Annual Reports and Voting – HLMA, AUTO, PAY and TEP

It’s that time of year when many companies issue their annual reports and request that we vote on AGM resolutions. I pity our postman as I still receive most of the reports on paper (they are easier to read in that form) and they are getting to be very heavy. Here are some examples and brief comments:

Halma (HLMA): 248 pages.  Emphasises “sustainable growth over 50 years” and included a tribute to co-founder David Barber who died recently. Report is full of non-essential bumf which I doubt anyone reads. I voted against the Remuneration Report – total remuneration of CEO £3.5 million last year and against the Chair of the Remuneration Committee plus several other non-exec directors who either seemed superfluous or have too many jobs.

Auto Trader Group (AUTO): 170 pages. A clear description of the business and future developments but do we really need 20 pages of bumf on “Making a difference” (ESG etc). Interesting to note that the average price of a used car advertised on their web site rose by 22% last year. There is clearly a shortage of second-hand vehicles as new car sales have been depressed for a number of reasons. People are holding on to their cars for longer it seems. Again I voted against the Remuneration Report and the Chair of the Remuneration Committee (single figure of pay for the CEO last year was £1.7 million). Cannot see any reason for such generous pay for directors. Also as with Halma I voted against share buy-backs and calling General Meetings on 14 days notice.

Paypoint (PAY): 162 pages. This is a complex business providing payment and other services to retailers and SMEs. Their markets have been changing as mobile top-ups have declined and bill payments in cash also. Romanian business was disposed of and a settlement with Ofgem re competition infringements of £12.5 million has been booked as a prior-year adjustment. You can spend a long time reading this Report without getting a very clear understanding of where the profits came from and their future prospects.

Total pay of the CEO last year was £911k which is down on the previous year. Does that reflect the Ofgem settlement? I have no idea as the 11-page Remuneration Report does not explain. Again lots of ESG bumf under the heading “Responsible Business”.

Telecom Plus (TEP) also published their Final Results last week. This company is clearly going to benefit from the failure of numerous energy suppliers. The National Audit Office has blamed the Ofgem regulator for light touch regulation and allowing businesses to be set up with poor financial resources. Gareth Davies, head of the NAO, said: “Consumers have borne the brunt of supplier failures at a time when many households are already under significant financial strain having seen their bills go up to record levels. A supplier market must be developed that truly works for consumers”. Certainly regulation has been lax but the setting of price caps that stopped world market gas prices from being passed on to customers was also quite irrational.

With a lot of the competition to Telecom Plus being removed from the market their prospects are looking up and the share price has zoomed upwards.

Needless to point out that I hold shares in all the aforementioned companies. They have many things in common – high levels of repeat revenue, have high returns on capital and appear to be well managed. But they have not been immune to the general bearish view of the stock market by investors at present.

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

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After IDEAGEN and EMIS, What to Buy? VIP Perhaps?

With bids for Ideagen (IDEA) and EMIS (EMIS), two of my larger and longer-standing holdings, I need to look for new small/mid cap technology stocks in which to invest. I may be willing to hold the realised cash for a short while but with inflation at 10% it’s going to be costly to hold much cash for very long.

I note AB Dynamics (ABDP) has been tipped in both Techinvest and Small Company ShareWatch last week but I already hold that and it does not look particularly cheap to me as yet.

Techinvest reported on their New Year Tips last week. With 12 stocks recommended the average fall is 17.7% to date which just shows how out of favour small tech stocks have been of late. Only one of the 12, Ingenta, rose with all the rest falling. I won’t mention the rest because none look greatly attractive to me.

What I am looking for is companies with good intellectual property, which can provide barriers to competition, in growing market sectors, with good returns on capital, high levels of recurring revenue, positive cash flow and with rising revenue (Ingenta has a poor track record in that regard and has low return on capital).

Readers should add your suggestions for companies to look at by leaving a comment (see left hand column of this blog).

One alternative to investing in tech stocks is property companies and I read the Annual Report of Value and Indexed Property Income Trust (VIP) over the weekend. Property companies are a good hedge against inflation, particularly as VIP has a focus on holdings with index linked rent reviews. Their comments on future prospects make for interesting reading.  To quote:

“Total returns will be lower but still satisfactory over 2022 as a whole. They may be around 12% overall with returns for industrials, retail and the alternative sectors all in the early teens but offices only around 5% with capital values flat, rents under pressure and voids through the roof. Property’s real returns will be far lower, with the RPI already up 9% year on year. It will stay higher for far longer than the Bank or England or the market expects. Stagflation is here to stay for at least as long as the war in Ukraine drags on”.

That’s a good summary of my own view and investors might be happy with a 3% real return this year as world economies go into recession.

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

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EMIS Bid and Comments on Capital Gains Tax

Last week was certainly a depressing one for stock market investors. My portfolio was down substantially even taking into account the last-minute announcement on Friday of an agreed takeover bid for EMIS Group (EMIS).

This is a cash offer of 1,925p which is a premium of almost 50% to the recent trading price so is surely likely to be accepted. EMIS is one of my longer-term holdings – first purchased at 485p in 2011, but it has been somewhat disappointing. Overall total return has been 12.7% per annum including the latest bid premium but with a strong position in the supply of medical solutions they should surely have been making big profits in the recent pandemic and in the support of the NHS where large amounts of money are being spent. I think the big problem has been having the Government as a major customer who tend to dictate the pricing.

I did buy a few more shares recently at 1,272p but failed to have the courage of my convictions and should have bought more. Like many investors no doubt, I have gone on a buying strike and am selling as the market trends down rather than buying.

My capital gains tax charge for last year is only moderate but with holdings in Ideagen and EMIS soon to be realised I will be paying a big bill this year. Capital gains tax should be indexed now that inflation is reaching 10%. I will be paying tax on fictitious, not real, gains.

Perhaps ShareSoc should be taking up that issue.

Will the market improve over the summer? I doubt it until there is better news on the economic front. We appear to be heading into a worldwide recession prompted by higher commodity prices. There may be some share bargains appear in the next few weeks but I personally won’t be rushing back into the market.

Meanwhile I am at least out of hospital but have written to the Chairman of the local NHS Trust to complain about the dysfunctional management and waste of resources. There is lots of money being spent on the NHS but the patient experience is still crap.

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

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Scottish Mortgage Results

I am sure many of my readers hold the Scottish Mortgage Investment Trust (SMT), as it has been one of the most popular UK trusts in the last couple of years. They published their preliminary results this morning.

The commentary from the Chairman and the Fund Manager made lots of positive noises about the long-term success of the company but the share price has fallen by 5% today at the time of writing, continuing the negative short-term trend. That probably is a result of the S&P 500 falling by 4% yesterday. In addition the negative impact on investors has been compounded by the company moving to a discount to net asset value (6.5% as at last night) when it is has often traded at a premium.

The NAV declined by 13.1% last year while the company’s benchmark (the FTSE All-World Index) rose by 12.8%. The discrepancy is simply down to the fact that SMT hold many technology stocks. Apparently the Managers have “remained calm and focussed on what they have been entrusted to do” in such bumpy market conditions. Which is good to hear but it does not help with answering the question of whether to continue holding the stock or not.

Will growth companies, which SMT focusses upon, come back into fashion? Two of their biggest holdings are vaccine maker Moderna and Tesla. Moderna has fallen 70% from the highs of last year because of doubts about the longevity of the Covid vaccine market but SMT argue that the company’s technology can be applied to other diseases so they have increased their stake in the company by part selling Amazon and Tesla. It’s worth reading the announcement for more details of the bets they are making.

I have no reason to believe that their investment choices are not sensible ones but clearly the market perceives growth stocks as being unfashionable at present as investors move more into commodity stocks. How long this trend will last is difficult to say as predicting global economic events is a fool’s game. In the short-term it may be best to follow the trend, i.e. join the herd who are selling while keeping a close eye on any rebound or change of market perception. But that only makes sense if you are not crystallising any capital gains tax by selling – unless of course you are crystallising a loss. Moving in and out of investment trusts in the short term while ignoring the tax implications is never wise.

I do hold some SMT but I certainly won’t be giving up on the company completely.

Please take note of the warning about investment advice given on this blog here: https://roliscon.blog/about/

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

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Hewlett Packard Confusion and Berkshire Hathaway Stake

The Investors Chronicle (IC) published an article last week entitled “What does Buffett see in HP?”. I read it with interest as I used to do a lot of business with HP and its customers before I retired from a proper job. But I think the article might have confused more people than it enlightened.

The article referred to the acquisition of a “large stake in printer manufacturer and software company Hewlett Packard (US:HPE)” by Berkshire Hathaway. But the latter actually acquired a stake in HP Inc (US:HPQ).

The Hewlett Packard company split into two companies in 2015 these being HP Inc (HPQ) focussed on printers and PCs, and HP Enterprise (HPE) focussed on software and services. The latter made the disastrous acquisition of Autonomy although they did win a legal case on the issue of misleading accounts in January this year.

The printer/PC business was seen as being slower growth and of course as being in a highly competitive sector and hence achieved a relatively low market rating. It’s now on a historic P/E of 7 but as the IC article indicated the free cash flow of HPQ has been improving greatly. Return on assets has improved to 17% as well so one can see why Buffett might be attracted to this business.

The IC article also talked about the management in-fighting at HP not prevented by weak management at the top of the company. In fact the company want through a series of top management changes after the founders departed and the worst of them was the appointment of Carly Fiorina as CEO. To quote from Wikipedia “Fiorina’s predecessor at HP had pushed for an outsider to replace him because he believed that the company had become complacent and that consensus-driven decision making was inhibiting the company’s growth. Fiorina instituted three major changes shortly after her arrival: replacing profit sharing with bonuses awarded if the company met financial expectations, a reduction in operating units from 83 to 12, and consolidating back-office functions. Fiorina faced a backlash among HP employees and the tech community for her leading role in the demise of HP’s egalitarian “The HP Way” work culture and guiding philosophy which she felt hindered innovation. Because of changes to HP’s culture, and requests for voluntary pay cuts to prevent layoffs (subsequently followed by the largest layoffs in HP’s history), employee satisfaction surveys at HP—previously among the highest in America—revealed widespread unhappiness and distrust, and Fiorina was sometimes booed at company meetings and attacked on HP’s electronic bulletin board.”

The company’s record of investing in software was also abysmal when hardware was becoming ever cheaper and generic. This cumulated in the disastrous acquisition of Autonomy.

But the fact that the company has survived (albeit it in two parts) is no doubt due to its strong historic reputation for well-engineered quality products and strong brand name.

But there are two key lessons to learn from the history of HP: 1) Changing the culture of an organisation is always exceedingly difficult and is likely to fail unless done very sensitively; and 2) Management incompetence can damage even the most admired businesses, as Hewlett Packard used to be.

To quote from my book Business Perspective Investing: “One of the key factors that affect the outcome of any investment is the competence of the management and how much they can be trusted to look after your interests rather than their own. Incompetent or inexperienced management can screw up a good business in no time at all, although the bigger the company, the less likely it is that one person will have an immediate impact. But Fred Goodwin allegedly managed to turn the Royal Bank of Scotland (RBS), at one time the largest bank in the world, into a basket case that required a major Government bail-out in just a few years”.

At Hewlett Packard it was not quite so disastrous and the company certainly faced challenges as the computer technology market changed but the damage done to a once great company was unhappy to see.

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

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Ideagen Offer and Inspiration Healthcare Webinar

I mentioned a possible offer for Ideagen (IDEA) in a previous blog post (see https://roliscon.blog/2022/04/15/possible-offer-for-ideagen/ ). Today one was announced – a cash offer of 350p per share from HG which is a massive premium to the last listed price of 243p. The directors are recommending it so at such a premium I think it is likely to be a done deal. I will be accepting for my shares.

That should at least offset the losses today from the rest of my portfolio as the market heads south. We are surely in a bear market now. Perhaps folks read my previous blog post which suggested it was a good idea to sell in May and go away.

This morning I attended a preliminary results webinar by Inspiration Healthcare (IHC) in which I have a very small holding. The company sells neonatal products for premature babies. The share price has been drifting down like many technology companies. But revenue and EBITDA were up. Margins were also up as they concentrated more on their “own brand” products which is something I always like to hear. Distributing products from other companies is never very profitable in the long run.

The company has been investing in facilities, R&D and IT systems. But there have been logistic challenges as many other companies are facing. With purchased items increasing in cost also and they are changing suppliers in some cases.

Only 4% of revenues are from the Americas so there is big potential there if they can get regulatory approval and develop their marketing.

The company is cash generative and has no borrowing.

Project Wave is aimed a developing a new product and was delayed by the Covid pandemic but is now progressing – it’s now in clinical trial with possible commercialisation next year.

There was interesting discussion of ESG initiatives and staff support. Some 40% of staff are now working from home and one third of staff on a 4 day week (4 days at 8.00 to 6.00). They are using the Charities Aid Foundation (CAF) to distribute donations to charities – an organisation I seem to be coming across more frequently of late and worth knowing about if you make charitable donations.

There were a couple of questions from the audience. One on the increased costs of EU regulation for medical products. The second question was on a possible share buy-back. The answer was that it was not a benefit and “not on the cards”. It was suggested that it is important to maintain a strong balance sheet and to invest the capital. I cannot but agree as I almost always vote against them except in investment companies.

This webinar was on the Investor Meet Company platform and it was a helpful one. I recommend you watch the recording if you have an interest in small tech companies.

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

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Sell In May and Go Away?

Rhododendron Odee Wright now in flower

An old saying in the stock market is “Sell in May and Go Away”. This is because historically the market tends to fall during the summer months for reasons that are not altogether clear. Bearing in mind the transaction and tax costs involved in selling shares and buying them back later in the year, and the fact that like all supposedly reliable investment rules, it tends to be traded away by the anticipation of knowledgeable investors, I do not normally take any notice of this theory.

But I feel this year it might be a good idea to follow. Inflation is forecast to rise to over 10% and GDP forecasts are falling so we might even enter a recession later his year. There is doom and gloom all around with the war in Ukraine not helping and commodity prices rapidly rising impacting both businesses and consumers.

A good example of the concerns of many companies was evident in the announcement by 4imprint Group (FOUR) this morning. Their trading statement said: “The Board is conscious that only four months of the year have elapsed and that current geo-political and broad economic factors may well affect the Group’s performance during the balance of the year. In particular, we are cognisant of potential issues relating to possible further COVID variants, supply chain disruption, inventory availability, increasing cost of product, availability and cost of labour, the effect of inflation on our customers’ budgets and the general threat of economic recession”. They are talking about the USA which is their major market but they could just as well have been discussing the UK.

Despite the fact that revenue so far this year has been up 27% over the last normal year of 2019, the company is clearly worried about the future. There have been similar statements from many other companies.

Another good example of the problems faced by many companies was a comment by Up Global Sourcing (UPGS) in a webinar yesterday. Everybody might be back in the office but the impact of higher shipping costs is having an adverse impact of 4% on their gross margin. They are looking for automation to reduce man hours and hence other costs.

We might currently have full employment but that is not going to last I suggest.

I think this might be one year to exit stock market holdings which will at least enable you to avoid monitoring your market holdings while you are on your summer holidays. Or at least move to holding shares that may be less volatile or less impacted by current economic trends.  

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

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Elon Musk Takes Over Twitter

The board of Twitter have accepted the bid from Elon Musk to acquire Twitter for $44 billion. How is he going to finance this? Apart from being the richest person in the world, probably by borrowing against his shareholdings in Tesla.

But users of Twitter will be concerned about his plans for the platform. This is what Elon said (in a tweet of course): “Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated. I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans. Twitter has tremendous potential -I look forward to working with the company and the community of users to unlock it.”

As an active twitter user I find these commitments to be positive. Authenticating all users should be done by all social media platforms to deter the abusive comments that are all too common. Twitter also needs to cease the political bias which is all too evident in its selection of who and what to suppress.

There are some simple changes to Twitter that might help. For example, allowing you to “dislike” tweets as well as “like” them, and allowing edits of tweets to enable one to correct the typos that creep in when using a mobile phone. There is also too much repetitive advertising on Twitter of late, often irrelevant to you.

Now would it not be good if we could get Elon Musk to take over the BBC and remove the left wing, woke bias from that also!

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

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Elon Musk and Twitter

Elon Musk has offered $43 billion to buy Twitter but the Twitter board have responded by announcing a “shareholder rights plan”. This should rather be called a “management rights plan” because it’s what is called a “poison pill” defence which allows the board of the company to defend against any hostile bid by permitting them to issue so many new shares at a big discount that the bidder is diluted and unable to gain control.

This is in my view unethical and unprincipled. Irrespective of your views on Twitter or on Elon Musk, the adoption of a poison pill is effectively a frustration of shareholder democracy.

There is a hint that Mr Musk would limit the amount of censorship that Twitter applies to posts. For example Donald Trump has been permanently suspended from Twitter for comments that Twitter judged to be an incentive to violence. You can read their judgement here:  https://blog.twitter.com/en_us/topics/company/2020/suspension . It hardly appears to be a fair and unbiased view.

It’s not just Donald Trump that faces the wrath of the Twitter censors. For example news aggregator Politics For All (PFA) was banned for “distorting stories by focusing on specifics that would go viral”. Is that not what all news media do?

Free speech is an important constitutional right in the USA and when such a dominant medium such as Twitter chooses to interfere in politics or for commercial reasons then it needs to be censured. So Elon Musk might just be a better owner that the existing Twitter management.

The other issue is that the board of Twitter may simply be defending their well-paid jobs by trying to block a takeover. I hope they lose this battle.

Poison pill defences are of course not permitted in the UK under Takeover Panel rules. It is unfortunate that they are not outlawed in the USA.

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

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Possible Offer for Ideagen

Yesterday, after the market closed, there was an announcement that Cinven are considering an offer for Ideagen (IDEA). They note the recent speculation but say there is no certainty an offer will be made and no approach has been made to the directors.

I first purchased shares in this company in 2012 and they are still a significant proportion of my portfolios so this potential offer is worthy of some comment. The share price at closing on Thursday was 253p which according to Stockopedia means that the prospective normalised p/e is 35. The market cap is 11 times sales revenue.

Even if the share price has fallen from a peak of 325p in the last year as with many technology stocks, this does not make it outstandingly cheap in my view that would warrant a very high bid premium.

But there are many good qualities in this company such as high recurring revenue although the financial picture is clouded by numerous acquisitions and disposals resulting in a lot of adjustments in the accounts. A bidder might find it attractive though simply because it operates in the high growth market sector of audit, risk and compliance software so anyone wanting to move into that sector might be willing to pay a high premium for a well managed company.

I will await the outcome but if there is a sharp jump in the share price next week I might hedge my bets and sell a few shares.

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

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