ShareSoc Seminar – Ideagen, Zegona, LoopUp and Anexo

Some brief notes on the ShareSoc Seminar I attended yesterday (10/7/2019). There were four companies presenting:

Ideagen (IDEA): This company has presented many times before to ShareSoc members and those who invested after the first such event will have done very well indeed (I hold the stock). This time we had CEO Ben Dorks presenting rather than Exec Chairman David Hornsby and Ben did a good job explaining their buy and build strategy for this software company. They now have 4,700 customers including many big names and 7 out of 10 UK audit firms – not that this seems to have solved most of the poor audit quality I commented on in a previous blog post probably because box ticking does not help when “judgmental” issues and failing to challenge management seem to be the big problems there.

Organic growth might be slightly reduced this year due to transition to an SAAS model but they plan to add £30 million in revenue from acquisitions. There were some interesting comments on how they integrate acquisitions – they “ideagenise” the companies, the people and the products!

A question arose concerning the apparent low return on capital of this company (as reported by Stockopedia et al). I have looked at this in the past and the key is to look at the cash flows and return on cash invested, as David Hornsby suggested.

Zegona (ZEG). This is an investment company that is investing in European telecoms operators where they think there are opportunities for consolidation. In essence a “buy, fix and sell” strategy. Their main investment at present is in Spanish company Euskaltel.

The financial ratios may look attractive but I doubt I can keep track of European telecoms operators and their regulatory environment so this looks like a “special situation” to me that is for the experts in this area only.

LoopUp (LOOP). This company provides teleconferencing services. I hold a very few shares in this company whose value has halved after a recent profit warning related to forecast sales revenue falling. It was therefore particularly disappointing that the Co-CEO who was due to present did not appear due to sickness. Instead we have Gareth Evans from Progressive Digital Media who provide research reports on the company. He covered the business well and he mentioned they use LoopUp themselves.

Recent problems allegedly relate to the slow build-up of new “pods” (sales teams), diversion of experienced sales staff into training and “general economic factors”. But I thought the general economy was doing well so I doubt that the latter is a good explanation.

One thing not mentioned in this presentation was the announcement on the same day that SFM UK Management (a subsidiary of Soros Fund Management) had acquired over 8% of the company so someone still has faith in it.

Progressive did supply their latest analysis of the company that shows forecast adjusted eps of 6.2p for this year and 8.5p next year which makes them not expensive on a p/e basis. I think this is one to monitor to see if there is no more bad news in which case it may be an opportunity to acquire a business with many positive characteristics.

But the share price fell again this morning. But that’s just following the trend in small cap technology stocks over the last few days – Ideagen included. That’s after a good positive run in such companies in the last few weeks. Small cap stocks are suddenly out of favour it seems and that’s nothing to do with Brexit as companies such as LoopUp and Ideagen will not be affected in any way and actually might benefit from the falling pound that has resulted from nervousness over Brexit.

Anexo (ANX). This is an interesting company that I had not come across before. It provides litigation and courtesy cars to impecunious drivers who have no-fault accidents. The company maintains a stock of vehicles to provide as courtesy cars but that includes a large number of Mercedes cars so not all their customers can be impecunious.

They mainly get their business from introductions from small vehicle repair shops, and claim a success rate of 98.5% in recovering from insurers. The latter consistently ignore claims until they are taken to court and just before a court hearing.

The management spoke well in their presentation and clearly have ambitions to grow the business substantially – they claim only 2% market share at present. But they do have to fund the cost of vehicle provision and legal costs before a claim is settled.

The business may be at risk of changes to the law on what can be recouped from third parties but it certainly deserves closer examination.

Just one general comment on the event. It is disappointing that several of the powerpoint presentations were poor. Too many words on them in too small a font and with not enough graphics to make the points they are trying to get across. This seems to be a common failing in small cap company presentations. The slides should support what the speaker is saying with a few key messages, not distract from the spoken words.

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

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Inheritance Tax Simplification – Perhaps

On Friday (5th July) the Office of Tax Simplification (OTS) published their second report on the simplification of Inheritance Tax (IHT). You only need to read the report to see how complex it is at present. They have made some recommendations for changes but they are relatively minor. Major changes were ruled out. Even the suggested changes need to be accepted by the Treasury so they may not be implemented, and even if they are it appears likely that they would not happen quickly. These are some of the key proposals:

  • Exemptions for gifts might be simplified. For example, the exemption for “normal expenditure out of income” is unclear in effect and requires detail record keeping for many years which few people are capable of doing. They suggest it be replaced with a higher personal gift allowance. Tip: keep a spreadsheet of all income and expenditure (including gifts) if you are making personal gifts at present.
  • The 7-year period after which gifts are free from IHT also creates problems in record keeping (even bank statements are not retrievable after 6 years), particularly as it can extend to 14 years. Taper relief is another complication. The proposal is to scrap taper relief and have a simple 5-year rule for exemption.
  • The residence nil-rate band introduced a lot of complications in IHT calculations and received a lot of negative comments but they don’t propose to remove or simplify this area as they say it’s still relatively new and more time is required to evaluate its effectiveness. But it says some solicitors choose not to advise clients about this concession because it is so complicated!
  • They propose no change to the provision that reduces the IHT tax rate on all assets to 36% if a person leaves more than 10% of their estate to charity despite the fact that it is little used. Note: this is a very useful facility so if you have a will that does not include such a provision then you need to review it because it can reduce your overall IHT bill.
  • Business property relief, particularly on “unlisted” AIM shares, was considered in the review. It questions whether third party investors in AIM traded shares meet the “policy objective” of Business Property Relief (BPR). But it makes no specific recommendation other than noting that removing APR (Agricultural Property Relief) and BPR would fund a reduction in the main rate of IHT to 33.7% from 40%. However it does point out the anomalies in determining whether a business is trading or is just an investment vehicle and in non-controlling shareholdings held indirectly. It suggests this be reviewed.

Is there a threat to IHT relief on AIM shares? It is not clear that there is and certainly not in any short-term time frame. In any case, investing in AIM shares simply because they offer IHT relief is a bad policy. Investment should never be driven by tax considerations. In addition the requirement to hold them for 2 years makes for dubious trading decisions and the complexity in record keeping if one trades in the shares of AIM companies can be mind-boggling.

In summary the proposed changes, even if HM Treasury supports them, are not going to simplify IHT that much. You will still need to take expert advice on this area of your financial affairs and tax accountants will not be put out of work. There is no revolution proposed.

You can read the OTS report here: https://tinyurl.com/y65jubxz

Or read my original comments on what should have been done here: https://roliscon.blog/2018/05/31/inheritance-tax-review/

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

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LoopUp Profit Warning and Brexit Party Policy

Conference calling AIM company LoopUp (LOOP) issued a trading statement this morning which contained a profit warning. At the time of writing the share price is down 47% on the day but it has been falling sharply in recent days which suggests the bad news had already leaked out.

This is an example of what happens when lofty growth expectations are revised downwards. Revenue is now expected to be down 7% on the previous market consensus and EBITDA down 20%. The company blames the shortfall on “subdued revenue across its long-term customer base” driven by macro-economic factors and diversion of sales staff into training new ones.

LoopUp is presenting at the ShareSoc seminar event on the 10th July so it will be interesting to hear what they have to say about this – see https://www.sharesoc.org/events/sharesoc-growth-company-seminar-in-london-10-july-2019/ . This news comes only a month after LoopUp held a Capital Markets Day when there was no hint of these problems. I did a report on that here: https://roliscon.blog/2019/06/07/broker-charges-proven-vct-performance-fee-and-loopup-seminar/

I do hold a few shares in LoopUp but thankfully not many.

Brexit Party Policy

I mentioned in a recent blog post that the Brexit Party is looking for policy suggestions to enable them to develop a platform for any prospective General Election. Here’s what I sent them with respect to financial matters:

  1. The personal taxation system is way too complicated and needs drastically simplifying. At the lower end the tax credit system is wide open to fraud while those on low incomes are taxed when they should not be. The personal tax allowance, both the basic rates, and higher rates, need to be raised to take more people out of tax altogether.
  2. The taxation of capital gains is also now too complicated, while tax is paid on capital gains that simply arise from inflation, which are not real gains at all. They should revert to being indexed as they were some years ago. For almost anyone, calculating your own tax that is payable is now way too difficult and hence requiring the paid services of accountants using specialist software.
  3. Inheritance tax is another over-complex system that wealthy people avoid by taking expert advice while the middle class end up paying it. It certainly needs grossly simplifying, or scrapping altogether as a relatively small amount of tax is actually collected from it.
  4. The taxation of businesses is inequitable with the growth of the internet. Small businesses, particularly retailers, pay a disproportionate level of tax in business rates while their internet competitors often avoid VAT via imports. VAT is now wide open to fraud and other types of abuse such as under-declarations, partly because of the EU VAT arrangements. VAT is in principle a simple tax and the alternative of a sales tax would create anomalies but VAT does need to be reformed and simplified.
  5. All the above tax simplifications would enable HMRC to be reduced in size and the time wasted in form filling by individuals and businesses reduced. Everyone would be a winner, and wasted resources and expenditure reduced.
  6. The taxation of company dividends on shares is now an example of the same profits being taxed twice – once in Corporation Tax on the company, and then again when those profits are distributed to shareholders. This has been enormously damaging to those who receive dividends and the lack of tax credits has also undermined defined benefit pension funds. The taxation of dividends should revert to how it once was.
  7. The regulation of companies and financial institutions needs very substantial reform with much tougher laws against fraud on investors. Not only are the current laws weak but the enforcement of them by the FCA/FRC is too slow and ineffective. Although some reforms have recently been proposed, they do not go far enough. Individual directors and senior managers in companies are not held to account for gross errors or downright fraud, or when they are, they get off too lightly. We need a much more effective system like they have in the USA, and better laws.
  8. Shareholder rights as regards voting and the receipt of information have been undermined by the use of nominee accounts. This has made it difficult for individual shareholders to vote and that is one reason why investors have not been able to control the excesses in director pay recently. The system of shareholding and voting needs reform, with changes to the Companies Act to bring it into the modern electronic world.
  9. The pay of directors and senior managers in companies and other organisations has got wildly out of hand in recent years, thus generating a lot of criticism by the lower paid. This has created social divisions and led partly to the rise of extreme left socialist tendencies. This problem needs tackling.
  10. Governance of companies needs to be reformed to ensure that directors do not set their own pay, as happens at present, but that shareholders and other stakeholders do so. Likewise shareholders and other stakeholders should appoint the directors.
  11. Insolvency law needs reform to outlaw “pre-pack” administrations which have been very damaging to many small businesses. They are an abuse of insolvency law.
  12. All the EU Directives on financial regulation should be scrapped (i.e. there should be no “harmonization” with EU regulations after Brexit). The MIFID regulations have added enormous costs to financial institutions, which have passed on their costs to their customers, with no very obvious benefit to anyone. Likewise the Shareholder Rights Directive might have had good objectives but the implementation has been poor because of the lack of knowledge on how financial markets operate in the UK. Other examples are the UCITS regulations which have not stopped Neil Woodford from effectively bypassing them, or the PRIIPS regulations which have resulted in misleading information being provided to investors.

Let me know if you have other suggestions, and of course the above policies might be good for adoption by other political parties in addition.

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

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Bonmarché Update, FCA Grilling over Woodford and Amati AIM VCT AGM

Yesterday Bonmarché (BON) conceded defeat in its opposition to a takeover bid at 11.4p. On the 17th May it had rejected the bid because it “materially undervalues Bonmarché and its prospects”. The share price of this women’s clothing retailer was over 100p a year ago but the latest trading review suggests sales are dire because of underlying weakness in the clothing market and “a lack of seasonal weather”. Auditors might have qualified the accounts due to be published soon due to doubts about it being a going concern if sales did not pick up before then. Bonmarché looks to be another victim of changing shopping habits and changing dress styles.

Is the market for traditional men’s clothes any better? Not from my recent experience of buying two formal shirts from catalogue/on-line retailer Brook Taverner. Cost was zero although I did have to pay postage. Why was the cost zero? Because they had a special offer of 60% off for returning customers, and I had collected enough “points” from them to wipe out the balance. Smacks of desperation does it not?

On Tuesday the Treasury Select Committee interviewed Andrew Bailey of the Financial Conduct Authority (FCA) over the closure of the Woodford Equity Income fund and their regulation of it. It is well worth listening to. See https://parliamentlive.tv/Event/Index/34965022-ec99-4243-8d0b-ae3350c31fe4

It seems that technically the fund only made two minor breaches of the 10% limit on unlisted stocks twice in the UCITS rules which were soon corrected in 2018. But Link were responsible for ensuring compliance as they were legally the fund manager as they were the ACD who had delegated management to Neil Woodford’s company. But in the morning of the same day the Daily Telegraph reported that nearly half of the fund investments were actually illiquid including 20% that were nominally listed in such venues as Guernsey and not actively traded. In other words, they were perhaps technically complying with the UCITS rules but their compliance in principle was not the case. Mr Bailey suggested this is where regulation might be best to be changed to be “principle” based rather than “rule” based but surely that would lead to even more “fudges”? The big problem is yet again that the EU, who sets the UCITS rules, produced regulations that lacked any understanding of the investment world.

The Investment Association has suggested a new fund type be allowed which only allows limited withdrawals, e.g. at certain times or on notice. But that does not sound an attractive option to investors. When investors want to sell, they want to sell now.

Bank of England Governor Mark Carney has said open-ended funds are “built on a lie” in that they promise daily liquidity when it may not always be possible. He also suggested they posed a systemic risk to financial stability. Or as Paul Jourdan said at the Amati AIM VCT AGM: “Liquid investments are liquid until they are not”.

There is of course still no sign that Neil Woodford is taking steps to restore confidence in his funds, as I suggested on June the 5th. There needs to be a change in leadership and in name for that to happen. Once a fund has become a dog and untouchable in the minds of investors, and their financial advisors, redemptions will continue. Neil Woodford making reassuring statements will not assist. More vigorous action by Woodford, Link, and the FCA is required. Affected investors should encourage more action.

The Amati AIM VCT (AMAT) had a great year in the year before last as small cap AIM stocks rocketed but last year was a different story. NAV Total Return was down 10% although that was better than their benchmark index. AB Dynamics was the biggest positive contributor – up 93% over the year with Water Intelligence also up 93%. Ideagen was a good contributor (now second biggest holding) and Rosslyn Data was also up significantly. Accesso fell 36% but they are still holding. I asked whether they had purchased more AB Dynamics in the recent rights issue but apparently they could not as it was no longer VCT qualifying.

I also asked about the fall in Diurnal which wiped £1.2 million off the valuation. This was down to clinical trial results apparently. However, fund manager Paul Jourdan is still keen on biotechnology and pharmaceutical firms as he suggested that healthcare is being revolutionised in his concluding presentation – he mentioned Polarean as one example.

Other presentations were from Block Energy – somewhat pedestrian and not a sector I like – and Bonhill Group which was more lively. Bonhill were formerly called Vitesse Media but are growing rapidly from some acquisitions and clearly have ambitions to be a much bigger company in the media space.

It was clear from the presentations that the investee company portfolio is becoming more mature as the successful companies have grown. This arises because they tend to take some profits when a holding becomes large but otherwise like to retain their successful holdings.

All resolutions were passed on a show of hands vote but I queried why all the resolutions got near 10% opposing on the proxy counts which is unusual. It seems this is down to one shareholder whose motives are not entirely clear.

In summary, an educational event and worth attending as most AGMs are.

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

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Broker Charges, Proven VCT Performance Fee and LoopUp Seminar

The Share Centre are the latest stockbroker to increase their fees. Monthly fee for an ISA account is going up by 4.2% to £5.00 per month with increases on ordinary share accounts and SIPPs also. This is the latest of a number of fee increases among stockbrokers and retail investor platforms. The Share Centre blame the required investment in technology development and “an increasing burden of financial regulation”. The latter is undoubtedly the result of such regulations as MIFID II imposed by the EU which has proven to be of minimal benefit to investors. As I was explaining to my sister over the weekend, this is one reason why I voted to leave the EU – their financial regulations are often misconceived and often aimed at solving problems we never had in the UK.

I received the Annual Report of Proven VCT (PVN) this morning – a Venture Capital Trust. Total return to shareholders was 10.3% last year, but the fund manager did even better. Of the overall profits of the company of £18.6 million, they received £7.7 million in management fees (i.e. they received 41% of the profits this year). That includes £5.6 million in performance fees.

Studying the management fee (base 2.0%) and the performance fee, I find the latter particularly incomprehensible. I will therefore be attending the AGM on the 3rd July to ask some pointed questions and I would encourage other shareholders to do the same. I am likely to vote against all the directors at this company.

I also received an Annual Report for Proven Growth & Income VCT (PGOO) and note that of the 4 directors, 2 have served more than 9 years and one is employed by the fund manager. So that’s three out of four that cannot be considered “independent” so I have voted against them. I would attend their AGM on the same day but the time is 9.30 which is not a good choice and would waste a whole day.

Yesterday I attended the “Capital Markets Day” of LoopUp (LOOP). This is an AIM listed company whose primary product is an audio conference call service. It’s just a “better mousetrap” to quote Ralph Waldo Emerson as 68% of the world are still using simple dial-in services rather than more sophisticated software products such as Zoom and WebEx. There are lots of other competitors in this field including Microsoft’s Skype which I find an appallingly bad product from past experience. Reliability and simplicity of use is key and LoopUp claimed to have solved this with no learning required, no software downloads or other complexities and high-quality calls aimed at the corporate market.

I have seen the company present before and do hold a few shares. This event was again a very professional sales pitch for the company and its product with no financial information provided. Yesterday they also covered the addition of video to their basic conference call service which was announced on the day, plus a new service for managed events/meetings. Video addition is probably an essential competitive advantage that was previously missing. They covered how their service is differentiated from the main competitors which was good to understand.

Last year they acquired a company called MeetingZone which has increased their customer base and revenue substantially and are transitioning the customers to the LoopUp product. Revenue doubled last year and is forecast to rise by about 50% in the current year. Needless to say the company is rated highly on conventional financial metrics and return on capital has been depressed by the cost of the acquisition. But one reason I like this company is that it’s very easy to understand what they do and what the “USP” is that they are promoting, plus their competitive position (many company presentations omit any discussion of competitors).

They also have an exceedingly good sales operation based on groups of people organised in “pods” which was covered in depth in the presentation. These only have team bonuses and the key apparently is to recruit “empathetic” people rather than “individualists”. Perhaps that is one reason 60% of them are female. As I said to their joint CEO, I wish I had seen their presentation some 30 or more years ago when I had some responsibility for a software sales function.

The latter part of this 3-hour event was an explanation of how the software/service is used by major international law firm Clifford Chance with some glowing comments on the company from one of their managers. Customer references always help to sell services.

In conclusion a useful meeting, but lack of financial information was an omission although “Capital Market” days are sometimes like that. But the positive was that they had both institutional investors and private investors whereas some companies deliberately discourage the latter from attending such events which I find most objectionable.

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

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AB Dynamics Placing, and Metro Bank Troubles

AB Dynamics (ABDP) announced a placing to raise £5 million this morning. The money will be used to finance potential acquisitions, add production capacity and meet working capital requirements. This company provides vehicle testing systems and has been rapidly expanding recently. The share price has also been rising like a rocket in the last few weeks and on fundamentals the company is now very highly rated – prospective p/e for the current year is 47. So perhaps the company just saw this as a good opportunity to raise some money.

The new shares are being placed at 2200p though which is a discount of 13% to the share price last Friday. However although this is being done via a placing to institutional investors there is also an “open offer” for those such as private shareholders who cannot participate in the placing. This is the way to do such things and as a holder of the shares I will probably take up the open offer just so as to avoid dilution, although I don’t consider the price as particularly attractive. The share price dipped first thing this morning on the news but has subsequently recovered most of that fall.

Metro Bank (MTRO) has been in trouble since the start of the year when it disclosed it had wrongly risk-weighted some of its loans which meant its capital ratio was wrong. Metro is one of the so-called “challenger banks” that aim to tackle the dominance of the big high-street banks in the UK. The company did a placing to raise another £350 million last week to shore up its balance sheet.

But depositors have been spooked by the news and apparently there were queues of customers withdrawing money from branches in West London recently. Is this another run on a bank, as happened at Northern Rock? Where a falling share price and collapsing confidence in the bank caused depositors to panic? The FT ran an editorial saying it was not similar but it looks very much so to me. Although the Financial Services Compensation Scheme (FSCS) now protects deposits up to £85,000 that will not help many retail customers and the delays in obtaining compensation will encourage depositors to move all of part of their funds elsewhere and promptly. Corporate clients have no such protection anyway. When confidence in a bank is lost, even if it is technically solvent, depositors don’t hang around.

Here’s a good quote from eminent Victorian author Walter Bagehot: “Every banker knows that if he has to prove he is worthy of credit…in fact his credit has gone” (in another letter in the FT today).

From my experience of trying to open an account with Metro Bank recently, I have doubts about the quality of this business anyway. I gave up in the end. Needless to say I don’t hold shares in Metro. But all banks are becoming exceedingly difficult to deal with. My long-standing (over 50 years) bank recently made me visit a branch to prove who I was. There was a letter complaining about the service from banks in the FT on the 15th May. It suggested that “something has gone badly wrong” with frontline bank service. I had similar problems with a business account at HSBC who proved impossible to talk to other than by visiting one of their branches – and even then they were unable to resolve difficulties. It is extremely annoying that banks are becoming paranoid about KYC and security checks so that they won’t even talk to you on the telephone about simple queries.

If any readers can recommend a bank who acts more reasonably and sensibly, let me know.

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

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Wey Education News

Wey Education (WEY) published a very positive half-year report his morning. This small AIM-listed company operates in the on-line education field and I have written about it several times in the past (you can search the blog for previous posts). Under its former Executive Chairman, David Massie, who sadly died, it launched an ambitious expansion programme including overseas ventures in Kenya, Nigeria and China. They have written off those and closed down operations in London (total cost £881k) and will be concentrating on their UK InterHigh and Academy 21 businesses in future.

The good news is that turnover is up 55% and adjusted profits on continuing operations is both positive and very substantially up. The share price is up over 50% today at the time of writing. Possibly helped by share commentator Paul Scott saying he had bought some recently.

There is a great need for the alternative education to conventional schools that Wey provides so let us hope they are now heading in the right direction, albeit that there is some competition in this sector.

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

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