GoGompare AGM and a Generous Remuneration Scheme

Yesterday I attended the Annual General Meeting of GoCompare.com Group (GOCO) which was actually renamed GoCo Group at the meeting. This was held in the City of London at 3.00 pm but even so there were still very few ordinary shareholders present – less than ten I would guess.

The company’s main business is a price comparison web service, particularly focused on car insurance, but also covering utilities and other products. It is of course fronted by Italian opera singer Gio Compario in TV advertisements. They also have a “Rewards” business providing discount vouchers which they recently acquired and a new business called WeFlip that automates utility switching. The company is chaired by Sir Peter Wood, founder of Esure and Directline insurance companies and he recently purchased about 4% of the business.

Sir Peter introduced the board and then invited questions. I was the only shareholder who asked any questions and I focused on the remuneration. For some background it’s worth noting that the CEO, Matthew Crummock, received a total (single figure) remuneration of £1.59 million in 2018. This is for a company that had revenue of £152 million and pre-tax profits of £33.8 million last year. For 2019 his basic pay will be increased by 12.5% to £450,000 and his maximum opportunity on an LTIP from 200% of salary to 230%. He also gets an annual bonus and “PSP” awards. A typically very complex scheme which results in a 19-page Remuneration Report!

I asked why awards under the “Foundation” bonus scheme were made when the performance targets were not met. It was stated that they were only £1 million short on revenue so the remuneration committee decided to award the bonus and the board supported it.

I also asked about the non-specific Bonus and PSP targets for 2019 given on page 57. What were the “Selection of people and cultural measures” and the “Customer centric measures”? At this point the Chairman suggested that these questions be handled after the meeting but I insisted they should be answered then which he conceded. Some reasonable answers were then given. But I advised the Chairman that I would be voting against the Remuneration Report as I considered it too generous.

Voting was then taken on a poll. But the Chairman advised there were substantial votes against the Remuneration Report on the proxy counts. In fact there were 25% of votes against the Remuneration Report and 15% of votes against Angela Seymour-Jackson who chairs the Remuneration Committee. There were also 11% of votes against Non-Exec Zillah Byng-Thorne perhaps because she is also CEO of Future Plc and also a non-exec at Paddy Power Betfair – too many jobs I suggest.

I spoke to Angela Seymour-Jackson after the formal meeting. She said she was disappointed that institutional shareholders voted against the Remuneration Report. She mentioned the payment of a bonus when the performance target was not met was one reason. I said a bonus target is a target that should be met, otherwise the bonus should not be paid. There will likely be more consultation with investors.

I also explained that I dislike LTIPs because they have been one reason why executive pay has ratcheted up in the last few years, and I particularly dislike those that pay out more than 100% of salary. I told her that bonus schemes need to pay out quickly if they are to provide real incentives, i.e. within months not years. She said they were constrained by the guidance in the Corporate Governance Code. Comment: in fact the latest version of the code does not mandate LTIPs and in any case the Code is always a “comply or explain” system. Companies can adopt better systems if they choose to do so and explain why.

This company is a typical example of why executive pay is out of hand and there is no sign that the directors of such companies are likely to change their ways. The widespread public concern over excessive pay and over-complex remuneration schemes that might pay out very large sums has not yet resulted in any change of policy and remuneration committees are still a soft touch. Change is needed.

Otherwise this was a poor quality meeting – no trading statement issued on the day, no presentation, and minimal shareholder attendance. But I did pick up from talking to one of the directors that the WeFlip business, in which the company is investing millions this year, is ahead of internal targets. But the company will win no prizes for its corporate governance.

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

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Accesso Technology AGM Report

I attended the Annual General Meeting of Accesso Technology (ACSO) this morning at their offices west of London. With a 10.00 am start time there were only about ten ordinary shareholders there.

This company provides ticketing and queuing systems for theme parks and other visitor attractions. It had a great share price performance under the management of former CEO and then Executive Chairman Tom Burnet (who is still on the board as a non-exec director) until October 2018 when the share price peaked at about 2900p. It’s now about 815p having picked up slightly after this morning’s announcement. Long-standing shareholders are not too happy as evidenced by one question posed by a shareholder – see later.

The new Chairman Bill Russell introduced the board (who had almost all changed in the last year) and then new CEO Paul Noland covered the morning announcement. There had been a positive start to trading and they are on target to meet year end forecasts. There was also coverage of the “significant investment in product integration”. That is a major issue to understand and may be spooking investors. As Paul Scott on his Stockopedia blog said this morning, there is “enormous capitalisation of development spending onto the balance sheet” and that’s just a comment on the historical position when they clearly plan to spend more.

David Stredder opened with questions on the impact of the change to IFRS 15 accounting which has substantially reduced revenue in the “guest experience” (queuing systems) segment because they now only recognise the net revenue rather than the gross amount billed. Comment: reading these accounts with all the “adjustments” and changes in the last year from acquisitions, etc, makes for tedious work. It’s easier just to look at the cash flow statement which shows how cash profits have come down due to very heavy development expenditure which was capitalised.

David also asked how each of the new non-execs were recruited. Apparently by searching Tom Burnet’s “network” and using professional advisors. A recruitment company was not apparently used for these jobs, which is definitely a negative sign in my view. Using the “old boy network” is not the best way to get independent and challenging non-executives. Also Tom Burnet cannot be considered independent being a former executive director which is frowned upon now in corporate governance circles.

In response to a question on the large increase in development expenditure, it was stated that they needed to increase expenditure on the two acquired companies (which were relatively “early-stage”) and to integrate them into a new open platform. It was later stated by Tom that customers were looking for simpler deployment systems which also prompted the software redevelopment.

I asked about the aborted acquisition last year which cost the company $1.7 million in wasted fees, and why was it not announced at the time? Surely a price-sensitive matter? The response from Tom was that they were advised that announcing it could be deferred until the next trading statement as it was not that significant an item. Comment: That may have been the advisor’s view but it’s not mine.

It later transpired that the acquisition was aborted because some of the key investors whose support was required for a large rights issue required to fund the acquisition backed out. They had become nervous about the tech sector. It was undoubtedly a poor time to do that.

One shareholder asked for explanation of why the share price had halved, and more. Tom gave the reasons as:

  1. General market downturn in tech stocks (down 25%-30% in the Autumn).
  2. A pattern of shorting in their stock for the first time.
  3. Internet blog reports which affected retail shareholders. He was particularly critical of comments by unregulated commentators and wants to do something about it. Comment: I agree with him and said so in the meeting.
  4. Shareholder disappointment that he was stepping down.
  5. Concerns about increased development expenditure.

Comment: the fact that Tom also sold a large number of shares no doubt contributed but I agree with his analysis.

David criticised the lack of PR to private investors that might have mitigated these concerns but Tom said the board decided not to get into a battle of words as they were advised this would not help. Comment: probably right there but some positive presentations may have helped.

The issue was raised about the lack of availability of institutional analyst reports to private investors. This had probably not helped as these had been generally positive. One of the non-execs had complained about this as a problem for all AIM companies to the stock exchange, his M.P., etc. Comment: it was bad before even MIFID II came into force but is now exceedingly frustrating even if you are “professional” investor (i.e. a “sophisticated” or “high net worth” investor as classified by the FCA).

Above is a summary of the key questions/answers which helped to reveal exactly why the shares are now out of favour. I think investors are concerned about the heavy development expenditure and there is always some doubt about whether this will pay off in terms of future profits. One gets the impression it is necessary to redevelop old systems and provide a new technology platform for the future but it is clearly not going to be cheap. So profits are not likely to leap upwards for some time.

The confusing accounts probably does not help to instill confidence either, plus of course a new board and new CEO. It’s effectively “all change” at Accesso and investors don’t like revolutions.

With the current valuation the shares may be a buying opportunity as they have fallen so far, but I think a lot of investors will wait and see.

As regards the meeting itself, not a great location and time with no presentation to attract investors but otherwise it was well managed by the new Chairman.

All votes were passed on a show of hands, although some of the resolutions received considerable votes against for no very obvious reasons, e.g. 950k against the reappointment of KPMG. Note that there was no remuneration resolution on the agenda which is a shame because the remuneration scheme at this company is certainly one I would have voted against. AIM companies do not have to have one but it is certainly good practice to do so.

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

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AB Dynamics Placing, and Metro Bank Troubles

AB Dynamics (ABDP) announced a placing to raise £5 million this morning. The money will be used to finance potential acquisitions, add production capacity and meet working capital requirements. This company provides vehicle testing systems and has been rapidly expanding recently. The share price has also been rising like a rocket in the last few weeks and on fundamentals the company is now very highly rated – prospective p/e for the current year is 47. So perhaps the company just saw this as a good opportunity to raise some money.

The new shares are being placed at 2200p though which is a discount of 13% to the share price last Friday. However although this is being done via a placing to institutional investors there is also an “open offer” for those such as private shareholders who cannot participate in the placing. This is the way to do such things and as a holder of the shares I will probably take up the open offer just so as to avoid dilution, although I don’t consider the price as particularly attractive. The share price dipped first thing this morning on the news but has subsequently recovered most of that fall.

Metro Bank (MTRO) has been in trouble since the start of the year when it disclosed it had wrongly risk-weighted some of its loans which meant its capital ratio was wrong. Metro is one of the so-called “challenger banks” that aim to tackle the dominance of the big high-street banks in the UK. The company did a placing to raise another £350 million last week to shore up its balance sheet.

But depositors have been spooked by the news and apparently there were queues of customers withdrawing money from branches in West London recently. Is this another run on a bank, as happened at Northern Rock? Where a falling share price and collapsing confidence in the bank caused depositors to panic? The FT ran an editorial saying it was not similar but it looks very much so to me. Although the Financial Services Compensation Scheme (FSCS) now protects deposits up to £85,000 that will not help many retail customers and the delays in obtaining compensation will encourage depositors to move all of part of their funds elsewhere and promptly. Corporate clients have no such protection anyway. When confidence in a bank is lost, even if it is technically solvent, depositors don’t hang around.

Here’s a good quote from eminent Victorian author Walter Bagehot: “Every banker knows that if he has to prove he is worthy of credit…in fact his credit has gone” (in another letter in the FT today).

From my experience of trying to open an account with Metro Bank recently, I have doubts about the quality of this business anyway. I gave up in the end. Needless to say I don’t hold shares in Metro. But all banks are becoming exceedingly difficult to deal with. My long-standing (over 50 years) bank recently made me visit a branch to prove who I was. There was a letter complaining about the service from banks in the FT on the 15th May. It suggested that “something has gone badly wrong” with frontline bank service. I had similar problems with a business account at HSBC who proved impossible to talk to other than by visiting one of their branches – and even then they were unable to resolve difficulties. It is extremely annoying that banks are becoming paranoid about KYC and security checks so that they won’t even talk to you on the telephone about simple queries.

If any readers can recommend a bank who acts more reasonably and sensibly, let me know.

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

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Bango Loses Grant Thornton and Mello Event

On Friday I missed the Bango AGM (I am a very smaller holder of the shares) as I wanted to attend the last day of the Mello event – a brief report on that is below. There was a surprising vote against the reappointment of Grant Thornton as the auditors at Bango (BGO). This is very unusual. Most auditors can assume they will get back in unless they have really cocked up a previous audit.

So why did Grant Thornton (GT) lose the vote with 55% of shareholders against? Was it disgruntled investors who held Patisserie or Globo previously – both cases of massive frauds undiscovered in the GT audits of those firms? Or was it because of events at AssetCo, Nichols or the University of Salford where GT were censured?

None of those reasons. According to Bango Chairman David Sear it was because proxy advisor ISS recommended voting against on the basis that the company had paid GT marginally more for other work than for their audit of the company. That’s despite Mr Sear’s comments that the latest audit by GT was the toughest they had ever had and they were competitive on a re-tender.

I suspect some investors might prefer another auditor even so.

Mello Meeting

This event in Chiswick was certainly worth attending – mainly for the quality of the speakers and the opportunity to network with other investors. Leon Boros gave a very good presentation on why you should invest directly in equities rather than funds or bonds. We probably can’t all manage to achieve his feat of becoming a multi-millionaire solely from ISA investment via a very focused portfolio. He not only evaluates companies well, but also has learned how to trade shares to maximise profits and minimise losses. He recommended the book “The Art of Execution” by Lee Freeman-Shor and I would do so also – see my previous blog post here for a review: https://roliscon.blog/2018/02/18/the-art-of-execution-essential-reading-for-investors/ .

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

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Chas Stanley Prices Crest Membership At Ridiculous Level

Charles Stanley have sent out a letter to all their customers who use Personal Crest accounts that in future they will be charged £504 per annum (inc. VAT). Although the company stopped offering the service to new customers some time ago, existing users have in some cases been paying nothing to be a Personal Crest member. They clearly want to get rid of all such users of their service, including those using the low-cost Chas Stanley Direct platform because £504 is not likely to be an economically justifiable fee for most people.

They claim in the letter that there is a gap between what they charge for the service and the effort and costs involved as a Crest sponsor. Is this really true though? Almost all stock market trades go through the Crest system whether you are in nominee account or Personal Crest account. So why should it cost more?

In reality they are probably just trying to “simplify and standardise their service to cut costs and improve the service to clients” as they recently announced. But there are major advantages to having a Personal Crest account. You are on the share register of the company so the shares are clearly owned by you unlike in a nominee account. In addition you get the dividends on the shares paid directly to you instead of it sitting in a broker’s account earning them interest rather than you. Clients would probably be willing to pay a reasonable fee for the service, but not £504.

The only saving part of the announcement is that they are offering a free transfer to another Crest sponsor free of charge. I imagine many people will take up that offer although there are not many alternatives. I suggest clients of Chas Stanley who are affected by this change also send in complaints about this change.

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

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Mello Trust and Funds Event and ShareSoc AGM

I managed to attend part of the Mello Trust and Funds Event in West London yesterday and although I had other commitments today, I may manage to attend the second day of the main Mello 2019 event tomorrow. If you have not attended one of these events before, it is definitely worth doing so. The only slight criticism I would have is that getting to Chiswick from South East London where I live via the slow District Line is not great. The wonders of the London transport network meant it almost took me two hours to get there. I’ll give a brief report on the sessions I attended, and what particularly interested me:

There was a good presentation by the young and enthusiastic George Cooke on the Montanaro European Smaller Companies Trust (MTE). This is a company I had not come across before and it looks to have a good performance record. It’s a stock pickers fund in essence but Mr Cooke’s approach to small cap company research seems similar to mine. However he covers the whole of Europe whereas my focus on direct investments is the UK. I will take a more in-depth look at this company.

I attended a panel session on investing in small cap funds and one member of the audience questioned why one would do so when you can invest in the companies directly. Here are two possible reasons: It can give you exposure to geographic or sector areas that you cannot adequately research oneself (as in MTE), and for UK funds it is always interesting to see what the high-performing fund managers are buying and selling even if you only get a limited view. That’s why I invest both directly in companies and in funds.

I also attended a presentation by Carl Harald Janson on International Biotechnology Trust (IBT) a company I already hold so I did not learn a great deal new. This is a sector specialist with a good track record and it is now paying dividends out of capital which has help to close the discount to NAV when it used to be quite high. The discount is now negligible.

Several stand staffers in the exhibit area tried to sell me “income” funds but that proved difficult as I had to tell them I never buy income funds. For long-term returns, growth funds usually provide better performance and you can always sell a few shares to produce cash income – and you may be better off tax-wise also as a result. But many people buy funds for retirement income so they are attracted by the “income” name. This is where more financial education might be beneficial.

The last presentation I saw was by Nick Britton of the AIC (Association of Investment Companies who represent investment companies). Their web site is always useful for researching investment trusts and their past performance, which I tend to prefer as against open-ended funds although I do own a few of the latter.

Nick covered the differences between the two types of funds (open versus closed). His presentation suggested that closed-end funds consistently performed better for several reasons and he compared some funds of both types run by the same manager as evidence. There are a number of reasons why closed-end funds perform better in the long term and I was convinced by the statistics on this a long time ago. But Nick gave some more data on the subject.

So why do open-ended funds dominate the fund industry (£1.2 trillion versus £189 billion funds under management)? I rather expected that after the Retail Distribution Review (RDR) that platforms would no longer have a strong financial incentive to promote open-ended funds but it seems there are other reasons remaining which are not exactly clear. But it’s the investors who are suckered into buying open-ended funds who should know better. Like in most markets, folks buy what they are sold rather than do their own research and buy the best option. That’s particularly problematic on property funds which Nick was particularly scathing about.

I hope ShareSoc members are better informed. Which brings me on to the subject of their AGM which was held at the Mello meeting. This was a relatively straightforward event as there were no controversies of significance, although I did suggest that with more funds in the bank they might want to hire more staff and spend more on marketing. As one of the two newly appointed directors pointed out, few investors have heard of ShareSoc although they do enormously good work in promoting the interest of private investors and in educating them. In my experience, sales of anything often relate simply to how much money is spent on marketing even if some attention has to be paid to the most cost-effective channels. But if you don’t know what works best, you just have to experiment until you find the most productive approaches.

However ShareSoc membership is growing and it’s now twice the size of UKSA with whom merger discussions are now taking place – which I wholeheartedly support incidentally. There are also discussions taking place about supporting Signet activities, who run investor discussion groups, following the recent death of John Lander who led Signet for many years.

ShareSoc is spending money though on improving their back-end membership system which will help to improve the services provided to members.

In summary this was a useful event, and like all such meetings, as useful for networking and picking up gossip as much as from learning from the formal sessions.

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

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Good News – Autonomy CFO Jailed

Good news – former CFO of public company jailed for fiddling the accounts. Oh to see that happen more often so as to deter manipulation of accounts that is so prevalent and so damaging to investors.

Sushovan Hussain, the former CFO of software company Autonomy, was sentenced to 5 years imprisonment by a US Court yesterday plus he was fined $4 million and ordered to forfeit $6.1 million he made from the sale of the company to Hewlett-Packard. He won’t even be spending time in a cushy minimum-security prison as he is a foreign national. He was found guilty some months ago on 16 counts of security fraud and other counts. In essence the allegation was that sales were inflated in the accounts and the result was that when HP bought the company, they had to write off much of the $11 billion they paid for it.

Although Autonomy was a UK public company, and the Serious Fraud Office did look at the case they decided to do nothing. However a civil action against Mr Hussain and the former Autonomy CEO, Mike Lynch is still being pursued in the English courts, and the latter also faces criminal charges in the USA.

Mr Hussain is planning to appeal the verdict. Let us hope he does not succeed because such cases provide a good deterrent to future malefactors.

These were some of the allegations against Autonomy:

  • Booking transactions to resellers as revenue when there was no end-user license (i.e. “channel stuffing” as it is sometimes called).
  • Engaging in “round-trip” transactions where purchases were invented so it could pay money to companies which then returned it to Autonomy to cover fictitious sales.
  • Backdating sales transactions so they fell into a previous accounting period.

There was also a claim that bundles of hardware/software sales were treated as solely software in the accounts. Why does this matter? Because software sales are valued in company valuations much more highly than hardware sales.

The above are some of the things that investors in IT companies need to look at although abuse can be difficult to spot in the published accounts of a public company. High accounts receivable and apparent lengthy payment delays can be clues. There were some questions raised about Autonomy’s accounts even before the takeover.

Hussain and Lynch have claimed that some of the disputed differences were simply down to different accounting standards (US GAAP versus IFRS) and I said when originally commenting on the case that I was unsure that this stood up to scrutiny. The US Court judge clearly rejected that argument.

But the sad thing is of course that we rarely see such cases pursued to criminal convictions in the UK, whether they are large or small companies.

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

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