Argo Blockchain and FT Letter

An announcement appeared this morning from Argo Blockchain Plc (ARB). It was well timed as I was going to write something on the hype surrounding blockchain technology soon. ARB has received a requisition to remove two of the directors, and appoint others. The company has been focused on providing a cryptocurrency mining service and floated on AIM at a price of 16p – it’s now just over 3p. But a few weeks ago it gave up the “mining-as-a-service” business to focus on other things such as mining for its own account. I guess the falling price of Bitcoin, et al, meant that folks did not see any profit in paying for such a service.

But the company does have considerable cash remaining which equates to more than the current market cap. It has not been disclosed what the purpose of the aforementioned requisition is but perhaps it is to encourage a return of the cash to shareholders. It would certainly make some sense to do so and wind up the business perhaps.

Blockchain has been hyped as the solution to many business problems. But there was a very interesting article by Patrick McConnell in the latest edition of the magazine IT NOW (a publication of the British Computer Society of which I am Member). It was a pretty damning appraisal of the technology behind blockchain and its usability. One paragraph says “It is possible that the technical architecture underpinning blockchain may be adequate for supporting certain classes of narrow business problems, but none have emerged yet”. It also describes how the Australian Stock Exchange (ASX) decided in 2015 to replace its CHESS equities settlement application with blockchain technology but has since effectively given up with only vestigial remnants of that architecture remaining. There have been other reports of the very high overheads involved in using blockchain for high-volume transaction processing systems. It would seem blockchain is a technology promoted by those who do not really understand it.

Lastly, I was pleasantly surprised to see that the Financial Times published a letter from me on the subject of statistical significance this morning – see https://www.ft.com/content/5717e868-5203-11e9-9c76-bf4a0ce37d49  . This was a follow up to a report that scientists would like to abandon the use of such measures in the publication Nature. So I thought it best to try to put a stop to this irrationality before we see too many spurious claims and charlatans appear.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

 

LCF – Another Audit Failure & the latest on Brexit

I have not covered the events at London Capital & Finance (LCF) before although the national press has done so extensively. LCF sold “mini-bonds” to 11,500 people who invested £236 million in them and are likely to recover very little. These “bonds” were promoted as being “ISAs” in some cases when they were not, and that they were FCA regulated when in fact they were not – only the company was FCA “authorised” for certain activities but that did not include selling these bonds.

The company paid very generous commissions on the sale of the bonds, as much as 25%, and the money raised was invested in small companies with few assets and who are very unlikely to provide a return.

But it has now been disclosed in the Financial Times that based on the 2017 accounts of LCF it appears that the company was technically insolvent even then. However it received a clean audit report from auditors EY. Administrators Smith & Williamson report on a series of “highly suspicious transactions” linked to a number of individuals where money appears to have been diverted to them.

I have written repeatedly on the failures of the audit profession, and the lackadaisical approach of the Financial Conduct Authority (FCA) to improve standards and enforce them. Reforms are in progress (see https://roliscon.blog/tag/arga/ ) but it cannot be too soon. In the meantime, as always, the underlying problem is the gullibility of the public and their lack of financial education. Anyone who had undertaken more than a cursory look at the background of LCF and its finances would have shied away rapidly. But certainly being able to claim FCA authorisation was misleading and that is an issue that needs resolving.

Brexit

It seems Prime Minister May could have another attempt at passing her preferred EU Withdrawal Agreement which got defeated for the third time yesterday. Not that MPs managed to get any majority for alternative solutions in previous indicative votes. I supported the Prime Minister’s solution as a reasonable compromise although it was some way from being a perfect Agreement. However, with no time remaining to renegotiate it, refusal of the EU to countenance changes, and the general desire of the public to see the matter closed with no more debate, it was the best option available. However it was clear from watching yesterday’s debate that there are many MPs, both remainers and brexit supporters who had fixed opinions on the subject and were not going to change them. Mrs May’s problems were compounded by the Northern Irish DUP contingent, the awkward squad one might call them, and by Jeremy Corbyn doing all the could to obtain a general election by opposing any compromise in the hope of winning power.

What would I do if I were Prime Minister now? Decisive action is required which could include I suggest the following options: a) Ensure we exit the EU with no deal a.s.a.p. so as to force both the remainers and brexiteers to face up to reality, and the EU likewise – a rapid agreement on a free trade deal might then be concluded or the wisdom of Mrs May’s compromise would be made plain; or b) call a General Election with a new Conservative party leader and with a manifesto that is pro-Brexit. That would force all Conservative MPs to support the manifesto or be de-selected, i.e. they either support the manifesto or quit. The Labour party and other parties would also need to clarify their position on Brexit in their manifestos thus thwarting any more bickering about where they stand. With a bit of luck the outcome would be a clear majority in Parliament for a Government not beholden to minorities.

The EU might permit an extension of Article 50 to allow time for a General Election – at least 2 months is probably required, although there is no certainty on that. Some EU bureaucrats still seem to think that if they are awkward enough the UK will decide Brexit is not worth pursuing after all, but that ignores the political split that will remain in the UK with the Conservative party still disunited.

Will Mrs May take any decisive steps such as the above? I doubt it.

There is one advantage arising from the Brexit debate. The pressure on Parliamentary time has meant that the massive increase in Probate Fees for larger estates has been delayed. They won’t now take effect from the 1st April as proposed. Now might be a good time to die if you are fed up with this world so as to avoid more Brexit debates and save on probate fees!

Rather than finish on that depressing note, let us welcome a sunny Spring day that will lift all spirits, and with the pound falling (which helps many UK companies) and the stock market rising, life is not so bleak as politicians would have us believe.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Renalytix AI Presentation

Yesterday I attended a presentation by Renalytix AI (RENX), a company which listed on AIM last November. They are focused on revolutionizing the diagnosis of kidney disease. This is an area I know something about having suffered from renal disease for at least 35 years, if not longer (a lot of renal disease goes unrecognised and undiagnosed for years).

The cost of renal disease is enormous and is estimated to be $90 billion per annum in the USA alone. The reason is because treatment options (dialysis or transplant) once End Stage Renal Disease (ESRD) is reached are very expensive. A lot of renal disease, although there are several types, is caused by diabetes which we know is a rapidly escalating problem in the world. The company aims to develop better diagnosis so as to separate out those people who are likely to escalate into ESRD and who could be treated to prevent the need for dialysis or transplant and hence save most of the costs incurred by Medicare and others (the company is very focused on the US market).

When the company listed it was effectively a start-up but they did acquire some technology from EKF Diagnostics. Namely some tests for biomarkers in blood that are predictive to some degree. The company aims to combine this with other patient data to provide an accurate diagnostic. They have partnered with Mount Sinai, a very large US healthcare provider who have a large database of patient records and a biobank of blood samples. They also have other similar partners. They hope to sell the diagnostic test and analysis for less than $1000. Clearly the key is whether the test and analysis they are developing is validated by actual studies of predictability which they hope to have this year in the second quarter, and whether reimbursement for the cost is approved.

When asked how many diagnostic tests they might sell in future periods, the CEO said they were unable to forecast that at this time. It was also said they hope to breakeven by the end of the year, but clearly financial forecasts are somewhat uncertain.

They have also licensed some technology from Mount Sinai (FractalDX) for the monitoring of kidney transplants and medication thereof which is key to achieving low rejection and long-term survival rates. This provides a second product line. There is potential competition in that area but not apparently a strong one.

The company raised $27 million in the IPO and have spent $11 million on IP licenses plus $1.4 million on software/AI development and clinical assay development leaving them with $13.1 million in cash at the end of December. They don’t expect to run out of cash this year, but there is a clear risk that they will need more funding in due course. Current market cap is £76 million.

Why did they list on AIM rather than the USA? Not totally clear but probably because it is easier to raise capital for a new venture in a public listing on AIM than in US markets.

The company has an impressive board led by CEO James McCullough so one does not doubt that they have the required expertise and ability to achieve their ambition. But it’s still an unproven product in an unproven business model.

I questioned whether improved early-stage diagnosis would help when in the past treatments for kidney disease have been few. But this is apparently changing with products such as SGL2 inhibitors now available. It’s certainly an area where a lot of research to develop new drug treatments is taking place.

In conclusion, I was impressed by the management, although in such presentations by AIM companies you usually hear a persuasive “story”. But I was not totally convinced that they have a revolutionary product, at least one proven, or one that will justify the cost over other cheaper ways of picking up renal disease at an early stage and monitoring its progression. Simple checks such as for high blood pressure and blood in urine (which can be picked up by a dipstick) and blood tests for creatinine and other measures are readily available. They will need to prove that their biomarker tests and AI analysis of other patient parameters provide significant benefit. If they do the market potential is enormous. If not it might prove a disappointing investment.

A company to keep an eye on I suggest rather than plunge into at this stage unless you like high-risk propositions.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Royal Bank of Scotland AGM – How to Vote

Shareholders in the Royal Bank of Scotland (RBS) will have received their Annual Report and Notice of the AGM in the post today. The meeting is on the 25th April for those in a nominee account, and its being held at the RBS headquarters in Scotland of course.

There are 28 resolutions on the Agenda. Please ensure that you vote your shares. Resolution Number 28 directs the board to appoint a Shareholder Committee and was put forward jointly by ShareSoc and UKSA. The board has again opposed that resolution on spurious grounds. A Shareholder Committee would provide a say on such matters as director nominations, remuneration and strategy and that resolution should be supported by all thinking shareholders. See this document for more explanation and a list of the resolutions: https://www.investors.rbs.com/~/media/Files/R/RBS-IR/results-center/letter-to-shareholders-2019.pdf

Corporate governance at RBS is still poor and a Shareholder Committee would cure that. The Financial Times today highlighted one remuneration issue which is that the CEO, Ross McEwan will receive a pension contribution this year of 35% of salary, i.e. £350,000. This seems to be the latest wheeze to avoid scrutiny of high pay with other major UK banks paying similar amounts. So another recommendation is to vote against the Remuneration Report (Resolution No. 2).

Personally I will also be voting against the authorisation of share buy-backs (Resolutions 26 and 27), and against the resolution that permits General Meetings at 14 days notice (No. 24), as I always do.

I will also be voting against the Chairman Howard Davies (Resolution 5) for opposing Resolution 28.

For more information see the ShareSoc blog item here: https://www.sharesoc.org/sharesoc-news/vote-for-rbs-agm-special-resolution-28-shareholder-committee/

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Will Neil Woodford Succeed?

How long do you give a fund manager before giving up on poor performance? This is the key question faced by investors in the funds run by Neil Woodford and his Woodford Investment Management company.

Neil Woodford had a very successful record at Invesco – their High Income fund turned £10,000 into £230,000 over 25 years. In 2014 he departed to set up his own investment company and he attracted many followers to the new platform but the record since then has been very poor. For example the main LF Woodford Equity Income C Acc fund has delivered a return of -7.0 % over 3 years according to TrustNet while the stock market has in general been booming. The Woodford Patient Capital Trust which invests in smaller, early-stage companies is even worse with a share price total return of -10.7% over 3 years according to the AIC.

Woodford also run funds for Hargreaves Lansdown and St. James Place although they might have slightly different mandates. Recent articles in the FT suggest those companies still have faith in Woodford with comments about the “contrarian” approach of Mr Woodford and that it is likely to come good in the end. But will it? Has the market changed while the style of the fund manager has not? Has he simply lost his touch as a stock-picker? Over-confidence in one’s ability can be a great danger for stock-pickers. But perhaps he has just been unlucky with his stock selections?

Three years is about as long as I give fund managers before exiting completely, and I would reduce my holding in a fund before then. My decision tends to be based on my view of the investments the fund is holding. For example, the top 5 holdings in the Equity Income Fund are Barratt Developments, Imperial Brands, Burford Capital, Provident Financial and Theravance Biopharma. The last one is a one-product biopharmaceutical company with no profits, Barratt is a housebuilder when investors are fleeing the sector due to house price declines and the threat of higher interest rates, Imperial Brands is a tobacco company subject to ever tougher Government regulation, Burford Capital is a backer of law suits (a litigation funder) and Provident Financial is a consumer loans business. These are all companies that other investors might avoid so they are truly contrarian investments. The holdings of Woodford Patient Capital are even more idiosyncratic. One of the largest holdings is in Purplebricks which I have commented on negatively in the past. Investors therefore need to judge whether these kinds of investments will come good in the next year or two. I have my doubts.

Another question to be asked is whether Woodford has simply spread himself too thinly with multiple funds now under management. Does he have the same level of support from a team that he had at Invesco? Large fund managers are not one-person businesses.

One issue to look at in addition is does the fund manager have a clear investment process, i.e. do they stick to clearly stated rules or are just idiosyncratic? Is it the process that is failing or the manager’s decisions that are at fault? All fund managers make some mistakes but a look back over past investments can be a good indication of what is going wrong.

My past experience tells me that “contrarian” fund management approaches often fail. Swimming against the tide of investment trends is positively dangerous and rarely works. Incidentally I watched the Burt Lancaster film “The Swimmer” last night – a very stylish film indeed. The ending might represent the failure of dreams over reality. Perhaps Neil Woodford’s dream is fast disappearing?

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Safestore and Fundsmith AGMs

Today I attended the Annual General Meeting of Safestore Holdings Plc (SAFE) in Borehamwood. Their head office is next to one of their self-storage units. They now have 146 stores with a concentration in London/South-East England, and in major UK cities, plus some in Paris.

The Chairman, Alan Lewis, commenced the meeting with a very brief statement. He said 2018 was a good year with good strategic progress. He is confident value creation will continue. Note that Mr Lewis is stepping down as Chairman and they are looking for a replacement as he has now served for 9 years.

Safestore is a growing company in a growing sector. As people accumulate more junk, house sizes shrink and more people live in flats, they run out of space for their belongings. The demand is also driven by divorce and death. In addition to personal users, small businesses find such facilities useful to store goods, tools & equipment, or display material.

Revenue was up 11% last year, and earnings up 125% (or as this can be seen as a property company, EPRA earnings were up 15.5%). The dividend was increased by 13.8%. Self-storage companies can be perceived as property companies but they are best viewed as operating businesses in my view (the CEO seemed to agree with that). The market cap is way higher than the book value of the assets unlike in most property companies of late. Self-storage is one of the few growth areas in the property sector at present.

Page 8 of the Annual Report gives some information on the market for such facilities. Compared with say the USA, the UK storage space per head of population is only a small fraction of the USA. In other words, the UK market is relatively immature and to reach the same level as the USA would require another 12,000 stores!

I asked the Chairman why the company did not expand more rapidly if the potential is there? The response from the CEO was that there were problems with finding suitable new sites and with planning restrictions. They are also conservative on finance. A question on potential acquisitions arose as it is a fairly fragmented market in the UK but it seems few such opportunities are reasonably priced and meet the quality criteria they have. They did take over Alligator last year. Competitors don’t seem to be growing any more rapidly, and the CEO suggested they were gaining market share.

The main other question I raised was about their Remuneration scheme. At the 2017 AGM they only just managed to win the Remuneration Policy vote and at the 2018 AGM the Remuneration resolution was again just narrowly voted through. Remuneration Committee Chairperson Claire Balmforth explained that institutional investors were unhappy with the LTIP and the “quantum” of pay – that’s a polite way of saying it was too high. Indeed remuneration at this company is high in relation to the size of the business – the CEO received a total pay of £1.6 million last year (single figure remuneration). Even the Chairman received £135,000.

However it’s apparently all change after extensive conversations with institutional investors. The executive directors have agreed changes to the LTIP and a “more conventional” LTIP will be introduced in 2020. As a result they did better on the remuneration vote, and the votes on the re-election of Balmforth and Lewis, with the Remuneration resolution passing with 70% support.

It was not until later when I chatted to the directors that I discovered where I had come across Claire Balmforth before. She used to be HR Director, then Operations Director, at Carpetright when I held shares in that company.

Anyway I gave them my views on remuneration. Namely I don’t like LTIPs at all, particularly those that pay out more than 100% of base salary. I prefer directors are paid a higher basic salary with an annual bonus paid partly in cash, partly in shares.

Other than the pay issue, I was positively impressed as a result of attending the meeting.

One issue that arose was the poor turnout of shareholders at the meeting. There were more “suits” (i.e. advisors) than the 3 ordinary shareholders (two of those were me and son Alex). Now it happens that earlier in the day I was watching a recording of the annual meeting of Fundsmith Equity Fund which I had not been able to attend in person this year. Terry Smith was in his usual good form, and he said there were 1,300 investors at the meeting. That’s more than any other UK listed company or fund (most funds do not even have such meetings). An amusing and informative presentation helps enormously to attract investors of course. I wish all companies would bear that in mind.

You can watch the Fundsmith meeting recording here: https://www.fundsmith.co.uk/tv .

Anyone who wishes to learn how to make money in stock markets should watch it. Terry Smith has a remarkable record at Fundsmith. He said last year was not a vintage year as the fund was only up 2.2%. But that beat their benchmark and only 7.8% of UK funds generated positive returns last year. In the top 15 largest UK funds over 3 and 5 years, they are the clear winner.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Patisserie and Interserve Administrations, plus Brexit latest

Yesterday the administrators (KPMG) of Patisserie (CAKE) issued their initial report. It makes for grim reading. The hole in the accounts was much worse than previously thought with an overstatement of net assets of at least £94 million. That includes:

  • Intangible assets overstated by £18m;
  • Tangible assets overstated by £5m;
  • Cash position overstated by £54m;
  • Prepayments and debtors overstated by £7m;
  • Creditors understated by £10m.

The accounts were clearly a total fiction. It is uncertain whether there will even be sufficient assets to make a distribution to preferential and unsecured creditors. As expected ordinary shareholders (who are not creditors) will get nothing. You can obtain the KPMG report from here: http://www.insolvency-kpmg.co.uk/case+KPMG+PJ12394136.html

KPMG suggest there may be grounds for legal action against various parties including Patisserie auditors Grant Thornton by the administrator, but as Grant Thornton are the auditors of KPMG they are suggesting the appointment of another joint administrator to consider that matter.

Otherwise it looks a fairly straightforward administration with assets sold off to the highest bidders and reasonable costs incurred.

Another recent administration was that of Interserve (IRV). This was forced into a pre-pack administration after shareholders voted against a financial restructuring (effectively a debt for equity swap) which would have massively diluted their interest. But now they are likely to get nothing. Mark Bentley of ShareSoc has written an extensive report on events at the company, and the shareholder meeting here: https://tinyurl.com/yy7heunl . He’s not impressed. I suspect there is more to this story than meets the eye, as there usually is with pre-pack administrations. They are usually exceedingly dubious in my experience. As I have said many times before, pre-pack administrations should be banned and other ways of preserving businesses as going concerns employed.

Brexit. You may have noticed that the stock market perked up on Friday. Was this because of some prospect of Mrs May getting her Withdrawal Agreement through Parliament after all? Perhaps it was. The reasons are given below.

There were two major road blocks to getting enough MPs to support the deal. Firstly the Irish DUP who had voted against it. But they are apparently still considering whether they can. On Thursday Arlene Foster said “When you come to the end of the negotiation, that’s when you really start to see the whites of people’s eyes and you get down to the point where you can make a deal”. Perhaps more concessions or more money for Northern Ireland will lubricate their decision.

Secondly the European Research Group (ERG – Jacob Rees-Mogg et al) need to be swung over. Their major issue is whether the Agreement potentially locks in the UK to the Irish “Backstop” protocol for ever. Attorney-General Geoffrey Cox’s advice was that it might, if the EU acts in bad faith. I have said before this legal advice was most peculiar because nobody would enter into any agreement with anyone else if they thought the other would show bad faith. Other top lawyers disagree with Cox’s opinion. See this page of the Guido Fawkes web site for the full details: https://tinyurl.com/y4ak6q3c

Mr Cox just needs to have a slight change of heart when his first opinion must have been rushed. He has already said that the Vienna Convention on international treaties might provide an escape route so he is creeping in the right direction.

Mrs May will have another attempt at getting her Withdrawal Agreement through Parliament, assuming speaker Bercow does not block it as repeat votes on the same resolutions are not supposed to be allowed in Parliament.

It was very amusing watching a debate at the European Parliament over Brexit issues including whether an extension of Article 50 should be permitted – the EU can block it even if the UK asks for it.  The EU MEPs seemed to have as many opinions as UK MPs on the issues. The hardliners such as Nigel Farage wish that it not be extended so that the UK exits on March 29th. Others are concerned that keeping the UK in will mean they have to participate in the EU elections in May with possibly even more EU sceptics elected.

It’s all good fun but it’s surely time to draw this matter to a close because the uncertainty over what might happen is damaging UK businesses. A short extension of Article 50 might be acceptable to allow final legislation to be put in place but a longer one makes no sense unless it’s back to the drawing board. But at least the proposal for another referendum (or “losers vote” as some call it) was voted down in Parliament. Extending the public debate is not what most of the public want and would surely just have wasted more time instead of forcing MPs to reach a consensus.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.