Why Do People Queue, and Retail Renaissance?

This blog post was prompted by pictures of people shopping on Oxford Street last night and a tweet from Emilios Shavila showing a queue for Primark at my local shopping centre in Bromley – it looks to be at least 100 yards long. Why does anyone queue to buy non-essential items? Have they not discovered internet shopping?

This is very puzzling as personally I can’t stand to queue for anything and I don’t think I have been in a shop for over 3 months, and very rarely also in the last year. Do people like the social interaction of shopping? Or is it because they can take a friend along and ask them “do I look good in this?”. Perhaps retail shops are not quite heading for extinction just yet, but I certainly would not be investing in them at present unless they had a very strong on-line business element. I feel that shopping habits really are changing and the epidemic has  hastened the move to on-line retail therapy.

The good news is that US retail sales bounced upwards by 18% in May which is a record since 1992 according to the FT and confounded forecasts of a rise of only 8%. That followed a decline of 15% in April. Will the UK follow a similar pattern? Let us hope so because retail spending can have a big impact on the overall economy.

One company that might be affected by High Street footfall is Greggs (GRG) who gave an update on their plans for outlet reopening this morning. Many of their shops are still on High Streets although they have been diversifying into other locations such as motorway service stations and train stations. Greggs has over 2,000 shops altogether and plan to reopen 800 on the 18th June. The rest will reopen in July.

The share price has jumped by 7% at the time of writing, but they do say that they “anticipate that sales may be lower than normal for some time”. Shore Capital reiterated its “Sell” rating on the share because they consider the High Street will take time to adjust to life in a post-coronavirus environment”. They also consider that Greggs will incur significant extra costs as a result of the measures they need to take.

My view (as a shareholder in Greggs) is that I still find it impossible to judge the likely profits (or losses) at Greggs in the short term despite quite a lot of detail in today’s announcement. It’s really a bet at present whether you see it as a valuable property in the long term or not while ignoring the short-term pain. That’s not the kind of investment bet I like to take so I will simply wait until the picture becomes clearer. Regrettably the same logic applies to many other companies at present.

On a personal note, one organisation that has solved the queuing problem is the NHS. Apart from converting my hospital appointments to telephone consultations, the latest manifestation was a new “drive-thru” blood testing service. You get a timed appointment so I drove up on the dot and immediately had it taken through the car window. No need to even get out of the vehicle. Absolutely brilliant. But I am not sure that will be quite so practical in mid-winter.

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

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Why the FCA Did Nothing About the Lloyds TSB Abuse

Those who were Lloyds TSB shareholders back in 2009 when they merged with HBOS to form Lloyds Banking Group (LLOY) thought it was bad deal at the time and it certainly turned out to be so. HBOS had many dubious loans to property companies and when the banking crisis arose they were in deep financial difficulty. There seemed very little benefit in the merger for Lloyds shareholders

Subsequently a legal action was launched by the disgruntled Lloyds TSB shareholders which was lost in the High Court in late 2019. I wrote the following to the Financial Conduct Authority (FCA) soon after:

“I refer to the recent judgement in the High Court in the case of SHARP and Others v BLANK and Others (the case concerning the takeover of HBOS by Lloyds TSB). Although the judge in the case rejected the claim by shareholders in Lloyds, he made it clear in his judgement that there were significant omissions from the prospectus that was issued at the time.

Specifically he says in his Executive Summary: “But I consider that the Circular should have disclosed the existence of the ELA facility, not in terms such as would excite damaging speculation but in terms which indicated its existence”; and “Likewise, I consider that the board ought to have disclosed the Lloyds Repo. The board assumed that because at the time of its grant it had been treated by the authorities as “ordinary course” business that provided an answer to all subsequent questions. But whether it should be disclosed in the Circular as material to an informed decision was a separate question. The Court must answer that question on an objective basis. The size of the facility, the fact that it was extended in tight markets, the fact that it was linked to the Acquisition and was part of a systemic rescue package showed that this was a special contract which ought to have been disclosed”  (see paragraphs 46/47 of the Executive Summary which can be obtained from here:  https://www.judiciary.uk/judgments/sharp-others-v-blank-others-hbos-judgment/

There were also possible other omissions from the disclosures which the judge did not consider but the above does provide prima facie evidence of a breach of the Prospectus Rules.  The directors of the company (Sir Victor Blank and others) would certainly have been aware of this funding and failing to disclose it was negligent.

Investors in Lloyds TSB (I was one of them) were misled by these omissions and the subsequent outcome was financially very damaging to those investors.

I suggest your organisation needs to look into these matters as a breach of the Prospectus Rules surely is a matter that makes the culprits liable to sanctions under the Rules and there is no statute of limitation in regard to these matters.”

Their response after 5 months delay can be summarised as follows:

  1. The Lloyds Circular was subject to the Listing Rules, not the Prospectus Rules. The FSA approved the Lloyds Circular under those rules.
  2. In the Judgement by Sir Alastair Norris he did not consider whether they breached the FSA rules.
  3. We will not be opening an investigation into these allegations as we are time barred from taking enforcement action (there is a 2-year limit for enforcement action).

In summary therefore, the shareholders were unable to obtain redress by civil action and the FCA proved to be toothless to deal with this matter also. It is very regrettable that the protection that shareholders believed they had against the abuse of directors not acting in their interests proved to be imaginary.

Shareholders were not given all the information to which they were entitled and that fact alone merited action by the FCA. But they have declined to pursue it. Considering the similar case of the Royal Bank of Scotland Rights Issue in 2008, it is very clear that shareholders should not rely on what is said in prospectuses or circulars.

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

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Babcock Dividend, Ocado Placing, AGM Reform and Why Are People So Angry?

To follow up on my previous blog post about Babcock (BAB) and the possibility of it “skipping” its final dividend, the company issued its Final Results this morning and spelled it out. This is what it said about the dividend: “Given the current level of uncertainty over the impact of COVID-19, the Board has decided to defer the decision on our final dividend for the year ended 31 March 2020. We recognise the importance of the dividend to our shareholders and the Board will keep this under review during the financial year as the impact of COVID-19 becomes clearer”. That is not what Shore Capital suggested at all.

Although the company appears to have met forecasts for last year, and says it has a record order book, the share price has fallen 5% at the time of writing. The market in general is down considerably also though.

Ocado (OCDO) announced an institutional placing yesterday together with an offer via Primary Bid to retail investors. Like the one for Segro I commented on yesterday, this is a fund raising for expansion and is at a relatively small discount and dilution. These arrangements are now becoming common but I still don’t like them. They give private investors very little time to decide whether they wish to take up the offer and they do not know what price is being offered. As a holder of Ocado, this is another one I declined to invest in. Ocado share price is down 5.7% this morning at the time of writing which is exactly the same as the discount in the offer to the previous closing price, i.e. you could pick up shares in the market just as cheaply. I suggest companies should do proper rights issues rather than this dubious method and that the FCA should regulate this area more robustly.

There was a good article in the Financial Times today under the headline “Coronavirus casts doubt on the future of AGMs”. It describes the debate over the reform of AGMs and the use of virtual AGMs. It also covered an initiative by organisation ShareAction who are raising money to fund research into the issue. They quote Catherine Howarth as saying “We hope to co-develop a robust framework for AGMs that would still include shareholder votes and which would also help companies interact with a wider range of their important stakeholders including employees, customers, suppliers and communities”. That may be a worthwhile initiative if it makes AGMs more vibrant and useful than they are now but bearing in mind the funding of ShareAction it may not be a totally unbiased proposal.

What we do not want is AGMs dominated by “stakeholders” with political views as happens already at some companies – such as oil and mining company AGMs with endless complaints from environmental activists or defence industry company AGMs dominated by those who believe the company should not be involved in that industry at all. Companies are not in business to right all the social wrongs in the world, but to provide a financial return to their shareholders. They just need to operate within the laws set by national governments. Company law in the UK already requires the company to take the wider interests of stakeholders such as employees or customers into account and they can be represented at AGMs easily enough now by just buying a few shares – you only need one share to attend an AGM.

The FT article does make some good points about virtual AGMs, one of which I commented upon yesterday (EKF Diagnostics). But it suggests that it might cost £10,000 to hold a “hybrid” meeting at a small company. That is surely a grossly excessive estimate if voting is done on a poll. It’s trivial to set up a Zoom meeting for the number of investors likely to attend such a meeting (only a dozen at EKF).

I don’t often comment on general political or economic issues, but I find the current hysteria about the death of George Floyd and the resulting demonstrations over “Black Lives Matter” in the USA and UK totally out of proportion. George Floyd was a very tall and heavy person who it is alleged resisted arrest. He had a past criminal record and was a drug user. The full facts of the case have not yet been revealed and it is way too early to say whether the police used excessive force or not, even if the result was very sad.

As to whether there is wider discrimination against black or coloured people in the USA or the UK is also doubtful. From my experience of working in the USA, there appeared to be very little direct discrimination. Did not Colin Powell become head of the US Army and Secretary of State? Did not Barack Obama become US President? But as in the UK, black people are disadvantaged often by the social and cultural backgrounds of their families. Righting that can only be done by education not by demonstrations or laws. Demonstrations actually make matters worse, and the recent violent ones and attacks on property such as historic statues actually make people less sympathetic to the cause. Meanwhile the failure by the police to stop these events undermines law and order in general, just as happened with the Extinction Rebellion demonstrations.

Why are people so angry that they feel the need to take part in such demonstrations, including many people who are not black and hence could not have personally suffered from any prejudice? You can see the same problem in the divisive politics of Brexit where rational debate soon flew out of the window and it degenerated into personal slanging matches on social media. In fact social media and national media reporting of news has actually coarsened political life. The BBC in particular has often seemed to be more interested in stimulating outrage to improve their readership or programme viewing and web site clicks than in reporting the facts in a neutral and unbiased way. This is not a useful national broadcasting service. It has become a medium for slanted propaganda and for stimulating social unrest. This is a problem that responsible politicians will need to tackle sooner or later. But in the meantime those such as Sadiq Khan in London seem more interested in stimulating political division over trivia with the objective of gaining a few votes.

As investors, my readers will have to face up to these issues sooner or later because when the social fabric of a country crumbles as the result of poor leadership, sooner or later the economy crumbles also.

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

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Babcock Price Fall, Segro Placing, TR Property and EKF Diagnostics Virtual AGM

I said in a previous blog post “that I tend to avoid FTSE-100 companies as their share prices are driven by professional analysts’ comments, by geo-political concerns, by general economic trends and by commodity prices. You can buy a FTSE-100 company and soon find it’s going downhill because one influential analyst has decided its prospects are not as they previously thought”.

Indeed that is exactly what happened after I made a recent purchase of Babcock International (BAB). Soon after Shore Capital Markets published a note that said it would be skipping its final dividend. The share price promptly fell by 7% on that day even though they claimed to “retain a buy stance” on the shares.

The last announcement by the company covering the subject of dividends on the 6th April simply said “The Board will consider the final ordinary dividend for this financial year ahead of our full year results announcement [due on the 11th June] taking into account developments over the next two months”. Do Shore Capital have inside information or are they just guessing? Or did they consult the company first? If they were given any relevant steer on this matter, the company should have issued a statement on it. Regardless it’s somewhat annoying even if some moderation of the dividend might make some sense and everyone else is cutting them. I would not be too concerned about the loss of dividend because I never buy shares for dividends alone, but I don’t like to suffer capital losses.

Yesterday property company Segro (SGRO) announced a placing “to take advantage of additional investment opportunities”. There was no open offer but private shareholders could participate via Primary Bid if you were willing to accept the price agreed with institutional holders. The shares issued represented 7% of the existing capital and the placing price turned out to be 820p, a discount of 4.5% to the previous close. I declined to participate, mainly because I have enough of their shares already. One has to ask why they could not have done a proper rights issue as there seemed no great urgency in the matter.

Last night I watched a presentation by Marcus Phayre-Mudge, fund manager for TR Property Investment Trust (TRY), on the internet. This tended to simply confirm my view that this is a well-managed fund which is withstanding the Covid-19 epidemic well. It has avoided many of the property sectors most damaged by the virus. It has a pan-European focus when internet retailing in the rest of Europe is still well behind that in the UK. He said “retailing is in an accelerating structural shift” but he does not “believe the end of the office is nigh”. A very useful and informative presentation via PI World even if he got cut off at the end due to some unknown technical issue. You can see a recording of it here: https://www.piworld.co.uk/

This morning I attended the virtual AGM of EKF Diagnostics (EKF), a medical products manufacturer mainly for diagnostic applications. There were about 12 attendees via a Zoom conference call and it worked quite well. Attendees were asked to register and submit questions in advance, although there was time to ask impromptu questions in the meeting also which were invited at the end.

Voting was done on a poll so the results of that were displayed first. The meeting was chaired by CEO Julian Baines.

I submitted a question about their investment in Renalytix AI (RENX) and its progress, which had been recently listed. I suggested progress was slow but the response was that progress had not been slow at all. However the Covid-19 situation has delayed tests in hospitals in the USA.  Progress on approvals is significant and revenues are expected shortly.

There was a question on the ramp-up of sales in McKesson and the answer was they had slowed significantly. But the company overall was only about 10% down on core products. They had seen business coming back on line in May and June.

Another question related to the Longhorn product which was claimed to be “the world’s safest sample collection product” (very relevant to virus sample collection of course). They are selling millions of these tubes in the USA. There is only one competitor who is allegedly infringing their patents – they are speaking to them “robustly” at present.

There were several other questions and answers of no great significance, but it was certainly a useful meeting and a good example of how any small/medium company could run a virtual AGM very easily. Why do they not do so?

My thanks to EKF for running such an event, which took less than 30 minutes in duration.

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

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Business Trends, Speedy Hire and the Hospitality Sector

After my negative comments in a previous blog post on Friday about the short term prospects for share prices bearing in mind all the uncertainties that face us, there were several other commentators over the weekend who suggested the market was ignoring the realities. Too much exuberance in expectation of a quick recovery was a common theme. That may be why the market opened in a sluggish manner this morning when Monday morning is often a time when share prices rise after investors read share tips over the weekend.

What is really happening in the real economy is the key question? Just walking around the streets near my home it is clear that builders and home improvers have got back to work. This is also apparent in the trading statement issued by tool/equipment hire company Speedy Hire (SDY) this morning, in which I hold a few shares. Their revenue is only 17% down on the prior year for the last week, whereas it was down 35% in April. With aggressive cost cutting measures already taken, the “Board remains confident that the Group can operate within its existing debt facilities and covenant tests during a prolonged period of reduced trading activity”.

However the bad news is that the accounts have been delayed and they are investigating a claim against a subsidiary named Geason acquired in 2018. They are also writing off the carrying value of goodwill and the contingent consideration payable on that acquisition. It only represents c.2% of group revenues but they say it has not performed in line with management’s expectations. It looks like an acquisition that was unwise. It is probably no coincidence that the finance director is soon departing.

One indicator of investor confidence is of course the state of the housing market. When house prices are rising, investors feel wealthier, and when they are falling, confidence is undermined. Knight Frank reported a 2.1% decline in central London property prices in April and Nationwide reported a national 1.7% fall in May. That is not surprising though bearing in mind that the Covid-19 epidemic may have discouraged house purchases given the economic uncertainty and job losses. Will people really be buying houses when they have just been “furloughed”? In addition, estate agents have been closed and house buyers deterred from visiting properties by isolation restrictions. But in the real world, this may be rapidly changing. A neighbour of mine in our outer London suburb decided to sell her house recently. In just a few days she had a number of inquiries and there were several offers received in no time at all. She did lower the price somewhat as against what I would have asked, to achieve a quick sale no doubt, but it is clear the market is alive and well.

Retailers are getting back in operation – there have even been two new shops opened recently in our local High Street. But the travel and hospitality sector firms are furious about the new quarantine rules for visitors coming into the UK. They claim, perhaps rightly, that it will kill their businesses and they would have to cease trading. A group called “Quash Quarantine” claims the quarantine rules are unjustified and not based on any science, i.e. they are disproportionate. A “letter before action” has apparently already been submitted to the Government. Comment: This looks like shutting the stable door after the horse has bolted as checking incoming visitors and enforcing quarantine might have had some effect in the early stages of the epidemic in the UK but it will now have minimal impact. It surely makes sense to have some targeted restrictions (e.g. visitors from known “hot-spots”) and more checks/testing of visitors in general but a blanket set of rules with little chance of 100% enforcement seems very unreasonable. Otherwise the tourism industry will be destroyed at enormous financial cost, and the whole hospitality sector damaged.

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

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Market Trends, Big Miners and Will the Music Stop?

Stock markets continue to rise. They seem to be ignoring the bad company results that are going to come out in the next few months. Although there are signs that the Covid-19 epidemic is weakening, some sectors such as hospitality are going to be in lock-down for some time. The economy is clearly going into recession with many employees being laid off. The lack of consumer spending, not just because some people have less money to spend, but because others are growing more nervous of spending money or finding fewer things to spend it on, is going to have a wide impact on the economy.

Cash is being put back into the stock market, simply because with very low interest rates there seem to be few good alternatives. The measures taken by central governments to refloat the economy will promote asset inflation so these trends may continue.

Investment trusts I hold which are popular with private investors seem to be some gainers from this market enthusiasm with their discounts narrowing again. Small cap stocks are also recovering and with very low liquidity just a few trades can raise their prices dramatically for no good reason. Or sharply reverse when a few sellers think the prices have risen too far. Rational judgement on share prices flies out the window when share prices are being driven primarily by momentum.

My portfolio continues to follow the market trend as it is very diversified even though I don’t hold shares in the sectors worse hit by the epidemic. I may have to put cash back into my ISAs which I withdrew only in March after making some sales. I have been buying a few large cap stocks which is not usual for me. I tend to avoid FTSE-100 companies as their share prices are driven by professional analysts’ comments, by geo-political concerns, by general economic trends and by commodity prices. You can buy a FTSE-100 company and soon find it’s going downhill because one influential analyst has decided its prospects are not as they previously thought.

But I did start buying a couple of big miners, BHP and Rio Tinto, in March which has worked out well. I considered the fundamentals sound and China, which is their major market, was clearly recovering and getting back to work rapidly. There was an interesting article in the Financial Times a couple of days ago highlighting other reasons why they are doing well. It was headlined “Australia’s iron ore miners exploit supply gap as Covid-19 hobbles rivals”. It explained how BHP, Rio Tinto and Fortescue Metals Group were capitalising on the production problems of their competitors in Brazil and South Africa who have been badly hit by the epidemic, while demand has remained buoyant. In Australia, where most of the mining is in Western Australia, they took vigorous action to halt the virus early on and most of the workers fly in and out so are easy to monitor. It seems that this unexpected turn of events has helped rather than hindered my investment performance for a change.

Although I am confident that the economy will recover in due course, and stock markets will follow that trend as they always must do, in the short term I find it difficult to be positive. It is hard to identify companies where one is both confident that they won’t be badly affected by the epidemic in the short term and where one can reasonably accurately forecast their future earnings. It’s the opposite of shooting fish in a barrel to use a bad metaphor. Together with the uncertainty of whether we will get a second virus wave, whether a working vaccine will be found, the impact of Brexit and the prospect of higher taxes, mine and the confidence of other investors must surely be low. In the short term, growth in company profits is going to be hard to come by, which is often the major driver for improving share prices.

But the market is ignoring that. It reminds me of the infamous saying of Citigroup CEO Chuck Prince during the last big financial crisis – “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”

Unfortunately judging when to move in and out of markets is not a skill that most investors have and so I will stick to trend following while keeping a sharp eye on events.

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

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Scottish Mortgage Investment Policy and LSE RNS Announcements

The Scottish Mortgage Investment Trust (SMT) have issued their Annual Report and AGM Notice. Readers who hold this trust will not need reminding that it has shown a remarkable performance over the last few months. That’s when the stock market has been decimated by the Covid-19 epidemic and the share prices of many other similar trusts and of the companies they hold have fallen sharply.

Last year SMT achieved a total share price return of 12.7% to the end of March and in the current year it achieved a share price increase of 23% to the 12th May. How has it achieved this return? Primarily by holding “hot” stocks like Tesla, Amazon.com, Illumina, Tencent and Alibaba to name the top five holdings. Over a third of the current holdings are unlisted ones. They claim the flexibility to invest in such companies “has been an important driver of returns over the last decade”. I do not dispute that but they are now proposing to change the “investment policy” of the company to raise the maximum amount that can be invested in such companies from 25% to 30%, based on the proportions when invested (that is why they have managed to already exceed that figure).

Is this a good idea? Should investors support it? Bearing in mind the travails of Neil Woodford where the funds he managed had large numbers of unlisted holdings, is it wise one has to ask?

Personally, I do not think it is and will be voting against. I am not suggesting that Baillie Gifford, nor the individual fund managers they employ, will make the same mistakes as Woodford. Just that valuing unlisted companies is a different matter to that of listed companies where there is always a market price. In addition unlisted holding are very illiquid in nature. Disposing of them can be very difficult. Private equity investment trusts often trade at a considerable discount to their net asset values for those reasons, while SMT currently trades at a premium of 2%.

Retaining the existing limit would prevent more unlisted investments being made, unless some of the unlisted holdings are disposed of, but that may be no bad thing given the current market enthusiasm for them.

I also note that Prof. John Kay is retiring from the board after serving since 2008. Much as I admire the wisdom of Prof Kay, I welcome this change. I hate to see directors of trusts serving more than 9 years and ignoring the UK Corporate Governance Code, as they so often do.

LSE RNS Announcements. I use the London Stock Exchanges free service to deliver RNS announcements via email. This morning it suddenly changed to a new format without prior notice. The first such notice I received was not in the best format in several ways. Wasted space in a right-hand margin, and no way to print just the announcement text and not the excess.

The second announcement I received just led me into an incomprehensible dialogue. I have sent them a couple of complaints.

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

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Discounted Share Issues at Learning Technologies and Whitbread, plus Trump Media Regulation

Companies are vying to undertake placings at present, to shore up their balance sheets in the face of the coronavirus epidemic. With many businesses closed, or suffering very substantial reductions in revenue, they can hardly be blamed for wanting to raise some cash. But private shareholders are disgruntled when they cannot take part in such fund raising, either by the use of a rights issue, or the inclusion of an “open offer” in a placing.

Let’s look at two recent examples – one I hold a few shares in, namely AIM listed Learning Technologies (LTG) and the other being Whitbread (WTB).

Yesterday LTG announced a placing when the market closed. This morning the details are provided. The shares were issued at a discount of 7.6% to the previous closing price and the dilution of existing shareholders was 9.6%. The directors participated including Chairman Andrew Brode and CEO Jonathan Satchell when private shareholders could not as there is no open offer.

That may not be a massive discount but it still rankles. However the shares could be bought in the market at near the placing price this morning. But my main concern is that the justification for the placing given by the company does not make much sense. They say that “The Company believes the current macroeconomic conditions present opportunities to accelerate future growth and gain further share of the $370 billion corporate learning market. The learning industry is highly fragmented and management believes high quality assets previously tracked, and potentially others that were not, are now becoming available at valuation levels that are highly compelling”.

Times are so tough it seems that you can now pick up some companies cheaply seems to be the argument. Does that make any sense? Not to me. Acquisitions are best made for strategic reasons, i.e. they are complementary business-wise and have good prospects, not simply because they are cheap. If they are also particularly cheap now because business prospects are much worse, that’s no reason to buy them surely?

The LTG announcement also refers to the “robust liquidity position” based on substantial facilities and refers to “further cash preservation” measures it has available. Is this perhaps hinting at some other reasons for the placing?

The other company worth mentioning is Whitbread. This company is now focused primarily on their budget hotel chain, Premier Inn. You can see why they may need the cash as both business and tourist travel has ground to a halt.

They said on the 21st May that “All restaurants and the vast majority of hotels closed in the last week of March 2020” and “Decisive action taken to reduce cash outflows and further enhance liquidity, including significant reductions in capital expenditure and discretionary spend, voluntary pay cuts for Board and management team and use of UK and German Government support packages”. They also announced a full rights issue to raise £1 billion.

They put a gloss on this by saying “The purpose of the Rights Issue is to ensure that Whitbread emerges from the COVID-19 pandemic in the strongest possible position to take advantage of its long-term structural growth opportunities and win market share in both the United Kingdom and Germany”, but they also said this which really spells out the main reason: “Actions Whitbread has taken have ensured its business can withstand a prolonged period of closures and/or low demand.  However, given Whitbread’s high fixed and semi-variable costs, its balance sheet will be impacted by material cash outflows during the period when its hotels and restaurants are closed or operating at low occupancy levels as a result of UK Government measures and/or social distancing”.

You can see why the rights issue is a heavily discounted one – a discount of 47% to the market price on the 20th May to encourage people to take up the shares, based on one new share for every two held. It also indicates how large investors view the issue. They need a lot of encouragement to subscribe.

Now anyone who remembers the RBS rights issue back in 2008 which was also a heavily discounted one will recall what a disaster that was. Such issues are to be treated with caution. In the case of Whitbread, it’s simply a bet that the business can reopen in the next few months and that customers will return. Readers can make their own judgement on that, but the company certainly seems to be taking the necessary steps to survive. However investors should remember that just because you already have some money invested in a company, it is not a reason to put more in. You should just judge it on whether buying the new shares at the price offered makes sense given the prospects for the business. Let the institutions and index tracking funds worry about maintaining their percentage stake.

An interesting item of news last night was that Donald Trump has signed an Executive Order” seeking to amend Section 230 of the Communications Decency Act. That law enables social media sites such as Twitter, Facebook, et al, to avoid responsibility for what appears on their sites because they are not treated as “publishers”. The law in the UK is similar.

That is based on the fact that they do not monitor, edit, or have control over what people post on such sites, and it might be very difficult to do so practically. But in reality they have been intervening in that way more and more. President Trump has raised the issue apparently because they edited a couple of his tweets to add “fact-check” links. Mr Trump only has 80 million followers on Twitter!

In reality these social media sites do monitor what is posted to remove or block some content. I recently had the need to complain to a financial blogger about some comments posted on an article on his site and it was very clear that he had been reviewing all such comments before they appeared, i.e. he was moderating the blog comments. In such circumstances it is difficult to see how someone could claim not to be the “publisher”.

In the financial world, it is quite important that what is published is accurate and responsible and I agree with Donald Trump. Social media sites cannot have it both ways – they are either moderating their sites or they are not, and it they are then they are publishers. In that case they have to take responsibility for all content, not just some of it. But if they are not moderating then the readers had better beware and there needs to be some other way to prevent or discourage libellous comments or market abuse from taking place.

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

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The New Corporate Insolvency and Governance Bill

The Government has introduced the Corporate Insolvency and Governance Bill into Parliament. This is quite an important piece of legislation for share investors and for property investors. Insolvency practitioners will also be interested as it makes substantial changes to that area. It’s had very little media coverage though as the news channels are swamped by coronavirus news, debate over Dominic Cummings breaking the lock-down (or not depending on your point of view) and Brexit news.

The Bill is being “fast tracked” through Parliament as it is considered urgent. Some of the measures in the Bill cover practical problems arising from the epidemic crisis. Some are temporary but others are permanent.

As regards insolvency, the Bill introduces greater flexibility into the insolvency regime. For example, it provides greater powers to ward off creditors and enable directors to escape personal responsibility if they continue trading. It provides a “moratorium” to facilitate a rescue of a business via a company voluntary arrangement (CVA), or a restructuring or fund raising as opposed to it going into administration. The directors can remain in charge of the business while a restructuring plan is put in place, or a scheme of arrangement decided upon. A “monitor” (a licensed insolvency practitioner) has to oversee the process however and give consent to various matters.

It will provide more flexibility for companies in difficulties, while complicating insolvency law, which is complicated enough already. It also includes provisions for companies to ward off winding up petitions during the epidemic crisis which have apparently been used lately by landlords to get rent paid after a “statutory demand” has been issued. In addition while in a moratorium, the company is protected from termination of supply agreements.

In summary this new “moratorium” facility should be a big advantage to companies that are in financial difficulties, and may better protect the interest of shareholders than the existing provisions in insolvency law. Companies in difficulties are too often forced into administration where ordinary shareholders typically receive nothing when a temporary “stay of execution” might enable them to survive and subsequently prosper.

General Meetings

Another aspect of the new Bill are provisions to allow companies to hold General Meetings electronically. Investors will already have seen companies only permitting two shareholders to attend their Annual General Meetings because of the restrictions imposed on public meetings by the Government. The Articles of most companies do not provide for electronic meetings at present.

The new Bill enables any company to use an electronic general meeting, or a hybrid meeting (i.e. some people physically present and some accessing it electronically). Companies can also delay their AGMs. These provisions are only temporary. Companies can also delay their account filings.

The Bill gives companies the right to run meetings as they see fit. For example it says: “The meeting need not be held at any particular place; The meeting may be held, and any votes may be permitted to be cast, by electronic means or any other means; The meeting may be held without any number of those participating in the meeting being together at the same place; A member of the qualifying body does not have a right— (a) to attend the meeting in person, (b) to participate in the meeting other than by voting, or (c) to vote by particular means.”.

This may be acceptable in the short term, during the epidemic crisis, but I have suggested to the ShareSoc directors that the organisation should draw up some recommendations for how “virtual” or “hybrid” meetings should be held in future. The experience to date of such meetings is very unsatisfactory, with answers to questions not being given at the meeting for example. Not having the interactivity of a physical meeting with at least some members present is also a severe disadvantage.

Some bigger companies have already updated their Articles to permit such meetings but a recommended set of Articles should also be published that do not simply give the directors the power to run such meetings as they see fit.

For more details of the Bill’s provisions, see https://services.parliament.uk/bills/2019-21/corporateinsolvencyandgovernance.html.

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

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Unsatisfactory Avast AGM, and Designated Accounts

I “attended” the Avast (AVST) Annual General Meeting today. This was of course held on-line using Zoom with only one director in physical attendance (Warren Finegold) who chaired the meeting. Zoom seems to be becoming the de facto standard for on-line meetings.

The Chairman of the company, John Schwarz, gave a brief presentation backed up by some slides. To summarise, it was another strong year of growth and profitability. A new CEO is now in place. EBITDA was up 8% with strong cash generation and hence there was a steady reduction in debt. They added 400,000 paying customers making a new total of 12.6 million. There were numerous new product releases and dividends are up 8.1%.

But nobody could raise questions at the meeting. In addition, although shareholders could submit questions in advance, these were not answered at the meeting. Overall this was a totally unsatisfactory way of conducting an on-line AGM.

Votes were taken on a poll to be declared later, but the proxy counts were quickly flashed on the screen. I noticed Belinda Richards managed to get 13.7% of the independent shareholder votes against her. I wonder why.

The whole meeting was over in 15 minutes.

Apparently customers of The Share Centre have been notified that there are new terms and conditions which cover the future use of designated nominee accounts. This will be a major step forward in investor protection and shareholder enfranchisement. Most brokers, like the Share Centre, use only “pooled” nominee accounts where your holdings are jumbled up with those of all their other customers. It relies on the brokers sorting out who owns what, which can sometimes prove to be not at all easy if a broker gets into financial difficulties. Designated accounts contain both the broker and end customer identification on the share register and hence are by far preferable.

It will be interesting to see how they support such accounts, and whether it will be affected by the proposed merger with Interactive Investor. This was approved by a vote on the 8th April but there has been no further news.

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

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