Strix Shares Crash, GB Group Results and Segro Bond Issue

Shares in kettle control supplier Strix Group (KETL) fell by 40% this morning after they published a trading update. It reported that the Covid lockdowns in China had adversely affected their major OEM customers. Along with negative comments about the future impacts and “continued macroeconomic and political uncertainty” you can see why investors are nervous.

I used to hold this stock but sold the shares in May and August last year – at a small loss I hasten to add – as growth prospects seemed to be weakening and the valuation seemed too high. So I am currently suffering from schadenfreude – pleasure in escaping from that disaster.

Yesterday GB Group (GBG) issued an interim statement which received some negative comments. This is what Graham Neary said on Stockopedia about it: “…. the outlook statement tells us that H2 has started in line with expectations, and there is no change to forecasts. Net debt currently sits at around £118m. This is a large and reputable business providing advanced digital intelligence services to some of the world’s biggest businesses. However, there are many different moving parts to understand, and I perceive it as a black box type of investment. It is in my “too difficult” tray at this time”.

My response to some of the other posts was “Re all the comments on GB (LON:GBG) the accounts are complex but it helps to watch the company’s presentation here: https://www.gbgplc.com/en/investors/ . There have clearly been negative impacts from declines in cryptocurrency and internet companies generally but I am not as negative as others about prospects.  A lot of the issues are one-offs and judging a company on one half-year’s results is not wise in my view. I am a long-term holder and am likely to remain so”.

This is clearly one company affected by all the negative reports on cryptocurrency trading and the collapse of several companies operating in that sector (FTX etc). It appears there are many fewer people opening crypto trading accounts and needing to have their identity verified – surely a good thing.  

Another company announcement of interest today was from property company Segro (SGRO). It said it is issuing a 19-year bond with an annual coupon of 5.125%. It was six times oversubscribed apparently. This shows that property companies can still raise debt easily which was one concern affecting their share prices recently but it seems they now have to pay a lot more in interest on such debt than they have been doing of late. If they need to refinance existing debt it is clearly going to be at much higher rates. Can they still make a profit if debt is that much more expensive? They surely can if inflation is running at 10% and rents they can charge are up to match.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Webinars Galore – Intercede + AB Dynamics + Augmentum

I seem to be filling my days with webinars of late. Two today and one yesterday, partly because this is the season for half-year results announcements.

I’ll cover the recent ones – all on the Investor Meet Company platform, but I’ll only give you some general impressions and highlight particular points as you can watch recordings of them for the detail:

Intercede (IGP). Positive results and the company seems to be moving in the right direction – expanding products to cover a wider customer spectrum and making acquisitions. The presentation also covered what the company’s products provide in the identity/security sector but even though I have been a shareholder in this company for a long time it is no clearer to me what the products provide in terms of individual benefits or why people would buy them rather than competing products. Like many technology companies they have a communication problem!

One also gets the distinct impression that the products are complex to install and maintain. Does identity management really need to be that complicated? This and the above factor may be why the company has never grown as quickly as it should have done. But I remain a long-term holder of the shares.

AB Dynamics (ABDP). This company has come a long way since I first purchased the shares in 2015. From being a small UK company operating in a niche of the automotive engineering sector it has become a major international business. It now has a high proportion of recurring revenue from previously being reliant on one-off deals and has recovered well from the impact of the Covid epidemic.

A good presentation if rather too full of acronyms and there was a focus on ABD Solutions which is providing automated driving solutions to companies such as big miners. This company is also growing by acquisition and there seem to be more opportunities for that.

Both the above companies got somewhat bogged down in their presentations on the detailed financial results. This is both boring and unnecessary as we can all read the results announcements before the event. Only a very few key financial points need to be presented.

Augmentum Fintech (AUGM). This is an investment company which I do not currently hold. It focusses on the financial technology sector and the share price performance has been quite dire in the last eighteen months as a result of it being in a deeply unpopular sector. The presenter said there has been a sell off of risk assets but it could be a compelling market in 2023. I agree with the former comment but as regards the latter I would not like to take a view on it. Markets are composed of willing buyers and willing sellers and emotions have more influence than facts.

There were some interesting comments on digital assets such as crypto currencies and that the speaker had met FTX management but the company did not invest.

The company’s interim results reported that NAV per share had remained stable but NAV fell. These numbers are no doubt influenced by the share buy-backs the company has been doing and note that they have been buying back shares at an average discount of 42%!

Comment: The only way to judge the value of these kinds of investment companies is to look at the underlying holdings in which they are invested. That can be difficult to do as they are small unlisted companies and there was minimal information provided in this presentation on them. But a high discount to NAV is common on private equity investment companies.

However I think that valuations of small technology companies may have reached a plateau and may be now reasonable value. But it could take some time for investors to view the sector more favourably as many people have been badly burnt in the last year from over-optimism about the technology sector.

These are my personal views alone of course and should not be relied upon!

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

More Cheap Labour Required? And Results from Intercede and Telecom Plus

Both the CBI and the CEO of Next have called for a relaxation of immigration rules so as to provide more workers. There are desperate shortages of staff in some sectors of the economy such as retail and hospitality, particularly in low-paid unskilled jobs. With a booming economy it has proved very difficult to recruit staff at wage levels that companies want to pay.

The problem has been compounded by a rise in “inactivity” levels, i.e. people who could be employed but are not. Some of them are suffering from long-term sickness but others have simply dropped out of the workforce because they can survive on benefits. The Covid epidemic has encouraged these trends but in essence there are underlying factors such as demographic changes that are a major cause. As the population ages people are less keen to work and are more likely to suffer from medical complaints that the NHS cannot fix quickly due to mismanagement of that service of late.   

Do we need to allow more immigration to help businesses? I suggest not. A tight employment market encourages companies to invest in improving productivity when if they can hire labour easily they do not. Poor productivity is one of the major problems in the UK economy and has been for years.

Even Labour leader Keir Starmer is opposed to unrestricted immigration and has said “Let me tell you: the days when low pay and cheap labour are part of the British way on growth are over”.

The UK needs to look at fixing some of these problems via Government policies on social security benefits including pensions and helping those suffering from illness by improving the NHS while companies need to invest more in productivity improvements. That means more equipment and better training.

Two more sets of results from companies I hold in my portfolio came out this morning. Recession? What recession?

Telecom Plus (TEP) reported revenue up by 51.5% and adjusted profit up by 22.5% with dividends up to match in its interim results. Reading this company’s results helps you understand the impact of the energy crisis on household bills and the impact of government interventions to cap prices.

Not only has the company increased the number of customers signed up to its services because they now have a very competitively priced offering for energy supply, it has also meant that more people have been signing up to sell their services as their household budgets have come under pressure due to the rising cost of living.

The rising cost of energy has also meant customers have reduced their energy consumption by 10% over the summer with a larger reduction expected over the winter months. Customer churn remains at record low levels and bad debt provision seems not to be a problem although that might rise. Forecasts for full year profits and dividends have been increased.

As both a customer of Telecom Plus as well as a long-term shareholder, but not a reseller, I am happy with the progress made.

Intercede (IGP), a company specialising in digital identities, reported revenue up 24% in their interim results and net profits up 124%. Again there is a positive outlook statement and it looks like the strategy to grow by acquisition is paying off. The share price may not have been buoyant of late as small cap technology stocks have fallen out of favour but the company seems to be doing the right things. That’s solely my opinion as a long-term holder of the shares of course.

Both companies demonstrate that there are still profits to be made, even in the tricky energy sector where the government has been interfering.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Holmes Sentence, Diploma Results, TRIG Announcement, Office Space Surplus and Gamification of Trading

It was good to see that on Friday Elizabeth Holmes, former CEO and founder of Theranos, was sentenced to 11 years in prison for fraud. The US company claimed to have a revolutionary blood testing device and raised $900 million when the product never worked and investors and customers were deceived. This is the kind of sentence that we should see in the UK but never do for companies that mislead investors.

This morning Diploma (DPLM) published their Final Results for last year. Both revenue and profits were ahead of forecast. This is a diversified engineering company which has grown both by acquisitions and organic expansion. With a bland company name and a low profile, this can be an under-appreciated business while it also benefited from a high proportion of export sales last year (a 5% benefit to revenue from foreign exchange movements).

Another announcement this morning was from The Renewables Infrastructure Group (TRIG) which is one of those alternative energy suppliers which the Chancellor recently targeted with a new tax as they were making too much profit. The detailed impact is now spelled out.

The new tax is a 45% levy on revenues in excess of £75/MWh. TRIG estimates this will reduce the company’s NAV per share by 8.3p per share, i.e. about 6%. But the company expects electricity price increases to more than offset that. The company will also see a positive impact from inflation but that is offset by a similar decrease in asset valuations which are discounted at a higher rate as a result.

The overall impact on the share price today at the time of writing is negligible but many of these changes were already forecast of course. This is an example of the problem of investing in companies or sectors where the government is interfering in the market. In this case the government decided to incentivise renewable electricity generation but then decided that companies were making too much money as a result.

An interesting article in the FT has highlighted the rise in empty office space as working patterns changed with more people working partly or fully from home. Occupancy levels have plateaued at about half pre-Covid levels and new construction has slowed. Offices can be repurposed to meet the housing shortage but that is not always easy the article reports. You can see why the commercial property sector is in the doldrums and that is surely not likely to change soon. I doubt people will return to the old working patterns now they have enjoyed the benefit of a lot less commuting, particularly in London. Personally I always hated commuting and avoided it so far as possible. Even after setting up a business initially in the West End, that was soon moved out to the suburbs freeing up two or more hours extra working time.

Lastly the FCA has warned against the “gamification” of trading apps. This is where product features are added to encourage activity. The FCA is right to look at this issue but as usual it is closing the stable door after the horse has bolted. It has been clear for many months that some share trading platforms are encouraging speculation as opposed to long-term investment.

Note: I hold shares in DPLM and TRIG.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Voting at BHP and Bioventix, and Cryptocurrency Rout

The results of the Annual General Meeting of BHP Group (BHP) have been announced. The most significant item was the rejection of an amendment to the constitution by 90% of voters. This was a resolution requisitioned by Members and would have enabled shareholders to dictate operational policies on such matters as environmental issues to the directors. It was rightly rejected as removing powers from directors to manage the company in the best interests of the company is unwise.

You can read the speeches given at the AGM here: https://www.londonstockexchange.com/news-article/BHP/bhp-group-2022-agm-speeches-and-presentation/15709454 . There is a big focus on changing the culture of the organisation.

I also received the Annual Report and a proxy voting form for the AGM of AIM listed Bioventix (BVXP) today. Thankfully their share registrar, Share Registrars Ltd, have now implemented a simple and easy to use electronic proxy voting system.

I only voted against the share buy-back resolution as I can see no good reason to use surplus cash in that way rather than paying a special dividend. Share buy-backs are rarely justified and depend on the directors’ view of the value of shares which is often wrong.

I am glad to see that the cryptocurrency markets are suffering a severe bout of financial indigestion with exchange FTX in financial difficulties and Bitcoin prices back down to where they were in 2020. Mining company Argo Blockchain (ARB) listed on AIM also appears to be in difficulty.

I’ll repeat what I said in January 2021 on why I won’t be investing in Bitcoins: “There is no intrinsic value in a Bitcoin. With company shares the intrinsic value may be somewhat uncertain and share prices subject to the emotions of investors but there is at least a way to determine the value by looking at the discounted cash flows generated by a company. The future cash flows help you to determine the current value. But with cryptocurrencies there are no associated cash flows. No dividends paid out and no profits generated directly from the assets as with company shares.

If you buy cryptocurrencies you are simply buying a “pig in a poke”.

Roger Lawson

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Supermarket Income REIT Presentation

I watched a webinar from Supermarket Income REIT (SUPR) yesterday on the Investor Meet Company platform. This is not a company I currently hold but I may consider investing in it even though it is in the currently deeply unfashionable sector of commercial property trusts.

They have a focus on omni-channel supermarket properties and 80% of their leases are indexed to inflation with a WAULT of 15 years. They have hedged 100% of their debt exposure to 2026 at 2.6%. They claim it is a defensive, counter-cyclical company with a low LTV.

80% of their portfolio is leased to Tesco and Sainsburys and they have just established a new ESG committee, but who hasn’t?

Their indexed leases have caps of about 4 to 5% on about 5% of their portfolio.

The presentation was eminently clear with good slides.

There is also a recent report published by Edison on the company.

The current discount to NAV is 10.6% and the dividend yield is 5.8% according to the AIC so it is not as cheap as some REITs at present. But that may be because of the defensive nature of the business (supermarkets are unlikely to be affected much by the recession as people have to eat) and the historic good performance figures over 5 years.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

More News on Globo Case

Globo was a company subject to a large fraud back in 2015 which caused the company to collapse and investors lost everything. Shareholders might have thought that any legal proceedings were dead but not so. The FCA have published a note on how they have been progressing the case which is here: https://www.fca.org.uk/news/press-releases/fca-progresses-market-abuse-claim-against-globo-plc-chiefs

In summary despite the Greek courts rejecting extradition requests to face criminal charges against the former CEO and CFO, the FCA is now progressing a civil case and the High Court has rejected an application to strike out the proceedings.

As a former shareholder in Globo it is good to hear that the case is still being pursued although I did not lose money on my shareholding having decided that there were too many unexplained and unaccountable problems being reported and therefore selling before it went bust. But many other shareholders were not so lucky.

After 7 years it would be good to have some conclusion on this example of how fraud can fool auditors such that the reported accounts were a complete fiction.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

JPMorgan Global Growth AGM and Twitter Fees

Yesterday I attended the Annual General Meeting of JPMorgan Global Growth and Income Plc (JGGI). This is a global investment trust as the name implies and the meeting was a “hybrid” AGM with a number of shareholders present in person but I attended on-line. Questions could be posed on-line but voting was only via proxy in advance for those attending on-line. I found this a perfectly satisfactory arrangement.

The meeting commenced with a presentation from the managers after brief words from the Chairman about the recent merger of the trust with the Scottish Investment Trust which almost doubled the size of the company. The result will be lower management fees.

The trust is a “high conviction, bottom-up stock selection” investor with 80% active share, i.e. it is definitely not a closet index tracker. As one investor pointed out, this results in a high stock turnover as they are sensitive to changes in the current valuations of companies.

The annualised return since 2008 has been 2.4% ahead of the MCSI All Country World Index per annum but they slightly underperformed last year. But it has a good long-term record and usually trades at a premium to NAV.

The manager emphasised that they aim to own the “best” companies but talked about the 185 different data points they measure on companies re ESG factors – a very tiresome subject that is now promoted by all fund managers. I just want them to make money!

There were some negative comments on Apple, Tesla and Lyft (they prefer Uber). They like Amazon, NXDP, LVMH etc where they are overweight.

There were a few questions from the audience. One was is the dividend covered by earnings? The answer was NO. The justification given was that it is best to invest in the best companies and not worry about the dividend cover. Would it not be best to reinvest the profits? Most investors prefer a reasonable dividend and the company has retained profits from capital that it can pay out.

All resolutions were passed based on the proxy counts before the meeting.

In summary this was a useful meeting which was well managed. For those who want good international coverage and like active management this is a share worth considering.

I shall be tweeting about this report of course. Also yesterday Elon Musk suggested that he would introduce a subscription service on Twitter at $8 per month which would give users some priority in search which he considered essential to defeat spam and reduce the number of adverts they see. There would also be verification of users who subscribed. In reality he is changing the business model from total reliance on advertising.

I am all in favour of those changes. More moderation is required on Twitter and if charging helps to reduce the number of garbage and abusive comments then so much the better.

Musk is also planning to halve the number of Twitter staff. It’s not many companies that have so many non-essential staff that half can be fired. It will be interesting to see the outcome of these changes for investors in Twitter.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Market Conditions, Fonix Mobile Webinar and Aston Martin

The stock market seems to have calmed down now that we have some political stability in the country, it seems we might not run out of gas this winter after all and may be able to keep the lights on. But small cap companies are still very depressed with stock market investors preferring to put any spare cash into big or mid-sized oil/gas companies. Big miners are still holding up reasonably well because of the high dividends they are paying despite the gloom over the prospects for consumption in China.

I am not trying to buck the trend and have even bought some BP, Shell and Rio Tinto shares recently. I feel that all those new speculators in small cap company shares that joined in during the boom times have departed the market and are not likely to return soon. Once bitten, twice shy may be their motto.

I reduced my holdings in smaller companies as their share prices declined but I still hold some of them. One such is Fonix Mobile (FNX) who gave a presentation of their annual results on the Investor Meet Company platform today. I’ll briefly summarise what they do:

The company specialises in carrier billing systems, i.e. charging fees to your mobile phone as an alternative to credit card payments (75% of revenue), and in text messaging services (22% of revenue). They are experts in core verticals such as media, charity donations and online gaming but any transactions of less than £40 qualify so can be used also for such things as car parking payments.

What do I like about this company? The positives are:

  • Steady growth in revenues and profits in the last 4 years (they listed on AIM in October 2020).
  • High return on capital.
  • Pay a decent dividend.
  • High recurring revenue and high customer retention.
  • Focus on internally generated growth not acquisitions.
  • Limited foreign adventures.

They do have an international development strategy but that’s mainly focused on Ireland at present with some activity via partners in Germany and Austria. They are also evaluating other markets but they suggest they have room to grow in their existing markets. They are mainly investing in product development and sales/marketing. They only have 40 staff at present with about 15 in product development.

The management presented well and a recording is available of course.  Note though that the shares are tightly held and there is limited trading in the shares with a bid/offer spread of over 2.5%.

There are other companies in the carrier billing market, e.g. Bango and Boku, but the focus on certain verticals in the UK clearly has enabled them to build a solid niche.

I see Aston Martin (AML) published another poor set of results this morning – a year to date loss of £511 million and debt rising to £833 million although claimed revenue was up. The company blamed “supply chain challenges and logistics disruptions”. It still looks a complete basket case to me and I suggest only car aficionados should consider investing in it. When the anticipated recession really bites will folks be buying “ultra-luxury” cars as they call them? My only slight interest is that after holding it for 9 years my Jaguar XF will soon need replacing – a big bill today for some maintenance work on it. Let me have your suggestions for new petrol or hybrid luxury vehicles, or perhaps I will be able to pick up a low-cost Aston Martin when they near bankruptcy?

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

AEW UK REIT, JGGI Merger and ShareSoc’s investor Basics

Yesterday I watched a presentation by AEW UK REIT (AEWU) on the Investor Meet Company platform. This is a property investment trust which I hold but like many property companies the share price has done badly in recent weeks and it’s now on a discount to NAV of over 24%. The portfolio manager, Laura Elkin, explained that the company’s objective is to achieve a high income for investors through active management.

One of the main concerns of investors in such companies is that with interest rates rising, property investing may become less attractive as they typically have significant amounts of debt used to finance property purchases and may need to refinance their debt at more expensive levels. But AEWU have fixed their debt at 2.9% p.a. for the next 5 years and they have a high current cash holding. Their loan to NAV ratio is only 31%.

The current dividend yield is 8.7% although that is not covered by current earnings. This arises from some property disposals resulting in a high cash holding but they expect the dividend will soon be covered again.

There are apparently opportunities arising to buy properties at good prices and they are having conversations with open-ended property fund managers who are having to dispose of assets after falls in the property sector and pension funds having to realise cash.

Another question was whether their property leases were indexed linked. Generally not. Indexed linked leases often have a cap and collar which provides only limited protection and AEWU’s leases are generally fairly short term anyway so can often be relet at higher prices. But that does surely mean that if the economy grinds to a halt then vacancies might increase and pressure to reduce letting prices will rise.

One interesting comment was that the office market is being hit by the ESG agenda. Prices are being affected by the quality of the property in that regard and this is meaning some improvement of properties is required to make them more attractive before reletting.

This was a useful presentation and a recording is available. AEWU have a good long-term record but property trusts are currently out of favour. Taking a long-term view, commercial property is looking to me to be quite an attractive sector at current price levels and AEWU seems to be nimble enough to take advantage of opportunities.

There was news today of a proposed merger of JPMorgan Global Growth and Income (JGGI) trust with JPMorgan Elect (JPEI) trust. The latter is a rather peculiar investment trust with three classes of shares – Growth, Income and Cash. Holders of any of the latter can switch between the classes without incurring tax liabilities.

Total assets of Elect are relatively small at £341 million in comparison with JGGI’s £1446 million so it is certainly a rational move so far as Elect holders and the manager are concerned. Is there any benefit for JGGI holders? There is some minor advantage of a larger asset base reducing overall costs so I will probably vote in favour as a holder of JGGI.

Investing Basics: ShareSoc has launched a series of videos. See https://www.sharesoc.org/investor-academy/investing-basics/ . It’s a meritorious attempt to educate people on the basics of investment in an easy-to-use format and in a few short sessions. It may help some people although this may not be a good time to encourage people to take up stock market investment. The markets are volatile at present with poor returns in the short-term discouraging new investors.

But shares are beginning to look cheap particularly in the small cap sector and where can one get an income of 8.7% which is what AEWU is paying in dividends? No instant access bank or savings account is paying more than 2.5% while gilt yields are higher but still nowhere near 8.7%. There is a capital risk in investing in REITs but there is also in gilts. Corporate bonds may be another alternative to look at but information on those is quite limited.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.