The New Realities and Private Healthcare

The editorial in this week’s Investors Chronicle was full of doom and gloom. Under the headline “Facing up to new realities” the editor said “The threats identified by the WEF (World Economic Forum at Davos) include climate change, the cost of living crisis, geopolitical confrontation, high debt levels, recession, low growth, social unrest and cyber crime. These crises are converging, it says, to shape a unique, uncertain and turbulent decade to come”.

All I can say is that I have seen all this before and the problems we face are actually relatively minor in comparison with the difficulties faced in previous decades. Having lived through the 1970s when the UK economy was on its knees, we only face minor handicaps now in my view. The WEF is talking us into a recession as when confidence in the economy falls then businesses stop investing for the future. But this is a temporary phenomenon and when we get out of the gloom of winter the picture may be a lot brighter.

Another interesting article in Investor’s Chronicle was on private healthcare which had the headline “Private care likely to boom amid NHS crisis” and I would not dispute that comment. It covered Spire Healthcare (SPI) one of the few medical companies that are UK listed. I was particularly interested in the article because Spire have recently acquired The Doctors Clinic Group who provide private GP services mainly in the London area. I actually used the service a month ago when I got fed up with trying to book an appointment with my NHS GP who have a dysfunctional web site and hopeless phone service. Doctors Clinic was a very efficient, slick and relatively low cost service which I would recommend. Appointments can be made and in person relatively quickly.

But the acquisition by Spire was a relatively small one for them. The financial results of Spire over the last eighteen months do not inspire confidence. Profit margins are poor with only “unadjusted” profits of £4.2 million on revenue of £598 million in the last 6 months. The results were apparently hit by cancellations due to the covid epidemic and staff absences for the same reason.

There is clearly great potential to expand the private GP service as people give up on the NHS but Spire seem to be no better than the NHS at operating a service that more than covers the costs of provision.  And this is one of those companies that “polishes” their financial figures by reporting Adjusted EBITDA and even adjusted cash flows so interpreting their financial figures is not easy.

Investors would have more confidence in the company if they focussed on unadjusted financial figures plus better profit margins and return on capital which have never been brilliant in the last decade.

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

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GB Group Webinar plus Spirent and Paypoint Trading

I watched the Capital Markets Event webinar yesterday of GB Group (GBG), a company whose shares I have held for a number of years. As one of the speakers said, identity verification is the key for trusted e-commerce and GB has exploited the growing demand for that.

The event lasted over 2 hours and was full of marketing hype including four presentations from customers saying how wonderful the company was. But I learned very little that was new about the company’s activities.

Future guidance was reiterated. According to Stockopedia that puts the company on a prospective p/e of 19.2 for the current financial year (year end of March) and 17.1 for next year which does not seem expensive. The half-year results recently announced showed positive growth in revenue but earnings per share down and debt risen no doubt due to the recent large Acuant acquisition.

I would have liked much more information on their competitive position, market share, integration progress etc.

This morning there was a trading statement from Spirent (SPT). This said 2022 results were in line with expectations but also included the comment “the Group’s performance is now likely to have a heavier than usual weighting to the second half of 2023”. That was enough to scare the market and the share price is down 16% at the time of writing. Investors have learned to be very wary of such comments – it usually simply means sales targets are not being met.

Yesterday did produce some better news at another of my holdings – Paypoint (PAY). They said “Group net revenue from continuing operations increased by 9.8% in the quarter to £32.5 million”. The share price perked up yesterday and it looks fundamentally not expensive but a large holder (Sanford DeLand Buffettology Fund) has been selling recently and still holds a big stake so the share price may remain under pressure.

The other good news yesterday was that inflation fell slightly to 10.5%. Will it continue to fall? Probably but at that level it’s still rapidly eroding the value of the pound in our pockets. Food price inflation is a particular problem. Killing off inflation is not going to be easy as labour shortages and strikes means there will be pressure to increase wages and hence prices for some time.

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

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Lifting the Gloom, But Not at Halfords

I think I have been suffering from Seasonal Affective Disorder (SAD). It seems to have been raining and cloudy since before xmas and the stock market did not perk up until the last few days.

Even today one of my holdings, Halfords (HFD) issued a profit warning which caused the share price to drop by 20%. But the losses on that were offset by significant rises in a number of my other holdings including some technology stocks and property REITs.

Is this the end of the bear market? I don’t know but I doubt it. The economic prospects are still poor. However I have cautiously purchased a few small AIM company shares including GB Group (GBG), Eckoh (ECK) and RWS (RWS). These are not share tips but more a strategic move to increase my holdings in smaller companies which now seem good value when I have a large cash balance at present.

What was the problem at Halfords? Softer than expected cycling and tyre markets was one aspect but enthusiasm for cycling is bound to fall in very cold and wet weather. Another problem was difficulty in recruiting skilled labour in Autocentres.

These might both be temporary problems so I am not planning to reduce my holding which was mainly purchased before the recent ramp up in the share price after it was enthusiastically tipped in several publications. That shows the danger of following the crowd.

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

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Fundsmith Annual Investor Letter

Terry Smith has published his thirteenth annual letter for investors in the Fundsmith Equity Fund (which I hold). As usual it’s a good mixture of sound analysis of market events and witticisms. I’ll cover a few significant points:

The fund underperformed the MSCI World Index with a total return of minus 13.8%, which was better than my own portfolio. As he points out the only way to beat the market last year was to hold energy stocks and nothing else. But both I and Fundsmith have a focus on growth companies so we have been under-weight in the dinosaurs of the investment world.

As Terry says: “Whilst a period of underperformance against the index is never welcome it is nonetheless inevitable. We have consistently warned that no investment strategy will outperform in every reporting period and every type of market condition. So, as much as we may not like it, we can expect some periods of underperformance” which is a fair comment.

Terry points out that we have gone through a period of “easy money” when central banks ignored the consequences of their actions. He says “One of the problems of easy money is that it leads to bad capital allocation or investment decisions which are exposed as the tide goes out”.

He is particularly critical about the management of Paypal and Facebook  (Meta) plus makes negative comments on Alphabet and Amazon and their expenditure on non-core businesses. He is scathing about the failure of some companies in which the fund has holdings to engage or even to provide information about the return they are getting on investments. He says: “What I am complaining about is the bipolar response some companies have to long-standing shareholders versus newly arrived activists”.

He has a particular attack on Unilever as in previous years and makes this acerbic comment on their marketing of soap: “When I last checked it was for washing. However, apparently that is not the purpose of Lux, the Unilever brand, which apparently is all about ‘Inspiring women to rise above everyday sexist judgements and express their beauty and femininity unapologetically”.

Lastly he attacks the exclusion of share-based compensation from financial reporting which can completely distort comparisons with other company’s figures.

In summary, another thoughtful report from Terry Smith and I am happy with the funds continued focus on investing in companies with a high return on capital and high margins with good cash conversion.

The Fundsmith EquIty Fund letter can be read in full here: https://www.fundsmith.co.uk/media/bm0lyc22/annual-letter-to-shareholders-2022.pdf

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

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EDGE Performance VCTs, REITs and Paypoint

I am glad to read that Edge Performance VCT (EDGH) is planning to wind-up. I have written about this VCT several times in the past despite never holding it and I always considered it a basket case which seemed to be run more in the interests of the management and advisors than shareholders. ShareSoc ran a campaign on the company to try and get it reformed, but ultimately without success.

It has now been revealed that they paid dividends illegally for which they are asking shareholders to vote through a “whitewash”. The latest announcement also says: “As Shareholders will be aware, the Company’s net asset value has significantly reduced in recent months, with, among other things, market-related reductions in the portfolio valuation, a dividend paid on 6 May 2022, share buy-backs and the payment of advisers’ fees having substantially depleted the Company’s cash. As a result, the Board and the Investment Manager are of the opinion that the Company is sub-scale and that the Company’s ongoing charges ratio will be too high at approximately 14.89 per cent.

Following lengthy discussions with the Investment Manager as to the Company’s current position and the overall market outlook, the Board does not foresee any reasonable opportunity for the Company to grow in the short term. Accordingly, after careful consideration the Board believes that it is in Shareholders’ best interests that the Company be placed into a members’ solvent voluntary liquidation, with the intention that there will be an orderly winding down of the Company, realisation for cash of the Company’s assets and a return of that cash to Shareholders in a manner which will be intended to preserve VCT tax-reliefs”.

This decision is several years too late in my view while in the meantime managers and advisors have extracted large amounts of cash.

On another subject, my portfolio is down again today mainly because the share prices of property funds/trusts including REITs have fallen sharply. This is no doubt due to the rise, and prospective more rises, in interest rates. This might impact property companies when their debts need to be refinanced. This has affected all property companies, even those who have fixed their interest on debt at low levels and have many years to run before they need refinancing.

In a few years time, the position on interest rates may be very different as inflation is forecast to fall rapidly next year. Property companies should be long-term holding so I won’t be panicking over the latest share price falls.

Another share that has fallen today is Paypoint (PAY) which I hold. That’s despite recent director share buying including another deal today. What do they know that I don’t is the question one asks oneself in such circumstances. Perhaps they are convinced that the recently announced bid for another company is really a good deal when the market seems to think otherwise.

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

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The Cult of We – Book Review

If you want a good read over Christmas, I can highly recommend the book “The Cult of We” by Eliot Brown and Maureen Farrell. It covers the history of the WeWork company (later renamed the We Company) and its founder Adam Neumann.

WeWork was valued at over $50 billion at the peak of euphoria and received many billions of dollars in venture capital funding from Softbank and other private equity investors. It eventually ran into difficulties as the funding failed to keep pace with mounting losses. Indeed apart from it’s very early years it is doubtful it ever made a profit.

This was a company that pretended to be a technology business but in reality was simply leasing large office space and sub-letting it to small businesses and start-ups. One might say it was leasing long and letting short as there was a high churn of customers.

Adam Neumann was a messianic character who promoted the idea that he and his wife were inventing a new social order with a focus on “we” not “me” where small business could share resources and build a social network. In reality they barely talked to each other.

It’s a great example of how investors can be fooled by a glib and charismatic personality. Investors jumped in for fear of missing out (FOMO) in the boom years of venture capital funding without doing proper due diligence or standing back and looking at the reality of the business model.

There was certainly a demand for these kinds of “serviced” offices for small businesses or large ones that urgently needed more space. But it was an easy concept to copy with many imitators quickly springing up. No barriers to entry is the key phrase!

The story of wasted cash with non-existent corporate governance takes some beating. A private jet purchased, big parties with free booze for staff, pot smoking by Adam, and other uncontrolled excesses make for amusing reading. Diversifications into schools for kids (WeGrow) and other unrelated ventures followed.

But it’s not only a good story about the growth and collapse of a company but a good overview of the US venture capital industry in the last 15 years and some of the personalities involved. We may not see the like again I suspect.

I won’t tell you how the story ends so as to avoid spoiling your enjoyment of the book, but there is certainly much to be learned from it. One is beware of charismatic founders/CEOs. They are not all as visionary as Steve Jobs and can easily become megalomaniacs.

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

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Should You Invest in Disreputable Companies?

Yesterday Glencore (GLEN) announced that it had agreed to pay US$180 million to the Democratic Republic of Congo to settle claims of bribery and corruption. This follows an investigation by US, UK and Brazilian authorities over the activities of the company. The result included a $1.1 billion payment over the US claims. But the impact on Glencore and its shareholders was not high because Glencore is making many billions of profits from coal mining – which many people see as a disreputable business even though it is not illegal.

Leaving aside the issue that it is mainly the shareholders who are suffering these penalties when it should be the individuals involved in bribery and corruption the question one has to ask oneself is should I invest in a company with a historic poor reputation? It looks very cheap on a prospective p/e of 4.4 and yield of 8.4%.

I have decided to hold by nose and buy a few shares in the company. In reality there are few large mining companies that do not have some skeletons in the cupboard. BHP was blamed for a major dam failure in Brazil which created an environmental disaster and has also admitted to a culture of sexual harassment of staff. Rio Tinto managed to destroy the Juukan Gorge in Australia in 2020 – a major cultural heritage site for aborigines for which Rio has been apologising ever since and paying compensation.

BHP and Rio Tinto have taken steps to ensure similar problems do not happen in future and Glencore likewise claim to have reformed. Let us hope they have done so.

I see Purplebricks (PURP) have received a requisition for a general meeting to remove the existing Chairman, Paul Pindar, as a director. Given the financial track record of the business this is not at all surprising. The requisitioners claim that since its flotation the company has raised £200 million of equity capital of which approximately £40 million remains and the company continues to lose money.

Is this a management problem or simply that the business model has never worked? I suspect the latter in which case changing the Chairman may not improve matters. To quote Warren Buffett: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.

I only held shares in Purplebricks very briefly and I sold because of concerns about the reputation of the business and some of the decisions it made. I was never convinced it would make a profit.

What should shareholders in Purplebricks do now? Certainly there is little point in allowing the current board to continue in the vain hope of a recovery. A revolution is the only likely way forward so if I was a shareholder I would vote for the general meeting resolutions.

Postscript: Glencore is giving a presentation today (an “Annual Investor Update” – available from here: https://www.glencore.com/publications ) that gives a good background on how the business is developing. There was an emphasis on the worldwide shortage of copper production which makes for a huge opportunity for the company. They are also aiming for a “responsible” decline in coal production – halving production by 2035. Overall they aim for net zero carbon by 2050 and claim to be more advanced than their major competitors in that regard. They are clearly saying all the right things to improve their reputation.

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

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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  )

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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  )

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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  )

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