VCT Investor Workshop

Today I attended a VCT Investor Workshop on-line run by the British Smaller Companies VCTs (BSV and BSC). These are two of the better performing generalist VCTs managed by YFM. It was a disappointing event.

There were presentations from investee companies Unbiased and SharpCloud which gave a general overview of the businesses but no financial information – such as sales, profits and what the VCT’s valuation is based upon. In other words, the key information about a business that any investor needs.

As I got the impression from other VCT managers that a year or two back the valuations of new deals were rising to levels that might reduce future returns I asked this simple question: “Are you paying less for new investments as I get the impression the market had become over-heated?”

The question was not answered. In fact few questions were answered, perhaps because the time allotted was minimal – perhaps 10 minutes which turned into 5 minutes in reality as other sessions overran.

I really don’t see the point of running events when not enough time is allowed for questions and key issues are ignored.

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

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Strix Shares Crash, GB Group Results and Segro Bond Issue

Shares in kettle control supplier Strix Group (KETL) fell by 40% this morning after they published a trading update. It reported that the Covid lockdowns in China had adversely affected their major OEM customers. Along with negative comments about the future impacts and “continued macroeconomic and political uncertainty” you can see why investors are nervous.

I used to hold this stock but sold the shares in May and August last year – at a small loss I hasten to add – as growth prospects seemed to be weakening and the valuation seemed too high. So I am currently suffering from schadenfreude – pleasure in escaping from that disaster.

Yesterday GB Group (GBG) issued an interim statement which received some negative comments. This is what Graham Neary said on Stockopedia about it: “…. the outlook statement tells us that H2 has started in line with expectations, and there is no change to forecasts. Net debt currently sits at around £118m. This is a large and reputable business providing advanced digital intelligence services to some of the world’s biggest businesses. However, there are many different moving parts to understand, and I perceive it as a black box type of investment. It is in my “too difficult” tray at this time”.

My response to some of the other posts was “Re all the comments on GB (LON:GBG) the accounts are complex but it helps to watch the company’s presentation here: https://www.gbgplc.com/en/investors/ . There have clearly been negative impacts from declines in cryptocurrency and internet companies generally but I am not as negative as others about prospects.  A lot of the issues are one-offs and judging a company on one half-year’s results is not wise in my view. I am a long-term holder and am likely to remain so”.

This is clearly one company affected by all the negative reports on cryptocurrency trading and the collapse of several companies operating in that sector (FTX etc). It appears there are many fewer people opening crypto trading accounts and needing to have their identity verified – surely a good thing.  

Another company announcement of interest today was from property company Segro (SGRO). It said it is issuing a 19-year bond with an annual coupon of 5.125%. It was six times oversubscribed apparently. This shows that property companies can still raise debt easily which was one concern affecting their share prices recently but it seems they now have to pay a lot more in interest on such debt than they have been doing of late. If they need to refinance existing debt it is clearly going to be at much higher rates. Can they still make a profit if debt is that much more expensive? They surely can if inflation is running at 10% and rents they can charge are up to match.

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

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Webinars Galore – Intercede + AB Dynamics + Augmentum

I seem to be filling my days with webinars of late. Two today and one yesterday, partly because this is the season for half-year results announcements.

I’ll cover the recent ones – all on the Investor Meet Company platform, but I’ll only give you some general impressions and highlight particular points as you can watch recordings of them for the detail:

Intercede (IGP). Positive results and the company seems to be moving in the right direction – expanding products to cover a wider customer spectrum and making acquisitions. The presentation also covered what the company’s products provide in the identity/security sector but even though I have been a shareholder in this company for a long time it is no clearer to me what the products provide in terms of individual benefits or why people would buy them rather than competing products. Like many technology companies they have a communication problem!

One also gets the distinct impression that the products are complex to install and maintain. Does identity management really need to be that complicated? This and the above factor may be why the company has never grown as quickly as it should have done. But I remain a long-term holder of the shares.

AB Dynamics (ABDP). This company has come a long way since I first purchased the shares in 2015. From being a small UK company operating in a niche of the automotive engineering sector it has become a major international business. It now has a high proportion of recurring revenue from previously being reliant on one-off deals and has recovered well from the impact of the Covid epidemic.

A good presentation if rather too full of acronyms and there was a focus on ABD Solutions which is providing automated driving solutions to companies such as big miners. This company is also growing by acquisition and there seem to be more opportunities for that.

Both the above companies got somewhat bogged down in their presentations on the detailed financial results. This is both boring and unnecessary as we can all read the results announcements before the event. Only a very few key financial points need to be presented.

Augmentum Fintech (AUGM). This is an investment company which I do not currently hold. It focusses on the financial technology sector and the share price performance has been quite dire in the last eighteen months as a result of it being in a deeply unpopular sector. The presenter said there has been a sell off of risk assets but it could be a compelling market in 2023. I agree with the former comment but as regards the latter I would not like to take a view on it. Markets are composed of willing buyers and willing sellers and emotions have more influence than facts.

There were some interesting comments on digital assets such as crypto currencies and that the speaker had met FTX management but the company did not invest.

The company’s interim results reported that NAV per share had remained stable but NAV fell. These numbers are no doubt influenced by the share buy-backs the company has been doing and note that they have been buying back shares at an average discount of 42%!

Comment: The only way to judge the value of these kinds of investment companies is to look at the underlying holdings in which they are invested. That can be difficult to do as they are small unlisted companies and there was minimal information provided in this presentation on them. But a high discount to NAV is common on private equity investment companies.

However I think that valuations of small technology companies may have reached a plateau and may be now reasonable value. But it could take some time for investors to view the sector more favourably as many people have been badly burnt in the last year from over-optimism about the technology sector.

These are my personal views alone of course and should not be relied upon!

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

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More Cheap Labour Required? And Results from Intercede and Telecom Plus

Both the CBI and the CEO of Next have called for a relaxation of immigration rules so as to provide more workers. There are desperate shortages of staff in some sectors of the economy such as retail and hospitality, particularly in low-paid unskilled jobs. With a booming economy it has proved very difficult to recruit staff at wage levels that companies want to pay.

The problem has been compounded by a rise in “inactivity” levels, i.e. people who could be employed but are not. Some of them are suffering from long-term sickness but others have simply dropped out of the workforce because they can survive on benefits. The Covid epidemic has encouraged these trends but in essence there are underlying factors such as demographic changes that are a major cause. As the population ages people are less keen to work and are more likely to suffer from medical complaints that the NHS cannot fix quickly due to mismanagement of that service of late.   

Do we need to allow more immigration to help businesses? I suggest not. A tight employment market encourages companies to invest in improving productivity when if they can hire labour easily they do not. Poor productivity is one of the major problems in the UK economy and has been for years.

Even Labour leader Keir Starmer is opposed to unrestricted immigration and has said “Let me tell you: the days when low pay and cheap labour are part of the British way on growth are over”.

The UK needs to look at fixing some of these problems via Government policies on social security benefits including pensions and helping those suffering from illness by improving the NHS while companies need to invest more in productivity improvements. That means more equipment and better training.

Two more sets of results from companies I hold in my portfolio came out this morning. Recession? What recession?

Telecom Plus (TEP) reported revenue up by 51.5% and adjusted profit up by 22.5% with dividends up to match in its interim results. Reading this company’s results helps you understand the impact of the energy crisis on household bills and the impact of government interventions to cap prices.

Not only has the company increased the number of customers signed up to its services because they now have a very competitively priced offering for energy supply, it has also meant that more people have been signing up to sell their services as their household budgets have come under pressure due to the rising cost of living.

The rising cost of energy has also meant customers have reduced their energy consumption by 10% over the summer with a larger reduction expected over the winter months. Customer churn remains at record low levels and bad debt provision seems not to be a problem although that might rise. Forecasts for full year profits and dividends have been increased.

As both a customer of Telecom Plus as well as a long-term shareholder, but not a reseller, I am happy with the progress made.

Intercede (IGP), a company specialising in digital identities, reported revenue up 24% in their interim results and net profits up 124%. Again there is a positive outlook statement and it looks like the strategy to grow by acquisition is paying off. The share price may not have been buoyant of late as small cap technology stocks have fallen out of favour but the company seems to be doing the right things. That’s solely my opinion as a long-term holder of the shares of course.

Both companies demonstrate that there are still profits to be made, even in the tricky energy sector where the government has been interfering.

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

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Holmes Sentence, Diploma Results, TRIG Announcement, Office Space Surplus and Gamification of Trading

It was good to see that on Friday Elizabeth Holmes, former CEO and founder of Theranos, was sentenced to 11 years in prison for fraud. The US company claimed to have a revolutionary blood testing device and raised $900 million when the product never worked and investors and customers were deceived. This is the kind of sentence that we should see in the UK but never do for companies that mislead investors.

This morning Diploma (DPLM) published their Final Results for last year. Both revenue and profits were ahead of forecast. This is a diversified engineering company which has grown both by acquisitions and organic expansion. With a bland company name and a low profile, this can be an under-appreciated business while it also benefited from a high proportion of export sales last year (a 5% benefit to revenue from foreign exchange movements).

Another announcement this morning was from The Renewables Infrastructure Group (TRIG) which is one of those alternative energy suppliers which the Chancellor recently targeted with a new tax as they were making too much profit. The detailed impact is now spelled out.

The new tax is a 45% levy on revenues in excess of £75/MWh. TRIG estimates this will reduce the company’s NAV per share by 8.3p per share, i.e. about 6%. But the company expects electricity price increases to more than offset that. The company will also see a positive impact from inflation but that is offset by a similar decrease in asset valuations which are discounted at a higher rate as a result.

The overall impact on the share price today at the time of writing is negligible but many of these changes were already forecast of course. This is an example of the problem of investing in companies or sectors where the government is interfering in the market. In this case the government decided to incentivise renewable electricity generation but then decided that companies were making too much money as a result.

An interesting article in the FT has highlighted the rise in empty office space as working patterns changed with more people working partly or fully from home. Occupancy levels have plateaued at about half pre-Covid levels and new construction has slowed. Offices can be repurposed to meet the housing shortage but that is not always easy the article reports. You can see why the commercial property sector is in the doldrums and that is surely not likely to change soon. I doubt people will return to the old working patterns now they have enjoyed the benefit of a lot less commuting, particularly in London. Personally I always hated commuting and avoided it so far as possible. Even after setting up a business initially in the West End, that was soon moved out to the suburbs freeing up two or more hours extra working time.

Lastly the FCA has warned against the “gamification” of trading apps. This is where product features are added to encourage activity. The FCA is right to look at this issue but as usual it is closing the stable door after the horse has bolted. It has been clear for many months that some share trading platforms are encouraging speculation as opposed to long-term investment.

Note: I hold shares in DPLM and TRIG.

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

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Saving Tax and Protecting Income from Inflation

To follow on from my comments on the Chancellor’s Statement and the changes to dividend and capital gains tax, it emphasises the importance of minimising tax liabilities.

It is important for both income and capital gains to hold your shares in ISAs or SIPPs which makes them both tax free. If you have maximised your holdings in ISAs and SIPPs then if you want tax free dividends one option to look at is Venture Capital Trusts where dividends are tax free and you also get tax relief on investment in new shares. Or you can simply buy them in the market where you won’t get the initial tax relief but will avoid the prompt decline in your investment value as they normally trade at a significant discount to NAV – currently between 5% and 12% for generalist VCTs.

The dividend yields on VCTs are also typically quite high mainly because they tend to only maintain capital values while converting capital profits into dividends. The AIC web site can provide a summary of all VCTs, their dividends and past price performance.

VCTs have not been performing well of late as their focus on unlisted and AIM shares in small companies which are out of market favour has damaged their share price performance after a period of excess exuberance particularly in technology company shares. But now valuations in small companies have become more reasonable so it might be time to consider more investment in VCTs.

Investing in ISA and SIPPs do not of course give you cash dividends to spend but you can put money into ISAs and then take out the cash accrued from dividends tax free, except for Lifetime ISAs.

From my past investment in VCTs I now have a substantial proportion of my income tax free. But VCTs and their taxation are complex subjects so make sure you understand them and/or take professional advice on them. My comments above are based on my understanding of the position but I do not guarantee that it is correct.

As regards minimising capital gains tax one solution is simply to not sell holdings that are showing a profit, or offset them with sales of holdings showing a loss.

Inflation protection

The other big issue raised by the Chancellor’s statement was how to protect a portfolio from the ravages of inflation. A half-year report from Value and Indexed Property Income Trust (VIP) this morning shows how they are providing that. For example they say: “VIP’s dividend per share has risen every year since 1986 when OLIM’s management began. It has risen by 932% over the 36 years, against the Retail Price Index rise of 232%. The medium term dividend policy is for increases at least in line with inflation, underpinned by VIP’s index-related property income.”

The net asset value per share fell during the half year but this is explained by these comments: “….rising bond yields and slower rental growth force property valuation yields up and capital values down. All sectors will be affected, with offices declining further, retail giving back its recent gains and the industrial sector suffering worst in the short term as it had become the most overheated. With consumer confidence at an historic low, and mortgage rates rising rapidly, stagflation may be here to stay, for at least as long as the war in Ukraine lasts.

Property transaction volumes have slowed down markedly since the summer, especially in the previously strongest sectors such as industrials and retail warehousing, with many sales only going through after agreed prices have been “chipped” by buyers and many more properties having to be withdrawn from the market unsold. Buyers now are few and far between as they wait to see how far yields move out. Property unit trusts have become forced sellers to meet withdrawals, proving yet again that open-ended vehicles are the wrong way to invest in property. Some pension funds will also need to sell after they were caught short of cash to meet margin calls on their dangerous LDI (Liability Driven Investing) schemes.

Land Securities has just sold a prime long-let London office at 9% below its March valuation, while the market for older or secondary offices has fallen off a cliff, with some now virtually unlettable and unsaleable where they do not meet environmental standards. The deep “brown discount” for properties in all sectors with non-compliant Energy Performance Certificates (EPCs) is the clearest evidence so far of the growing market impact of ESG. Two-thirds of car showrooms, for example, are currently estimated to have non-compliant EPCs.”

Property REITs are another sector out of favour at present for those reasons but longer term I would expect them to provide some protection against inflation.

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

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Chancellor’s Autumn Statement

This morning Jeremy Hunt delivered his Autumn Statement. As expected taxes are up and Government spending is down, but exactly where the latter cuts, which are estimated to be £30 billion, will fall is not clear. That is particularly so as the NHS and Social Care are getting £8 billion more and schools £2.3 billion more.

Infrastructure spending remains also with Sizewell C nuclear power station going ahead and HS2 to Manchester plus other rail projects. Comment: a great pity that HS2 has not been canned which would save many billions of pounds.

As a retired taxpayer with significant dividend income and capital gains in some years (not this one I hasten to add), the tax increases are not as bad as they might have been. The pensioners “triple-lock” remains in place when my feeling is it should not have been retained, while with a lot of our assets in ISAs and SIPPs the damage won’t be too bad.

There is also continued support worth £26 billion for energy bills with £300 going to pensioners and the energy price guarantee will be extended past April 2023.

The big personal tax increases will come from a reduction in the threshold for the higher rate of 45p to £125,140 while income tax, inheritance tax and National Insurance thresholds will be frozen for a further two years until April 2028.

The tax-free dividend allowance will be reduced to £1,000 next year and to £500 from April 2024. The exempt amount of capital gains will be reduced to £6,000 next year and to £3,000 from April 2024, but capital gains tax rates are otherwise unchanged so there should be no rush to sell assets to realise gains. 

A rise in the Energy Profits Levy and a new tax on the extraordinary profits of electricity generators will raise £25 billion. The former will hit oil/gas producing companies unless they can offset it with investment allowances for developing UK oil and gas extraction. Comment: I hope Just Stop Oil take note of this poke in the eye and give up their campaign.

There will also be an impact on renewable energy generators with a 45% levy on “extraordinary profits” – defined as electricity sold above £75MWh.These changes seem to have been well anticipated and the prices of renewable energy trusts (wind farms etc) not significantly changed so far today at the time of writing while a UK gas producer I hold has risen.

It is always unfortunate though that the Government is making legislation that changes the likely future profits of these companies on which their long-term business plans, and my investment decisions were based.

There is also some jam for those living on means tested benefits to help with the cost of living. Benefits will rise by the rate of CPI meaning they will go up by 10.1%. There will also be £6.6 billion provided to improve the energy efficiency of houses and business premises which is a rational move when the UK compares very badly with similar European countries in insulation of buildings and construction quality.

The Chancellor has also announced that electric cars will no longer be exempt from vehicle excise duty from April 2025. This is a sensible move as the lack of tax on them was undermining the tax base and that incentive will no longer be necessary.  

In conclusion I suggest these tax/spend changes are a reasonable compromise and seemed to have had minimal impact on the stock market. I quote from the Chancellor: “The furlough scheme, the vaccine rollout, and the response of the NHS did our country proud – but they all have to be paid for. The lasting impact on supply chains has made goods more expensive and fuelled inflation. This has been worsened by a Made in Russia energy crisis.Putin’s war in Ukraine has caused wholesale gas and electricity prices to rise to eight times their historic average.”

Raising taxes won’t be liked by some Conservative MPs but I think they will accept the changes as necessary. The key is to ensure that spending cuts actually happen and that there is no back-sliding on that commitment.

Autumn Statement: https://www.gov.uk/government/news/chancellor-delivers-plan-for-stability-growth-and-public-services

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

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Market Trends, WeWork, Cryptocurrencies, Passive Saturation

Last week was a remarkably one for my stock market portfolio. Share prices were up on almost all my holdings. This was no doubt sparked by good news from the USA – inflation seems to be under control with CPI falling to 7.7%, and the war in Ukraine is looking up as Russia withdrew from the west bank of the Dnipro River. Stalemate in the latter war is looking increasingly likely which may encourage both Russia and Ukraine to reach some accommodation.

I also get the impression that stocks were being bought back in a panic after previous sales as they fell sharply in previous months. This particularly affected less liquid small cap and AIM stocks.

But this is surely only temporary relief from the gloomy economic prognostications. Interest rates in the UK still need to rise further as inflation is still high and real interest rates still negative. Political stability may help over the next few months but it looks like we are all going to be significantly poorer from aggressive tax rises. This will not help the UK economy one bit.

I watched an interesting TV documentary on WeWork yesterday. WeWork was essentially a company that rented out office desk space, i.e. it was a property company but ended up being valued as a high flying technology business valued at a peak $47 billion before it crashed. Led by Adam Neumann as CEO in a messianic style it developed into a cult which became further and further detached from reality. As profits were non-existent they redefined the word profit.

It’s a great example of how investors can be suckered into backing dubious companies led by glib promoters simply due to FOMO (fear of missing out). There is a good book on this subject entitled “The Cult of We: WeWork and the Great Start-Up Delusion” which I have ordered and may review at a later date.

Cryptocurrency exchange FTX became bankrupt last week. At the end it looked like a typical “run on a bank” as folks rushed to take their money out. FTX reportedly had less than $1bn in easily sellable assets against $9bn in liabilities before it went bankrupt. This has also affected other cryptocurrencies as traders take their money off the table.

Can cryptocurrencies survive? Only if backed by the state I would suggest. I am reading an interesting book – the Travels of Marco Polo which covers his time spent in the Mongol empire including China circa 1300. It describes how paper money was widely accepted in the Mongol empire which covered most of Asia at the time. But it was backed by gold or silver for which it could be exchanged. One advantage of their paper money was if you wanted a lower denomination note you could simply cut up a larger one. Paper currencies do rely on public confidence which is why state backing is so essential and also confidence that holdings are not going to be devalued by excessive printing of more money. Cryptocurrencies have tackled this issue in more than one way including the need for large power consumption to create new coins. But the whole structure still seems unsound to me.

An interesting article in the Investors Chronicle this week covered the subject of passive investing under the headline “Passive Saturation”. There has been concern expressed for some time that a high proportion of the stock market is held by index tracking funds that simply follow the herd. This might magnify trends and not relate to the reality of fundamentals in the companies they buy and sell. This was previously not thought to be a problem because the “passive percentage” of the market was estimated to be only 15%. But a new academic report suggests the real figure is more like 38%.

A very high passive percentage means that stock pickers can do well, and better than the indices as they ignore trends and look at the fundamental merits of companies. I prefer actively managed funds even if you do pay more for them in charges. Funds that rely solely on momentum may have done well historically but they are likely to exaggerate trends both up and down and the higher the percentage of the market held by passive funds, the more dangerous this becomes.

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

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Voting at BHP and Bioventix, and Cryptocurrency Rout

The results of the Annual General Meeting of BHP Group (BHP) have been announced. The most significant item was the rejection of an amendment to the constitution by 90% of voters. This was a resolution requisitioned by Members and would have enabled shareholders to dictate operational policies on such matters as environmental issues to the directors. It was rightly rejected as removing powers from directors to manage the company in the best interests of the company is unwise.

You can read the speeches given at the AGM here: https://www.londonstockexchange.com/news-article/BHP/bhp-group-2022-agm-speeches-and-presentation/15709454 . There is a big focus on changing the culture of the organisation.

I also received the Annual Report and a proxy voting form for the AGM of AIM listed Bioventix (BVXP) today. Thankfully their share registrar, Share Registrars Ltd, have now implemented a simple and easy to use electronic proxy voting system.

I only voted against the share buy-back resolution as I can see no good reason to use surplus cash in that way rather than paying a special dividend. Share buy-backs are rarely justified and depend on the directors’ view of the value of shares which is often wrong.

I am glad to see that the cryptocurrency markets are suffering a severe bout of financial indigestion with exchange FTX in financial difficulties and Bitcoin prices back down to where they were in 2020. Mining company Argo Blockchain (ARB) listed on AIM also appears to be in difficulty.

I’ll repeat what I said in January 2021 on why I won’t be investing in Bitcoins: “There is no intrinsic value in a Bitcoin. With company shares the intrinsic value may be somewhat uncertain and share prices subject to the emotions of investors but there is at least a way to determine the value by looking at the discounted cash flows generated by a company. The future cash flows help you to determine the current value. But with cryptocurrencies there are no associated cash flows. No dividends paid out and no profits generated directly from the assets as with company shares.

If you buy cryptocurrencies you are simply buying a “pig in a poke”.

Roger Lawson

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Supermarket Income REIT Presentation

I watched a webinar from Supermarket Income REIT (SUPR) yesterday on the Investor Meet Company platform. This is not a company I currently hold but I may consider investing in it even though it is in the currently deeply unfashionable sector of commercial property trusts.

They have a focus on omni-channel supermarket properties and 80% of their leases are indexed to inflation with a WAULT of 15 years. They have hedged 100% of their debt exposure to 2026 at 2.6%. They claim it is a defensive, counter-cyclical company with a low LTV.

80% of their portfolio is leased to Tesco and Sainsburys and they have just established a new ESG committee, but who hasn’t?

Their indexed leases have caps of about 4 to 5% on about 5% of their portfolio.

The presentation was eminently clear with good slides.

There is also a recent report published by Edison on the company.

The current discount to NAV is 10.6% and the dividend yield is 5.8% according to the AIC so it is not as cheap as some REITs at present. But that may be because of the defensive nature of the business (supermarkets are unlikely to be affected much by the recession as people have to eat) and the historic good performance figures over 5 years.

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

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