Category: Companies

Revolution Demanded at Abcam – Quite Rightly

The former CEO and founder at Abcam (ABC) is planning to call an EGM to replace the Chairman. He has published an open letter to shareholders which spells out the reasons – see https://www.globenewswire.com/news-release/2023/05/17/2671109/0/en/Jonathan-Milner-Announces-That-He-is-Taking-Steps-to-Call-an-Extraordinary-General-Meeting-of-Abcam-Shareholders.html

My comment is the sooner the better. His letter is a very good summary of where Abcam has gone wrong recently. I hope shareholders will support him.

I purchased Abcam shares in 2006 soon after the company listed on AIM in 2005. I still have my analysis of the shares made at the time which included a cash return on capital of 78% and a prospective p/e of 22. Revenue was growing at a fast pace and all went well under the leadership of Jonathan Milner as CEO for several years.

But even before he stepped down in 2020 the business was clearly in some difficulties. I commented on this blog negatively about the large expenses on new IT systems (which was capitalised) and very generous remuneration schemes. I could not get my reasonable questions answered by the Chairman at the AGMs I attended and subsequently voted against him.

You can search this blog for the past articles on Abcam which reinforce what Mr Milner is saying.

But the last straw was the delisting from AIM and the move to NASDAQ in 2022. As Mr Milner points out, this was pointless and has not benefited shareholders. I sold most of my shares starting in 2020 and the balance only recently – overall return of about 30% per annum since 2006. But the recent financial figures have been disappointing with margins declining and way too many adjustments.

The conversion of Abcam shares to ADRs for the NASDAQ listing may help to frustrate the calling and voting at an EGM.

Mr Milner says the current Chairman is weak – I agree. He needs to go with a refreshed board put in place.

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

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Should ISAs Be Simplified? And AJ Bell Results

This morning AJ Bell announced their interim results. It is one of the UK’s largest investment platform operators and has been very successful at growing its customer base through having low charges and a simple user interface, particularly for SIPPs.

Customers grew by 7% in the platform business and overall revenue was up 37% with profits up 61%.

But the CEO has promoted the idea of simplifying the ISA regime. He says “Over the years a once simple product has fragmented into multiple versions with different rules and benefits. In proposals presented to the Chancellor, we have outlined a system which combines the many current versions into one ISA product that would be easy for people to understand and would encourage more investment”.

I am all in favour of that proposal. The financial world is complex enough and the different ISAs can potentially confuse and discourage new investors.

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

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Oil+gas Companies, Woodside Energy Voting and Archie Norman’s Mission

Oil and gas companies share prices are rising today after the price of oil rose on news from Saudi Arabia. One such company I hold is Woodside Energy (WDS) and I now have the opportunity to vote at their Annual General Meeting which I have done on-line (difficult to attend the AGM in person as it’s being held in Perth, Australia).

There are a couple of resolutions to amend the constitution and one on “capital protection”. These have clearly been put forward by climate activists as a way to dictate to the management of the company what they should be doing. I voted against both resolutions as I believe managers should manage and not be directed by a small minority of shareholders, or shareholders in general. If shareholders do not like what the company directors are doing they can change them, or sell their shares of course.

I also voted against the two remuneration resolutions without a close examination. Typically too complex and too generous as with most large company schemes.

On the subject of voting at AGMs, Archie Norman, the Chairman of M&S, is leading a campaign for changes to Company Law to better enfranchise shareholders in nominee accounts and improve AGMs. He has written to the Business Secretary Kemi Badenoch asking for changes to improve shareholder democracy.

Hybrid meetings are allowed now but he apparently wants “all digital” ones to be permitted which I suggest is not a good idea. But otherwise he is right that this area of Company Law needs reforming. The Government is well aware of this after campaigns by ShareSoc et al, but action is progressing at a snail’s pace.

You can find more details of Archie Norman’s views and actions on the web.

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

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Why I Never Invest in Banks

This has been said by Terry Smith, and reiterated in a recent FT article, but it could just as well have been said by me. He says “I think it is precisely because I understand banks that I never invest in their shares. The recent events surrounding the collapse of Silicon Valley Bank (“SVB”) and Credit Suisse reinforce this stance”. Banks are inherently highly geared and on a knife edge of instability that can be disrupted by the slightest wind.

See https://www.fundsmith.co.uk/news/2023/4933-financial-times-why-i-never-invest-in-bank-shares/ for Terry’s explanation.

From my involvement in the collapse of the Royal Bank of Scotland I came to realise that the accounts of banks can conceal all kinds of risk taking and are often simply incomprehensible. Recent events reinforce that view. Banks should probably not be listed companies in my view as normal equity investors will not understand the reality.

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

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Wandisco Update and Budget Postscript

I received an email yesterday on the subject of Wandisco (WAND). It was from someone using a fictitious name and an invalid email address so you can judge for yourself how accurate this is likely to be. This is what it said: “The inside scoop at WanDisco is that the European Sales Director has done a total number on them. Multiple huge sales reported, complete with purchase orders (which they now suspect may have been faked). Such little financial governance from the board that while they were lauding this guy as an amazing success, no one seemed to notice that the money hadn’t actually arrived. How out of control must a company be to not notice millions of bucks missing from the accounts?”

Is that credible? I don’t think so. See my previous comments in this blog post: https://roliscon.blog/2023/03/14/4704/

Were these “purchase orders” or simply “letters of intent”? In such a small company it is certainly incredible that the CEO and CFO were not familiar with the details of these orders and were not monitoring the likely cash flows. My previous comments are still relevant.

As regards the budget, Labour are apparently unhappy with the dropping of the lifetime pension allowance and will reverse it given the chance. This was always an iniquitous piece of tax legislation, effectively taxing money at high rates that was previously saved by prudent employees. The £1 million lifetime allowance was not enough to provide a comfortable lifestyle in retirement for previous high-earners. What guaranteed interest rate could they achieve? An annuity of £1 million would only likely mean an income of £60,000 p.a. for life which with inflation rapidly eroding the value is not a great proposition.

For a senior medical consultant working for the NHS the low lifetime allowance was certainly a great incentive to retire early to avoid breaching the £1 million lifetime allowance.

But another complaint is that the scrapping of the lifetime allowance and increase in the annual allowance to £60,000 will enable people to avoid Inheritance Tax. And why not? Inheritance tax is a dubious tax to start with as it taxes money previously taxed as income – effectively double taxation. It’s a tax based more on the principle of screwing as much as tolerable from personal savings rather than an equitable scheme to relieve people of what they can afford to contribute.

The whole personal taxation system needs reforming to make it more rational and simpler. There are so many loopholes and complications that making simple changes can lead to unintended consequences as seen with the latest changes.

The lifetime allowance was introduced to prevent the abuse of high tax relief on pension contributions. Scrapping the limit seems to be an ill-thought through reaction to problems in the NHS. The Labour Party could be right in that respect.

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

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Silicon Valley Bank Rescue and Wandisco Discussion

Silicon Valley Bank (SVB) has been rescued both in the USA and UK. In the UK HSBC has taken over the business for £1 and put in some more cash. But bank share prices are still being negatively impacted as doubts about their stability remain.

The problem at SVB was in essence a failure to manage interest rate risks on bonds they held as security which they could not sell to meet depositor redemption requests without recognising big losses. It demonstrates the knife edge that most bank balance sheets sit on, which is why I don’t invest in banks. Lending long and borrowing short as all banks do is a recipe for disaster unless very carefully managed.

Last night there was a panel discussion of the problems at Wandisco (WAND) at the Mello event. I gave my view of the likely problem at the company which is likely to have wiped out investors in a company that was worth £905 million before the shares were suspended.

This company has been reporting numerous very large “orders” in recent months but if you read the last annual report it says this: “Commit-to-Consume contract structure to be widely utilised across all future clients, where a customer is contracted to move a minimum amount of data over a given time” and reports several new deals using that structure. What exactly were the implied commitments in terms of cash by these “orders” is the key question which is not apparent. The company revenue forecasts were probably based on more than the minimums committed and probably inherently too optimistic. We will no doubt learn more in due course.

Who was to blame for this fiasco? The sales person or persons involved as the company suggests or the CEO and CFO for not being more sceptical about the likely future cash flows? The latter I suggest. The announcements made by the company were in my view misleading and hence effectively a fraud on investors.

Can the company recover? As I said in the meeting, the company does appear to have some good technology but avoiding administration is not going to be easy. The company may need more funding urgently to meet its customer commitments but who would invest in the business as confidence in the management will have been lost and investigating the problem will take time? It may take weeks if not months to resolve and the longer the company shares are suspended the more difficult it becomes.

There was a general discussion at the Mello event on how to avoid frauds which lose investors their money. Can you spot likely frauds was one question discussed. I think you can in many cases. There were warning signs at Wandisco such as never reporting a profit since they listed which is why I never invested in it. But sometimes it’s very difficult as at Patisserie Valerie where the audited accounts were fictitious.

One of the speakers mentioned a good book on the subject entitled “Lying for Money” by Dan Davies. I have ordered a copy. I would also recommend “The Signs Were There” by Tim Steer and I cover some of the things to look at when researching companies in my own book entitled “Business Perspective Investing”.

What should be done to avoid investors losing money from frauds?

Tighter regulation of announcements was one suggestion and tougher penalties for convictions was another. In general the UK legal regime is much too weak and the FCA has historically been very lax although they have been improving.

David Stredder suggested that companies that list should contribute to an “insurance” fund in case the company suffers fraud that would compensate investors (it’s rarely possible to recover funds from the fraudsters). This is an interesting idea but it would need to be a large fund to cover the likely cases.

Note that relying on non-executive directors or Nomads to pick up and stop problems does not work. Investors need to do their own due diligence.

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

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Silicon Valley Bank Collapse, Wandisco Discussion and Fundsmith Equity Fund Annual Meeting

The collapse of Silicon Valley Bank (SVB) is a typical story of a bank run after depositors lost confidence and rushed to the exit door. This bank may not be well known to UK investors but they were very active on funding and providing banking services to early-stage US technology companies on the West Coast. This could have a severe impact on the tech sector.

The UK entity has also ceased trading and a letter signed by more than 140 companies was sent to the Chancellor begging him to step in with emergency funding. Without access to their funds, companies won’t be able to meet payroll or other commitments so might have to also enter administration.

There may be some justification for intervention in this case and hopefully keeping depositors protected will not cost an enormous amount.

The Nasdaq fell sharply on Friday and expect the same on Monday.

Also on Monday, Mello are hosting a panel discussion on Wandisco (I am on the panel) from 5.00 onwards – see  https://melloevents.com/mm13march2023/

I made some comments on the apparent fraud at Wandisco in a previous blog post and it is clear that many private investors were suckered into investing in the company (not me in this case). You should get some good tips on how to avoid such disasters.

I have just watched a recording of the Fundsmith Equity Fund annual shareholder meeting – see https://www.fundsmith.co.uk/tv/ . Terry Smith gave his usual slick performance and brushed off the negative 13.8% fund performance last year with the comment that “it was predictable” after such a long run of positive returns.

The detractors in the fund’s holdings were mainly tech stocks such as Meta, Paypal, Microsoft and Amazon. He reiterated the investment strategy of “only investing in good companies, don’t overpay and then do nothing”.

It is worth watching the video. I will continue to hold the fund as the formula followed is still likely to be effective.

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

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DotDigital Webinar, Wandisco Announcement and Immigration Laws

I watched the DotDigital (DOTD) interim results presentation on the Investor Meets Company platform this morning. I have held the shares for a number of years and have been happy with the company’s progress in general.

For the half year revenue was up 9%, with 95% being recurring. Adjusted EBITDA was slightly down but cash balance was up 24%. What are they going to do with the cash? They are looking at M&A activity.

There was a good competitive review. It is clear that the market for similar products is now quite mature so poaching from other suppliers is the name of the game and more consolidation among suppliers is likely. Their US market position is still unclear although they report “early evidence of success in the USA” after management changes and rebuilding the sales team.

It seems likely that steady growth should be achievable from more geographic expansion, more partnerships and the addition of more product features regardless of US success.

Another technology company that made a devastating announcement this morning was Wandisco (WAND). They said “The Board now expects that anticipated FY22 revenue could be as low as USD 9 million and not USD 24 million as previously reported. In addition, the Company has no confidence in its announced FY22 bookings expectations”. They blame one senior sales employee for “significant, sophisticated and potentially fraudulent irregularities with regard to received purchase orders and related revenue and bookings”. The shares have been suspended

I have looked at this share a number of times as I have a historic interest in database replication, but never acquired the shares. I can understand the need for what they sell but the accounts always looked dubious to me. Revenue very volatile and profits non-existent. I prefer to invest in relatively boring companies like DOTD with large recurring revenue based on a different business model.

On the political front an enormous amount of media coverage is on the small boat crisis and the attempts by the Government to halt illegal immigrants. These are mostly economic migrants, not people fleeing war or other disasters.

It is suggested that the proposed Government legislation would be illegal, because it contravenes the European Convention on Human Rights and the Refugee Convention. The latter was established in 1951 to help people made homeless or stateless by the Second World War and was a very positive move at the time. But it was never intended to enhance the rights of economic migrants who wish to move to a wealthier country.

I suggest that a breach of a Convention is not necessarily illegal and that the UK can withdraw from Conventions whenever it considers it necessary to do so. The country is being swamped by migrants, both legal and illegal ones.  This is putting enormous pressure on housing and social services.

For example the London Borough of Lewisham have recently published a new “Local Plan” and it reports these statistics: The population has grown by 23% over the last 20 years and is still growing rapidly. Some 46% of the residents identify as BAME heritage which rises to 76% for the school population. This shows the impact of uncontrolled immigration over the last 50 years, but the Council is still “planning for an open Lewisham”. That’s undefined but suggests that they are open to even more migration.

The BBC, as is now commonplace, spouts the views of left-wing commentators including that of a well-known footballer for no good reason. His views on football may be sound but he does not understand the problem of illegal immigrants.

Will the Government be able to halt the flow of illegal immigrants? Only if they take a very tough stance in my view.

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

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Woodside Energy Results and Climate Report

Woodside Energy (WDS), an Australian gas and oil producer, issued their results this morning. I hold some shares in the company as a result of my holding in BHP when WDS acquired their oil interests.

The financial results were very positive helped by “realised prices” for their products increasing by 63%. They are continuing to expand production so as to meet demand.

Alongside their results they issued a 65 page “Climate Report” which explains what they are doing to control carbon emission. This is similar to other reports produced by major oil/gas companies and attempts to justify their actions in the face of those who would like to see all oil/gas production shut down.

This is what their CEO had to say: “As we have seen in the wake of the invasion of Ukraine, significant volumes of gas and other fossil fuels cannot simply be removed from our energy systems without consequence, let alone be switched off altogether overnight.

We need all options on the table if we are to successfully change the way we produce and consume energy and limit global temperature rise.

Energy security and the energy transition therefore should not be seen as alternatives. It is increasingly clear that they both require effective management and substantial investment.

In the Asia Pacific region, major economies such as Japan remain clear that they need Australia to continue as a secure, affordable supplier of energy, including liquefied natural gas (LNG). Investment in new LNG supply can help meet demand at affordable prices. And LNG can help Asia to decarbonise, for example by replacing coal, supporting renewables, and in hard-to-abate uses.

There have been reasons for optimism during 2022. The energy crisis has not deflected the world’s resolve to meet the goals of the Paris Agreement, which were reaffirmed at the Sharm elSheikh climate summit in November. Major economies introduced supportive new policies, such as the United States’ Inflation Reduction Act, and Australia legislated its climate targets.

But this is not uniform. The public discourse on the energy transition can be polarised and ideological, particularly in Australia. We believe this is to the detriment of careful analysis of climate science and delivery of practical solutions. We seek to rebalance this through this report and our broader advocacy”.

Comment: This seems eminently sensible and I will be happy to support the company’s position on this. I am likely to continue holding the shares while many institutions dump them in the face of ESG concerns.

On another subject, the FT has today reported that City of London Minister Andrew Griffith has attacked the impact of the Financial Conduct Authority’s consumer duty measures. He suggests that it could damage the sector and trigger a wave of spurious lawsuits.

I agree and said it was a complete waste of time and would add substantially to the costs of financial services firms which they would pass on to consumers. See my consultation response here: https://www.roliscon.com/Consumer-Duty-Consultation-Response.pdf

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

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Warren Buffett’s Letter to Shareholders

Warren Buffett has published his latest annual letter to shareholders in Berkshire Hathaway. As usual it contains several words of wisdom on investment and I’ll pick out a few interesting points:

He does not believe in efficient stock markets and says: “It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. Efficient markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.

He relates how his capital allocation decisions and stock picking have been “no better than so-so” offset by a few good decisions and good luck. He emphasises this lesson for investors of holding on to your winners but selling your losing investments: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well”.

Buffett justifies share buy-backs which Berkshire did in 2022 as did some of their investee holdings. He says: “The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases”.

Comment: Management often have a strong incentive to advocate share repurchases as their incentive schemes are often based on earnings per share. Also they think it might help the share price. I frequently vote against share buy-backs because there are usually better ways for a company to use any surplus cash. Buffett may be one of the few people who can rationally value the benefit of share buy-backs and can be trusted to act in the interest of shareholders.

Charlie Munger, Warren’s partner and aged 98 has some interesting comments on railroads (they own BNSF). He says: “Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never”. As railroads are a natural monopoly because it’s very difficult to build new ones, one wonders why British railways consistently lose money while BNSF is very profitable. Management is surely the difference.

Warren continues to “bet on America” but the key message is invest in companies that can grow and compound their earnings and then have patience.

Full Newsletter Text: https://www.berkshirehathaway.com/letters/2022ltr.pdf

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

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