Author: rogerwlawson

Learning Technologies AGM and Brexit

I went to the Learning Technologies (LTG) Annual General Meeting yesterday, only to find my son Alex was there also (we both hold the shares). So we did a joint report which can be found on the ShareSoc Members Network. What follows are a few particularly interesting points from it.

LTG was a workplace digital learning solutions provider up to the beginning of last month when it announced it was to buy PeopleFluent – a cloud based talent management platform. Chief executive Jonathan Satchell described the deal as “transformative” for LTG’s US presence and that is surely the case. He also noted that “learning and talent are closely aligned” with cross-selling opportunities adding possibilities for further growth.

When the formal business was considered the first resolution was to accept the annual accounts and directors report. This had a surprise vote of 56 million proxies against (12%). I asked why the large vote against a resolution that normally gets a high percentage “yes” vote. Chief exec Jonathan Satchell replied that ISS (a proxy advisory firm) had recommended shareholders vote against the resolution on the grounds that there was insufficient disclosure in the Directors remuneration report, and shareholders had not been given a chance to vote on directors’ remuneration. Jon felt the complaint by ISS was overblown, but that LTG had discussed the issue with ISS and will look to improve disclosure next year. Jon noted it was not necessary to hold a vote on remuneration although I pointed out it was preferable to do so and many AIM companies did have remuneration votes. ISS had also noted that the Chairman Andrew Brode was on the remuneration committee, which they didn’t like. Jon did say that Andrew would be more than willing to give this role up and so in the coming year Jon said to expect a change on this committee.

A shareholder asked if the £13.3m Civil Service contract was a one off. Jon replied that there is scope for a one year extension to the contract but at the moment the accounts are based on the contract ending with no extension.

I asked about the PeopleFluent acquisition and questioned the use of a “cash box” transaction as this ignores shareholder votes in prior resolutions. A cash box placing allows a company to issue new shares by bypassing pre-emption requirements – meaning without shareholder approval. It works by a company forming a new subsidiary into which it puts cash via a placing and then buys that shell, paying with shares priced at whatever level it deems suitable. In effect it sidesteps the legal requirements of Company Law, and the resolutions previously passed by shareholders re share issuance.

Jon replied that LTG was up against US private equity and it was felt this was the best way to get the right amount of funds needed in a timely fashion to give the highest quality offer LTG could make. Comment: with the Chairman and CEO holding over 45% of the shares any vote would have surely gone through so it may not be so prejudicial to shareholders interests. But it sets a bad legal precedent as I think such transactions should be made illegal. Apparently Numis, their Nomad/Broker, suggested they do this. Otherwise it was a placing with no open offer which prejudices private shareholders although the discount to the previous share price was minor.]

Jon talked about the recent Pluralsight IPO, a similar US business. The company lost $90m on $160m revenue. Valuation $2Billion. Comment: this is obviously a “hot” sector for investors.

Summary: The enthusiasm of the CEO for the future prospects of the business were very evident and this seems to have been communicated to shareholders in recent weeks. The share price has been motoring upwards so it’s now on a prospective p/e of 44 according to Stockopedia. Certainly the high recurring revenue feature of the PeopleFluent business is positive as I always like companies with high recurring revenues and I said that in the meeting. However there are significant risks in such a major acquisition of a US business where there may be cultural and management style differences. The business also seems to have some difficulties and they have already be making some management changes.

In addition to that the large civil service contract in the UK will probably not be extended – or at most by a year – so historic revenue may not be representative of future revenue, and in addition the change to adopt IFRS 15 (see page 12 of the Annual Report) will impact 2018 financial figures. The corporate governance and the way the placing was done are also negatives. In summary there are a number of negative aspects in this business and potential high risks from the acquisitions that have been made (not just the latest one). The enthusiasm of investors for this business might be ignoring the substantial risks now associated with it so investors should keep a close eye on the progress of the acquisitions and their associated restructuring.

But as always, I learned a lot about this business and the individuals involved from attending the AGM. There were less than a dozen ordinary shareholders at the meeting which is disappointing given the opportunity it provides to quiz the management.

Brexit: I have not said much on the hot topic of Brexit of late although it’s no secret that I am generally in favour of it. The regulations that have come out of Europe such as MIFID II, the Shareholder Rights Directive and GDPR might have had good intentions behind them but in practice the detail regulations that result have been horribly complex and bureaucratic. The result has been very high costs imposed on many businesses and often with ineffective results. The key problem has been bureaucrats in Brussels with little knowledge of the real world and the business environment in the UK designing regulations without adequate consultation (or ignoring feedback submitted) and producing gobbledygook which few people understand. GDPR had positive objectives but the law of unintended consequences has resulted in people receiving hundreds of pointless emails.

The latest example of ridiculous claims of the cost of Brexit was the statement by Jon Thompson the head of HMRC that the “maximum facilitation” (Max Fac) option could cost UK businesses as much as £20 billion per year. This is apparently based on the cost of filling out customs declarations (200 million per annum at a cost of £32.50 each, plus other form filling according to the FT). This seems to assume that forms are filled out manually when in reality that can be done by computer software surely. Business might also look to reduce the costs by bulking up orders, or simply choosing not to export or import, i.e. to do business in different ways or with different people.

Whether Max Fac is a sensible option it’s difficult to say without a lot more evidence but staying in the Customs Union simply to avoid a hard border in Ireland does not seem to make sense because it means our trading policies and practices will be dictated by the EU. That’s not what people voted for in Brexit. People voted for political and governmental independence. Many people accept there may be some extra cost involved as a result but scare stories about the costs are not helpful.

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.

 

Two AGMs (Accesso and Foresight VCT) in one day

Yesterday I attended the Annual General Meeting of Accesso (ACSO) in Twyford at the somewhat early time of 10.00 am with the result that I got bogged down in the usual rush hour traffic on the M25. What a horrendous road system we have in London! A symptom of long term under-investment in UK road infrastructure.

Accesso provides “innovative queuing, ticketing and POS solutions” to the entertainment sector (e.g. theme parks) although they have been spreading into other application areas. The business has been growing rapidly under the leadership of Tom Burnet who moved from being CEO to Executive Chairman a while back.

Tom opened the meeting by introducing the board, including new CEO Paul Noland who is based in the USA where they now have 5 offices apparently. He also covered that morning’s trading statement which was positive and mentioned deals with Henry Ford Health System and an extension to an existing agreement with Cedar Fair Entertainment. Expectations for the year remain unchanged. Questions were then invited – I have just covered a few below.

I raised a concern about the low return on capital in the company (now less than 5% irrespective of how one cares to measure it). I suggested the reasons were large increase in administrative expenses (up 43% last year) and the cost of acquisitions. Did the board have any concerns about this? Apparently not. The reason is partly the acquisitions and the costs might come down as they rationalise operations but they are in no rush to do so.

The Ford deal was mentioned and Tom said this is one deal where the acquisition of TE2 has provided the technology to assist closure. This is what the company said about TE2 when they bought it: “The Directors of accesso believe that TE2’s cloud-based solution offers market-leading personalisation capabilities and data orchestration technologies which capture, model and anticipate guest behaviour and preferences not only pre- and post-visit online, but in the physical in-venue environment.  Personalisation is achieved via many heuristics, including machine-learning-based recommendations, in order both to enhance guest experiences and to provide actionable analytics and insights to the operations, retail and marketing organisations.”. I am sure all readers understand that. Hospital systems are clearly one target for this technology.

The vote was taken on a show of hands so far as I could tell, although the announcement the next day of the votes suggested it was done on a poll which is surely wrong. But there were significant numbers of votes (over 2 million) against several directors and against share allotment resolutions. I asked why and was told it was because of a proxy advisory service recommending voting against, allegedly because of some misunderstanding. The answer to my question seemed somewhat evasive though.

In summary, shareholders are clearly happy with the progress of the company but with a prospective p/e of 41 (and no dividends), a lot of future growth is clearly in the share price. Corporate governance seems rather hit and miss.

I then drove into London to the offices of Foresight in the Shard, again journey time a lot more than it should have been due to road closures, lane removal for cycle lanes, etc, etc. Interesting to note a large hoarding on the elevated section of the A4 inviting anyone who had a complaint against RBS and the GRG operation to contact them.

Also interesting to note when I stopped for fuel at a service station on the M4 that at the desk they were serving Greggs food and coffee as well as taking payment for fuel. I know that Greggs have kiosks in some motorway service areas but this is perhaps a new initiative to expand their market. It’s rather like the small Costa coffee outlets that are in all kinds of places. I am a shareholder in Greggs but this was news to me. Obviously I need to get out more to see what is happening in the real world.

The visit to Foresight was to attend the AGM of Foresight VCT (FTV) one of my oldest holdings. Effectively I have been locked in after originally claiming capital gains roll-over relief. It’s also one of the worst of my historic Venture Capital Trust holdings in terms of overall performance over the years.

I did not need to tell them again how dire the performance of the company had been over the last 20 years because another shareholder did exactly that. But I did query whether the claimed total return last year of 6.5% given by fund manager Russell Healey in his presentation was accurate. It was claimed to be so. Perhaps performance is improving but I am not sure I want to stick around to see the outcome.

One particularly issue in this company is the performance fee payable to the manager which I wrote about in my AGM report and on the Sharesoc blog last year. You can see why the manager has such plush offices as they have surely done very nicely out of this and their other VCTs over the years while shareholders have not, and will continue to do so.

Several shareholders raised questions about the reappointment of KPMG bearing in mind that in Foresight 4 VCT the accounts were possibly defective and a dividend might have been paid illegally. But the board seemed to know nothing about this matter. KMPG got about 6 hands voting against their reappointment and the board is going to look into the matter.

The above is just a brief report on the meeting as I understand Tim Grattan may produce a longer one for ShareSoc.

To conclude, both AGMs were worth attending as I learned a few things I did not already know. For example it seems my holding in Ixaris, an unlisted fintech company where Foresight have a holding, may be worth more than I thought. But I still think their valuation is a bit optimistic.

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.

More Regulation of Social Media?

In a couple of previous blog posts I have commented on the problems of social media and internet blogging sites, particularly with regard to how they affect the financial world, and what might be done about it. I suggested the Government hold a public inquiry into the whole area, but it seems they are not waiting. Such inquiries can take years so perhaps that is a good thing.

Yesterday the Sunday Times reported that the Government’s Media and Culture Secretary, Matt Hancock, was intending to introduce laws to control on-line bullying and harassment. He is quoted as saying: “The overall goal it to make Britain the safest place to be online as well as the best place to start and grow a digital business. We are committing to legislate on internet safety, potentially including a statutory code of conduct to make sure that we tackle bullying and harassment, which is a problem across social media but particularly for children. It will also include transparency reports so we know what bad behaviour is happening on social media and looking at the advertising that happens online”.

He is apparently suggesting that the technology platforms that support social media would be responsible for the content which is a major step forward and that penalties for ignoring the law would be severe. His major concern seems to be focused on children (he has some young ones of his own), but obviously such legislation could have a very wide scope.

The Government is rightly recognizing the seriousness of the problem so this is surely a positive move.

There are more details given here in a press release: https://www.gov.uk/government/news/new-laws-to-make-social-media-safer

This section in the document published in response to a green paper makes it clear that it will not just cover individuals such as children but business activity also:

“The code is intended to make it easier for people to report bullying content by providing guidance to social media providers as to policies they should have in place for removing this content. The Digital Economy Act 2017 section 103 sets out that the code of practice should only cover conduct which is directed towards an individual. However, we have set out additional guidance, not required under section 103, stating that the code of practice should also apply to conduct directed at groups and businesses, as users can be upset by content even if it’s not directed towards them individually.  

Examples of online bullying that will be addressed by the code include, but are not limited to:

  • Threats of harm made to individual(s);
  • Threats to share images (‘outing’);
  • Impersonation;
  • Posting personal information including information that can locate an individual(s);
  • Posting text or images to bully, insult, intimidate or humiliate an individual(s);
  • Posting an image of the individual(s) used without consent;
  • Posting false information about someone;
  • Nasty or upsetting comments;
  • Sending repeated unwanted messages to an individual(s);
  • Trolling – deliberately offensive or provocative online posts;
  • Flaming – brief, heated exchange between two or more people;
  • Dog-piling

It is clear therefore that this will be quite broad-based legislation that might well inhibit some of the commentary published in the financial sector.

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.

Solving the Irish Border Problem, Harry for King of Ulster

On this bright sunny day, with crowds out for the Royal Wedding, my thoughts turned to a simple solution to the Irish border problem. That is the problem faced in the Brexit negotiations on how to maintain a frictionless border with the Irish Republic (Eire) from Northern Ireland.

Surely the simple solution is to make Northern Ireland an independent country while still retaining its connection to the UK by appointing Prince Harry and Meghan Markle as the King and Queen of Ulster. The latter has strong Irish connections in her ancestry so this could appeal to many. Such titles are surely more impressive than the Duke and Duchess of Sussex which they are otherwise going to be endowed with.

As an independent country Ulster could retain all its traditional ties with the UK including use of the Union Jack in some form, and all the existing UK legislation. It could negotiate free trade agreements with the EU and the UK to sidestep the border problem. If there is any border control required, it would solely be on the sea ferry crossings, not on the Irish land border and therefore much easier to manage.

Those sceptics in this world will no doubt think of numerous objections to this plan, but it’s surely worth considering.

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.

Elecosoft AGM, British Land, Apple, Social Media and GDPR

Yesterday I attended the Annual General Meeting of Elecosoft (ELCO) as a shareholder. Elecosoft produce software products for the building/construction industry. It’s a fairly new purchase of mine so I thought I would go along and get an impression of the company and its management.

The meeting was held in the City of London at the convenient time of 12.00 noon and there were about 20 shareholders present. That’s more than I expected given the size of the business (market cap only £56 million). The share price has been rising recently after the company now seems to be growing rapidly after a period of relative stagnation. But like many software companies they capitalize a lot of software development which will not please some investors. They do have substantial recurring revenue from maintenance contracts which is an aspect of software businesses I always like. The company issued a positive trading update on the morning of the AGM.

The Executive Chairman, John Ketteley, is a former merchant banker apparently. He commenced by welcoming attendees to the 78th Annual General Meeting of the company (did I hear that right?), and that he found that easy to remember as he was also 78 years old. Yes this is a somewhat unusual leader for a software business.

The Chairman then launched straight into the formal business of the meeting without inviting questions – not a good sign – so I had to interrupt him. Questions should be taken first.

I asked why the company was requiring shareholders to “opt-in” specifically to receive a cash dividend rather than a scrip dividend. I have never seen this before in any company. The answer given was because those in nominee accounts had difficulty in taking up scrip dividends instead of receiving cash. But I had to tell him that as some of my holding was in a SIPP I had queried how they were going to handle this option and was advised that they took up the cash option for all investors in such cases, which rather defeats what the Chairman was trying to achieve. Some shareholders, like me, tend to prefer cash dividends as otherwise it can get complicated keeping track of one’s holdings. Only those with large direct holdings (not in tax free ISAs or SIPPs) are likely to want to take a scrip dividend.

There were a few questions from other shareholders. Might the company consider moving to the main market from AIM (or moving back as it turned out)? The Chairman saw no benefit in doing so and two shareholders say they would be definitely opposed. There are good tax and other benefits for shareholders from being on AIM. Another question was on moving to SAAS platforms – it seems some of their software is still PC based, but new development is moving to the web.

I would not say the Chairman handled the meeting particularly well despite his experience. Perhaps his age is showing. I did speak to him directly after the meeting and asked about the high number of management changes in the last year and whether he was considering retiring. He indicated that he needed to rebuild the team and that he was now very confident he had a good team in place. But succession planning does not seem to be a priority.

But it was a useful and interesting AGM, as many are. They often turn out to be more interesting than expected. There was also a goody bag of useful kit – a baseball cap (something us baldies can always use as I said to the Chairman), a UBS Memory Stick and a Notebook.

Let’s now consider two companies at the other extreme in terms of size. Firstly British Land (BLND) – a property company with a market cap of about £7 billion. This company has a large portfolio of City offices and retail stores. I first invested in this company in December 2015 when I bought a few shares at 795p on the basis that the falling prices of property companies due to fears over Brexit were overdone. The share price is now 695p so not exactly a great initial purchase!

But the share price has been recovering and in fact taking into account dividends received I am now at breakeven after some more purchases when it became even cheaper. But it has certainly been a poor investment in comparison with other property companies I hold (e.g. big warehouse providers). Any company with an interest in the retail sector has suffered and British Land has been selling such properties. That has reduced their income and impacted profits.

But I do like to have some more defensive large cap stocks in my portfolio to offset the more speculative small cap stocks such as Elecosoft (I run a “barbell” portfolio in essence). When I first purchased British Land it offered a yield of 3.6% and was at a discount to net asset value of 10%. The prospective yield is now 4.4% and the discount is over 25% even after recent share price rises, which is unusual for a property company.

British Land seemed to adopt a defensive stance although City centre office values have not been declining as expected. The company has been reducing debt with LTV (loan to value) now down at 28% based on the full year results published yesterday. Perhaps the lesson here was not to buy shares that start to look cheap unless they become really, really cheap. But non-executive director Preben Prebensen just spent £140,000 on buying shares so perhaps the future is looking brighter.

Apple Inc (AAPL) is the largest company in the world with a market cap of $919 billion. That’s still ahead of Amazon. I don’t hold Apple directly although some indirectly in the investment trusts I hold. Some people have questioned whether Apple can continue to grow and maintain its profit margins when a lot of the revenue comes from iPhone sales. Surely the mobile phone market is now quite mature with everyone having one (indeed some of us have two) and new models not providing much in terms of new features?

I can possibly provide some light on this having just upgraded from an iPhone 6 to an iPhone 8. They look and weigh the same. I only changed because of contract expiry and a concern that the battery was wearing out, but in fact I think the poor battery life was down to using a smartwatch which connects via bluetooth. The new phone has very similar battery life. Perhaps the camera is a wee bit better, but then I don’t use it a great deal. So in essence, I think I have wasted my money in upgrading. This surely brings into question how long Apple can continue to grow unless some of their other products take off. Their smartwatch has not been as successful as might have been expected – smartwatches still seem to be a minority interest.

Finally let me say some more on the issue of the abuses in social media which I covered in a previous blog post. Just to clarify one point, when I suggested a Government inquiry into social media, I was not necessarily advocating more legislation. I think laws can be very ineffective in mandating or enforcing social norms. For example, one existing problem is that libel laws are pretty useless to most people – only the wealthy can afford to pursue libel cases and even if they do, enormous costs end up being paid to lawyers while the resulting remedy may be ineffective. Making them criminal offences would be no more likely to be effective partly because the police have no resources to enforce most existing laws.

I think there needs to be an inquiry into the causes of the breakdown in social norms about what is and what is not acceptable behaviour. The fact that folks can post garbage anonymously is one issue to look into. Is education a solution perhaps? Or perhaps another solution might be to enable “trusted” reviews to be invoked – for example Wikipedia seems to be good at ensuring reasonably accurate and responsible public information and commentary even though in essence there is complete freedom for anyone to post there. Moderation of posted material is obviously advantageous which some platforms do not do, or do in a very limited way. Simply the publication of a “standard” or set of norms for public forums (as Wikipedia also has of course) might assist. A combination of approaches might be the solution, and perhaps more research into the causes is required. Those are the issues that a public inquiry might look into and provide some recommendations upon.

At present there is a focus on making the national press more responsible (the Leveson inquiry and its recommendations) while ignoring the new world of social media, blogging sites and other forums. They need to be embraced also as there is no longer a firm dividing line between media. Perhaps a social media regulator is required to take responsibility for and provide guidance in this area, as the Information Commissioner does for Data Protection? But with a lighter touch than we are getting with the GDPR rules which seem to be another example of excessive regulation from the EU which is unexpectedly imposing major costs on even the smallest organisations. I am not convinced the new rules will stop the spam that we all receive.

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.

LoopUp, Audioboom, Social Media Abuse and a VCT AGM

LoopUp (LOOP), a small AIM listed company that provides audio conferencing and in which I have a small holding, have announced a proposed acquisition of a company in the same business – MeetingZone Group. This will more than double the size of LoopUp so it constitutes a reverse takeover. As they are paying cash for MeetingZone it will be financed by a term loan and a large placing. The placing will be at 400p per share, when the share price last night was 435p so it’s only a small discount. The share price normally falls to the placing price in such circumstances but it actually rose today which suggests investors like the deal.

MeetingZone is profitable and is being acquired at 12 times EBITDA. The plan is to deliver a “timely transition of the MeetingZone Groups audio conferencing business to the LoopUp platform” as the announcement says. This is clearly potentially a significant step up in the size and profitability of the merged entity, but my slight concern is the risks involved in this transition as it means the customers will need to learn a new system. Such transitions are never easy.

Another small AIM company is Audioboom Group (BOOM) whose shares have been suspended for some time after they announced a proposed acquisition, with a fund raising to finance it. Yesterday they announced it had been impossible to complete the placing to fund the deal and the company now needs to raise some money just to cover its working capital needs. Audioboom is primarily a podcast hosting platform and revenue has been increasing but for the year to November 2017 it was still less than £5 million and the loss was expected to be a similar figure! Accounts have yet to be published though. Needless to say perhaps, I have never held shares in this company because I considered it to have an unproven business model. Such early stage companies are surely best financed via private equity who can accept the risks rather than public market investors. I wish them the best of luck in raising more funds.

But I did have some contact with the company after a certain person posted a podcast which contained abusive comments about me. So my lawyer asked politely that it be removed which the company did simply because it did not comply with their policies. The result was a torrent of abuse about Audioboom by the same aforementioned person which was totally uncalled for. But now the same person has been on the receiving end of an attack from someone else where he has even had to call in the police for assistance.

Postscript: Let me make it clear that I do not condone racist or other illegal communications of any kind. They can never be justified. I have only recently been informed of the content and likely reasons for it which has resulted in the aforementioned communication being referred to the police.

This is a typical example of the problems of social media and blogging sites which have been getting a lot of media coverage in the last few days. Facebook have reported that 2.5 million posts alone that included “hate speech” were removed in the last 3 months of 2017, and there were many more violent, terrorist or pornographic posts they also removed. However, they cannot easily identify lies, fake news, fraudulent advertisements and common abuse. In other words, the social norms about what should be “published” in a public forum are completely breaking down. Nobody can, nor does, police the internet.

This is now proving to be a major problem for anyone in public life such as politicians. Free speech is a good concept in essence, but when it degenerates to allowing irrational and unconsidered abuse and false allegations to be propagated then surely something needs to be done about it. The laws against “hate speech” and libel law hardly provide effective remedies to stop the kind of behaviour that is now becoming so prevalent. I suggest that the Government needs to undertake a full blown public inquiry into this problem.

It is particularly serious in the financial world where bad behaviour can affect the business of a company and its share price, effectively leading to “market abuse”.

Yesterday I attended the Annual General Meeting of Maven Income and Growth VCT 4 Plc (MAV4). There were only about half a dozen shareholders in attendance in the City of London.

I raised a number of issues and posed questions. Subjects covered were:

  1. The poor performance of the company last year, which I calculated to be a total return of 1.72% (i.e. less than inflation). Total return includes asset growth and dividends of course, and although the company paid out dividends of 12.45p last year representing a yield of 16.5% on the share price at the end of the year (tax free of course), it’s the total return that really matters. Otherwise shareholders are just getting their assets returned to them.
  2. Inadequate explanation for the poor performance in the Annual Report. It does mention that “one of the larger portfolio companies suffered a write down in value which diluted the overall performance in the financial year, but more explanation would have been preferable.
  3. The length of service of the board directors. Apart from director Bill Nixon, who represents the fund manager and which I do not accept should be a director simply for that reason, the other three directors including the Chairman have all served since 2004. So this is one of the few companies where I voted against the reappointment of all of them. I made it clear that the board should look at succession and they indicated they may do so.
  4. The high overhead costs in this VCT – total administration and management expenses I calculated to be 4.0% of net assets at year end, although Bill Nixon disputed this figure.
  5. There was a suggestion made that with high returns of cash to shareholders last year, and a new fund raising, there might have been some “cash drag” in the performance data.
  6. I questioned the impact of the new VCT regulations, and Bill Nixon said the market was getting “frothy” with valuations difficult to sustain. The inability to write debentures on investments limits the amount of control they will have in future. The manager has reshaped the investment team to adjust to the new focus – they now have 4 PHDs. They rarely back start-ups and prefer to back teams with successful track records – they don’t “want them to be learning on our money”.
  7. Advanced approval from HMRC on new investments is getting better (this has been a major concern for many VCTs of late as it delays closing deals). Now closer to 30 to 40 days. There is also a proposal for a “self-certification” scheme where a qualified independent person gives a positive opinion. This might be of assistance but there are still potential problems if a business is subsequently found not to qualify.
  8. The company is looking at using the funds raised to make 10 to 12 investments in the current year, so the new rules about what kinds of businesses can be invested in are apparently not proving to be a major problem. But Bill said the result is they are moving from investing in “old” economy companies to “new” economy runs. This is likely to mean that portfolio volatility will increase so overall returns (and hence dividends) may fluctuate more from year to year.
  9. Bill thought VCTs will raise less money this year so new offerings may be in high demand.

Votes were taken on a show of hands and the proxy counts circulated after the meeting. Only about 10% of shareholders voted which is the typical pathetic turnout these days from private shareholders in such companies. There were substantial votes against one resolution on share buy-backs but apparently this was mainly from one family who may not understand the issues.

In summary this was a useful meeting and worth attending. I am only holding this VCT for historic reasons after Maven took over management of previously problematic VCTs I invested in years ago. Performance has improved as a result but is still not great and high overhead costs would put me off investing more money in it. I am always surprised that such VCTs are able to raise more funds with such apparent ease.

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.

Wey Education Interims and Sainsbury’s Merger

I attended a presentation by Wey Education to private investors on their Interim Results yesterday evening. The Interim Results were issued in the morning, but the share price fell by 31% on the day even though the company reported turnover up by 44% and an adjusted profit before tax when it was a loss last year. The reasons are not difficult to deduce.

Wey Education is a small education company listed on AIM providing on-line education services. A previous extensive report on the company is present here: https://roliscon.blog/2018/01/11/wey-seminar-the-future-of-education/

An immediate issue I spotted in the morning’s announcement was this statement: “Adjusted profits were £145,000 (2017: £75,000) in line with our expectations for the first half. The figure represents profit before tax adjusted for share based payments (£18,000), amortisation of intangibles (£95,000), acquisition costs (£43,000) and the higher than trend expenditure on marketing and other matters flagged up at the time of the November placing to substantially boost group revenues and underlying profits over the next three years (£143,000).”

I made a note to query the adjustment for marketing costs, but I needn’t have bothered because Leon Boros raised the issue in the meeting before I got a question in. As I said though, it is surely unusual to “adjust” for marketing expenditure. Understanding adjusted financial figures can be difficult enough but marketing costs are surely just part of routine operating expenses. If they are particularly high because of management’s decision to spend more on marketing, even though the returns might come in months later in terms of higher revenue, then this is best handled simply by a note in the accounts.

Executive Chairman David Massie said this treatment was consistent with previous financial reports and he had been advised to do this by the Nomad (WH Ireland). I think he got some bad advice on that point. Profitability is of less concern to investors in such early stage companies than revenue growth and progress with business strategy.

Another possible negative was the prospective partnerships (including joint ventures) in China and Nigeria for which David clearly has high hopes. There was clearly skepticism among investors about the prospects for these ventures and the diversion from the key existing UK markets. David does have experience of doing business in overseas markets which may assist.

One slight hiccup on their internet marketing spend was a decision to change bankers from HSBC who apparently queried some of the payments from overseas. From my experience of dealing with HSBC as a business customer that was probably a sensible decision to take. Simply impossible to deal with sensibly and quickly.

One interesting point in the presentation was a description of their interest in AI which I was skeptical about if you read my previous report. It seems this is being funded by the EU which pleases me even if it is still a management diversion. A demonstration of the wonders of IBM’s Watson as being implemented by Vodafone for answering customer queries fell flat as it did not provide sensible answers. My experience to date of voice response systems is consistently bad. Even the much-vaunted Google or Apple’s Siri can be very annoying in comparison with a human being, or a written query. Still requires further development to meet real users’ needs I think.

WH Ireland have revised their estimates for sales down for 2018 as a result but eps unchanged. Revenue now forecast to be £4.1 million and “adjusted” EPS of 0.39 but bear in mind the comments above. As others have said, the share price probably got ahead of what is a sensible valuation for this business. Even if David Massie has ambitions to grow it into a world leader, he has a way to go to demonstrate that this can be achieved. But he does seem to be building an organisation that might do so. One of those “wait and see” investment propositions it seems to me at this point in time.

Sainsbury’s Merger. On the opposite end of the financial scale, size wise, the proposed acquisition by Sainsbury (SBRY) of the ASDA UK stores from Walmart has had a very positive effect on the share price. The announcement on the 30th April caused the share price of SBRY to rise by 15% on the day. But it’s interesting to look at the share price trend in the week or so beforehand where it had risen after a long period in the doldrums. Was there a leak, as so often happens in these cases?

This merger would provide a supermarket duopoly in the UK with the merged entity and Tesco both holding about 30% market share. Would that be anti-competitive? In my experience in business undoubtedly so. Neither would be competing on price with the other and they would both end up with a cosy profit maximising strategy. For investors, if the merger is allowed to take place, it should be great news for investors.

But for Sainsbury’s customers like me, it’s going to be very bad news. I hope the Competition and Markets Authority block this deal.

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.

Shareholder Democracy, RBS, Rightmove AGM and Stockopedia

There is a very good article by City Slicker in this weeks’ edition of Private Eye (No.1469) on the subject of “Apathy in the City”. The article comments on the “disengaged” share owners in Persimmon who failed to vote against the remuneration report, or simply abstained. See my previous blog post on that subject here: https://roliscon.blog/2018/04/25/persimmon-remuneration-institutions-duck-responsibility/

The article highlights the issue that the many private shareholders in the company probably also did not vote (they could have swung the result), because they have effectively been disenfranchised by the nominee system that is now dominant. The writer says “This democratic deficit has been richly rewarding for companies, share registrars and those representing retail investors”, and the result “has been a real diminution in shareholder democracy”. A few more articles of that ilk may sooner or later impress on politicians and the Government that substantial reform is necessary.

The article also points out how the EU Shareholder Rights Directive, one of the few good things to come out of the EU bureaucracy in my opinion, is being misinterpreted by the UK Government to suggest beneficial owners are not shareholders.

To get the message across I have written to my M.P. on the subject of Beaufort and the substantial financial losses that thousands of investors will suffer there as a result of the use of nominee accounts compounded by the current insolvency rules. If anyone would like a copy of my letter to crib and send to their own M.P., just let me know.

In the meantime the AGM at the Royal Bank of Scotland (RBS) is due on the 30th May. The RBS board has opposed the resolution put forward by ShareSoc and UKSA to establish a “shareholder committee”. That would be a step forward in corporate governance in my view and shareholders would be wise to vote in favour of that resolution (no.27). I do hold a few shares in the company but will be unable to attend the AGM in Edinburgh so if anyone would like a proxy appointment from me so that you can attend and voice your own views on the subject, please let me know. You would at least have the pleasure of seeing the buildings created in Gogarburn by empire builder Fred Goodwin for RBS.

The RBS Annual Report is a 420 page document which must make it one of the heaviest UK Plc Annual Reports. The motto on the cover is quite amusing. It reads “Simple, safe and customer focussed” – perhaps it means they intend to get back to that because RBS was none of these things during the financial crisis that almost bankrupted the business.

One aspect that City Slicker criticizes in the aforementioned article is the low “turn-out” of voters at AGMs, i.e. the low percentage of shareholder votes cast even including “votes withheld”. A third were not voted at Persimmon. That is not untypical at AGMs in my experience although institutional voting has improved in recent years. It’s often the private investors now who don’t vote due to the difficulty, or downright impossibility of voting shares held in nominee accounts.

But there was no such problem at Rightmove Plc on the 4th May. About 85% of votes were cast. As a holder I could not attend in person, but Alex Lawson has written a report which is on the ShareSoc Members Network. One surprising result though was that long-standing Chairman Scott Forbes got 39% of votes against his re-election and Remuneration Committee Chairman Peter Williams got 37% against. I voted against the latter, against the Remuneration Report and did not support the re-election of Scott Forbes either. With 12 plus years of service, it is surely time to look to board succession planning and a new Chairman. The board is to look into why they got so many votes against the two resolutions which is certainly unusual.

To conclude I see that blogger/journalist Tom Winnifrith is having yet another go at mild-mannered Ed Croft of Stockopedia after a spat at the UK Investor Show over a trivial matter. Since then Tom has been attacking Ed over “recommendations” given by Stockopedia in his usual rottweiler manner. As a user of Stockopedia and other stock screening services, I don’t expect absolutely all the positively rated stocks to be great investments. I know that some will be dogs because either the accounts are fraudulent, the management incompetent or unexpected and damaging events will appear out of the blue. So for example, Globo’s accounts fooled many people including me until late in the day so any system that relied just on analysis of the financial numbers would be likely to mislead. But stock screens rely on the laws of averages. The fact that there will be one or two rotten apples in the barrel does not mean that stock screens cannot be a useful tool to quickly scan and dispose of a lot of “also-rans” in the investment world. They can quickly highlight the stocks that are worthy of more analysis, or prompt dismissal.

Winnifrith seems unable to differentiate between meritorious causes that deserve the full power of his literary talents and those where his imitation of a sufferer from Tourette’s syndrome where he heaps abuse on innocent victims goes beyond the bounds of reason. Stockopedia provides a useful service to investors. Let us hope that the saying there is “no such thing as bad publicity” applies in this case.

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.

They Do Things Differently in the USA

Former Autonomy CFO Sushovan Hussain has been found guilty of 16 counts of fraud in a Federal Court in California. He was convicted on all 16 counts of wire and securities fraud. This case was based on allegations of false accounting to ramp up the value of the Autonomy business prior to its acquisition by Hewlett-Packard. The latter subsequently wrote down most of the $10.3 billion cost of that acquisition.

More background on this case is given in a previous blog post here: https://roliscon.blog/2018/02/26/autonomy-legal-case-and-revenue-recognition/

Although Autonomy was a UK public company, and the Serious Fraud Office did look at the case they decided to do nothing. However a civil action against Mr Hussain and the former Autonomy CEO, Mike Lynch (who was not indicted in the US case), is still being pursued in the English courts. This decision will clearly strengthen that action.

The US prosecutor suggested in court that the accounts were a façade and eventually proved to be an “unsustainable Ponzi scheme”. Mr Hussain is apparently likely to appeal the verdict, but he faces a prison sentence of up to 20 years – sentencing will take place on Friday.

How different to the UK where prosecutions for fraud based on false accounting almost never take place. Questions were raised about the accounts of Autonomy by investors and a whistle blower also raised issues before the sale to H/P but the UK authorities did nothing. The FRC did announce an investigation into the accounts of Autonomy in 2013. It is still listed as a “current” case on their web site, i.e. no report and no conclusions as yet. Why the delay?

This case demonstrates the typical sloth and inaction of the UK regulatory authorities in comparison with the USA. The FCA/FRC are both very ineffective, and the recent events regarding the Aviva preference shares and the collapse of Beaufort show how ineffective those bodies are in protecting the interests of investors. It’s a combination of a defective legal system and a culture of inaction and delay that permeates these organisations. Well at least that is my personal view.

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.

Beaufort Administration, Intercede and the Mello Conference

Yesterday I attended the first day of the 2-day Mello investor conference in Derby. There were lots of good presentations and some interesting companies to talk to. One hot topic of conversation was the collapse of Beaufort which was forced into administration (see two previous blog posts on the topic for details). There are apparently many people affected by it. There are a number of major issues that have arisen here:

  • The administrators (PWC) have suggested it might cost as much as £100 million to wind up the company and return assets to clients which seems an enormously large figure when the assets held are worth about £550 million. The costs will be taken out of the clients’ funds and as a result there will hundreds of larger clients who will suffer substantial loses (those with assets of less than £50,000 may be able to claim against the Financial Services Compensation Scheme – FSCS – but larger investors will take a hair-cut).
  • The assets (mainly shares) were apparently held in nominee accounts. Surely these were “segregated” accounts, i.e. not available to be treated as assets of the failed business? Most brokers who use nominee accounts will have wording in their contracts with their clients that cover this with often fine words that conceal the underlying reality that if there is any “shortfall” then the clients may be liable. But regardless, PWC are saying that because this is a “Special Administration” they have the right to take their fees out of the client assets/funds.
  • There will be a Creditors’ Meeting as required by all administrations but will the creditors be able to challenge the arrangements put in place by PWC and the costs being incurred? From past experience of such events I think they may find it very difficult. Administrators are a law unto themselves. It is alleged that there were offers from other brokers to take over the assets of Beaufort and their clients very quickly and at much lower cost, but that offer has been ignored. Investors need to ask why.
  • Note that the Special Administration regime was introduced during the financial crisis to enable the quick resolution of problems in financial institutions such as banks. This is where it is necessary to take prompt action to enable a company to continue trading and the clients not to be prejudiced. But in this case it seems we are back to the previous state where client assets are frozen for a lengthy period of time while the administrator runs up large bills at the clients expense.
  • I said only recently that the insolvency regime needs reform after the almost instant collapse of both Conviviality and Carillion. There may not have been a major shortfall in Beaufort and it might have been able to continue trading. But the current Administration rules just provide large, and typically unchallengeable, fees for the administrators who give the impression of having little interest in minimising costs. The result is the prejudice of investors in the case of a broker’s collapse, or of shareholders in the collapse of public companies.
  • Can I remind readers that part of the problem is the widespread use of nominee accounts by stockbrokers. I, ShareSoc and UKSA have long campaigned for reforms to reduce their use and give shareholders clear title and ownership after they purchase shares. In the meantime there are two things you can do: a) Avoid using nominee accounts if at all possible (i.e. use certificated trading or personal crest accounts so your name is on the share register); b) if you have to use a nominee account, make sure you are clear on the financial stability of the broker and that you trust the management. It would not have taken a genius to realise that some of the trading practices of Beaufort might raise some doubts about their stability and reputation.

I do suggest that investors who are affected by the collapse of Beaufort get together and develop a united front to resolve not just the problems raised by this particular case, but the wider legal issues. Forceful political representation is surely required.

See this web site for more information from PWC: https://www.pwc.co.uk/services/business-recovery/administrations/beaufort/beaufort-faqs.html

An amusing encounter at the Mello event was with Richard Parris, the former “Executive Chairman” of AIM listed Intercede (IGP). He was talking in a session entitled “The importance of the right board of directors” and he conceded that “separation of roles” is important, i.e. presumably he would do it differently given the chance. Richard, the founder of the company, has recently stepped down to a non-executive role, they have a new Chairman, and even Richard’s wife who was operations manager has departed. While I was in the session, there was even an RNS announcement saying the “Chief Sales Officer” had resigned (I am still monitoring the company despite having sold all but a nominal holding years back).

Richard pointed out to me that the pressure put on the company over his LTIP package back in 2012 meant that his share options are worthless as the performance targets put in place were not achieved. Well at least he is still talking to me and has joined ShareSoc as a Member apparently. Sometimes time can heal past disputes, and as I said, shareholder activism does work!

But it is regrettable that RBS are recommending voting against a resolution proposing a shareholder committee at their upcoming AGM. Perhaps not surprising, but a shareholder committee could avoid confrontation over such issues as remuneration and would be a better solution that confrontation.

I hope the Mello event becomes a regular feature of the investment calendar.

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.