Brexit – Over and Out – and Why Shareholder Votes Matter

Last night Brexit got done. We exited the EU after 47 years. Our last words to the EU bureaucrats were surely “over and out”. But we will need to resume the conversation to secure a trade deal. That still leaves room for many more arguments within the UK and with the EU.

Some people seem to think that there is a hope we might rejoin the EU some time in the future. But while the EU is dominated by bureaucrats and real democracy is so lacking in the EU institutions that seems exceedingly unlikely to me. Hope of any reform to the EU is surely forlorn.

It might be preferable to have some alignment on product and financial regulations but in the latter area the EU either follows well behind the UK anyway, or creates regulations like MIFID II that are over complex or simply incomprehensible.

One area that the EU could have been a leader in was to improve financial regulation such as on shareholder rights. They have produced a Shareholder Rights Directive but it is so badly written that it can and is being effectively ignored in the UK. Just take the area of shareholder voting and the problem of nominee accounts.

The Investors Chronicle (IC) have published an article by Mary McDougall this week entitled “Why Shareholder Votes Matter”. It shows how the nominee account system has disenfranchised most individual shareholders as they either cannot vote their shares, or it is made so difficult to do that they don’t bother.

I contributed to the IC article because I have a lot of knowledge of this area having pioneered the ShareSoc campaign on the issue and having experience of using multiple platforms over many years (see https://www.sharesoc.org/campaigns/shareholder-rights-campaign/ ).

The article mentions Sirius Minerals (SXX) which is currently subject to a takeover bid via a scheme of arrangement. A very large proportion of the shares are held by individual investors in nominee accounts but because of the voting rules on Court hearings all of them will only get one vote by the nominee operator who might not even vote at all. That’s because nominee accounts are generally “pooled” with only one name on the share register as a “Member” of the company – and that name is that of the nominee operator (i.e. the platform).

Another example that shows where votes are important is that of the forthcoming AGM scheduled for the 12th February at RWS Holdings (RWS), an AIM company. You might think that this will be a routine matter with just the standard resolutions. But not so. There is actually a resolution to waive the need for a Concert Party that might acquire more than 30% of the shares to make an offer for the company under the City Takeover Code. The Concert Party comprises Chairman Andrew Brode, Diane Brode and a Trust they control. They already hold 32.8% of the shares but as there is also a share buyback resolution that might increase their holdings, and hence trigger the need for an offer, a waiver is required. I voted against both resolutions – I always vote against share buy-backs unless there are very good reasons, and I don’t like public companies to have shareholders with more than 30%.

You can see that just a few private shareholders in nominee accounts might affect the outcome as the Concert Party cannot vote on the waiver. But will they?

Regardless I encourage shareholders in RWS to vote their shares – if you hold shares in an ISA your platform operator has a legal obligation to cast your votes.

The IC article mentions that the Law Commission is currently looking at the problems and legal uncertainties created by nominee accounts, but it also discloses that they only expect a “scoping study” on intermediated securities to be published in Autumn 2020. No great urgency there then!

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

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Miton UK Smaller Companies Fund In Decline

There was an interesting article published a couple of days ago by Citywire on the problems at the LF Miton UK Smaller Companies Fund. The fund is managed by well known investor Gervais Williams and Martin Turner and focuses mainly on AIM listed companies. Performance in 2019 was dire with the fund losing 14% when the sector was up 25%. Over the last 18 months this open-ended fund has shrunk by 75% as investors bailed out.

In the Citywire article Gervais is quoted as giving some positive comments including “The stocks in the fund are particularly undervalued on a relative and absolute basis, with an overall price-to-book ratio of 1.1 times, for example, versus 2.2 times for the FTSE AIM All-Share index”. A quick look at the portfolio gives me some doubts though.

The top holdings are Aquis Exchange, Kape Technologies, CentralNic Group, Totally, Corero Network Security, Kromek Group, Amino Technologies, Frontier IP, Hydrogen Group and Reabold Resources. I have held CentralNic and Corero in the past but not currently. Corero who operate in the digital security (DDOS) sector has been a consistent disappointment over many years with repeated placings required. Perhaps some of these business are undervalued and may turn into winners in due course, but the problem with holding small caps in an open-ended fund is that a hiccup in the overall fund performance causes investors to sell the fund and that means the fund manager has to sell some of the relatively illiquid shares to meet redemptions. That drives the share prices down.

This is similar to the problem Woodford had but in a slightly different form. The Miton holdings are at least listed but probably quite illiquid, i.e. low normal share volume and selling the size of holding that Miton might have would be difficult. But it’s similar in that the managers seem to have lost their touch at share picking.

The situation works in reverse of course if the fund grows in size after a positive period. Folks pile in and the share prices of the shares the fund invests in are driven up.

One has to question whether this kind of fund should be an open-ended fund rather than an investment trust. The bigger the fund grows (it’s now still £57 million in size), the more dangerous the situation becomes.

But for private investors, one way to avoid this “herding” problem is to invest directly in small cap shares rather than in a fund. Any individual investor may have such a small holding that one can move in and out of the shares without moving the share price too much. Or if you still wish to invest in small cap open-ended funds, make sure you jump on the bandwagon when it’s going up and bail out as soon as there are any performance hiccups.

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

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Intercede AGM and Tech Stock Valuations

Yesterday I attended the Annual General Meeting of Intercede Group Plc (IGP) at their offices in Lutterworth. I have held a very few shares in this company since 2010 in the hope that it would be able to turn its identity software solution into a profitable and growing business. Although they have some great major account customers, revenue has been static at around £10 million for the last 5 years and in 2017/18 they reported substantial losses. It always looked to me a typical example of a common failure in technology driven companies – great technology but inability to sell it. There was a revolution in the management in 2018 though with founder Richard Parris who was Executive Chairman departing in March 2018. Last year (year end March 2019), revenue was £10.1 million, a slight increase, and a small profit was reported after substantial reductions in costs.

New Chairman Chuck Pol introduced the board including the new CEO Klaas van der Leest and they have also appointed a new non-executive director, Rob Chandok. The other two non-executive directors have been there since 2002 and 2006 which is too long but they were not up for re-election.

There was no trading statement or other announcement on the day, so we went straight into questions. I asked about the “distractions” referred to on page 9 of the Annual Report and Klaas covered the management changes. It seems quite a number of staff left and new hires were made including sales staff, pre-sales and new developers, but the situation was now stable.

I asked about the status on development of channel partnerships which is what they are now clearly focusing on rather than direct sales. In response it was stated that 2 new channel managers had been appointed – one for the USA and one for the rest of the world. But it takes time to develop channel sales. The previous 4 offices have been cut to 2 in Lutterworth. Is it difficult to recruit staff bearing in mind the Lutterworth location? Not an issue it seems as remote working is now practical – Klaas lives in Surrey for example and visits the office a few days per week.

I also asked about the comment about development of a more standard variant of MyID (see page 6 of the Annual Report). Klaas said when he arrived the product had not been standardised – they were more selling a toolkit with “lots of arms and legs” so significant implementation expertise and effort was required. Comment: this explains why sales were not easy in the past because from my experience in the software industry this adds to costs substantially and slows sales.

I later asked whether the development effort put into before the management changes were made was of any use, but it seems that has been “mothballed” and they are concentrating on sales of MyID.

Another shareholder asked about the £1.45 million of receivables that are “past due” (see page 40) – have they been received? The answer from the CFO was in the main yes. The reason for the long payment times were because they are involved in large projects, often acting as sub-contractor. But he was somewhat evasive about whether they were now all collected and refused to disclose the current outstanding position. But he did say that with the type of clients they have, collection is not usually a problem.

I asked about the convertible loan note they have which is quite expensive – £4.7 million outstanding at 8% p.a. interest and repayable by December 2021. Could they be redeemed early? Answer was no but the board is considering that issue. As one shareholder commented, all they need to do is get the share price above the conversion price to remove the problem, although there would be some dilution as a result of course.

I chatted to Klaas after the formal meeting closed, and it’s good to have the company led by an experienced sales person. The changes he has been making look altogether positive but it seems to be taking some time to produce better results – but that might simply be the long lead times on major account sales and the time it takes to develop the partnerships. But it would have been preferable to have a trading statement of some kind at this meeting. I think we will have to wait and see on this company.

Technology Stock Valuations – Bango and Boku

Intercede is an example of a company which has minimal profits at present so valuing it is not easy. Based on broker’s forecasts of some increase in revenue this year it’s valued by the market at 1.4 times revenue approximately. That simply reflects the slow growth and the convertible debt issue. The large number of shares still held by Richard Parris may not help either. If the sales and profits can be ramped up, that may appear cheap in due course.

It’s interesting to compare this company with other technology stocks which have announced figures recently, which I also hold (none in a big way as they are all somewhat immature businesses to my mind with no proven profit or positive cash flow record).

Bango (BGO) issued interim results on the 17th September. It operates in the mobile phone payment and identity verification markets. It has forecast revenue for this year about the same as Intercede’s at £12 million and may break even after substantial historic losses. Its valuation is over £100 million, i.e. about 10 times revenue. The big difference from Intercede is that it is seen as a high growth business in terms of revenue! Another similar business is Boku (BOKU) which is also rapidly growing but historically loss making. They issued an interim statement on the 10th September. Revenue was up 39% and they appear to be on target to meet full year forecasts of revenue of $52 million. Their market cap valuation is £280 million at about 7 times revenue. Both companies have volatile share prices and tend to talk about EDITDA as profits are ephemeral.

You can see how important revenue growth is to technology stocks and why Intercede’s valuation is so low at present. If growth disappears as it did at Intercede then valuations quickly fall. You can see why it is necessary to look at the business dynamics, the management and the future prospects for the company to be able to understand the valuations.

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

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AppScatter Group – Another Case of Very Dubious Accounts

Last night I gave a presentation on my new book and explained why accounts are not to be trusted. I said that there were several new examples revealed every month of dubious accounts and today we have another one. In this case the company is AppScatter Group (APPS). This is an AIM listed company whose shares are currently suspended because of a proposed acquisition. I do not hold the shares but have been monitoring it as it operates in a sector that is of interest to me.

Today they published their interim results for the period to the end of June. To quote from it: “appScatter is a scalable B2B SaaS platform that allows paying users to distribute their apps to, and manage their apps on, multiple app stores. Additionally, the centralised platform enables app developers and publishers to manage and track performance of their own and competing apps across all of the app stores on the platform”.

Launch of the platform is behind schedule putting pressure on working capital so they have issued equity to raise £1.6 million and entered into a loan facility for £5 million on which they are paying 11% interest to cover that and the acquisition costs.

Revenue was up on the 2018 figure at £710k but the half year loss was £5.1 million. But this is the really surprising statement: “The revenue for the first six months of 2018 included accrued revenue of £576,573. This related to work carried out for corporate customers where invoicing was anticipated to occur after the reporting date.  Only £38,000 of this work had been invoiced as at 31 December 2018 and given timing uncertainties under when the balance will be invoiced the accrued revenue was not recognised for the twelve months to 31 December 2019. On a consistent basis the comparable revenue figure for the first six months of 2018 would be £365,596”.

So in simple words, they recognised future revenue when there was no certainty of invoicing or when it could be billed. This is just totally imprudent accounting but the directors signed off on this and their AIM Nomad would have done so also.

This kind of sharp practice hardly inspires confidence in the future of the business. But it’s symptomatic of the lax accounting standards that have crept into public companies of late. The 2018 full year results show the CFO resigned in June 2018 and adoption of IFRS15 reduced revenue by £1 million over the prior year. The accounts were also qualified by their auditors over the valuation of their investment in Priori Data.

Unfortunately although I do not hold the company directly it is held by two of the Venture Capital Trusts I hold. I hope they make representations to the management on this issue.

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

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Burford – Illegal Market Manipulation?

Burford Capital (BUR) have issued an announcement that makes a number of allegations about the events surrounding the recent shorting attack involving Muddy Waters. It includes:

  • Spoofing and layering to move the share price, e.g. putting in numerous share sales on the order book and cancelling them before they can be filled.
  • That includes numerous such transactions just before Muddy Waters issued a tweet giving Burford as the target, and as that tweet was delayed only Muddy Waters or its associates could have known of the timing.
  • Exiting their short position by buying Burford shares at the same time as continuing on the same day to make their allegations.
  • Falsely alleging the company was “insolvent” which would have been picked up by algorithmic traders.

They allege these activities are simply illegal and have informed the regulatory authorities on the matter, plus hired three large law firms (Quinn Emanuel Urquhart & Sullivan LLP, Freshfields Bruckhaus Deringer LLP and Morrison & Foerster LLP) plus a Professor at New York’s Columbia University who is an expert to look into the trading activity.

For those not familiar with market manipulation techniques, just read the Burford announcement for a good explanation: https://tinyurl.com/y6xrs38h.

Let us hope that the UK’s Financial Conduct Authority (FCA) promptly looks into these complaints, and that the Financial Report Council (FRC) also investigates the accounts and past audits of the firm. Despite Burford being a very large company, it is listed on AIM so the AIM regulators (i.e. the LSE) and its NOMAD should also be looking into the matter surely?

As I said in a previous blog post here: https://tinyurl.com/yy9pamh5, one of the problems in most shorting attacks is the mixture of possibly true and false allegations, which the shorter has not even checked with the target company, along with unverifiable claims and innuendo. The shorter can make a lot of money by such tactics while it can take months for the truth or otherwise of the allegations to be researched and revealed. By which time the shorter has long moved on to other targets.

Shorting is not wrong in essence, but combining it with questionable public announcements is surely market manipulation which is covered by the law on market abuse.

To remind you, I have never held any position in Burford Capital, short or long, and there are good reasons why not which I give below. But I have held shares in other companies which have been the victim of shorting attacks – in one case justifiable in another not, so I would like to see some reform of this area of the market.

As regards Burford, just reviewing this company against the check lists given in my new book, it would have failed as an investment proposition on several counts. These are:

  • Smaller transactions (Chapter 2). Burford’s profits are very dependent on a few large legal cases. Any problems in such cases could wipe out the profits whereas companies who have many smaller contracts rather than a few large ones are less vulnerable to surprises.
  • Repeat business (Chapter 2). Every legal case they pursue is a “one-off” transaction which means there is no certainty of future such business.
  • Short term contacts (Chapter 2). The legal case the company pursues can take years to finally resolve, i.e. they are long-term contracts rather than short-term ones. This means they are complex in accounting terms and risky.
  • No risk of Government regulation (Chapter 4). This area of legal practice is very much subject to Government regulation and has significantly changed in recent years.
  • Applicable listing rules (Chapter 7). The company is listed on AIM which is a much lighter touch regulatory regime than that for fully listed companies despite the fact that it is a very large business (market cap still £1.8 billion even after recent share price falls).
  • Adhere to corporate governance code (Chapter 7). Corporate governance at this company is odd to say the least with directors serving for more than ten years and no executive management on the board. In addition the CFO is married to the CEO.
  • AGMs at convenient time and place (Chapter 7). The company holds its AGMs in Guernsey where it is registered.
  • Accounts easy to understand and accounts prudent and consistent (Chapter 8). I would certainly question whether both the recognition of the value of on-going legal claims in the accounts is prudent. It is also very difficult for any outsider to judge the merits of the claims.
  • Do profits turn into cash (Chapter 10). From the 2018 accounts: Pre-tax profit was £307 million while Cash Outflow from Operating Activities was £233 million. Enough said.

The above are just a few easy points to pick out, but I could go on at some length on why I would not have invested in Burford and did not despite it being regularly tipped in the financial press.

See here for the book details that includes the checklists used in the above analysis: https://www.roliscon.com/business-perspective-investing.html

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

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Goals Soccer Centres, Renishaw, Economic Forecasts, Politics and Portfolio Transfers

It’s Friday in August, the markets and the pound are falling, the Conservative Party have lost a bye-election meaning their majority in Parliament is vanishing, and the Governor of the Bank of England has forecast a shrinking economy as a result of Brexit. It’s gloom all around which explains the falling UK stock market today. But Mark Carney is only forecasting a 33% chance of a contraction in the UK economy in the first quarter of 2020, which means that there is a 67% chance it won’t and even then for only a short period of time. That’s assuming you have any confidence in Bank of England forecasts which are notoriously unreliable. The media are not exactly reporting matters in an unbiased way. Those who support Brexit are unlikely to be worried by such forecasts and they would probably accept a temporary disruption to the economy. Remaining or leaving the EU was never a primarily economic decision so far as Brexiteers were concerned – it’s about democracy and who makes our laws.

But there is certainly bad news for investors in Goals Soccer Centres (GOAL) who have reported that the defects in their accounting go back to at least 2010. The 2018 audit has had to be suspended, there is no time frame for producing the accounts and therefore the company is going to be delisted from AIM. This looks to be another example of defective audits – the past auditors were KPMG and BDO.

I have complained about the length of time it takes to switch portfolios between investment platforms in the past. The good news today is that I finally completed one. This latest one I have done has taken from the 23rd May to the 31st July, i.e. 70 days. And that’s one where it was a transfer of holdings in a personal crest account with Charles Stanley, after they raised their charges on such accounts, to another personal crest account with another provider which was already in existance. That should have been very simple as there were no fund holdings in the account – just all direct holdings on the register.

It is really quite unreasonable that account transfers should take so long and require so much effort, including numerous emails and letters to get it completed. It’s anti-competitive to allow such delays to continue.

Well at least that’s one simplification of my portfolios. I also sold out from Renishaw (RSW) yesterday after disappointing final results – revenue down 7% and below forecasts mainly as a result of alleged economic conditions in the Asia Pacific region. The share price is down another 5% this morning at the time of writing. This may be a fundamentally sound business with good products in essence but clearly investors like me are losing confidence that the company can justify its high p/e rating when growth is going into reverse.

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

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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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