Unsatisfactory Avast AGM, and Designated Accounts

I “attended” the Avast (AVST) Annual General Meeting today. This was of course held on-line using Zoom with only one director in physical attendance (Warren Finegold) who chaired the meeting. Zoom seems to be becoming the de facto standard for on-line meetings.

The Chairman of the company, John Schwarz, gave a brief presentation backed up by some slides. To summarise, it was another strong year of growth and profitability. A new CEO is now in place. EBITDA was up 8% with strong cash generation and hence there was a steady reduction in debt. They added 400,000 paying customers making a new total of 12.6 million. There were numerous new product releases and dividends are up 8.1%.

But nobody could raise questions at the meeting. In addition, although shareholders could submit questions in advance, these were not answered at the meeting. Overall this was a totally unsatisfactory way of conducting an on-line AGM.

Votes were taken on a poll to be declared later, but the proxy counts were quickly flashed on the screen. I noticed Belinda Richards managed to get 13.7% of the independent shareholder votes against her. I wonder why.

The whole meeting was over in 15 minutes.

Apparently customers of The Share Centre have been notified that there are new terms and conditions which cover the future use of designated nominee accounts. This will be a major step forward in investor protection and shareholder enfranchisement. Most brokers, like the Share Centre, use only “pooled” nominee accounts where your holdings are jumbled up with those of all their other customers. It relies on the brokers sorting out who owns what, which can sometimes prove to be not at all easy if a broker gets into financial difficulties. Designated accounts contain both the broker and end customer identification on the share register and hence are by far preferable.

It will be interesting to see how they support such accounts, and whether it will be affected by the proposed merger with Interactive Investor. This was approved by a vote on the 8th April but there has been no further news.

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

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Burford Capital Share Trading and Why No Transparency?

Burford Capital (BUR) was affected by a shorting attack from Muddy Waters (Carson Black) who have published several dossiers attacking their accounts. As I have said before, I have never had any interest, long or short, in the shares of that company but I have publicly questioned the business model, their corporate governance and the prudency of their accounts. But other investors take a different view of the company.

Burford have alleged that there was some manipulation of their share price taking place at the time of the shorting attack, i.e. market abuse by such methods as “spoofing and layering”. They went to court to force the LSE to disclose the share trades so that they could determine whether this was in fact the case and to identify who might have been doing it. The application was supported by a joint letter from ShareSoc and UKSA.

The High Court rejected the application on a number of grounds. For example because the FCA and LSE had already reviewed the matter and could not confirm the allegations.

ShareSoc director Paul de Gruchy has now published a blog article which covers the judgement. See: https://www.sharesoc.org/blog/regulations-and-law/slave-to-the-algorithm-burford-and-the-importance-of-maintaining-confidence-in-a-broken-system/

It is very good analysis of the problem of identifying market manipulation when the market is dominated by high frequency trading. For example it says: “An ordinary investor may wonder what strategies could be revealed by releasing the trading data in relation to a single company on two days. It appears that there is a genuine fear that “algorithmic” trading companies would have their secrets exposed by this information”; and: “This may look like market manipulation, but the LSE, who have a commercial interest in maintaining the income stream provided by high frequency, algorithmic trading, say it is “legitimate”. Indeed, it is a noticeable feature of the judgment that the judge appeared unconcerned by the clear conflict that the LSE has in being a commercial business seeking to maximise revenues with its role in identifying market manipulation. A cynic might say that the difference between “legitimate” and “illegitimate” market manipulation depends on the level of fees you pay to the gatekeeper”.

The share trading all took place some weeks ago. What damage could have been done by disclosure of the trades? The Court could have imposed confidentiality conditions to avoid wider public distribution if they had a mind to do so. The fact that the FCA have given it a whitewash hardly inspires confidence either as they have been notoriously inefficient in pursuing wrong-doing in financial markets.

We do not know whether there was any market manipulation taking place and we will never know as Burford is not going to appeal the judgement. That is a shame because transparency is all important in financial markets.

Investors do want to know when market manipulation is taking place and who is doing it. As Mr de Gruchy says: “It was hard to imagine how confidence in the markets could be further eroded. This judgment has managed to do so”. I completely support ShareSoc’s stance on this issue.

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

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Is it Elecosoft or Eleco? And Electronic Meetings.

One company I hold is building software company Elecosoft (ELCO). I have just received the notice of the Annual General Meeting and one oddity is that they have a resolution on there to change the name of the company to Eleco.  But surely the company used to be named that but amended it when they changed to focus on the software side of the business. So why the reversion? No explanation is provided so far as I can  see.

Another confusion in the notice is that there is a proposed change to the Articles to permit electronic general meetings. That will be solely at the discretion of the Chairman but reading the detail it is not at all clear how electronic meetings are supposed to work. For example, they still include provision for a “show of hands” vote but how does one show one’s hand electronically?

As with many other companies, they are not permitting anyone but two people to attend the AGM. You may be able to attend electronically but no questions are possible. But they may be hosting an event later in the year where shareholders will be able to ask questions in person.

It would certainly be helpful to have clarity on the above issues, and as most companies are dispensing with physical meeting, at least temporarily, it would surely be a good idea for the FCA to lay down some regulations on how electronic meetings should operate rather than letting every company to make up their own.

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

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Property Shares Spooked by Land Securities and Pets at Home Accounts Attacked

Land Securities Group (LAND) published their annual results yesterday. I don’t hold the stock but what they said seems to have spooked the whole property sector.

The company is a large holder of both retail and office property. For retail property, only 38% of rents due were collected within 10 days of the due date in March. For offices it was better at 89% but that is still down from the prior year at the same time. What possibly really scared people was that the company said they estimated that only 10% of its office space was actually occupied. There has clearly been a big trend to move staff to working from home, particularly from central London locations.

If companies realise they can operate with much less office space, the demand longer term may drop unless the office space can be repurposed. Every cloud has a silver lining so perhaps this would be one way to solve the housing shortage in London – just convert the unused office space to apartments. Or perhaps convert it to “competitive socialising” venues as Ten Entertainment (TEG) described their bowling alleys in their results this morning.

Will people revert to working in the office if the epidemic is over? This is the key question because property investment is a long-term game so it would be rash to make decisions on investing in property on short-term demand. I suggest home working will only have limited appeal for both staff and management. Not many staff have space for a “office” at home and keeping kids and pets at bay while working is not easy. It also makes staff motivation and management more difficult. But if the virus epidemic continues for a long time then there will be many fewer people wanting to commute into central London. Offices may move to locations to which people can drive, as happened in the 1960s and 70s.

On the subject of pets, the company Pets at Home Group (PETS) came under attack yesterday from Bonitas Research. They published a report that suggests the accounts of PETS were distorted by incorrect disclosures of loans to joint ventures. You can find the report on the web.

I don’t currently hold PETS shares, but I used to do so. I sold in November 2019. One reason I sold, other than thinking the profit I had made was very adequate, was that the accounts were particularly difficult to understand. The multiple joint ventures (mostly veterinary practices) which seemed to lose money was one concern. Making forecasts of future earnings and cash flow was difficult as clearly the strategy was to take over many of those ventures or wind them up.

Whether the claims by Bonitas are correct (they go so far as to say that the company lied about undisclosed trading loans) I would not like to say as it would require more research than I have time to spend. PETS has yet to publish a response to these allegations, at the time of writing.

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

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Dividend Cut at Elecosoft, Dignity Trading and Public Transport Problems

Many investors are suffering from dividend cuts by companies. The latest one in my portfolio is Elecosoft (ELCO), a company that produces software for the construction sector. In their announcement of the full year results this morning they indicated revenue and earnings were much as forecast to December, and cash flow was good enough to put them in a net cash position.

Normally these results would not have caused any concerns that the dividend would be reduced or cancelled, but not this year. Even though they only previously paid small dividends and half the “cost” as a scrip dividend, this year’s final dividend has been cancelled. This is what the company had to say:

“Proposed Dividend: Elecosoft’s strong trading performance and cash generation in 2019, and, ironically, the strong start to trading in 2020, would normally have warranted the payment of an increased final dividend. However, having regard to the uncertainties created by the Coronavirus situation and the need to conserve our cash resources, the Board has decided to not recommend a final dividend”.

I don’t normally like to challenge the wisdom of management, who may know more than me about the trading position of the company and future revenue, but this does look at first glance to be excessively cautious. That is particularly so bearing in mind they could have paid it as a scrip dividend if they wished to conserve cash. ShareSoc has published some comments and written to the FRC, FCA and BEIS on the problem of dividend cuts suggesting they should issue some guidance. That seems to be a sensible suggestion because at present we don’t know whether this is just management panicking or being simply prudent.

One company that should surely be benefiting from the coronavirus epidemic is funeral provider Dignity (DTY) – I do not hold the shares. More deaths surely mean more business for them. But in their trading update today they show that it is not that simple. The company says the following:

“The absolute number of deaths increased by approximately one per cent to 161,000 from 159,000 in the comparative period last year. Sadly, since the end of the quarter, the UK has witnessed in excess of 20,000 deaths in a single week, the highest since the beginning of 2000. The number of possible incremental deaths as a result of COVID-19 is a matter of substantial speculation. Should 2020 witness a large number of incremental deaths, beyond the 600,000 originally anticipated by the Office for National Statistics, then it is possible that 2021 and 2022 could experience a lower number of deaths than in 2019. The Group will not speculate on the most likely outcome”.

In addition there is the problem that as many people cannot attend funerals, some funerals are being postponed or executors are opting for lower cost funeral packages. Dignity was already suffering from aggressive price competition which had prompted a strategic review before the latest crisis arose.

The company had previously decided to suspend dividend payments. Like Elecosoft they apparently are simply unable to forecast the likely impact of the epidemic on their business. So no guidance for 2020 is being provided.

On Saturday the 9th May Grant Shapps, Transport Secretary, said that only 10% of former public transport capacity will be available in some locations if social distancing is to be maintained. It seems likely that will be so for many months even if people are permitted to go back to work. This will clearly cause major problems in London where almost all commuters use public transport such as trains, the underground and buses.

After the Prime Minister spoke on the 10th May, Mr Shapps issued this tweet: “Speaking this evening the PM was clear – if you’re going back to work in a job that cannot be done from home, please avoid public transport if possible. Go by car, or even better, cycle or walk. To help, we’ve announced more than £2bn in the biggest ever boost to cycling and walking”.

An example of how problematic London transport has become is a report in the Times that says Transport for London (TfL) has asked the Government for £2 billion. To quote: “TfL is down to its last £1bn, which is being burnt at a rate of £21m a day — leaving it less than two months from emptying its coffers and illustrating the intense pressure on local authority finances”. The article suggests the Government will attach some strings to any funding.

Mr Shapps was clearly right to point out the public transport capacity problem, but his apparent remedy to get everyone walking and cycling makes little sense. It is a typical view of politicians who can afford to live in central London. But for the vast majority of London commuters who travel many miles to get to work, it’s simply impractical even if they are keen cyclists.

Mr Shapps also justified his proposals by saying the epidemic is a great health opportunity to encourage active travel with the objective to double cycling by 2025. He also proposes to implement at least one “zero emission” city, and argues that one of the few positives will be improved air quality. He actually said there are “more than 20,000 extra deaths a year attributed to NO2 emissions”.

This figure is nonsense. It repeats the past allegation of 40,000 deaths from air pollution in the UK which has been shown to be simply wrong and a corruption of statistical evidence. In reality, there may be a few months shortening of life expectancy from all air pollution sources, a lot of which cannot be removed such as natural sources. But the figure is essentially uncertain and it is clear there are no deaths directly attributable to pollution. To specifically indicate NO2, which mainly comes from transport, as being the problem is also wrong when the Government advisory body COMEAP could not even agree that NO2 contributed to the negative impact on health of air pollution from particulates.

Mr Shapps clearly knows little about air pollution and its impact on health but is using his ignorance to put a positive spin on his actions in response to the transport crisis.

Just to show how there is no direct correlation between traffic levels and air pollution, this is what the London Air Quality Network (LAQN) recently reported: “Levels of the pollutant nitrogen dioxide (NO2) has reduced significantly during lockdown, research from King’s College London has found. Concentrations of NO2 have lowered as much as 55% due to less road traffic. However, levels of PM10 and PM2.5 were higher after lockdown than at any other time in 2020, due to easterly winds and pollutants from northern Europe”. The reduction in NO2 is perhaps not surprising when measurements by the LAQN are often taken at the roadside so will be heavily influenced by adjacent traffic. But as particulates (PM10 and PM2.5) are of much greater health concern you can see that Mr Shapps’ spin on the air pollution issue is somewhat misleading. Other UK cities have also shown no direct correlation between traffic reduction from the epidemic and air pollution – at least to date.

The air pollution problem is much more complex than can be solved by encouraging walking and cycling alone.

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

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Porvair and Segro AGMs

I “attended” the Annual General Meeting of Porvair Plc (PRV) this morning. This was of course not a conventional meeting with minimal numbers there in person. But there was a telephone conference call before the legal meeting to enable shareholders to ask questions, although there were less than half a dozen investors who chose to dial-in.

The Chairman, John Nicholas, made some brief comments to begin with. He mainly just summarised the recently issued trading statement. But he did say all plants were open and they expected to be modestly cash generative for the balance of the year except in extreme circumstances. There was no AGM statement, so we then went straight into questions.

One investor asked about the impact of the problems in the aviation sector. Answer: too early to say.

I asked about the impact of the oil price decline, which in case you had not noticed briefly went negative yesterday. There was no clear answer to that but their recent acquisition Royal Dahlman obviously might be affected.

I also asked whether they could do something about the extreme volatility of the share price and the wide spread. All shares are volatile of late but Porvair is one of the worst in my portfolio and the spread this morning was 7%. That is unusual for a company of this size. They will talk to their broker Peel Hunt about this.

Another shareholder suggested they should do more to raise awareness of the company and it was admitted that they do not spend much time on promoting the company to investors. It might certainly help liquidity if they did so.

As the AGM itself was done on a poll with all resolutions passed, the “meeting” was over in 15 minutes. However it was still a useful event.

The other AGM held today which I could have attended in normal circumstances was that of Segro (SGRO). That was at exactly the same time as Porvair, but they also did not provide any way for shareholders to attend electronically. Questions could be submitted in writing via email but that is hardly a good alternative. I hope they publish the questions and answers.

Note that ShareSoc have just published a blog post concerning the letter written by ShareAction to FTSE-100 companies complaining about the lack of provision of virtual AGMs this year by many companies. Their complaints are very justified. The technology is simple to use and a simple conference call would suffice for many companies.

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

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Rio Tinto Production and BHP, plus Hollywood Bowl Placing

Mining company Rio Tinto (RIO) issued a statement on its first quarter production this morning. This was a very positive report and the share price has risen over 5% at the time of writing. The share price of BHP Group (BHP), another big miner in the FTSE-100, rose in tandem.

I am not generally a fan of mining companies as their profits are very dependent on the prices of the commodities they produce, but with a p/e of under 10 and a very high dividend yield I did consider those two companies worth a small punt recently. They are both heavily dependent on industrial consumption in China but that seems to be recovering, particularly for iron ore. That may of course simply be because it is difficult to halt blast furnaces temporarily. Their production guidance for 2020 remains basically unchanged apart from in copper where demand and prices have fallen and production and development of a new mine in Mongolia has been disrupted by the coronavirus epidemic.

Hollywood Bowl (BOWL) announced a share placing this morning at 145p – a slight premium to last nights price. The share price has risen by 10% today. This company is in the “hospitality” sector as it runs bowling alleys primarily, all of which have been closed.

The company has taken aggressive steps to cut expenditure such as halting all new developments, delaying all discretionary expenditure, furloughing staff using Government schemes and deferring a proportion of salaries for management. It is also negotiating with its landlords to defer rent payments for 9 to 12 months. In addition it has agreed relaxed covenants with its lenders, and it previously announced that the interim dividend will be cancelled.

All of this means that monthly cash burn will reduce to £1.6 million while its sites remain closed so it suggests it won’t run out of cash until the end of October. But I am still glad I sold most of the shares I held in this company in February. Financial results for this year are clearly going to be very poor and it may take a long time before customers return in volume.

As with all companies in this sector, buying the shares at present is pretty much a bet on when the restrictions might be listed and business return to normal. I have no better view on that than most readers of this article I suspect. But the share price probably rose today on the view that the company may avoid going bust if life returns to normal within a few months’ time.

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

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