New Year Forecasts and Internet Retailers

It’s that time of year when share tipsters start to issue their bets for the New Year. But the collapse of on-line grocer Farmdrop and recent profit warning from Boohoo (BOO) prompts me to think that one thing I will be avoiding next year is on-line retailers apart possibly from the gorillas already in that space.

Unlisted Farmdrop went out of business a few days ago so customers who were expecting deliveries of farm produce for Xmas won’t get them. Farmdrop is reported to have raised as much as $40 million in capital and has as many as 10,000 customers and 450 suppliers who will be having a threadbare Christmas. The company was making substantial losses based on its last filed accounts.

Farmdrop had competitors, as of course does Boohoo. I think entrepreneurs have realised that it is now very easy to set up an on-line shopping site using software such as Shopify, and there are in reality no barriers to entry. The products such as groceries or fast fashion are not unique but investors have been piling money into such businesses without thought as to how profits can be achieved. Companies have been spending enormous amounts on marketing on the basis that will get them to high enough revenue to cover their costs. But other companies are doing the same. Established players such as Boohoo will no doubt survive albeit at reduced profit margins as they will suffer a welter of small fish nibbling at their market share as the lure of apparent future profits draws in new entrants.

Physical retailers are not in a good position either with the Covid-10 epidemic resurging and forecasts being made of more lock-downs after Christmas. But they have at least moved to have on-line shopping options to a large extent, using their strong, well-known brand names and financial strength to take market share.

With personal taxes rising, and given the above, my tip for the New Year is to avoid retailers unless they have dominant positions or clear barriers to entry and definitely avoid small companies trying to establish themselves in already crowded internet markets.

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

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Northern Venture Trust and Other VCTs

Northern Venture Trust (NVT) recently published their Annual Report. It shows that the manager (now Mercia) collected a performance fee of £2.5 million which on my calculation raised the overall fees and expenses as a percentage of closing net asset value to 4.5%.

This is way too high in my opinion even allowing for the work involved in managing a portfolio of small, unlisted investments. When launched back in 1995 Northern did not have a performance fee but it was added later despite the opposition of myself and many other shareholders.

There is of course no evidence that performance fees in investment trusts improve performance

I will be submitting a question and comments to the AGM on the 7th January on this issue and I would encourage other shareholders to do the same. It would be best to remove the performance fee. Other VCTs such as the Amati AIM VCT do not have one and they outperformed Northern last year in terms of Total Return.

VCTs are a perpetual problem in relation to excessive management fees, poor corporate governance, and general behaviour prejudicial to the interests of shareholders. Shareholders in the Edge Performance VCTs and Core VCTs should vote in support of campaigns for change – see https://www.sharesoc.org/campaigns/edge-vct-campaign/ and https://www.sharesoc.org/blog/vcts/core-vct-another-messy-vct/  . Note: I have never held shares in either of those VCTs but they are typical examples of problems in VCTs over the years.

Oddly enough a person who shall remain nameless has suggested that ShareSoc has become more active in campaigns against incumbent management since I departed as I was often too sympathetic or supportive of management. This is a gross distortion. Just considering VCTs, the following is a list of VCTs where I made representations or ran full blown campaigns while I was a director of ShareSoc or UKSA in the last 25 years:

Acuity VCT, Albion VCT, Baronsmead VCTs, Bluehone VCT, British Smaller Companies VCT, Chrysalis VCT, Downing Income 3 VCT, Foresight 1+3+4 VCT, Murray VCTs, Northern Venture Trust, Oxford Technology VCTs, Rensburg AIM VCT, Singer & Friedlander VCT and Quester/Spark VCT (some have since changed their names).

In some cases, this resulted in major board changes and changes to the fund manager. The results were positive in most cases which shows how important it is for shareholders to take action when things are going wrong.

It is good to see that since ShareSoc was founded 10 years ago by me and others it has become more active recently in promoting campaigns against companies. With a new Chair they are also seeking a new General Manager to take the organisation forward.

I wish them the best of luck in the New Year as it is certainly important for ShareSoc to continue to increase membership to act as a representative voice for private shareholders.

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

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BHP Unification

As a small shareholder in BHP Group (BHP) I have just received a heavyweight document (285 pages) explaining the proposed unification of the company. This proposal is to remove the dual listed structure of the Australian and UK companies and the complex corporate structure associated with that.

For UK shareholders of BHP Group Plc this will mean, if it is voted through, that you will have your Plc shares replaced by Depositary Interests (DIs) on a one for one basis in BHP Limited (the Australian company). Those DIs will be administered by Computershare and this is similar to how most foreign registered shares are managed. Those with BHP Group Plc paper share certificates will have those replaced by electronic DIs. Share dividends will be paid directly to you in sterling as before.

For those with very small holdings of certificated Plc shares there is a facility to sell your shares if you do not wish to hold the Ltd shares in future.

One major implication is that the new Limited Shares will not be covered by a Primary Listing in the London Stock Exchange but will likely be only a “standard” listing. This may cause some institutions who manage index-based funds such as UK focussed trackers to need to sell the shares, although as the new shares will increase the total number of Ltd shares listed worldwide there may be purchasing of the shares by other funds to maintain their index proportions. There may be some short-term volatility in the share price as a result.

At present the price of the Australian listed shares can significantly differ from the UK listed shares, after accounting for exchange rates. The unification will mean only one price applies in future. BHP Plc shares have historically traded at a lower price than the Limited shares and that differential will be eliminated.

Note that the exchange of shares for UK shareholders should not incur any capital gains liability – it will be treated as a “roll-over” not a sale/purchase transaction. There will also be no Australian withholding tax applying to future dividends.

BHP management gave a presentation to ShareSoc members this week on the unification which I watched and as a result I can see no reason not to support this transaction. Hence I will be voting in favour.

The above is a simple explanation of a complex transaction. So please read the supporting documents for the meetings at which this transaction will be voted upon on the 20thJanuary. You can also log-in online to view the meetings. Go to https://www.bhp.com/unify for more explanation, the shareholder circular and prospectus.

But please make sure you vote your shares, including those in any nominee accounts!

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

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Afghanistan – A Disaster Area

In this season of goodwill, let is give some thought to the plight of Afghanistan. This is what was reported on “The Hill”: “The economic contraction triggered by the Taliban takeover is unprecedented. A projected 30 percent loss of its gross domestic product could occur within a year. The economy is imploding and there is no cash left for people’s everyday transactions.

Afghanistan is a country historically shored up by external aid. It is now untethered as international political positions have hardened against the new de-facto rulers in Kabul and previous channels of support have been shut down. Salaries of key public sector workers — doctors, nurses and teachers — have not been paid in months. Health facilities have no means to pay for fuel to run generators or ambulances. Basic service delivery is at risk of collapse, and the people who depend on these services are the unintended victims.

Without bolder international support to maintain the indispensable social functions of the state, it will not be possible to prevent death in Afghanistan this winter. Already starved by the worst drought in 20 years, two-thirds of the population will depend on food assistance in 2022, the World Food Program estimates. Children will succumb to high levels of malnutrition, first dying from preventable diseases, then from outright starvation. With no health clinics to go to, more women will die giving birth. Families will face freezing winter temperatures without electricity or clean water”.

In fact Afghanistan has only been kept solvent by foreign aid for many years. For good Christmas reading I recommend a book entitled “The Places in Between” by Rory Stewart (photo above). It describes his walk across the country in 2002 soon after the Taliban were ousted from power by the US invasion. He walked the distance from Herat to Kabul in mid-winter, often alone although he did pick up a dog as a companion on the way.

He was told many times that it was unwise to do so but he gives a graphic description of life in the villages and towns he passed through and the people he met. Altogether a book that gives a good description of the country and its people – in essence a great “travel” book for the winter days. It will make you feel happy that you are snug at home in England and all our minor difficulties can soon be forgotten.  

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

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Victorian Plumbing Falls, Dunelm Loans and Parties

I commented negatively on Victorian Plumbing (VIC) back in June soon after it launched an IPO at 262p. After an initial spurt upwards in the share price it’s now at less than 100p. It has recently published it’s annual results which look positive if you take them at face value – revenue up 29% and adjusted EBITDA up 53%. But in reality the story is more complex with reported pre-tax profit down 17% and there are mixed messages about future prospects. It should remind everyone of the danger of investing in new IPOs.

Another item of news today was from Dunelm (DNLM) who have negotiated a new bank facility and the odd thing is that it has various “sustainability” conditions. Does this mean that banks will not lend you money in future unless you commit to reducing your greenhouse gas emissions, source your cotton products from responsible sources, reduce your plastic packaging and provide a customer “take-back” service. These are all commitments made by Dunelm which will be verified by an independent third party.

As an investor in Dunelm, I consider it quite unreasonable that banks should be trying to interfere in the management of companies in this way. Some of the objectives may be meritorious but it is surely for the company to decide on such matters, not bankers.

I don’t normally comment on the trivia of political grandstanding but the recent media publicity about alleged parties at No.10 Downing Street and redecoration of the Prime Minister’s flat is exasperating. Have politicians not got more important things to argue about?

And why should we put up with media being dominated by such stories when they should be covering more important news?

Attacking Boris Johnson for events he did not even attend and neither did other Ministers makes no sense. The alleged party happened a year ago so it’s ancient history in political terms and perhaps some junior staff should be warned not to do it again if there is real evidence of wrong-doing (which is unclear). But the Prime Minister should not be wasting his time on such trivia. Allegations he was being untruthful make no sense either as clearly he was relying on information given to him by others.

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

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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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