous that people have come to realise that there is little point in saving when they can fall back on the state when needed. Another contributory factor is the low return on savings achievable when interest rates have been kept so low by QE and government policy to erode the value of their own borrowing. This has been the madness of economic policy in the UK until recently.

Part of the problem is that the wages of typical working or middle class families have been eroded in real terms in recent years. Galloping price inflation particularly in basic commodities such as food has exacerbated this trend. It is beyond the scope of this article to delve into the reasons for this in detail but low labour productivity and the available of cheap labour from immigration are two factors to bear in mind. But as the Resolution Report says “Low savings are, in part, merely a symptom of this economic stagnation”.

It is simply unrealistic to expect those on low wages or living on state benefits to save. A recent analysis showed that some 36 million people – 54.2 per cent of all individuals – paid less tax than they received in benefits according to the analysis of Office for National Statistics (ONS) data for 2020/21. The UK population is way too dependent on state benefits.

The Government encourages savings by providing tax reliefs in various forms including ISAs and by direct subsidies such as the LISA and Help to Save schemes. The Resolution Report argues the latter are more effective ways of encouraging saving. But I suggest that it is the lack of surplus income over the basic cost of living and hence the inability to save plus cultural reluctance to look more than a few weeks ahead when reliance on state benefits is endemic which are the key problems.

The Resolution Report says that “extension and widening of Help to Save could be paid for by reducing the generosity of ISAs, which largely benefit the already wealthy. For example, capping the overall lifetime value an individual is allowed to save into an ISA at £100,000 would only affect a small minority of people (thus minimising administrative and economic costs). This is a typical “we can soak the rich because they won’t notice kind” of argument. It’s the politics of envy in essence. They argue this would “reduce the cost” of the lost tax from ISAs but the UK population is already taxed too highly and imposing more tax on the wealthy will just increase the disincentives to invest in UK companies. This is the politics of madness.

The number of people with very large ISAs (worth more than £1 million) is in fact relatively small at about 1,500 after the market falls last year. If you look at the holders they are typically those who have invested in equity ISAs (not cash ISAs), have been investing the maximum allowed over many years since ISAs and PEPs were launched in the 1990s and have been both patient and wise investors. Why should such people be discouraged? They have often backed British companies when they needed to raise money, particularly in smaller AIM companies. This has turned out to be a very sound economic policy which has meant that the UK has one of the most vibrant smaller companies markets.

But the success of some ISA millionaires has been widely publicised and this has provided a great incentive for people to save via investing in equity ISAs. If people see they can become relatively rich by using ISAs they are much more likely to save in that way, otherwise they will invest in a bigger house on which there is no tax of course. We need more investment in businesses not in property. Reducing the attractiveness of ISAs because a few people become wealthy from using them is counterproductive.

In reality some of the main beneficiaries of the ISA system are the young. The Resolution Report says “…. there were around 2.4 million ISA holders under the age of 25. This group were the most likely to be active savers with approximately 79 per cent making a deposit in 2019-20”. That shows that the tax incentives were working well in a segment of the population who were otherwise unlikely to save but instead spend any surplus cash.

ISAs have helped to encourage everyone to invest in businesses although cash ISAs are somewhat dubious in my view. ISAs have been a great success in helping to encourage an investment philosophy and if the tax relief was reduced all that would happen is that instead of investing the money it would be spent on luxuries, foreign holidays, or more put into pension schemes.

Would supporting Help to Save be more beneficial? Help to Save is basically a hand-out to anyone who can fill out a form. It is like anything that is given without strings or obligations. It only provides a minor encouragement to saving and does not encourage good habits of frugality or saving. Only about 250,000 people have opened a Help to Save account which shows it is not very attractive, mainly because of the limitations imposed.

I have to declare an interest in this subject as I am an ISA millionaire, as is my wife whose portfolio I also manage, even after last year’s somewhat dismal investment performance. The Resolution Report does not just suggest limiting the annual allowance (currently £20,000) but putting a cap on the overall value of a ISA. This would have most peculiar consequences. Most of the value held in an ISA is likely to have arisen from capital growth and dividends received rather than additional contributions. Would investors be expected to sell their holdings if they went over the limit, when the value of holdings can be very volatile? Limiting new contributions if a cap was exceeded would not make much difference to the value of overall ISA holdings and be complicated to operate.

In summary the Resolution Report has not adequately considered the consequences of imposing limitations on ISAs. And we need less tax, not more.  

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

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The New Realities and Private Healthcare

The editorial in this week’s Investors Chronicle was full of doom and gloom. Under the headline “Facing up to new realities” the editor said “The threats identified by the WEF (World Economic Forum at Davos) include climate change, the cost of living crisis, geopolitical confrontation, high debt levels, recession, low growth, social unrest and cyber crime. These crises are converging, it says, to shape a unique, uncertain and turbulent decade to come”.

All I can say is that I have seen all this before and the problems we face are actually relatively minor in comparison with the difficulties faced in previous decades. Having lived through the 1970s when the UK economy was on its knees, we only face minor handicaps now in my view. The WEF is talking us into a recession as when confidence in the economy falls then businesses stop investing for the future. But this is a temporary phenomenon and when we get out of the gloom of winter the picture may be a lot brighter.

Another interesting article in Investor’s Chronicle was on private healthcare which had the headline “Private care likely to boom amid NHS crisis” and I would not dispute that comment. It covered Spire Healthcare (SPI) one of the few medical companies that are UK listed. I was particularly interested in the article because Spire have recently acquired The Doctors Clinic Group who provide private GP services mainly in the London area. I actually used the service a month ago when I got fed up with trying to book an appointment with my NHS GP who have a dysfunctional web site and hopeless phone service. Doctors Clinic was a very efficient, slick and relatively low cost service which I would recommend. Appointments can be made and in person relatively quickly.

But the acquisition by Spire was a relatively small one for them. The financial results of Spire over the last eighteen months do not inspire confidence. Profit margins are poor with only “unadjusted” profits of £4.2 million on revenue of £598 million in the last 6 months. The results were apparently hit by cancellations due to the covid epidemic and staff absences for the same reason.

There is clearly great potential to expand the private GP service as people give up on the NHS but Spire seem to be no better than the NHS at operating a service that more than covers the costs of provision.  And this is one of those companies that “polishes” their financial figures by reporting Adjusted EBITDA and even adjusted cash flows so interpreting their financial figures is not easy.

Investors would have more confidence in the company if they focussed on unadjusted financial figures plus better profit margins and return on capital which have never been brilliant in the last decade.

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

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GB Group Webinar plus Spirent and Paypoint Trading

I watched the Capital Markets Event webinar yesterday of GB Group (GBG), a company whose shares I have held for a number of years. As one of the speakers said, identity verification is the key for trusted e-commerce and GB has exploited the growing demand for that.

The event lasted over 2 hours and was full of marketing hype including four presentations from customers saying how wonderful the company was. But I learned very little that was new about the company’s activities.

Future guidance was reiterated. According to Stockopedia that puts the company on a prospective p/e of 19.2 for the current financial year (year end of March) and 17.1 for next year which does not seem expensive. The half-year results recently announced showed positive growth in revenue but earnings per share down and debt risen no doubt due to the recent large Acuant acquisition.

I would have liked much more information on their competitive position, market share, integration progress etc.

This morning there was a trading statement from Spirent (SPT). This said 2022 results were in line with expectations but also included the comment “the Group’s performance is now likely to have a heavier than usual weighting to the second half of 2023”. That was enough to scare the market and the share price is down 16% at the time of writing. Investors have learned to be very wary of such comments – it usually simply means sales targets are not being met.

Yesterday did produce some better news at another of my holdings – Paypoint (PAY). They said “Group net revenue from continuing operations increased by 9.8% in the quarter to £32.5 million”. The share price perked up yesterday and it looks fundamentally not expensive but a large holder (Sanford DeLand Buffettology Fund) has been selling recently and still holds a big stake so the share price may remain under pressure.

The other good news yesterday was that inflation fell slightly to 10.5%. Will it continue to fall? Probably but at that level it’s still rapidly eroding the value of the pound in our pockets. Food price inflation is a particular problem. Killing off inflation is not going to be easy as labour shortages and strikes means there will be pressure to increase wages and hence prices for some time.

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

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Platform Improvements at Interactive Investor – Aren’t They Annoying!

Is it not very annoying when a software platform redesigns the user interface and screws it up! That is what has just been done by Interactive Investor (II).

They not only expect us to learn our way around a new system, for no obvious benefit to us the users, but have missed out on some important functionality. For example, the “voting mailbox” accessible from the Portfolio screen does not work. In addition when transactions are completed not all the information on costs is reported which I need to enter into my portfolio system.

More clicks are required to move around the site, for no purpose. There are probably other defects I have not even mentioned.

This is an abortion in essence and I think they should revert to the previous software version as clearly this one has not been adequately tested.

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

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Future Disclosure Framework, Revolution Beauty Case and Performance of Slater Growth Fund

Having concluded that the existing KIDs are not fit for purpose, with which I totally agree, the FCA are consulting on the “Future Disclosure Framework” for investments, i.e. what investors should be told before they splash their money out. You might think this would be a relatively simply matter to define but it is not – or at least the FCA wishes to make it complex as usual.

You can read their consultation document which they recently published here: https://www.fca.org.uk/publication/discussion/dp22-6.pdf

I have submitted a response which you can also read here: https://www.roliscon.com/Future-Disclosure-Consultation-Response.pdf

One particular point to note is that they fall into the common trap of suggesting the riskiness of an investment can be simply measured by the volatility of the share price. This is nonsense. Warren Buffett has said that stocks are more volatile than cash or bonds, but they’re safer to own in the long run, and he is quite right. The riskiness of an investment is a function of many other factors than price volatility. Major risks are the trustworthiness of the investment manager – the case of Revolution Beauty is discussed below as an example of what investors would have liked to know before they purchased the shares.

Revolution Beauty

The shares in Revolution Beauty (REVB) were suspended in September 2022 after the auditors raised concerns. On Friday (13/1/2023) all the bad news was revealed.

One of the issues is that larger than normal sales were booked to three distributors in the last month of the financial year. Payment for these orders was delayed. Two of the distributors returned some of the stock at a later date. This is a classic example of “channel stuffing” to improve a company’s financial reports. This is a very well known method of improving a company’s financial figures and is a fraud on investors. It’s a clear example of orders being booked in the expectation that they would never be delivered but reversed out in the next financial period.

There were also personal loans from two of the directors to the distributors or their affiliates and also loans made to some of the non-exec directors and senior managers which were not disclosed to the board.

We wait to see what action is taken against the directors who orchestrated this conspiracy but I suspect it won’t be as severe as I would like to see.

Slater Growth Fund

I have been monitoring the performance reports of other investors last year to see who did worse than me. Another recent example reported is that of the Slater Growth Fund run by Mark Slater. He is usually a sound manager – performance of +23% in the last five years well ahead of the relevant index and that includes a negative 25.5% last year. Last year was definitely not a good year for “growth” funds and my portfolio was certainly focussed on growth companies at the start of 2022. Similar problems were faced by the Fundsmith Equity Fund and the CFP SDL Buffettology Fund.

But as an individual investor I could quickly exit some of my holdings when I saw the way the wind was blowing while fund managers would have had more difficulty in moving rapidly as a few large sales would have depressed the share prices of companies they were selling. The other issue is that open-ended fund managers may have to sell holdings to meet redemption requests when investors want to withdraw their money which many did as gloom spread through markets. This is why I prefer closed-end investment trusts to open-ended funds – the former managers can make their own decisions about whether it is a good time to sell or hold on.

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

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Lifting the Gloom, But Not at Halfords

I think I have been suffering from Seasonal Affective Disorder (SAD). It seems to have been raining and cloudy since before xmas and the stock market did not perk up until the last few days.

Even today one of my holdings, Halfords (HFD) issued a profit warning which caused the share price to drop by 20%. But the losses on that were offset by significant rises in a number of my other holdings including some technology stocks and property REITs.

Is this the end of the bear market? I don’t know but I doubt it. The economic prospects are still poor. However I have cautiously purchased a few small AIM company shares including GB Group (GBG), Eckoh (ECK) and RWS (RWS). These are not share tips but more a strategic move to increase my holdings in smaller companies which now seem good value when I have a large cash balance at present.

What was the problem at Halfords? Softer than expected cycling and tyre markets was one aspect but enthusiasm for cycling is bound to fall in very cold and wet weather. Another problem was difficulty in recruiting skilled labour in Autocentres.

These might both be temporary problems so I am not planning to reduce my holding which was mainly purchased before the recent ramp up in the share price after it was enthusiastically tipped in several publications. That shows the danger of following the crowd.

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

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