Category: Companies

Two High Fliers Back Down to Earth

This week saw a couple of high-flying digital automation suppliers move back into more realistic pricing levels. On Tuesday DotDigital (DOTD) announced their preliminary results for the year to June. The share price fell sharply on the day and is now down over 25%, possibly prompted by negative comments on Stockopedia.

I won’t go into detail on the issues because this blog post would otherwise be a very long one. But I did attend the results presentation on the Investor Meet Company platform this morning when some of my questions, and others, were covered.

One question raised was about the reporting of “discontinued” revenue from the Comapi business. It was stated that this was definitely closed down completely by June this year so won’t appear in future. There was also concern that SMS business was impacting revenue and profits but it was stated that it was not cannibalising email revenue. But SMS business is at lower margins and there was clearly a spike last year in SMS business (if you are signed up for NHS services you will have realised that they are now tending to use that communication channel which I find quite annoying).

There was a good review of the competitive landscape and it seems there is good growth coming via partners with “connectors” such as Magento, Shopify, Big Commerce and MS Dynamics.

In summary my comment would be that I think this is still a fundamentally sound business which can grow some more, but I would prefer to see the accounts presented in a simpler way. However the share price had grown very rapidly in the last year and in my view was overvaluing the business. It’s now at a more realistic level.

The other company whose share price has taken a big knock is GB Group (GBG). Yesterday they announced a share placing at a price of 725p to raise money to enable them to acquire a similar US business. It looks to be a sensible acquisition. But the share price was at a discount of 17% on the market price and involves substantial dilution of existing shareholders.

Again I would suggest that this has reset the share price to a more realistic level. Retail investors may be able to participate via the Primary Bid platform.  

As I hold shares in both DotDigital and GB Group, these events have not done wonders for my portfolio valuations but I had been reducing my holding in these companies (top slicing) in recent months as the valuations did seem to be departing from reality. They are now back down to earth.

The Covid epidemic has certainly driven more digitisation of processes which both companies have benefited from but the valuations of such businesses have become strained in my view. Can the growth continue at the same rate in the next couple of years? Perhaps so but that is not certain.

Readers should of course form their own view on the valuations of these businesses and not rely on my comments. But they are both key players in the automation of marketing and financial services so are well placed for the future.

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

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The Death of Coal Mining and the Nuclear Alternative

Boris Johnson has said that the Glasgow climate deal is a “game-changing agreement” which sounds “the death knell for coal power”. Let us hope so. My father worked down a pit in Nottinghamshire in his early life and was all for replacing coal power stations by nuclear power. Coal mining is not just a great creator of pollution but is also positively dangerous for the miners.

China is one of the largest consumers and producers of coal and in 2019 there were 316 deaths of coal miners in that country. That was an improvement on previous years but it is still a horrific number.

Nuclear power is considered to be dangerous by some people but in reality it is remarkably safe. For example the Fukushima event in Japan in 2018 only directly caused the death of one person. For a very good analysis of the safety of various energy sources go here: https://ourworldindata.org/safest-sources-of-energy

One problem with nuclear power is that it tends to be produced in plants that have very high capital costs and take many years to build. They are also vulnerable to faults when in operation. This often results in very expensive costs in comparison with coal or gas. But that might be solved by the development of small modular reactors (SMRs) where Rolls-Royce (RR.) has a potential technology lead from their experience in building nuclear reactors to power submarines.

They have recently obtained more funding from the Government and from partners to develop this business – see the Rolls-Royce press release here:  https://www.rolls-royce.com/media/press-releases/2021/08-11-2021-rr-announces-funding-secured-for-small-modular-reactors.aspx

Will that enable Rolls-Royce to recover from the dire impacts of the Covid epidemic on its aero engine business? Perhaps but not for some years in the future I would estimate. Developing new technology and new production methods is always vulnerable to hitches of various kinds which tends to mean that it takes longer than expected.

There are of course alternatives to nuclear power such as wind power, hydroelectricity and solar. But wind power is intermittent thus requiring investment in big batteries to smooth the load and in the last year there was less wind that normally expected in the UK. This has impacted the results of companies such as The Renewables Infrastructure Group (TRIG) and Greencoat UK Wind (UKW).

Which technology will be the winner in solving the clean energy problem is not at all clear but I would bet that coal is definitely on the way out for electricity production although it might survive for use in steel manufacturing. UK coal fired power stations are scheduled to be closed down by 2024 and already the UK can go for many weeks without them being in operation.

Whether you accept the Government is right to aim for net zero carbon emissions by 2050 or not, we must surely all welcome the replacement of coal power generation by other sources.

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

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Alliance Trust Resets Dividend

An announcement this morning from Alliance Trust (ATST) says that the board has concluded that an increased dividend “will benefit existing shareholders and enhance the attractiveness of the Company’s shares”. They expect the overall annual dividend to increase by 32.5% over the 2020 dividend. The proposed increase will be well covered by distributable reserves and income it is suggested although no doubt some of the extra dividend cost will come from capital.

ATST had a reported yield of 1.43% last year according to the AIC which is the figure a lot of private investors look at when identifying good investments, when they should be looking at total return and overall performance. So far as the tax position of most private investors are concerned, turning capital growth into dividend income is a mistake as they will end up paying more tax. If they need more cash income they could simply sell some shares.

As with City of London Investment Trust I recently commented upon, and as very evident at their AGM, the emphasis on dividends paid by the trust, and growth in them, is apparently aimed at pleasing investors when investors are being fooled by the cash they see coming in when total return including capital growth is what they should really be paying attention to.

There are some interesting comments on Alliance Trust by Mark Northway in the latest ShareSoc Informer newsletter published today. He points out that the change to a “best ideas” portfolio approach managed by Willis Towers Watson since 2017 has not returned significantly above average performance after costs as anticipated. A huge amount of effort has been put in with little benefit he suggests. But perhaps that just shows how difficult it is to beat index benchmarks consistently particularly when the trust’s portfolio is so diversified. At least the trust’s performance is no worse than its benchmark as used to be the case before the revolution and appointment of a new manager.

As part of my “barbell” portfolio I am happy with the performance of Alliance Trust but I would have preferred them not to increase the dividend. I barely need to the cash as household expenditure is sharply down in the last year due to self-isolation from Covid. I’ll end up reinvesting the dividend cash after paying tax on it, when Alliance could do that for me tax free!   

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

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Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

Mello Event and Crimson Tide  Presentation  

 

I attended the Mello event yesterday where I reviewed Terry Smith’s book entitled “Investing for Growth” and Andrew Latto reviewed my book entitled “Business Perspective Investing”. He gave it a very positive review and made some suggestions for a second edition such as adding some case studies. I will ponder whether to work on another edition.

Another interesting session was a presentation by Crimson Tide (TIDE). This is a very small company even though it’s been around for a number of years – market cap only £19 million. It sells a software product called MPRO5 which claims to be a “leading mobile workforce management platform and service” on their web site. I own a very few shares in the company.

The presentation was by Luke Jeffrey, CEO, and he clearly has a technical background. He somewhat disappointed me by saying the product is a “toolkit”. It’s obviously a technology platform not an application solution. It has to be configured to meet application needs of which there seem to be a wide variety, i.e. there is no very strong focus on any business sector.

My experience of the software industry has taught me that people are looking for solutions not toolkits. Not surprisingly, he mentioned when asked about competitors that they often come up against “point solutions”.

They also seem to be extending their technology to cover IOT applications and also developing a “micro business” version. I find the idea of marketing software products to businesses such as plumbers to be a quite horrific business proposition. Selling low-cost software solutions to small businesses is rarely economic because it takes as much time and effort to sell to a small business as it does a large one while the price you can charge never reflects that. Sales, marketing and distribution in that sector is a major problem.

In summary I am not convinced that they can turn their interesting technology into a big business unless substantial changes are made. The presentation actually discouraged me from buying more shares in the company which is no doubt the opposite of what the speaker was aiming for.

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

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Mello Event

I am doing a review of Terry Smith’s book this afternoon at the Mello event and Andrew Latto is reviewing my book – should be an interesting free session: https://melloevents.com/melloresultsroundup/ . It starts at 1.00 pm and is a full afternoon of sessions of interest to investors. That includes a number of interesting companies presenting results.

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

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City of London Investment Trust Annual Report

I have been reading the City of London Investment Trust (CTY) annual report in advance of their AGM on the 28thof October. This is one of my oldest shareholdings – first purchased in 2011 with an annual total return since of 11.5% p.a. according to Sharescope. Historically it has been a good performer, if somewhat boring. That’s OK but last year was a disappointing one. Has Job Curtis, the long-time manager, lost his touch?

Last year the trust supplied a share price total return of 20.0% but that was less than the FTSE All-Share and the 26.4% reported by the AIC UK Equity Income Sector.

CTY is a UK “Growth and Income” trust and has a focus on higher-yielding “value” shares as it says in their annual report. For the second year running they had to draw on revenue reserves to enable them to maintain their record of increasing dividends.

But one only has to look at the top ten holdings to see why performance is not brilliant as it’s stuffed full of FTSE-100 shares such as British American Tobacco, Diageo, Rio Tinto, Unilever, M&G, RELX, Shell, Phoenix, BAE Systems and HSBC. The Fund Manager’s report notes that stock selection generated -3.80% of the performance. They did well from holdings in big miners such as Rio Tinto, BHP and Anglo American, didn’t we all, but not holding Glencore was a big detractor. They had a number of other holdings that detracted.

It may be unreasonable to take one year’s performance as indicative of likely long-term performance but are tobacco and oil companies really good investments at this point in time, however generous their dividend yields? More emphasis on growth and less on income might be appropriate I suggest.

The trust also has a large number of holdings – the top 40 only represent 76% of the portfolio. It looks over-diversified although given the size of the fund there may be good reasons for this.

The Fund Management company is Janus Henderson and it’s interesting to note in the history of the company, which they expand at length on in the annual report, that it used to be called TR City of London when Touche Remnant was the manager. After they were acquired by Henderson, the company was simply renamed “The City of London Investment Trust”. A wise move to disassociate the company name from that of the fund managers which was likely to change over time. The new name might not have been ideal though as there is another listed company named City of London Group and it hardly a good or registrable trade mark. The directors of Standard Life UK Smaller Companies Trust (SLS) who are about to make a mistake over a new name should bear that in mind.

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

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Gas Prices, Price Caps, Reckless Pricing and Telecom Plus

There was a lot of coverage of the impact of rising gas prices in the media this morning, particularly on retail consumers. The wholesale price of natural gas has been shooting up for a number of reasons – up 17% alone on Monday for example.

The Government imposed “price cap” has protected consumers to some extent, but it has meant that many companies that supply consumers have been losing money. There are as many as 55 companies that supply gas to retail consumers but a number have already entered administration and the forecast is that only 10 might survive.

The price cap is only reviewed every six months and that is clearly insufficient to keep up with the rapid change to open market prices. The price cap was introduced to protect consumers from big companies who had many long-standing customers on fixed expensive tariffs. Many were reluctant to switch to other suppliers which is now very easy. Government action might have been laudable to protect the most vulnerable from exploitation but when you start interfering in markets, the outcome is usually perverse.

As a shareholder in Telecom Plus (TEP) I have some interest in this issue. They have repeatedly complained about new entrants to the market who were promoting prices so low that they were bound to lose money. But they were doing this to build a customer base.

This is what TEP said in their last Annual Report in June: “The level of the energy price cap increased by almost £100 at the start of April, a substantial rise that reflects both rising wholesale prices and higher covid-related costs. Since then, wholesale costs have remained at an elevated level, which makes the switching market particularly challenging for all market participants.

Despite this, many independent suppliers are still setting their retail prices at whatever level is required to attract new customers on price comparison sites, irrespective of the impact it will inevitably have on their profitability and cashflow; as a result, we continue to see them reporting significant and unsustainable losses in their latest published accounts. A number of further suppliers have left the market over the last 12 months, with further insolvencies likely in the event that the current Ofgem consultation (designed to prevent suppliers using customer deposits as a substitute for shareholder capital) becomes effective”.

Business Secretary Kwasi Kwarteng has said that the Government “will not be bailing out failed companies” which is good to hear because it is the companies own fault that they have got into this parlous situation. Gas prices are always volatile and companies that had not hedged the price nor had long-term supply contracts were very likely to come unstuck.

A meeting of supply company leaders with Mr Kwarteng apparently encouraged dropping of the price cap, but he was adamant in retaining it. That is a great pity because this problem would never have arisen if a free market was allowed to operate.

There are other possible ways to protect vulnerable consumers and nobody ever has their gas cut off because their supplier goes bust.  

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

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Charles Stanley Takeover

   

I attended, via the LumiAGM platform, the Court Meeting and General Meeting of Charles Stanley Group (CAY) to approve the takeover by Raymond James this morning. In other words, these were hybrid meetings with both physical attendees and web attendees.

The meetings were reasonably well run but there were no questions from attendees and I guess it will go through as the offer price is more than 40% higher than the previous closing price for CAY shares. But we will have to await the final vote results (a 75% majority is required plus court approval in due course).

The LumiAGM platform is easy to use and I would recommend it to other companies.

It is perhaps unfortunate that yet another stockbroker is disappearing, therefore reducing competition. Consolidation in brokers and platforms is the name of the game of late as size matters now that profits are being eroded by new entrants while operating and regulatory costs rise. Keeping up technically is now expensive for example.  Raymond James is a good fit because they are primarily a full-service broker like Charles Stanley. But it may leave the execution-only Charles Stanley Direct platform out on a limb. I would expect they might sell that business to another execution-only platform operator in due course but the stated intention is not to change anything in the short-term.

At least this takeover will remove another holding from my portfolio, reducing it to 84 companies and funds, although a number of them are investment trusts and VCTs which require little monitoring. But with the market riding high, it’s a good time to weed out a few holdings.

Postscript: Based on the voting results, it looks like a done deal. Some 99.9% of shares were voted in favour, although the number of shareholders actually voting is astonishing low at only 72 (only 12.5% of those eligible). This should lead the Court to question the outcome, but will they?  See here for the full results: https://www.londonstockexchange.com/news-article/CAY/results-of-court-meeting-and-general-meeting/15138290  

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

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Standard Life UK Smaller Companies Proposes Name Change – Vote Against It!

The Standard Life UK Smaller Companies Trust (SLS) is proposing to change its name. The managers are currently Aberdeen Standard Fund Managers Limited but the name “Standard Life” has been sold to Phoenix Group so a change of name is not unreasonable.

Of course this is the kind of problem that arises when a trust is named after the fund manager. It also causes problems if the board of directors of the trust decides to change the manager which is not a rare event. Much better to choose a unique name which is not associated with the manager and which makes a good trade mark.

Investment trusts should not appear to be poodles of the fund manager which using the manager’s name gives the impression is the case.

What is the proposed new name? It’s “abrdn UK Smaller Companies Growth Trust Plc” (and no that’s not a typo – just the modern idiot fashion to decapitalise names). The word “abrdn” is the new name for the Aberdeen Group.

I recommend shareholders vote against this proposal and ask the directors to come up with a better name that they alone own, as I shall be doing. As an exercise in rebranding the proposed new name is not a good choice however one looks at it.

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

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