Too Much Cash, Wey Education and Patisserie Accounts

Are you stacked up with cash in your ISAs, SIPPs, and direct portfolios? As a dedicated follower of fashion (if the markets are falling as investors sell, then so do I) it is of some concern that the cash is not earning any interest. There was some relatively good news yesterday from soon to be listed A.J.Bell Youinvest. They are increasing the interest they pay on cash held in portfolios. Previously you got 0.05% on balances more than £50,000. It will now be 0.10% above £10,000, 0.15% above £50,000 and 0.25% above £100,000 on SIPPs and similar increases on ISAs and dealing accounts.

But that is still really quite paltry and still not good enough when you can get over 0.2% on even High Street bank deposit accounts and Goldman Sach’s Marcus account is offering 1.5%. Youinvest and other platforms must try harder I suggest to offer fair interest rates. In the meantime, the only option for investors is to take the cash out and deposit it elsewhere or spend it. But moving cash out of ISAs and SIPPs can make it difficult to put back in. The rules on such accounts should surely be changed to permit that more generally because at present it is “anti-competitive”. One option is to transfer your ISA or SIPP to another provider who does provide a better rate of interest on cash holdings, but that is such a tortuous and expensive process at present that it’s not really very practical to do so – at least the FCA is looking at that issue.

Why are investors selling? Apart from panics in certain stocks and sectors, such as the FAANG technology stocks in the USA, the political uncertainty in the UK is surely simply causing investors to take their money off the table. Folks are getting nervous. Reducing exposure to stocks likely to be hit by a hard Brexit or by the risk of a General Election and Labour taking power is a completely rational move. Private investors can do this quite easily while institutional investors apart from hedge funds can be more limited in their ability to do so. Investors in funds don’t like their funds to be holding large amounts of cash and the manager cannot easily move in and out of holdings in size without finding prices move against them.

Wey Education (WEY) is an AIM listed provider of on-line education. It has big ambitions but this morning the company announced that Executive Chairman David Massie has resigned with immediate effect. The cause is continuing health problems after major heart surgery. They also reported trading as “strong” but this will clearly be a major disruption in the short term as Mr Massie was undoubtedly the driving force behind the business of late. It rather highlights the danger of having an Executive Chairman in a company rather than a more conventional board structure. The share price is down 11% at the time of writing. This was one of my “experimental” small holdings where the picture has simply not developed as I hoped – that’s apart from the latest news. One concern here is that the company did not announce the fact that Mr Massie was only working part-time because of his health problems recently – surely this is “price-sensitive” information that should have been issued?

The Financial Reporting Council (FRC) have announced an investigation into the audit of the last 3 years accounts of Patisserie Holdings (CAKE) by Grant Thornton. They are also looking into the preparation of the financial statements by the former CFO. With the Serious Fraud Office (SFO) and the FCA also involved, the management of the company are going to be spending a lot of time talking to investigators. Let us hope that does not detract too much from putting the company back on a sound basis.

Patisserie has also been accused of failing to declare LTIP share awards to executives including the former CFO. Will there be action on that matter? I wrote a previous blog article on how they do things differently in the USA after the conviction of a former Autonomy executive for fraud – see https://roliscon.blog/2018/05/02/they-do-things-differently-in-the-usa/ . They also do things differently in Japan where Carlos Ghosn, Chairman of Nissan, has been arrested for misreporting his pay. Allegedly he actually received over $88 million over the last five years but only half was reported in their accounts. It is surely true that the UK is really quite “soft” on corporate misdemeanors of all kinds when it should be a lot tougher.

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

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Johnston Press, TrakM8 and Brexit

Over the weekend, Johnston Press (JPR) was put into administration and immediately sold to a new group of companies controlled by the company’s bondholders. In other words this looks like a typical “pre-pack” administration where a company does not go through a proper administration process with an open sales process but is flogged off to in a fire sale to those who already know the business and see an opportunity to collect a bargain.

Trade creditors will lose their money, shareholders will lose everything and the pension scheme is being dumped – and is likely to need bailing out by the Pension Protection Fund.

One investor in the company who wished to revive the business was Norwegian Mr Ager-Hanssen who on Saturday accused the board of thwarting efforts to turn the group around and a “sham” sales process. He is probably right from my experience of what happens in pre-pack administrations. Pre-pack administrations are an anathema as I have said many times before as they undermine a proper process when a company is in difficulties.

Johnston Press does have some very valuable media titles such as the Scotsman and Yorkshire Post but had managed to accumulate an enormous amount of debt by going on an acquisition spree. It also had a big pension deficit. The company put itself up for sale recently but now states that the offers were insufficient to repay the bonds so the company has concluded the equity is worthless. Or perhaps it was simply an example of where the prospective buyers could see it was cheaper to do it via a pre-pack.

I have never held shares in Johnston Press although I looked at it a few times as a possible “value” play. But high debt is a killer when the market in which a company operates is facing strategic problems. With newspaper circulations dropping, and advertising revenue being impacted by changes to media usage – particularly a move to internet advertising – the company failed to cut its debt rapidly enough while revenue was falling and profits disappeared.

Another disaster area on Friday was AIM-listed Trakm8 (TRAK) whose shares fell by 66% on the day to a new low of 22p. This was after publication of their half-year results and a trading statement. Group revenue fell by 38% and a very large loss was the result. The company provided numerous excuses for this and a very negative short-term outlook. But it suggests the market for the company’s solutions “will be robust in the longer term”. Anyone who believes the latter statement must be an eternal optimist.

I did hold this company’s shares briefly in early 2016 when it was the darling of many private investors and the share price peaked at over 360p but I rapidly became disillusioned with the management. Peculiar acquisitions made subsequently, poor cash flow (rather suggesting profits were a mirage of fancy accounting) and generally over-optimistic statements being issued. Warren Buffett has always emphasised the importance of trust in the management of companies in which he invests, and when I lose trust I sell in short order.

Brexit is a topic one can hardly avoid talking about at present. I gave my personal analysis of the draft withdrawal agreement here (yes I have read it): https://roliscon.blog/2018/11/16/brexit-agreement-is-it-a-fair-deal/ . On reflection it seems to me that Mrs May is attempting to meet the demands of both brexiteers and remainers with a compromise deal that keeps us partly in the EU in many regards. The result is that she has pleased few people – the right wing of her own party, the Labour Party and Jeremy Corbyn who is stirring the pot like mad to gain political advantage, the DUP who May relies on for votes, and many others. Even her cabinet seems split counting only those who remain. The concept of the “chequers” plan might have made some sense, but the detail of the proposed agreement is simply not acceptable to many people. I suggest she needs to reconsider, sooner rather than later.

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

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ShareSoc Seminar, new Patisserie CEO and Brexit

I attended the ShareSoc AGM and Company Presentations Seminar last night. The AGM was routine but a couple of points are worth noting: 1) Total membership increased to almost 4,000 in 2017 and I gather it has increased further since – partly from the Beaufort campaign; 2) Lord Lee, a well-known writer for the FT on small cap stocks, has become “Patron”. Anyone reading this who has not yet become a full, subscribing Member of ShareSoc should do so because they do an enormous amount of good work for investors.

As regards the company presentations, here is some brief coverage of the first three:

Ilika (IKA): This company produces solid-state batteries which have advantages over other battery types for certain applications. I first saw this company present to investors a couple of years ago. Revenue is creeping up but losses still exceed revenue. As last time, there seem to be some business opportunities but major revenue growth and profits do not appear to be likely in the short term. They might have interesting technology but can they sell it at a profit and in volume? Until they can prove this, I don’t think it’s a company in which I will consider investing.

Pelatro (PTRO): This company provides marketing software to telecoms companies. The company was only incorporated in January 2017 and listed on AIM in December of that year. They did a placing to raise more funds in August 2017. It’s clearly early days yet but revenue is forecast to grow rapidly. The CEO was a glib and fast talker which somewhat put me off, but he did explain the business reasonably well. This is definitely one I will do more research on. The AIM prospectus is of course available on their web site which is always worth reading for newish listings. However, attempting to print their last Annual Report caused Internet Explorer to hang twice, which is somewhat annoying.

Forbidden Technologies (FBT): This company provides technology to edit and manage videos using a proprietary codec. At least that is so far as I could understand it. The company has been listed on AIM for years but has been consistently loss making and revenue last year was still less than £1 million. There were a couple of existing disgruntled shareholders in the audience. The company came across as having some interesting technology but no very clear focus on who they were going to sell it to, what the USP was, what the competitors are, etc. Was it to be sold to major platform operators, or consumers? Looks like a typical company founded by technologists who don’t have strengths in sales and marketing – a very typical UK story. I could not see that the outlook will change because the presenters could not even sell the company to investors.

Perhaps I am being harsh on Ilika and Forbidden Technologies. But technology companies and their managers do need to learn that there is more to business than having a good idea and some bright technical staff.

The interesting news today was that Patisserie Holdings (CAKE) CEO Paul May has departed and a new CEO with a CV as long as your arm on “turnarounds” has been appointed with immediate effect. It’s hardly surprising that Paul May has left. The previous CFO went promptly after the alleged fraud was discovered but internal systems seem to have been very lax with the CEO not knowing about winding-up petitions and bank overdrafts. I hope he will be returning the bonus shares he obtained based on the false accounts.

Incidentally there will be a discussion on Patisserie at the Mello London event run by David Stredder on the 26th November – see http://melloevents.com/mello-london/ . The Mello events are always interesting for investors in small cap companies.

Brexit

One reader of my blog suggested that politics was off topic for this blog and I should stick to investment matters. But the blog does cover wider issues occasionally including economics, politics, corporate governance, management, transport, art, London events and other issues. Yes I do have a very broad range of interests! But Brexit is so key to the future financial health of the UK economy, and hence to investors in it, that it would be remiss not to cover it to some degree. No doubt that it is the reason why the Financial Times goes on about it endlessly.

Now I think the best comment on the current position was given in this tweet by my M.P., Bob Neill: “With all respect to some of my colleagues, pontificating about the draft deal Theresa May has secured before they have even read the text does not do justice to the seriousness of the issues at stake. The country deserves better than that and any proposals deserve a fair hearing.

I am therefore going to defer comments myself in detail until I have read the whole 585 pages of the draft withdrawal agreement and a couple of associated documents. You can find them here: https://www.gov.uk/government/publications/progress-on-the-uks-exit-from-and-future-relationship-with-the-european-union . I will also listen to what Mrs May has to say and other intelligent commentators before coming to any conclusions.

Although I am keen on many aspects of Brexit and hope it can be achieved without too much in the way of compromises, and with a practical solution, we certainly should not rush into any decision on the matter. This is not the time for emotion, or grandstanding.

Anyone who has read the whole 585 pages of the draft withdrawal agreement is welcome to post some comments on this blog of course. There’s a challenge for you!

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

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Persimmon Departure, Abcam AGM and Over-boarding

Persimmon (PSN) issued an announcement this morning saying that CEO Jeff Fairburn was stepping down at the request of the company because “the Board believes that the distraction around his remuneration from the 2012 LTIP scheme continues to have a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role”. They are undoubtedly right there.

To remind readers, their misconceived and uncapped LTIP potentially would have meant bonus shares being awarded to Mr Fairburn worth well over £100 million, and similar large sums to other managers. Part of the potential award was later given up but even so it was the most disgraceful example of how pay has been ramped up by LTIPs in recent years. Another example at Abcam (ABC) is covered below.

Persimmon also issued a third quarter trading statement today which was generally positive. They clearly have a good forward committed sales pipeline and the extension of the help-to-buy scheme was positive news in the budget. But I am still somewhat nervous that the housebuilding market may suffer as interest rates rise. New houses are becoming unaffordable for many people despite the demand for accommodation and growing population.

Yesterday I attended the Annual General Meeting (AGM) of Abcam. This is a company that sells antibodies and other life science products/services. It is operating in a high growth sector. I first invested in the shares of the company in 2006 and it has delivered a compound total return of over 32% per annum to me since based on Sharescope figures. I am therefore happy with the financial performance of the business as I said to the board at the AGM. That’s even allowing for recent declines in the share price as analyst forecasts were reduced and general market malaise affected high-flying technology stocks. But I am very unhappy about two aspects: 1) failure to answer simple questions at the AGM, which is the second time in a week where this problem has arisen (the previous being Patisserie); and 2) the remuneration scheme and revised LTIP.

What follows is a report on the meeting, summarised and paraphrased for brevity. The meeting was held at the company’s Cambridge offices at 2.00 pm, but not even a cup of tea was offered.

The recently appointed new Chairman, Peter Allen, introduced the board and there was then a very brief presentation from CEO Alan Hirzel. He said there were between £5 billion and £8 billion of opportunities for the company to grow which they were focused on. They had doubled revenue in the last 5 years, at 11.5% CAGR. There were lots of opportunities to continue to grow the business. They are now focused on 4 areas: 1) RUO Antibodies which are still growing; 2) Immunoassays where growth was 25% last year; 3) China for RUO tools (China could be as big a market as the USA in a few years and they now have 300 people there and are putting more investment in); and 4) CP&L (Abcam Inside). He said the company needs to invest in technology and IT to achieve their growth goals.

Questions were then invited. I commented on the absolutely massive expenditure on new IT systems. They have spent at least £33 million on the Oracle implementation with another £16 million to go and the project is clearly way behind schedule. This level of costs has even caused analysts to downgrade future profit forecasts. As the former IT manager of a large public company, this seemed disproportionate to me in relation to the size of the business. However much one recognises that IT is the key to the business, this looks like a typical project that is way out of control. Who is responsible for this, are they still with the company, who are the outside contractors and what is the current state of this project?

The Chairman first responded that any answers to shareholder questions could only relate to information already in the public domain. This is simply legally wrong and I will be writing to him on this subject and the other issues below.

However Alan Hirzel did respond and accepted the IT project was over budget and covered the history of the project. It was essential to replace some of the legacy systems which were unmaintainable. Many had been built in-house (even an email system apparently) and they had multiple different HR systems in different countries. HR was the first project completed (partner Hitachi as systems integrator) followed by a communication system (part CRM perhaps – it was not clear) but finance and supply chain (manufacturing) projects were yet to be done. He said the CIO had been replaced and a new system integration partner appointed. He assured me that the project was under control now.

I asked who the new IT contractor was, at which point the Chairman refused to answer as that was not in the public domain. I complained that this was a breach of company law as questions must be answered unless there are good reasons to do otherwise. For example, answers can be refused if it is confidential information, not in the company’s interests to do so or may affect the good order of the meeting. The relevant Regulation is here: http://www.legislation.gov.uk/uksi/2009/1632/pdfs/uksi_20091632_en.pdf (see Section 12).

I can see no reason why my question could not be answered as I said to the Chairman and to their lawyer, neither of whom seemed to be aware of the Regulations or the common law principle about answering questions at general meetings. The Chairman also suggested that they could not disclose some information because they would have to issue an RNS announcement to cover it. This of course only applies to “price sensitive” information and I don’t see how knowing who their IT contractor is would be price sensitive. Very annoying and feeble excuses were being given in essence from someone who is supposed to be a very experienced company Chairman. This is the second time in a week (the other was at Patisserie) where the law on answering questions was ignored which is exceedingly annoying.

After that debate, which I will be following up including with a complaint to the FCA as it is not acceptable for companies to ignore the law, we moved on to the Remuneration Resolutions.

I said the following: “Remuneration also seems to be out of control. Although the CEO seems to be generally doing a good job, his pay last year was £1.8 million. This is also out of proportion to the revenue and profitability of the business. Not only that but his basic pay has been increased by 22%, and the maximum award under the LTIP increased from 150% to 400% of base salary. This is obscene and totally unnecessary. Such highly geared schemes promote risky behaviour as we saw with bankers in the financial crash of 2008. I always vote against remuneration policies where the maximum award under LTIPs is more than 100% of base salary and I will be doing the same here. I encourage my fellow shareholders to do likewise”.

There was a response from Louise Patten, chair of the Remuneration Committee to the effect that they could be “traduced” for underpaying rather than overpaying (“criticised” I think she meant). A review had shown that the CEO was underpaid in comparison with market rates in the sector. The LTIP was only a temporary measure as a new policy would be adopted in 3 years’ time.

I also asked whether they had received representations on the subject of remuneration from proxy advisory services and fund managers. She indicated there had been but mainly focused on other issues than the LTIP (in fact they got only 67.1% FOR the Remuneration Report, and 86.7% for the Remuneration Policy which are very low numbers). I said I had no objection to an increase in base pay if justified, but the LTIP was an example of how pay is ratcheting up and it sets a very bad precedent that other companies will follow to have a 400% bonus maximum. I have of course argued with Ms Patten before on the remuneration schemes at this company to no effect, so I chose to vote against her and her two colleagues on the Remuneration Committee but she still collected most of the proxy votes. No other shareholders in the meeting, other than my son Alex who holds the shares also, voted against the remuneration resolutions or the directors which rather demonstrates that when shareholders are happy with a company’s financial performance, they will vote for anything.

There were few other questions from shareholders at the meeting, but after the formal part had finished I asked the Chairman why he only managed to achieve 79.6% of votes in support of his appointment. He said this was because of complaints of “over-boarding”, i.e. that he had too many roles. In fact he has 4 other Chairman roles and one other non-executive directorship which I certainly think is too many and is contrary to ShareSoc’s guidelines. He argued that it was no problem and he did not agree with the current attitude of some proxy advisory services. I disagreed. The duties of directors are more onerous than ever, particularly if the job is to be done properly. Even small difficulties at a company can create a lot of extra work. One of course only has to look at Patisserie Holdings and their recent difficulties where Luke Johnson had lots of other commitments and failed to pick up what appears to be a massive fraud executed by the finance director. Peter Allen seems to think that all he has to do is turn up for a few board meetings each year, let the executive directors get on with business and do not much else. But Abcam is becoming a large company where the Chairman’s role is much more significant than that.

I voted against the Chairman anyway because I think Chairman should be familiar with company law and how to handle questions at meetings. Good ones do of course know how to answer questions without giving out sensitive information or avoiding direct answers but it is certainly not good for the Chairmen to start an argument with a shareholder in a meeting on any subject. Some Chairmen need to take a lesson in how to handle awkward folks like me who are not easily ignored.

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

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Earthport Accounts, City of London IT and Patisserie

Earthport (EPO) is the latest AIM company to report that its past accounts are not all they should have been. Following a review by the new CEO and CFO, it seems there have been errors in reporting of forward foreign exchange transactions. This will result in fair value adjustments and a reduction of £6.3 million to £16.6 million in the net assets of the group at June 2017. Likewise adjustments are required to previous years. Reported earnings are also reduced although there is no cash impact.

This is a payments business which has been consistently loss making despite growing revenue. The former Chairman and CEO (who was still on the board as a non-exec director) have departed “with immediate effect”. This is surely yet another case of audit failure. Who were the auditors? Answer: RSM. But it’s worth reading their audit report in the 2017 Annual Report where they highlight some problems in the same area.

I do not currently hold shares in Earthport and this latest news is hardly likely to inspire confidence in the company from investors. After many years, the company has not proved it has a business model that can generate any profits.

Pressure of business meant I missed attending the City of London Investment Trust (CTY) Annual General Meeting on the same day as the Patisserie General Meeting. This is one of my most boring holdings as it’s mainly invested in large cap UK companies. But no problem in not attending the AGM in person because there is a recording of it available here: https://www.janushenderson.com/ukpi/content/trustslive?o_cc=c3926 . That even includes the question/answer session which was omitted in a previous year. If you watched it while it was taking place you could also submit questions. This approach is to be highly commended.

The interesting comment I noted from fund manager Job Curtis was that they had recently put more money into the market and were gearing up. He clearly perceives there are value opportunities in the market after recent declines. Others seem to agree with him because the market is now picking up.

Just one postscript on the Patisserie (CAKE) General Meeting. Lombard in the FT (Matthew Vincent) questioned this morning whether placings were the only option. He suggests the company could have delayed and done a rights issue. This is basically the same issue that was raised at the Meeting by some shareholders. But it’s very unrealistic to suggest that was a viable option. In reality I think the appetite for a rights issue would have been very low because of the lack of financial information on the current position of the company. I certainly would not even have participated in the placing! Undertaking a rights issue when there was great uncertainty about the level of support would hardly have been recommended by any advisors. In addition it would have taken a lot longer to do that than it took to do the first placing. Time is of the essence in the circumstances the company faced and looking for bankers to fill the delay hardly looks realistic to me either.

I suggest Luke Johnson took the only reasonable steps available and he should be thanked for saving the business. Shareholders should be very glad that the company did not get stuffed through a pre-pack administration which is what I rather expected would happen, in which case they would have lost everything.

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

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Patisserie General Meeting – No Excitement But Few Questions Answered Either

I attended the General Meeting of Patisserie Holdings (CAKE) this morning at the ungodly time of 9.00 am – presumably chosen to deter attendance. An announcement earlier from the company will also have deterred attendance as it said no questions on past events would be answered so as not to prejudice investigations by “multiple regulators and authorities”. But there were about 20 shareholders present, including some institutional representatives.

This GM was to approve the second tranche of share placings and I expected it to be voted through which it was on a poll by more than 90% of shareholders. To remind you this company was on the brink of going into administration after the board discovered the accounts were false and the claimed cash on the balance sheet non-existent. In fact it was stated in the meeting that net debt was more like £9.8 million rather than as previously stated. Executive Chairman Luke Johnson kept the company alive by giving it an interest-free loan and arranging an emergency placing. As I said in the meeting, I considered the company had no better alternative to the actions taken having been involved in other similar problem situations before. I think shareholders (including me) are very lucky that Mr Johnson chose to take the steps he did. Mr Johnson reiterated there was no viable alternative several times in the meeting because there was no time to arrange anything else. He indicated later that he had not participated in the placings because he did not want shareholders to think he was acquiring shares cheaply and hence his interest in the company will now be diluted (he’s now down to 28%).

However there were several shareholders who expressed their unhappiness at the turn of events as one might have expected. There was one particularly vociferous shareholder who suggested that shareholders will lose 88% of their value as a result of the placings and that there should have been a rights issue instead. The shareholder said it was immoral, and unfair.

Mr Johnson opened the meeting by thanking shareholders for the messages of support he had received in the recent dark days. The board was doing everything it can to safeguard the company. There was potential fraud and a miss-statement of the accounts. Those errors are likely to have affected previous annual accounts.

He said that regulatory authorities including the SFO were investigating so he could not comment further. He believed it was a business worth saving and he had committed to reduce his other activities (in response to a question later he said he no other roles now).

Chris Boxall from Fundamental Asset Management asked if those supporting the placings had access to more information that others, i.e. other than that publicly disclosed? The answer was no. Comment: they must have faith in Luke Johnson because with so little information available it is very unclear what the future profitability of the business might be and there are big potential liabilities.

In response to other questions he said current trading had not been affected, although two sites had been closed. They are recruiting new staff when asked about management changes.

I tried to ask two questions:

  1. Is it possible the company could become liable to compensate shareholders for the “market abuse” related to the issue of false accounts [on which basis some investors will have purchased shares]? This is surely a similar situation to the case of Tesco where the FCA instructed the company to pay compensation. Shareholders taking up the placing shares might be interested in the answer. Mr Johnson refused to answer the question.
  2. Have you appointed lawyers to pursue claims against the former finance director (Chris Marsh) in respect of the fraud or to recover the value of share bonuses paid to him and the CEO (Paul May) on the basis of the false accounts? Mr Johnson refused to answer that question also.

Note that as this was a General Meeting there was no good reason not to answer those questions as they could not possibly prejudice the investigations by the legal authorities. This is an abuse of company law and I will be making a complaint about it.

What can shareholders do at this point? Not a lot but just await the results of the investigations and possible subsequent actions by the legal authorities. This might take many weeks, months if not years from past experience. The shares will remain suspended for the present. But I suggest shareholders should do the following:

  1. Write to Luke Johnson requesting that the company takes all possible legal steps to recover loses to the company that have resulted from the fraud from those who perpetrated the likely fraud, and in addition take steps to recover the value of shares issued to former and current directors under share option schemes that were based on the false profits that had been declared. In addition the company should examine the role of the auditors as it appears that they may have failed to pick up the accounting errors and failed to check all relevant bank balances and hence there may be a claim against them. Note: it is a lot easier for the company to sue former directors or auditors than it is for shareholders, however much they may wish to forget about it and move on.
  2. Write to the Financial Conduct Authority stating you were induced to invest in the shares of the company based on false accounts and encourage them to pursue legal actions against those at fault accordingly. In addition as this was a case of market abuse (similar to that at Tesco), request that the company be forced to compensate the affected investors accordingly. You should also encourage them and the SFO to move as fast as possible in their investigations as they are not known for speed in such matters.

So that’s a summary of the meeting held on a gloomy wet day in London – which probably matched the mood of the shareholders present. There were members of the press there getting their views no doubt for publication in the media later.

To look on the bright side, as I have an enormously diversified portfolio I found on exiting the meeting that my overall portfolio had risen more that morning than my potential losses on Patisserie simply as the overall market picked up. I may therefore be more sanguine than others. There is a lesson there of sorts for investors, but I also consider myself relatively lucky.

As someone said to me in the meeting, this was a company where there were no warning signs that investors could easily pick up in respect of the accounts. Investors cannot blame themselves for investing in what appeared to be a sound, profitable company from the accounts. Fraudulent accounts can fool even the most experienced investors.

Picture below is of Patisserie café in King’s Cross station take on my way to the General Meeting.

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

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Patisserie Cafe 2018-11-01

Bad News from Crawshaw and ULS, Ideagen AGM, Victoria Doubts and Other News

The real bad news today is that butchers Crawshaw (CRAW) is going into administration, “in order to protect both shareholders and creditors”. They hope the business will be sold as a going concern but it is unusual for shareholders to end up with anything in such circumstances. The shares have been suspended and the last share price was 2p. It actually achieved a share price of 3425p at its peak in 2005. Revenue have been rising of late but losses have been also.

I never invested in the company although I do recall seeing a presentation by the company when it was the hottest stock in the market but I considered it to be a business operating in a market with no barriers to entry and likely to suffer from competition once the supermarkets had woken up to what it was doing. That’s apart from the difficulties all high street retailers have been facing of late. Well that’s one disaster I avoided at least.

Another AIM stock I do hold is ULS Technology (ULS) who operate a conveyance service platform. A trading statement this morning for the first half year said the revenue is expected to be up 3% and underlying profit up 5%, despite a fall of 4% in the number of housing transactions across the UK market. But the sting in the tail was the mention of a slowdown in mortgage approvals which “may well be short lived but is likely to have some impact on the Group’s second half results”. The share price promptly dropped 20% this morning. It’s that kind of market at present – any negative comments promptly cause investors to dump the shares in a thin market.

One piece of good news for the housing market which I failed to mention in my comments on the budget was that the “Help to Buy” scheme is not being curtailed as some expected, but is extended for at least another two years to 2023.

Yesterday I attended the Annual General Meeting of Ideagen (IDEA), another company I hold. It was unexciting with only 4 ordinary shareholders in attendance so I won’t cover it in detail. But boring is certainly good these days.

It was the first AGM chaired by David Hornsby who is now Executive Chairman. One pertinent question from a shareholder was “what keeps the CEO awake at night?”. It transpired that the pound/dollar exchange rate was one of them simply because a lot of their revenue is in dollars (their US market seems to be a high growth area also). I suggested they might want a “hard Brexit” when the pound would collapse and improve their profits greatly. But the board somewhat ducked that issue. Note that this business is moving to a SAAS revenue model from up-front licence fees which may reduce organic growth slightly but increase revenue visibility. The point to bear in mind here is that even on a hard Brexit it is unlikely that trade tariffs would impact software income because there are no “goods” exported on a SAAS model.

Another question asked was about financing new acquisitions which the company does regularly. These are generally purchased for cash, and share placings are done to raise the funds required. Debt target revenue is only one times EBITDA so debt tends to be avoided.

It is worth comparing that with Victoria (VCP) a manufacturer of floor coverings who issued a trading statement on the 29th October which did not impress me or anyone else it seems. Paul Scott did a devasting critique on Stockopedia of the announcement. In summary he questioned the mention of a new debt being raised, although it was said that this would be used to repay existing debt, when there were few other details given. He also questioned the reference to reduction in margins to maintain revenue growth. The share price promptly headed south.

The company issued another RNS this morning in response to the negative speculation to reassure investors about the banking relationships, covenants and credit rating.

I have held a few shares in Victoria since the board bust-up a few years back and attended their last AGM in September when I wrote a report on it here: https://roliscon.blog/2018/09/11/brexit-abcam-victoria-and-the-beaufort-case/ . The share price was already falling due to shorters activities and my report mentioned the high level of debt. The companies target for debt was stated to be “no more than 2.5 to 3 times” at the AGM which is clearly very different to Ideagen’s!

I did have confidence in Geoff Wilding, Executive Chairman, to sort out the original mess in Victoria but the excessive use of debt and a very opaque announcement on the 29th has caused a lot of folks to lose confidence in the company and his leadership. Let us hope he gets through these difficulties. But in the current state of the stock market, the concerns raised are good enough to spook investors. It’s yet another previously high-flying company that has fallen back to earth.

One more company in which I have a miniscule number of shares is Restaurant Group (RTN) which I bought back in 2016 as a value/recovery play. That was a mistake as it’s really gone nowhere since with continuing declines in like-for-like sales. At least I never bought many. Yesterday the company announced the acquisition of the Wagamama restaurant chain, to be financed by a rights issue. The market reacted negatively and the share price fell.

I did sample some of the restaurants in the RTN portfolio but I don’t recall eating in Wagamama’s so it’s difficult to comment on the wisdom of this move. All “casual dining” chains are having difficulties of late as the market changes, although Wagamama is suggested to have more growth potential. The dividend will be rebased and more debt taken on though. With those reservations, the price does not look excessive. However, while they are still trying to get the original business back to strength does it really make much sense to make an acquisition of another chain operating in the same market? Will it not stretch management further? I will await more details but I suspect I may not take up the rights in this case.

One other item of news that slipped through in the budget announcements was the fact that in future Index-linked Saving Certificates from NS&I will be indexed by Consumer Price Index (CPI) rather than the Retail Price Index (RPI). This is likely to reduce the interest paid on them. But it will only affect certificates that come up for renewal as no new issues have been made of late. These certificates are becoming less and less attractive now that deposit interest rates are rising so investors in them should be careful when renewing to consider whether they are still a good buy. I suspect the Chancellor is relying too much on folks inertia.

At least even with the bad news, my portfolio is up significantly today. Is the market about to bounce back? I think it depends on consistent price rises in the USA before the UK market picks up, or a good Brexit deal being announced.

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

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