Author: roger9932

BP Agm Badly Managed and Disrupted By Protestors

I have been watching the BP (BP.) Annual General Meeting on-line. This was badly disrupted by protestors and the Chairman (Helge Lund) did a very poor job of restoring order. He had to ask for order several times and over 10 minutes in total were wasted before Lund requested removal of the protestors. Much too soft!

BP already supports a transition to net zero carbon which I consider misconceived. How many votes against Lund will he get? We shall soon see.

Note: I am a shareholder in BP.

Postscript: Helge Lund received 9.6% of shares voted against his re-election. Whether that was because of his weak approach to meeting management or dislike about the company’s strategy is unclear.

Requisitioned Special Resolution 25 was voted down by 83% which shows there is little support among shareholders for extreme policies.

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

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IBPO Delisting – A Bloodbath for Investors

There was an interesting discussion last night at the Mello meeting on the recent announcement of a delisting from AIM of iEnergizer (IBPO). IBPO is controlled by 83% shareholder EICR (Cyprus) Ltd whose major shareholder is Anil Agarwal. So he will have no difficulty passing the required 75% votes for delisting.

Unlike common practice, there is no offer to take out the smaller shareholders at a fair price. The share price dropped precipitately on the announcement but has bounced back this morning. This seems to be on the hope that the dividends will be maintained and just one year’s dividends might pay for the shares.

I personally would not bet on that because there are many ways a controlling shareholder can take out value from a delisted company.

I have been a holder of delisted AIM shares in the past and one such case did end happily after a few years but others did not. The key is to avoid investing in companies that could put you into such difficult positions. Prevention is better than cure (the company is registered in Guernsey so should be subject to the Takeover Panel Code which might help but trying to block a dominant shareholder from doing what they want to do is very difficult).

I covered some of the warning signs in my book Business Perspective Investing. These are a couple of extracts from it:

Large or Small Director Share Stakes

Common abuses of corporate governance codes happen when one or more directors have a controlling stake in the business, i.e. own more than 50% of the equity. Even owning 40% usually means they can win any vote and effectively have control.

One danger of such large stakes is that they might be tempted to take a company private if they think the shares are undervalued or they are simply fed up with sticking to the rules required of public companies.

On the other hand, it is important for directors to have a significant interest in a company’s shares so as to align their interests with that of other shareholders. Having a substantial interest provides a powerful incentive to promote the success of the company.  This particularly applies to executive directors but even non-executive directors should have a non-trivial shareholding. It’s even better if the directors acquired their share stakes by purchasing shares in the market rather than simply being a beneficiary of nil-price share option scheme awards.

Share stakes of directors should be big enough to be meaningful and to provide good incentives but not so large that they can dominate the board and other shareholders.

Company Domicile

Where a company is registered is definitely worth checking because it affects the laws under which the company operates. Even in those more developed countries with stronger traditions of protecting investors, e.g. the USA, you may find that there are differences between states. Delaware is generally viewed as more friendly to companies and their management than to their investors.

UK listed companies whose operating base is overseas may not be subject to the Takeover Panel Code (an important protection for minority shareholders), and can often create legal difficulties when wrong-doing needs to be pursued.

It is unfortunately a fact of life that some countries are viewed as protecting investors better than others. For example, when problems with Chinese AIM companies arose in recent years, many investors found it was difficult to enforce their rights in law or take action against errant directors.

In general, for UK listed companies, any domicile outside the UK adds to the risk of investing in a company. Domicile in the Channel Islands or Isle of Man is also not ideal [because company law is different and any shareholder meetings are likely to be held there thus discouraging attendance].

You might ask yourself why did this company register in the Channel Islands? There may be tax reasons why property companies/trusts do so but IBPO is not one such.

Another big question to ask is “do you trust the directors to act in the interests of all shareholders rather than just their own interests?”. Their recent actions clearly answer that question.

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

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The Death of Lord Lawson

The media is awash with tributes on the death of Nigel Lawson. A tax cutting chancellor who reinvigorated the UK economy and was a bulwark of Thatcherism. He denationalised whole swathes of UK industry and was subsequently active in support of Britain leaving the EU. He also served as chairman of the Global Warming Policy Foundation think tank which opposed some of the extreme environmental measures now being pushed through by a Conservative Government.  

He also said about traffic conditions in London that changes have done more damage, and is doing more damage, to London than almost anything since the Blitz. He was referring to the “Mayor’s addiction to cycling” and the introduction of the Cycle Superhighways by Boris Johnson and Transport for London.

In summary a highly intelligent and influential politician.

Note: I am no relation to him but people regularly call me Nigel when they can’t recall my first name. Hopefully that will be less frequent in future.

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

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Oil+gas Companies, Woodside Energy Voting and Archie Norman’s Mission

Oil and gas companies share prices are rising today after the price of oil rose on news from Saudi Arabia. One such company I hold is Woodside Energy (WDS) and I now have the opportunity to vote at their Annual General Meeting which I have done on-line (difficult to attend the AGM in person as it’s being held in Perth, Australia).

There are a couple of resolutions to amend the constitution and one on “capital protection”. These have clearly been put forward by climate activists as a way to dictate to the management of the company what they should be doing. I voted against both resolutions as I believe managers should manage and not be directed by a small minority of shareholders, or shareholders in general. If shareholders do not like what the company directors are doing they can change them, or sell their shares of course.

I also voted against the two remuneration resolutions without a close examination. Typically too complex and too generous as with most large company schemes.

On the subject of voting at AGMs, Archie Norman, the Chairman of M&S, is leading a campaign for changes to Company Law to better enfranchise shareholders in nominee accounts and improve AGMs. He has written to the Business Secretary Kemi Badenoch asking for changes to improve shareholder democracy.

Hybrid meetings are allowed now but he apparently wants “all digital” ones to be permitted which I suggest is not a good idea. But otherwise he is right that this area of Company Law needs reforming. The Government is well aware of this after campaigns by ShareSoc et al, but action is progressing at a snail’s pace.

You can find more details of Archie Norman’s views and actions on the web.

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

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Are We Nearing the End of the Bear Market?

There were glimmers of light in the UK stock market last week. I actually purchased a few shares to add to my current holdings although I still have a lot of cash in my portfolios. It is worth repeating what Mark Slater of Slater Investments Ltd said at the end of the week:

“The bear market that started in late 2021 is now getting fairly long in the tooth. It has led to significant de-ratings across the board, with a small number of exceptions among the megacaps that dominate the FTSE 100 index. We have now seen a run on a major bank. Many investors are trying to work out which is the next shoe to drop – perhaps a real estate collapse, perhaps a worse recession than expected. We are well and truly into the disillusionment phase. Sir John Templeton said that “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” Conversely, bear markets kill off the euphoria of the previous phase quite quickly and then grind away at any residual optimism until almost all market participants are deeply pessimistic. Given the current mood, the odds are that this bear market is nearing its end.

We are not advocates of market timing for the simple reason that it is extremely hard to get it right, both at the point of entry and exit. Investors who can do this are extremely rare, and most of them get it badly wrong at some point. Instead, we prefer to buy businesses we understand that can compound their earnings over time. We expect the majority of the companies we own to do this even though the economic backcloth is challenging. Some other companies we own will probably see their growth rates slow temporarily but we expect them to improve their competitive positions during tough times by taking market share or by making cheaper acquisitions. Only a handful of companies in the portfolio have experienced problems but these are typically due to unforced errors or things like China’s lockdown, issues that are temporary or fixable.

We have not seen so many companies we own trade on single digit PE multiples since 2008-9. Now, as then, as companies grow their earnings while their multiples fall they are getting cheaper and cheaper. It is analogous to holding a beach ball under water. Sooner or later you cannot hold it down any longer and it jumps above the water. For a more accurate analogy, someone would also be pumping air into the beach ball while you try to keep in down.

It is fashionable to be “down” on the UK, especially after the Truss budget. It is therefore worth remembering that the UK is not all doom and gloom. The Mid 250 index has broadly matched the earnings of the S&P 500 over the past twenty years. The UK market also produces a higher proportion of “tenbaggers” than the US market. Michael Caine might say that “not a lot of people know that” and he would be right. Our view is that we saw peak gloom about the UK last autumn.

While we cannot predict the end of the bear market with any accuracy we also believe we should not try to do so. We are comforted that we own good businesses that are cheaper than they have been for a very long time. If we look ahead a couple of years rather than a couple of months, we expect to make money When things are going wonderfully, people can rarely imagine that they can go wrong. Similarly, when times are tough, people often struggle to imagine that they will one day be wonderful again.”

These are wise words from a very experienced stock market investor.

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

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Ideagen Offer and Inspiration Healthcare Webinar

I mentioned a possible offer for Ideagen (IDEA) in a previous blog post (see https://roliscon.blog/2022/04/15/possible-offer-for-ideagen/ ). Today one was announced – a cash offer of 350p per share from HG which is a massive premium to the last listed price of 243p. The directors are recommending it so at such a premium I think it is likely to be a done deal. I will be accepting for my shares.

That should at least offset the losses today from the rest of my portfolio as the market heads south. We are surely in a bear market now. Perhaps folks read my previous blog post which suggested it was a good idea to sell in May and go away.

This morning I attended a preliminary results webinar by Inspiration Healthcare (IHC) in which I have a very small holding. The company sells neonatal products for premature babies. The share price has been drifting down like many technology companies. But revenue and EBITDA were up. Margins were also up as they concentrated more on their “own brand” products which is something I always like to hear. Distributing products from other companies is never very profitable in the long run.

The company has been investing in facilities, R&D and IT systems. But there have been logistic challenges as many other companies are facing. With purchased items increasing in cost also and they are changing suppliers in some cases.

Only 4% of revenues are from the Americas so there is big potential there if they can get regulatory approval and develop their marketing.

The company is cash generative and has no borrowing.

Project Wave is aimed a developing a new product and was delayed by the Covid pandemic but is now progressing – it’s now in clinical trial with possible commercialisation next year.

There was interesting discussion of ESG initiatives and staff support. Some 40% of staff are now working from home and one third of staff on a 4 day week (4 days at 8.00 to 6.00). They are using the Charities Aid Foundation (CAF) to distribute donations to charities – an organisation I seem to be coming across more frequently of late and worth knowing about if you make charitable donations.

There were a couple of questions from the audience. One on the increased costs of EU regulation for medical products. The second question was on a possible share buy-back. The answer was that it was not a benefit and “not on the cards”. It was suggested that it is important to maintain a strong balance sheet and to invest the capital. I cannot but agree as I almost always vote against them except in investment companies.

This webinar was on the Investor Meet Company platform and it was a helpful one. I recommend you watch the recording if you have an interest in small tech companies.

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

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Ukraine – A More Balanced View

I attended a meeting of investors on Sunday and the main subject discussed was the war in Ukraine. Most attendees clearly had a gloomy prognosis for the outcome mainly because of a belief that Vladimir Putin was a lunatic who desired to restore the USSR, i.e. he would not stop at Ukraine but would thereafter move into Moldova, Estonia, Latvia, Lithuania, Romania et al.  This view is very much reflected in the Western media with concerns that the war could very rapidly develop into a nuclear one.

President Zelensky is clearly a masterful politician. He came from nowhere to win the election for President when historically he was simply a comedian who pretended to be President. There are few more unusual biographies. He also became a master of social media and has won the hearts and minds not just of Ukrainians but of most of the western world – the British do of course love underdogs. Meanwhile Putin has failed in terms of public relations by not putting his case well and has even publicly suggested that Ukraine should not be considered an independent country.

I take a somewhat different view to the popular consensus although I would not want this to be seen as an apology for the acts of the Russian military. As in any war it is unfortunately the civilians who are suffering the most. A peaceful solution needs to be found because if the war is escalated, with more sanctions being imposed on Russia, then the economic damage will be severe and widespread on both Russia and many European countries.

I think when looking at political conflicts which lead to war then it is best to look at the conflict from the point of view of the enemy when pursuing a solution.

Ukraine has historically been closely linked to Russia after being dominated by Poland. To quote from Wikipedia by the Treaty of Perpetual Peace [surely a wonderful name for a peace treaty], signed in 1686, the eastern portion of Ukraine (east of the Dnieper River) came under Russian rule. As a result a large proportion of the population (about 30%) speak Russian, particularly in the Eastern region and the Crimea. In fact President Zelensky was brought up in a Russian speaking family. In other words there are strong cultural ties with Russia. Ukraine was also a founding member of the USSR until that was dissolved in 1991.

Russia is clearly concerned about the encroachment of NATO and the EU eastwards that could both militarily and economically threaten Russia. Only Belarus, Moldova and Ukraine are not in the EU but Zelensky has indicated his desire to join. There is also the problem of the insurgency in the Donbas region which was long-standing before the latest events plus the takeover of the Crimea by Russia which Ukraine wants back. The longer the war goes on, the more difficult it will be to reach an amicable solution as attitudes harden on both sides and people look for revenge. As has been pointed out, Russia might be able to achieve a complete occupation of Ukraine but that might be followed by many years of constant insurrections and guerrilla warfare against them.

Russia has now offered to cease fighting on the following conditions: Ukraine changes its constitution to enshrine neutrality, acknowledges Crimea as Russian territory and recognises the rebel-held areas of Donetsk and Luhansk as independent territories.

This appears to be a reasonable basis for a settlement that would halt the damaging fighting and cease the escalation. If all military forces were withdrawn by Russia from the rest of Ukraine and Ukraine itself committed to the above (including no applications to join the EU and NATO), then a modus vivendi could be achieved.

Many people suggest that Putin might be removed as sanctions bite and his economy collapses or the war goes against Russia. But that seems very unlikely to me. Opposition to Putin in Russia is quite small and exaggerated by western media. Putin re-established Russia politically and economically after the collapse of the USSR so many people respect him for that. The war in Ukraine will not undermine the regime in Russia unless it broadens into a much wider conflict with bigger military losses which seems unlikely to me. NATO is not likely to get involved and quite rightly because to do so would simply damage western European countries even worse as Russia retaliated by halting exports of gas and oil. Sanctions on Russia will not halt the fighting alone and will take too long to have an impact – they can only encourage Putin to reach some kind of settlement.

A settlement that gives time for countries like Germany and Italy to wean themselves off Russian gas is a better solution. There are many worse options.

Here’s a good quotation from the book by Barton Biggs I mentioned in a previous blog post:

“ Disregard the ranting and raving of the self-proclaimed elite thinkers and alleged experts on wars, economies, politics, and, above all, the stock market” and “History doesn’t evolve in a slow and orderly way; often it leaps forward in disorderly, chaotic jumps. People with wealth should assume that somewhere in the near or far future there will be another time of cholera when the Four Horsemen will ride again and the barbarians expectedly will be at their gate”.

So far as Ukrainians are concerned, those circumstances have already arrived.

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

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A Week to Forget in the Stock Market and DotDigital

Last week was certainly one to forget with Friday particularly bad for most portfolios (the FTSE-100 was down 3.5% on Friday and tech stocks were again hit – Nasdaq was down 1.7% on the day). With the war in the Ukraine continuing the economic outlook looks bleak. We already had sharply rising inflation and sanctions against Russia are driving up the price of oil and gas which is never good for the economy. As anyone who has received a utility bill of late will realise, consumers and industry are going to be hit by sharply rising prices in the next few weeks which will affect many businesses.

There was already a downward trend in the market and I expect this will continue unless peace breaks out in the Ukraine which does not look likely until Russia has achieved its objectives which might take some weeks, if ever. Taking over a country where the population is totally opposed to you is never easy, particularly when outside assistance is being provided and sanctions are biting. Ukrainians are not apparently going to accept defeat.

One of my investments which was worst hit last week was DotDigital (DOTD) but not because of the war. The company provides an “omnichannel marketing automation platform” as they call it (email and sms messaging). The share price fell by 60% after an interim announcement on Wednesday that suggested the forecasts for the second half were not going to be met. In addition the CFO and Chairman are departing (the latter on health grounds).

This is a company I have held for some years first buying at around 8p in 2011 and selling some at around 200p in 2021 when enthusiasm for technology stocks drove the price up to unsustainable levels. The price now is 58p.

The company is profitable, has no debt and lots of cash on the balance sheet and has shown steady growth so there is much that is positive about the company. But clearly the expansion of US operations on which forecasts relied has gone seriously wrong. I attended the results webinar on Friday and submitted the following question:

“Clearly one of the reasons for reduced forecasts is the disappointing figures from the USA. Why after several years has DotDigital not established itself well there? Why has the management of that region not been changed as a result?  There does not seem to be anyone on the board with experience in the USA. As you are looking for a new Chairman could you please ensure that a suitable person is appointed with some knowledge of operating in the USA”. The question was not answered but there was enough information disclosed to make it clear that all was not as it should be.

A question on margins got a response that margins will be lower in the second half because marketing spend will be going up. As regards the US management issues, it was indicated that a couple of management teams had been poached by competitors offering higher salaries. Lots of money from VCs and private equity was going into competitors. It was mentioned that “customer attrition had stabilised” which was a remarkably negative comment. With this kind of product (which I use myself) where there is high recurring revenue people are generally reluctant to change platforms. They should not be losing customers! But the figures suggest they are losing some customers and gaining very few new ones in the USA.

So it would seem that after some years of trying to make a success of the US market they are back at square one with a new management team. It looks like another example of a UK business entering the USA but falling flat on its face in terms of marketing approach.

I will try and find out more next week but I have not quite given up on the company completely as yet. These issues might be minor ones if they take appropriate steps.

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

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How to Protect Your Wealth When Wars Threaten

I mentioned in a previous blog post a book entitled “Wealth, War and Wisdom” by Barton Biggs which covers how the turning points of World War II intersected with market performance. I have now read it and I am surprised that this book is not better known. It’s a very good analysis of how the wars of the 20th century impacted stock markets and the wealth of individuals. It probably should be essential reading for residents of the Ukraine at this moment in time, but it’s worth everyone reading it.

Does the stock market predict wars and their impacts is one question he tackles. The answer is yes and more accurately than political commentators it seems in many cases.

Here are some tips from the book that might be helpful:

  • Stock markets recover when the news stops getting worse, and before good news appears.
  • Equity markets have been a good protection against loss of wealth even in countries that suffered defeats, particularly in the long-term. The economic recovery of Japan and Germany after the Second World War soon offset their losses during the war.
  • Bonds are a losing investment in real terms whether you are on the winning or losing side. Inflation erodes their value because Governments print money to finance wars.
  • Buying gold only works if you bury it in the back garden, as otherwise it’s likely to be confiscated.
  • Property, particularly farms you live on, or small businesses you operate, are good investments even in the worst times.

The author actually covers the history and battles of World War II in some depth and it’s a refreshing and well researched analysis even for someone like me who is old enough to have read about a lot about the era in the 1960s and since. It provides some wonderful anecdotes and facts about how those wars created suffering for many millions of people.

The book was published in 2007. The author, Barton Biggs, was born in the USA and was an investment manager and strategist for Morgan Stanley. He made his name by forecasting the dotcom boom and bust which he called “the biggest bubble in the history of the world”. There is a fuller biography on Wikipedia.

Altogether a very original book which I highly recommend.

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

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Warren Buffett Letter and Culture

Warren Buffett has published the latest Berkshire Hathaway letter to shareholders (see https://www.berkshirehathaway.com/letters/2021ltr.pdf ). As usual it makes for an amusing and educational missive including his comment on the $3.3 billion the company paid in taxes. He says “I gave in the office” is an unassailable assertion when made by Berkshire shareholders.

The company improved its per share value by 29.6% in 2021 which was slightly ahead of the S&P 500 with dividends included. That’s a big improvement on the previous two years when Berkshire lagged the index.

What has been one of the key reasons for the success of the company over the last 55 years? I would suggest culture is one. A culture of honesty, integrity and rational behaviour if you read the latest and prior newsletters.

Meanwhile the Chartered Institute of Internal Auditors (CIIA) have published a report entitled “Cultivating a Healthy Culture” (see https://www.iia.org.uk/policy-and-research/research-reports/cultivating-a-healthy-culture/ ). It suggests based on research among its members that culture is important and that 66% believe that the UK Corporate Governance Code should be strengthened in regard to the responsibilities of company directors. The Financial Times reported this as one of the causes of several company collapses in recent years such as at BHS, Carillion, Greensill and Patisserie Valerie. But if you read the reporting on this issue there is discussion of Environmental, Social and Governance issues (ESG) and equality issues as if adding those to the Governance Code might assist.

Yes I suggest culture is important but the key question to ask when looking to invest in a company from my experience is simply this “Is the Management Competent and Trustworthy?” (that’s a quote from my book on investing). If you don’t trust the management walk on by. And if you are holding shares in a company and news comes out that undermines your confidence in the directors, then sell the shares. Don’t wait for them to reform.

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

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