Argo Blockchain and FT Letter

An announcement appeared this morning from Argo Blockchain Plc (ARB). It was well timed as I was going to write something on the hype surrounding blockchain technology soon. ARB has received a requisition to remove two of the directors, and appoint others. The company has been focused on providing a cryptocurrency mining service and floated on AIM at a price of 16p – it’s now just over 3p. But a few weeks ago it gave up the “mining-as-a-service” business to focus on other things such as mining for its own account. I guess the falling price of Bitcoin, et al, meant that folks did not see any profit in paying for such a service.

But the company does have considerable cash remaining which equates to more than the current market cap. It has not been disclosed what the purpose of the aforementioned requisition is but perhaps it is to encourage a return of the cash to shareholders. It would certainly make some sense to do so and wind up the business perhaps.

Blockchain has been hyped as the solution to many business problems. But there was a very interesting article by Patrick McConnell in the latest edition of the magazine IT NOW (a publication of the British Computer Society of which I am Member). It was a pretty damning appraisal of the technology behind blockchain and its usability. One paragraph says “It is possible that the technical architecture underpinning blockchain may be adequate for supporting certain classes of narrow business problems, but none have emerged yet”. It also describes how the Australian Stock Exchange (ASX) decided in 2015 to replace its CHESS equities settlement application with blockchain technology but has since effectively given up with only vestigial remnants of that architecture remaining. There have been other reports of the very high overheads involved in using blockchain for high-volume transaction processing systems. It would seem blockchain is a technology promoted by those who do not really understand it.

Lastly, I was pleasantly surprised to see that the Financial Times published a letter from me on the subject of statistical significance this morning – see  . This was a follow up to a report that scientists would like to abandon the use of such measures in the publication Nature. So I thought it best to try to put a stop to this irrationality before we see too many spurious claims and charlatans appear.

Roger Lawson (Twitter: )

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Renalytix AI Presentation

Yesterday I attended a presentation by Renalytix AI (RENX), a company which listed on AIM last November. They are focused on revolutionizing the diagnosis of kidney disease. This is an area I know something about having suffered from renal disease for at least 35 years, if not longer (a lot of renal disease goes unrecognised and undiagnosed for years).

The cost of renal disease is enormous and is estimated to be $90 billion per annum in the USA alone. The reason is because treatment options (dialysis or transplant) once End Stage Renal Disease (ESRD) is reached are very expensive. A lot of renal disease, although there are several types, is caused by diabetes which we know is a rapidly escalating problem in the world. The company aims to develop better diagnosis so as to separate out those people who are likely to escalate into ESRD and who could be treated to prevent the need for dialysis or transplant and hence save most of the costs incurred by Medicare and others (the company is very focused on the US market).

When the company listed it was effectively a start-up but they did acquire some technology from EKF Diagnostics. Namely some tests for biomarkers in blood that are predictive to some degree. The company aims to combine this with other patient data to provide an accurate diagnostic. They have partnered with Mount Sinai, a very large US healthcare provider who have a large database of patient records and a biobank of blood samples. They also have other similar partners. They hope to sell the diagnostic test and analysis for less than $1000. Clearly the key is whether the test and analysis they are developing is validated by actual studies of predictability which they hope to have this year in the second quarter, and whether reimbursement for the cost is approved.

When asked how many diagnostic tests they might sell in future periods, the CEO said they were unable to forecast that at this time. It was also said they hope to breakeven by the end of the year, but clearly financial forecasts are somewhat uncertain.

They have also licensed some technology from Mount Sinai (FractalDX) for the monitoring of kidney transplants and medication thereof which is key to achieving low rejection and long-term survival rates. This provides a second product line. There is potential competition in that area but not apparently a strong one.

The company raised $27 million in the IPO and have spent $11 million on IP licenses plus $1.4 million on software/AI development and clinical assay development leaving them with $13.1 million in cash at the end of December. They don’t expect to run out of cash this year, but there is a clear risk that they will need more funding in due course. Current market cap is £76 million.

Why did they list on AIM rather than the USA? Not totally clear but probably because it is easier to raise capital for a new venture in a public listing on AIM than in US markets.

The company has an impressive board led by CEO James McCullough so one does not doubt that they have the required expertise and ability to achieve their ambition. But it’s still an unproven product in an unproven business model.

I questioned whether improved early-stage diagnosis would help when in the past treatments for kidney disease have been few. But this is apparently changing with products such as SGL2 inhibitors now available. It’s certainly an area where a lot of research to develop new drug treatments is taking place.

In conclusion, I was impressed by the management, although in such presentations by AIM companies you usually hear a persuasive “story”. But I was not totally convinced that they have a revolutionary product, at least one proven, or one that will justify the cost over other cheaper ways of picking up renal disease at an early stage and monitoring its progression. Simple checks such as for high blood pressure and blood in urine (which can be picked up by a dipstick) and blood tests for creatinine and other measures are readily available. They will need to prove that their biomarker tests and AI analysis of other patient parameters provide significant benefit. If they do the market potential is enormous. If not it might prove a disappointing investment.

A company to keep an eye on I suggest rather than plunge into at this stage unless you like high-risk propositions.

Roger Lawson (Twitter: )

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Royal Bank of Scotland AGM – How to Vote

Shareholders in the Royal Bank of Scotland (RBS) will have received their Annual Report and Notice of the AGM in the post today. The meeting is on the 25th April for those in a nominee account, and its being held at the RBS headquarters in Scotland of course.

There are 28 resolutions on the Agenda. Please ensure that you vote your shares. Resolution Number 28 directs the board to appoint a Shareholder Committee and was put forward jointly by ShareSoc and UKSA. The board has again opposed that resolution on spurious grounds. A Shareholder Committee would provide a say on such matters as director nominations, remuneration and strategy and that resolution should be supported by all thinking shareholders. See this document for more explanation and a list of the resolutions:

Corporate governance at RBS is still poor and a Shareholder Committee would cure that. The Financial Times today highlighted one remuneration issue which is that the CEO, Ross McEwan will receive a pension contribution this year of 35% of salary, i.e. £350,000. This seems to be the latest wheeze to avoid scrutiny of high pay with other major UK banks paying similar amounts. So another recommendation is to vote against the Remuneration Report (Resolution No. 2).

Personally I will also be voting against the authorisation of share buy-backs (Resolutions 26 and 27), and against the resolution that permits General Meetings at 14 days notice (No. 24), as I always do.

I will also be voting against the Chairman Howard Davies (Resolution 5) for opposing Resolution 28.

For more information see the ShareSoc blog item here:

Roger Lawson (Twitter: )

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Will Neil Woodford Succeed?

How long do you give a fund manager before giving up on poor performance? This is the key question faced by investors in the funds run by Neil Woodford and his Woodford Investment Management company.

Neil Woodford had a very successful record at Invesco – their High Income fund turned £10,000 into £230,000 over 25 years. In 2014 he departed to set up his own investment company and he attracted many followers to the new platform but the record since then has been very poor. For example the main LF Woodford Equity Income C Acc fund has delivered a return of -7.0 % over 3 years according to TrustNet while the stock market has in general been booming. The Woodford Patient Capital Trust which invests in smaller, early-stage companies is even worse with a share price total return of -10.7% over 3 years according to the AIC.

Woodford also run funds for Hargreaves Lansdown and St. James Place although they might have slightly different mandates. Recent articles in the FT suggest those companies still have faith in Woodford with comments about the “contrarian” approach of Mr Woodford and that it is likely to come good in the end. But will it? Has the market changed while the style of the fund manager has not? Has he simply lost his touch as a stock-picker? Over-confidence in one’s ability can be a great danger for stock-pickers. But perhaps he has just been unlucky with his stock selections?

Three years is about as long as I give fund managers before exiting completely, and I would reduce my holding in a fund before then. My decision tends to be based on my view of the investments the fund is holding. For example, the top 5 holdings in the Equity Income Fund are Barratt Developments, Imperial Brands, Burford Capital, Provident Financial and Theravance Biopharma. The last one is a one-product biopharmaceutical company with no profits, Barratt is a housebuilder when investors are fleeing the sector due to house price declines and the threat of higher interest rates, Imperial Brands is a tobacco company subject to ever tougher Government regulation, Burford Capital is a backer of law suits (a litigation funder) and Provident Financial is a consumer loans business. These are all companies that other investors might avoid so they are truly contrarian investments. The holdings of Woodford Patient Capital are even more idiosyncratic. One of the largest holdings is in Purplebricks which I have commented on negatively in the past. Investors therefore need to judge whether these kinds of investments will come good in the next year or two. I have my doubts.

Another question to be asked is whether Woodford has simply spread himself too thinly with multiple funds now under management. Does he have the same level of support from a team that he had at Invesco? Large fund managers are not one-person businesses.

One issue to look at in addition is does the fund manager have a clear investment process, i.e. do they stick to clearly stated rules or are just idiosyncratic? Is it the process that is failing or the manager’s decisions that are at fault? All fund managers make some mistakes but a look back over past investments can be a good indication of what is going wrong.

My past experience tells me that “contrarian” fund management approaches often fail. Swimming against the tide of investment trends is positively dangerous and rarely works. Incidentally I watched the Burt Lancaster film “The Swimmer” last night – a very stylish film indeed. The ending might represent the failure of dreams over reality. Perhaps Neil Woodford’s dream is fast disappearing?

Roger Lawson (Twitter: )

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Patisserie and Interserve Administrations, plus Brexit latest

Yesterday the administrators (KPMG) of Patisserie (CAKE) issued their initial report. It makes for grim reading. The hole in the accounts was much worse than previously thought with an overstatement of net assets of at least £94 million. That includes:

  • Intangible assets overstated by £18m;
  • Tangible assets overstated by £5m;
  • Cash position overstated by £54m;
  • Prepayments and debtors overstated by £7m;
  • Creditors understated by £10m.

The accounts were clearly a total fiction. It is uncertain whether there will even be sufficient assets to make a distribution to preferential and unsecured creditors. As expected ordinary shareholders (who are not creditors) will get nothing. You can obtain the KPMG report from here:

KPMG suggest there may be grounds for legal action against various parties including Patisserie auditors Grant Thornton by the administrator, but as Grant Thornton are the auditors of KPMG they are suggesting the appointment of another joint administrator to consider that matter.

Otherwise it looks a fairly straightforward administration with assets sold off to the highest bidders and reasonable costs incurred.

Another recent administration was that of Interserve (IRV). This was forced into a pre-pack administration after shareholders voted against a financial restructuring (effectively a debt for equity swap) which would have massively diluted their interest. But now they are likely to get nothing. Mark Bentley of ShareSoc has written an extensive report on events at the company, and the shareholder meeting here: . He’s not impressed. I suspect there is more to this story than meets the eye, as there usually is with pre-pack administrations. They are usually exceedingly dubious in my experience. As I have said many times before, pre-pack administrations should be banned and other ways of preserving businesses as going concerns employed.

Brexit. You may have noticed that the stock market perked up on Friday. Was this because of some prospect of Mrs May getting her Withdrawal Agreement through Parliament after all? Perhaps it was. The reasons are given below.

There were two major road blocks to getting enough MPs to support the deal. Firstly the Irish DUP who had voted against it. But they are apparently still considering whether they can. On Thursday Arlene Foster said “When you come to the end of the negotiation, that’s when you really start to see the whites of people’s eyes and you get down to the point where you can make a deal”. Perhaps more concessions or more money for Northern Ireland will lubricate their decision.

Secondly the European Research Group (ERG – Jacob Rees-Mogg et al) need to be swung over. Their major issue is whether the Agreement potentially locks in the UK to the Irish “Backstop” protocol for ever. Attorney-General Geoffrey Cox’s advice was that it might, if the EU acts in bad faith. I have said before this legal advice was most peculiar because nobody would enter into any agreement with anyone else if they thought the other would show bad faith. Other top lawyers disagree with Cox’s opinion. See this page of the Guido Fawkes web site for the full details:

Mr Cox just needs to have a slight change of heart when his first opinion must have been rushed. He has already said that the Vienna Convention on international treaties might provide an escape route so he is creeping in the right direction.

Mrs May will have another attempt at getting her Withdrawal Agreement through Parliament, assuming speaker Bercow does not block it as repeat votes on the same resolutions are not supposed to be allowed in Parliament.

It was very amusing watching a debate at the European Parliament over Brexit issues including whether an extension of Article 50 should be permitted – the EU can block it even if the UK asks for it.  The EU MEPs seemed to have as many opinions as UK MPs on the issues. The hardliners such as Nigel Farage wish that it not be extended so that the UK exits on March 29th. Others are concerned that keeping the UK in will mean they have to participate in the EU elections in May with possibly even more EU sceptics elected.

It’s all good fun but it’s surely time to draw this matter to a close because the uncertainty over what might happen is damaging UK businesses. A short extension of Article 50 might be acceptable to allow final legislation to be put in place but a longer one makes no sense unless it’s back to the drawing board. But at least the proposal for another referendum (or “losers vote” as some call it) was voted down in Parliament. Extending the public debate is not what most of the public want and would surely just have wasted more time instead of forcing MPs to reach a consensus.

Roger Lawson (Twitter: )

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Superdry – Does It Need a Revolution?

I mentioned the requisition of an EGM to appoint two new directors at Superdry (SDRY) in a previous article. Here’s some more analysis:

The requisition has been submitted by two founders – former CEO Julian Dunkerton and James Holder who together hold about 29% of the ordinary shares. They wish to appoint Julian and Peter Williams as non-executive directors – Mr Williams is a very experienced director of consumer products companies and is currently Chairman of Plc although he is stepping down from that role this month.

One does not doubt that Mr Williams would act independently as required by company law, and it is surely not unreasonable to have a nominee on the board representing shareholders who hold 29% of the company.

There was another announcement from the board of Superdry yesterday even more vociferously opposing the resolutions but they had already rejected the need for the requisition as not being in the company’s interest. They said that the current strategy is supported by shareholders and that this requisition will impose needless distraction and costs, i.e. the usual reasons given to rebuff any change.

Let’s look at the reasons for the requisition – apart from the general impression given that the founders think their baby is being screwed up by the new management – a common feeling of departed founders as I know personally. But the company does appear to have real problems if you just look at the share price – down from its peak of 2025p in January 2018 to 520p now, i.e. down 75%. In the results published in July 2018 the company proclaimed “double digit growth in sales and profits” and declared a special dividend, but subsequent announcements have been negative in tone. In October the company reported unusually warm weather had affected sales of heavier weight products which were a big proportion of its sales normally. They announced a diversification into lighter weight clothes and new product categories as a result. But weaker consumer confidence was also mentioned as affecting all retailers.

The latest Q3 trading statement, in February 2019, recorded group revenue down by 1.5%. Wholesale was up but e-commerce and particularly store revenue was down – the latter by 8.5% despite retail space being up. Cost savings were being progressed and the “comprehensive transformation programme” has been intensified. Consensus earnings forecasts have been falling so that the company is now on a prospective p/e of less than 10 and a dividend yield of 5%. When once it was seen as a growth business, it is clearly now perceived as having problems.

Superdry has now fallen out of the FTSE-250 index which will have caused some funds to dump the stock, and institutions who picked up 5.5 million shares from Mr Dunkerton in July 2018 will be none too pleased. Is this an example of how quickly a “fashion” retailer can go out of fashion, or simply down to some operational cock-ups? Such as not having the right stock for the prevailing weather conditions?

Mr Dunkerton claims the change in company strategy in 2017 is the cause of the problem and his return to the board would revive the company. He refers to other examples of founders returning such as Steve Jobs (Apple), Howard Schultz (Starbucks), Charles Schwab (at his brokerage), Jerry Yang (Yahoo), Malcolm Walker (Iceland), Steve Morgan (Redrow) and Michael Dell (Dell) who revived their companies’ fortunes.

Mr Dunkerton also alleges failings in product design and a number of operational changes that have impacted sales – he aims to fix the former by bringing back James Holder as a consultant to “reinvigorate the DNA of the brand” whatever that might mean. Although the board says Dunkerton was responsible for the Autumn/Winter 2018 range which contributed to the company’s underperformance, he denies it and says he was cut out of the design process.

Doing my own market research, a quick look at the Superdry web site tells me that the products look expensive, particularly for the target market and against likely competitors. Indeed when I asked one of my sons whether he purchased Superdry products he said only from E-Bay where they are cheaper.

We know High Street retail sales are difficult but on-line sales should be booming, but not at Superdry it seems. Though the on-line market is getting a lot tougher with “fast fashion” retailer QUIZ recently reporting a shortfall in sales due to forced discounting. Comparison pricing by shoppers on the internet is clearly becoming more common and if a brand like “Superdry” loses its reputation and exclusivity they will not be able to charge supra-normal prices. Perhaps that is the issue when there are so many channels now selling Superdry products and discounting so prevalent?

One brand extension being pursued is a move into children’s wear. As the founders’ say: “a kidswear range would destroy the ‘cool factor’ for the 16-24 age group, a key demographic”. I would agree with that statement. You can read more about the reasons for the requisition on this web site, set up by the requisitioners:

My conclusions: I always discount claims about the weather hitting sales and profits in companies – they tend to complain about the weather being either too hot or too cold when the weather is fundamentally variable. Their stocking and supply chain need to cope with that. Otherwise there seem to be major failings in both strategy and operations at the company. But will just appointing a couple of non-executive directors (one of whom clearly has an urge to interfere in operations) really help? It might just lead to a divided board who cannot agree on anything.

However, there is obviously a need for changes, in leadership and in other regards, which the board has rebuffed in essence. Shareholders are in a difficult position due to the limited nature of the proposed revolution. Shareholders might wish to support the requisition, but urge the board to make more substantive changes at the same time. Or at least have a more constructive dialog with the founders. There certainly seems no good reason to oppose Mr Williams’ appointment.

Roger Lawson (Twitter: )

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Another Accounting Scandal – Goals Soccer Centres

Yet another problem in accounting has been revealed at Goals Soccer Centres (GOAL). This morning they disclosed in a trading update the discovery of “certain accounting errors” and are reviewing their accounting practices. As a result, the board now expects full year results to be below expectations and publication of the 2018 results has been delayed.

The even worse news is that they have breached their banking covenants so are having to have one of those difficult conversations with their bankers. The share price has fallen 30% this morning (at the time of writing).

Goals is an operator of soccer pitches which listed on AIM as long ago as 2004. Revenue has been flat for the last few years and profits variable. Net debt approximates to revenue which is never a good sign. The company changed auditors from KPMG to BDO in June 2018 and in July 2018 the CFO resigned from the board “with immediate effect” to join his family business but continued in his role as CFO. A new “interim” CFO was not appointed until the 15th January 2019.

After this “own goal”, the company suggests it “will take a more prudent approach” in future. But it reinforces the need to reform the accounting and auditing professions because we are very likely to be told that this issue extends back for more than one year.

Note: I have never held shares in this company despite the fact there was some enthusiasm for it among investors at one time. The share price peaked at 425p in late 2007 but it’s been steadily downhill since. It’s now 38p. I was always doubtful whether there was any real money to be made enabling amateurs to play soccer.

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