Johnston Press, TrakM8 and Brexit

Over the weekend, Johnston Press (JPR) was put into administration and immediately sold to a new group of companies controlled by the company’s bondholders. In other words this looks like a typical “pre-pack” administration where a company does not go through a proper administration process with an open sales process but is flogged off to in a fire sale to those who already know the business and see an opportunity to collect a bargain.

Trade creditors will lose their money, shareholders will lose everything and the pension scheme is being dumped – and is likely to need bailing out by the Pension Protection Fund.

One investor in the company who wished to revive the business was Norwegian Mr Ager-Hanssen who on Saturday accused the board of thwarting efforts to turn the group around and a “sham” sales process. He is probably right from my experience of what happens in pre-pack administrations. Pre-pack administrations are an anathema as I have said many times before as they undermine a proper process when a company is in difficulties.

Johnston Press does have some very valuable media titles such as the Scotsman and Yorkshire Post but had managed to accumulate an enormous amount of debt by going on an acquisition spree. It also had a big pension deficit. The company put itself up for sale recently but now states that the offers were insufficient to repay the bonds so the company has concluded the equity is worthless. Or perhaps it was simply an example of where the prospective buyers could see it was cheaper to do it via a pre-pack.

I have never held shares in Johnston Press although I looked at it a few times as a possible “value” play. But high debt is a killer when the market in which a company operates is facing strategic problems. With newspaper circulations dropping, and advertising revenue being impacted by changes to media usage – particularly a move to internet advertising – the company failed to cut its debt rapidly enough while revenue was falling and profits disappeared.

Another disaster area on Friday was AIM-listed Trakm8 (TRAK) whose shares fell by 66% on the day to a new low of 22p. This was after publication of their half-year results and a trading statement. Group revenue fell by 38% and a very large loss was the result. The company provided numerous excuses for this and a very negative short-term outlook. But it suggests the market for the company’s solutions “will be robust in the longer term”. Anyone who believes the latter statement must be an eternal optimist.

I did hold this company’s shares briefly in early 2016 when it was the darling of many private investors and the share price peaked at over 360p but I rapidly became disillusioned with the management. Peculiar acquisitions made subsequently, poor cash flow (rather suggesting profits were a mirage of fancy accounting) and generally over-optimistic statements being issued. Warren Buffett has always emphasised the importance of trust in the management of companies in which he invests, and when I lose trust I sell in short order.

Brexit is a topic one can hardly avoid talking about at present. I gave my personal analysis of the draft withdrawal agreement here (yes I have read it): https://roliscon.blog/2018/11/16/brexit-agreement-is-it-a-fair-deal/ . On reflection it seems to me that Mrs May is attempting to meet the demands of both brexiteers and remainers with a compromise deal that keeps us partly in the EU in many regards. The result is that she has pleased few people – the right wing of her own party, the Labour Party and Jeremy Corbyn who is stirring the pot like mad to gain political advantage, the DUP who May relies on for votes, and many others. Even her cabinet seems split counting only those who remain. The concept of the “chequers” plan might have made some sense, but the detail of the proposed agreement is simply not acceptable to many people. I suggest she needs to reconsider, sooner rather than later.

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

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Brexit Agreement – Is it a Fair Deal?

I promised in my last blog post to read all 585 pages of the proposed Brexit agreement before commenting. I got to page 365 before concluding I had got a reasonable understanding of it. The “draft” agreement is certainly one of the longest and most complex documents I have ever read. It reads like a lot of documents that come out of the EU – generally incomprehensible to the layman. Indeed, it could have been written by an EU bureaucrat – perhaps it was.

The agreement covers primarily the immediate withdrawal issues and the two-year transition period, but it actually extends many years past then in some provisions. It’s hardly a clean break from EU regulations and bureaucracy.

If you don’t wish to read the 585 pages, there is a much shorter document, only 7 pages, that is an “Outline of the political declaration setting out the framework for the future relationship between the European Union and the United Kingdom” – available on the web. This spells out that the intention is to ensure close adherence by the UK to EU policies on customs and product regulations, on state aid policies, on financial services regulations, on intellectual property rules, on transport regulations, and many other areas. The draft agreement itself also ensures compliance on such matters as state aid and environmental policies. Just one example of this is the fudge over fishing in our future territorial waters where we should have control but will not – rules on that have to be agreed with the EU.

The claim by Government Ministers is that the agreement ensures there will be no disruption in the free movement of goods, thus protecting our industries, and it will enable us to regain control of our borders and the movement of people. But in reality we will still be subject to EU regulations in many areas, and some in perpetuity it seems.

The Irish border problem and the proposed solution is a complete fudge. I respect the desire of the Irish to ensure no hard border between North and Southern Ireland – as there has not been ever since we were both part of the EU and the 1998 Agreement to promote the peace process – but the basic problem is that Northern Irish politicians wish to have their cake and eat it. They want to remain full members of the United Kingdom which all that entails in terms of no customs barriers within but some at the borders and conformance to UK regulations while retaining free movement with southern Ireland.

Even though the proposal for what is effectively a “customs union” embodied in the agreement may be attractive to business, it effectively cedes control to the EU of what goods are permitted to be traded within the UK. At least that’s the way I read it. The EU has taken great care to ensure there is no “unfair competition” from the UK after Brexit by binding us to EU rule conformance.

Let’s just take one example which is the recent GDPR regulation enacted by the EU. Under Article 71 of the agreement. The United Kingdom is binding itself to “ensure a level of protection of personal data essentially equivalent to that under Union law” in perpetuity. So the EU could invent even more daft regulations than the current GDPR ones and the UK would have to adopt them with no say in the matter.

Another example is the issue of Competition Law and State Aid. New state aid in the UK can be challenged by the EU up to 4 years after the transition period (see Article 93). Is that a trivial matter? Hardly because for example the European Court of Justice (ECJ) just issued a judgement stopping the UK from paying for power plants to stay open so as to provide emergency power when required. This was providing certainty of supply and minimising price peaks in severe weather conditions. The ECJ can also interfere in interpretation of the agreement for 8 years after the transition period (see Article 158).

In summary the withdrawal agreement is far from being a “declaration of independence” for the UK as Brexit supporters wanted. It will not enable us to set our own rules and regulations on social policies, labour regulations or environmental standards. In effect it’s a Brexit in name only.

Surely it would be much better to have cut out this bureaucracy and save a lot of the money we have promised to pay the EU under the withdrawal agreement by pushing for a clean break followed by a free trade agreement with the EU. That is what the Leave-means-leave campaign (see https://www.leavemeansleave.eu/ ) are pushing for and that makes more sense to me also than accepting this very poor deal negotiated by weak politicians. This hardly seems to be the best deal that could have been negotiated as the Prime Minister is claiming.

Postscript: After writing the above I read this morning’s Financial Times. It seems their writers agree with me in an article headlined “Accord leaves Britain bound to Brussels”. It not just points out the problems in the “transition period” but on such matters as “state aid” where it says “the UK authority must take ‘utmost account’ of commission advice on all decisions, and can be overruled by Brussels or the ECJ”. Similarly their writer Philip Stephens headlines an article with “Parliament should reject a rotten deal”. Looks like the FT journalists may have actually read the agreement also. I certainly agree with Mr Stephens.

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

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ShareSoc Seminar, new Patisserie CEO and Brexit

I attended the ShareSoc AGM and Company Presentations Seminar last night. The AGM was routine but a couple of points are worth noting: 1) Total membership increased to almost 4,000 in 2017 and I gather it has increased further since – partly from the Beaufort campaign; 2) Lord Lee, a well-known writer for the FT on small cap stocks, has become “Patron”. Anyone reading this who has not yet become a full, subscribing Member of ShareSoc should do so because they do an enormous amount of good work for investors.

As regards the company presentations, here is some brief coverage of the first three:

Ilika (IKA): This company produces solid-state batteries which have advantages over other battery types for certain applications. I first saw this company present to investors a couple of years ago. Revenue is creeping up but losses still exceed revenue. As last time, there seem to be some business opportunities but major revenue growth and profits do not appear to be likely in the short term. They might have interesting technology but can they sell it at a profit and in volume? Until they can prove this, I don’t think it’s a company in which I will consider investing.

Pelatro (PTRO): This company provides marketing software to telecoms companies. The company was only incorporated in January 2017 and listed on AIM in December of that year. They did a placing to raise more funds in August 2017. It’s clearly early days yet but revenue is forecast to grow rapidly. The CEO was a glib and fast talker which somewhat put me off, but he did explain the business reasonably well. This is definitely one I will do more research on. The AIM prospectus is of course available on their web site which is always worth reading for newish listings. However, attempting to print their last Annual Report caused Internet Explorer to hang twice, which is somewhat annoying.

Forbidden Technologies (FBT): This company provides technology to edit and manage videos using a proprietary codec. At least that is so far as I could understand it. The company has been listed on AIM for years but has been consistently loss making and revenue last year was still less than £1 million. There were a couple of existing disgruntled shareholders in the audience. The company came across as having some interesting technology but no very clear focus on who they were going to sell it to, what the USP was, what the competitors are, etc. Was it to be sold to major platform operators, or consumers? Looks like a typical company founded by technologists who don’t have strengths in sales and marketing – a very typical UK story. I could not see that the outlook will change because the presenters could not even sell the company to investors.

Perhaps I am being harsh on Ilika and Forbidden Technologies. But technology companies and their managers do need to learn that there is more to business than having a good idea and some bright technical staff.

The interesting news today was that Patisserie Holdings (CAKE) CEO Paul May has departed and a new CEO with a CV as long as your arm on “turnarounds” has been appointed with immediate effect. It’s hardly surprising that Paul May has left. The previous CFO went promptly after the alleged fraud was discovered but internal systems seem to have been very lax with the CEO not knowing about winding-up petitions and bank overdrafts. I hope he will be returning the bonus shares he obtained based on the false accounts.

Incidentally there will be a discussion on Patisserie at the Mello London event run by David Stredder on the 26th November – see http://melloevents.com/mello-london/ . The Mello events are always interesting for investors in small cap companies.

Brexit

One reader of my blog suggested that politics was off topic for this blog and I should stick to investment matters. But the blog does cover wider issues occasionally including economics, politics, corporate governance, management, transport, art, London events and other issues. Yes I do have a very broad range of interests! But Brexit is so key to the future financial health of the UK economy, and hence to investors in it, that it would be remiss not to cover it to some degree. No doubt that it is the reason why the Financial Times goes on about it endlessly.

Now I think the best comment on the current position was given in this tweet by my M.P., Bob Neill: “With all respect to some of my colleagues, pontificating about the draft deal Theresa May has secured before they have even read the text does not do justice to the seriousness of the issues at stake. The country deserves better than that and any proposals deserve a fair hearing.

I am therefore going to defer comments myself in detail until I have read the whole 585 pages of the draft withdrawal agreement and a couple of associated documents. You can find them here: https://www.gov.uk/government/publications/progress-on-the-uks-exit-from-and-future-relationship-with-the-european-union . I will also listen to what Mrs May has to say and other intelligent commentators before coming to any conclusions.

Although I am keen on many aspects of Brexit and hope it can be achieved without too much in the way of compromises, and with a practical solution, we certainly should not rush into any decision on the matter. This is not the time for emotion, or grandstanding.

Anyone who has read the whole 585 pages of the draft withdrawal agreement is welcome to post some comments on this blog of course. There’s a challenge for you!

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

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Should You Give Up Fags and Booze, plus Coverage of Babcock and Babylon

The title of this article refers not to your personal habits, but whether investors should give up on holdings in tobacco and drinks companies. Yesterday British American Tobacco (BATS) dropped 10% after the Wall Street journal reported that the US Food and Drug Administration was planning a ban on the sale of menthol cigarettes. They contribute a significant proportion of BATS profits.

Aside from this possible temporary issue, the key question for investors is whether to hold tobacco stocks at all. Apart from the ethics of selling products that kill people (and as a former smoker I am not too concerned about that as many people participate in dangerous behaviour of other kinds despite being warned), the key question is whether you should invest in such companies. With BATS on a prospective p/e of 10 and a yield of 6.7% (according to Stockopedia) it might seem attractive. But the share price has declined from a peak of 5,530p in June 2017 to below 3,000p now.

Smoking in the developed world is falling – down to under 15% of the population in England according to the latest statistics. But it’s still growing in less developed parts of the world such as Africa and the Middle East. However, with more Government intervention and better population education, one has to face up to the fact that it is likely to be a declining market sooner or later. It’s obviously a sector very vulnerable to Government interference which are usually ones to avoid. So I suggest investors should not just give up smoking, they should give up on tobacco companies. Investing in companies operating in declining markets is always tricky as few managements accept the party is over and tend to continue in their same old ways with damaging effects to their health – just like smokers.

The next addictive product to talk about is alcohol which is also vulnerable to Government regulation. Diageo (DGE) is a company with leading brands in the sector. Strong brands can enable companies to earn a superior return on capital and some Annual Reports from the company talk about nothing else. Indeed they have so many brands that they recently announced they were selling off a few of them. Does that make sense? Probably because does one really need multiple gin and whisky brands? Personally I find great difficulty distinguishing the multiple brands of gin now on the market – most of them seem to be marketing gimmicks rather than really different products with different tastes. By the time they are diluted with your favourite tonic such as Fevertree, there’s not much difference. Diageo has one particular strength in that booze sales are less affected by general economic trends just like tobacco. People don’t give up drinking and smoking in a depression so are unlikely to be affected by Brexit, whatever the outcome. But health concerns and Government intervention are still risks – for example Diageo has potential problems in India. But I consider the risks worth taking in Diageo so I do hold a few shares in the stock.

Babcock International (BAB), the defence contractor, is another stock to avoid if you have environmental or social concerns. But that’s not the main reason the share price has been declining of late – the share price is down from a peak of about 860p in June this year to about 600p. The prospective p/e is now 7.3 and the yield about 5% which certainly makes it look cheap.

One reason for the decline is an attack by an investment firm called Boatman Capital. They allege (to quote from their web site): “Babcock has systematically misled investors by burying bad news about its performance. We believe it faces potentially massive exceptional costs, revenue pressure and declining margins”. They also suggested the company’s relationship with the Ministry of Defence had soured. Nobody knows who is behind Boatman and BAB say they are “untraceable” so this looks like yet another of those shorting attacks preceded by a damaging report that mixes up mud-slinging and innuendo with dubious financial analysis and a few real facts that add credibility. BAB issued a response to the Boatman report yesterday which is worth reading. Babcock investors can download the report from the Boatman web site.

Such attacks have been common among smaller cap stocks for some time. Sometimes the attacks have an underlying basis of a few facts, but sometimes they do not. As I have said before, I think this is an area that needs regulation, although how that can be done when often the material is published overseas is not easy to see.

But there is one thing that is certain. Any major Government contractor is vulnerable to changes in Government policy and financial retrenchment. Will the UK Government really be spending more on defence on future? I rather suspect not as other social priorities take precedence.

One of the Government’s priorities is to spend more on healthcare. There was a very interesting report on the activities of a company called Babylon Health in a recent BBC Horizon programme. Babylon, via their app called Babylon which anyone can download, provide an on-line symptom screening and G.P. service. This is an area I have taken an interest in for several years as it has always seemed to be that this is potentially one of the most effective uses of AI and medical technology to improve healthcare. Not that I have ever doubted the wisdom of doctors to diagnose my complex medical problems effectively but I do believe some intelligent assistance might speed diagnosis.

At present Babylon is focused on G.P. services although they are moving into more specialist secondary areas. In London they offer the service under the name “GP-at-hand” with support from the NHS. But some doctors are complaining they are pinching their registered patients which reduces their income in local surgeries, and leaves them with the relatively unhealthy and elderly who don’t have access to on-line services but are more expensive to service.

Babylon do not offer on-line diagnosis at present for legal reasons, which in my view is a pity. They just provide a “triage” service and pass you to a G.P. when required for an on-line video consultation. But would it not save the NHS an enormous amount of money to have patients doing their own diagnosis using an intelligent app? But the current “GP-at-hand” service is a step in the right direction.

Babylon have recently done a study of how their system compares to the diagnostic skills of real G.P.s and they came out of it well – see their report here: https://marketing-assets.babylonhealth.com/press/BabylonJune2018Paper_Version1.4.2.pdf . For some more critical comments on the company and a summary of its history, see http://www.nhsforsale.info/private-providers/babylon-health.html . I fear G.P.s will resist this innovation because the NHS is notorious for its slow take up of technology. As the BBC programme reported, the NHS is now the biggest user of fax machines in the world when most organisations gave up using them years ago and turned to more direct digital channels. This is symptomatic of the NHS’s continuing reliance on paper processes.

Babylon is a British company but it is private equity funded and not a public company. But this is surely the kind of company than should be listed. It’s one of the best applications of AI. Undoubtedly I would have a lot more confidence in medical diagnostic software supported by a trained doctor than I have in self-driving cars. At least you can get a second opinion on the former before you crash.

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

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Restaurant Group Rights Issue and Brexit Gloom

Restaurant Group (RTN) have announced the terms of the rights issue that is required to even part finance their proposed acquisition of Wagamama. I made some somewhat negative comments on that deal in a previous blog post and the general media comment has likewise been negative.

The rights issue is to raise £315 million at a price per share of 108.5p which is a discount of 57% discount to the last trading day price. Net debt will also increase substantially and the current dividend will be very much reduced. The high dividend yield was one of the reasons investors might have bought the shares in the last year so they will be very disappointed.

Investors Champion suggested that investors might have been “stitched up” and that buying anything from private equity owners is a recipe for a poor outcome. All I know is that I am very wary about buying rights issues that are at a steep discount since I got suckered into buying shares in RBS back in 2008. It usually means that advisors have told the company that there is little appetite for the issue because it is perceived as risky, and hence nobody is going to take up the rights offer, or underwrite it, without a very big incentive.

The share price has been falling further today after the announcement and is down over 5% at the time of writing.

Brexit Gloom

The pound has been falling and so has my portfolio today despite the fact that a lower pound will help many of the companies I hold – but when markets are falling there is nowhere to hide. Apparently this is over concerns that Mrs May won’t be able to either agree a deal with the EU; or even if agreed, won’t be able to get it through her cabinet or Parliament. Cannon to the right of her, cannon to the left of her, cannon behind her, volley’s and thunder’d, stormed at with shot and shell … but still she pushed forward with the Chequers deal into the valley of death (to paraphrase Alfred Tennyson).

Personally I thought the Chequers proposal was a good basis for a deal with the EU but the Irish border issue is a likely deal breaker. Time for a rethink perhaps? But I don’t mean another referendum as I don’t believe the general public have any enthusiasm for another lengthy political campaign and there is little time for one.

The Financial Times (FT) had the usual negative Brexit stories today which is getting very tiresome. I would cancel my subscription if it was not for the occasional useful article they publish. With news short over the weekend I think the editor might be instructing his staff to produce articles to fill the space on Monday focused on Brexit. This time it was how Brexit is weakening productivity growth, Ramsgate being on standby for a crisis at Dover, immigration curbs that worry meat processors and an editorial focused on the “serious” Jo Johnson. Apparently meat processors employ more than 60% of staff who come from the EU. I am not scared.

Will we run out of fried chicken or beef-burgers? Probably not because as the article points out some of the tasks can be automated. They clearly have not been to date because cheap foreign labour makes it uneconomic. My conclusion is that Brexit will improve productivity enormously to the benefit of the economy and help those low-paid workers whose wages have been depressed by immigration.

But there was one interesting article in the FT today. That was about the popularity of “proxy resignation services” in Japan. These are organisations that will take on the task of telling your boss you have quit if you are too embarrassed to do so. Fed up with your company, your work or the bullying boss. Just call “Exit” to give your notice on the required date and they handle it from then on. No need to even face your colleagues or be accused of being a quitter.

This is simply the reverse of the amusing George Clooney film “Up in the Air” where he ran an outplacement service for companies, i.e. took on the task of firing people in a way that avoided difficult conversations.

There should be a market for such services in the UK, but perhaps it should be extended to helping you dump your girlfriends or wives? So much better than having emotional confrontations. So there’s an idea to pursue for some entrepreneurial web developer. Even Mrs May’s cabinet might find such a service useful in the next few weeks.

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

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F&C Dumps Tradition

The Foreign & Colonial Investment Trust (FRCL) announced today that it will be changing its name to F&C Investment Trust in 3 days time. FRCL is one of the oldest investment trusts and celebrated 150 years since foundation in this year. It was also so far as I recall the first share I ever purchased (via their savings scheme) although I have not held it for some years.

FRCL is a global investment trust. How is it doing lately? Well after a rather dull patch it seems to have picked up in the past year, although it looks to have the usual big US cap stocks in its portfolio such as Amazon, Microsoft and Alphabet which are the top 3. It’s otherwise very diversified. The share price discount has also narrowed so it’s now on a very small premium. If they decided to change the name to make the trust more marketable a few months back, they perhaps need not have bothered.

FRCL has proved to be a good example over the years of the benefit of investment trusts for those who want boring and steady long-term returns from equity shares.

The company is also changing its TIDM from FRCL to FCIT which will annoy some.

Now one can argue that it was overdue for a “rebranding” to give it a more modern image but “Foreign & Colonial” was at least very memorable. The acronym “F&C” is not a good choice in my view. F&C is registered as a trade mark but it would not be my ideal choice of one – too many similarities to others. I prefer brands, and companies, to have strong, simple, memorable names that are clearly unique.

On that subject I received confirmation of the registration of the trade mark “Roliscon” from the Intellectual Property Office this morning, which is the name of the service company I own. I should have registered that years ago so I now have two registered trade marks to my name. It’s a very simple process.

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

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Taxation of Trusts, LTIPs and Technology Stocks

The Government has announced a review of the Taxation of Trusts. You can read the consultation document and respond thereafter here: https://www.gov.uk/government/consultations/the-of-taxation-of-trusts-a-review

It’s not about investment trusts, but all kinds of traditional trusts whose origin goes back hundreds of years and enables “settlors” to move assets into a trust and out of their personal wealth. There are a number of different reasons why trusts are created as the above document explains. The Government does not dispute that they have genuine uses but wishes to ensure that they are not used for tax avoidance. They also wish to try and simplify the taxation of trusts if possible.

One particular concern they have is about foreign resident trusts controlled by UK residents where they cannot necessarily see what is going on, i.e. they lack “transparency”.

I do have an interest as a settlor in a simple UK based family trust. These are not straightforward things to set up but as for many people it was created to try and move some assets out of the scope of inheritance tax. However, apart from the fact that you can retain some control of where the money goes as a trustee, you may almost as well just give your money to the beneficiaries directly. But you can include minors and unborn offspring as beneficiaries so there are some advantages in the trust form.

Taxation is paid on trust income and capital gains but in a somewhat different form to personal tax. I won’t even attempt to explain the differences here as it would take too long. You can be worse or better off than having it in a personal name, but it won’t be as tax free as ISAs or SIPPs. The major income tax benefits of trusts have long ago disappeared. But certainly one problem with trusts at present is that calculating tax and making tax returns is no simple task so trusts tend to be used by those who can afford professional assistance or have a trustee who can do the necessary work.

But the expense of preparing trust accounts and tax returns are deductible which does not apply to personal tax returns. They suggest this is unfair in that trusts are being favoured which I certainly would not agree with! Of course if the taxation of trusts was simplified so that any amateur could do the work, I might take a different view. But certainly dealing with trust accounts at present is not simple.

Indeed the whole area of trust creation and management is too complex but no doubt there are lots of professionals who make a good living out of advising on them so their consultation responses might be somewhat biased.

I have not yet gone through the document in detail and I’ll probably even need to take some advice on it before responding, but this consultation will be very important to some people.

LTIPs

The case of Persimmon and the value that departing CEO Jeff Fairburn obtained from their LTIP scheme continues to get a lot of media coverage. Best guess seems to be about £75 million, but there are similar every large sums of money to other executives and there could be millions also to each of more than 100 staff under the same scheme.

This comment in the FT’s LEX column this morning is very much apposite: “There are two lessons. First, UK boards should ditch LTIPs in favour of vanilla stock awards. LTIPs are too complicated, sometimes delivering fat payouts when investor returns are thin. Second, chief executives should avoid saying they have no responsibility for their own pay. No one believes them”.

Why did shareholders vote for the original LTIP at Persimmon? Probably because nobody anticipated what the scheme might pay out after the housing market became buoyant and the Government introduced the “Help-to-Buy” scheme. There was of course no cap imposed on the payout which should have been done. But LTIP schemes are so complex many shareholders can’t be bothered to read the details (as I found out talking to one investor at the recent Abcam AGM).

I very much agree that LTIPs would be best replaced by conventional share options.

I have never liked LTIPs for a number of reasons: 1) typically too complex with confusing targets rather than simple numeric ones; 2) they are too long term – incentive schemes need to pay out quickly if you want behaviour to be incentivised by them. Short term cash bonuses are simple to administer and have some merits but there was a demand a few years back to make remuneration relate to long-term performance as short-term schemes can create perverse incentives. Share options do at least align employee interests with that of shareholders.

One change that is also required to avoid executives determining their own pay is to take remuneration setting out of the control of directors and into the hands of shareholders, e.g. via a Shareholder Committee for which ShareSoc has been campaigning.

Technology Stocks Due a Revival?

Sophos (SOPH) shares tumbled yesterday. The cyber security group closed down 28% after a disappointing report about future revenues in a half-year statement. This was one of those UK stocks that reached very expensive valuations until about July since which it’s been heading south. Indeed that’s a common story among small cap technology stocks with many having fallen back sharply in the last few months. That’s despite the fact that many are still growing revenues and profits well above inflation, i.e. they are still growth stocks. Sophos did have a particular problem of comparability with previous year’s figures which were very buoyant after numerous cyber attack scares. The valuation of Sophos now appears more sensible and it would seem other folks also feel it is time to dip their toes back in the water because the share price rose. Or was that a “dead-cat” bounce today? But there do appear to be some buying opportunities appearing in this area, although nobody would say it’s not a high-risk field for investors. At least the valuations are not so daft as they were only a few weeks ago.

Note: I do hold both Persimmon and Sophos shares.

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

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