Rio Tinto AGM and Tracsis Results Webinar

I attended two webinars today. The first was the Rio Tinto (RIO) Annual General Meeting. This was a hybrid meeting run via the LUMI platform for on-line attendees (including on-line voting) although there were clearly a few shareholders in physical attendance. It was well organised.

There were good speeches from the Chairman and CEO who reported this was there third year with no fatalities – quite an achievement for a large mining company. This company is of course one of the largest mining companies in the world with a focus on copper, iron ore, nickel and lithium. There were record profits last year based on higher commodity prices and they paid out the biggest dividend ever of $16.8 billion.

It was stated that “respect for people and land is at the heart of our community” and there were multiple references to first nation people.

When it came to questions, one shareholder commented on the excessive length of the Annual Report (now 420 pages) which reinforces my comments in a previous blog post on this issue. He also requested that text be in b/w and not in multi-column format – to assist on-line reading no doubt. A good point.

Most of the questions were on environmental concerns about projects in Madagascar, Arizona, etc, so after 2 hours I switched to watching a webinar from Tracsis. There really needs to be some way to stop AGMs being dominated by environmental groups who are unable to keep their questions short and to the point. A time limit per question would be one way. And most of them would be better answered by written responses and by meetings with the CEO, for which they had apparently been given an opportunity.

The company is clearly paying a lot of attention to ESG issues anyway.

Tracsis (TRCS) is a rail technology company in which I hold a few shares. They reported interim results yesterday which were good – revenue up 31%, adjusted EBITDA up 14%, and dividend up. This was a PI World event which was well organised.

It was stated their objective is to increase recurring revenue which is something I always like in a business. There was discussion of the US rail market and the recent acquisition of Railcomm which gives them a good base from which to expand in what appears to be a very fragmented market for similar technology solutions. They are clearly intending to pursue M&A opportunities there.

I did not learn a great deal more but the CEO spoke fluently and the company clearly has growth ambitions. It was less impacted by the Covid pandemic than one might have expected last year when there was a significant reduction in rail passenger volumes and events were cancelled.

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

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Gresham House Energy Storage Results and Webinar

I attended the results webinar for Gresham House Energy Storage Fund (GRID) this morning as I hold a few shares in the company. This is in fact not a fund in the normal sense but an investment company (i.e. an investment trust). It invests in a portfolio of utility-scale operational battery energy storage systems (BESS) via operating companies, mainly in the UK.

The accounts of this company are tricky for the same reason that I explained in a previous blog post about TRIG – see https://roliscon.blog/2022/03/14/accounting-in-alternative-energy-suppliers/ . The valuation of its assets depends on an estimate of future cash flows and the discount rate that is used. It was noted that the discount rate has not been changed as a result of the recent rise in inflation and interest rates.

However at face value the results for the year announced today were very good. Net Asset Value per share was up 13.5% and Share Price Total Return was 23%. The shares now trade at a premium to NAV and were up another 5% today at the time of writing.

The company’s batteries, which typically provide for 2 hours of service, enables the National Grid to manage the demands on their network and maintain the frequency. This is getting more difficult as more renewable energy services are being added which are unreliable. Base load provision from nuclear, coal and gas is falling due to Government pressure to decarbonise the economy with older nuclear stations also being shut down.

The batteries used are mainly lithium-ion ones which prompted a question from the audience about the impact of rising battery prices. They are rising because lithium mining capacity has not grown with demand but it could also be a speculative cycle and the consistent downtrend in prices is still expected to continue. It was noted that battery degradation was at 97.5%, i.e. very low.

The company clearly intends to scale up with new projects to increase capacity including possibly in overseas markets.

The investment manager currently expects NAV per share to be in the range of 140-145p by the 30th June 2022. The board has a target dividend of 7p per share for 2022 and in response to a question it was said that dividends will be raised as the cover goes up.

It is clear that the move to electrify everything while supply from generating operations becomes uncertain will raise demand for managing network frequency and other services so the future looks bright.

But note that the Government is planning to take over the grid management operations currently provided by National Grid Plc, i.e. nationalise them. See the article in today’s FT for more on that. It might affect the future of Gresham House Energy Storage.

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

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Is Information Overload Getting Worse?

It’s that time of year when one is deluged with Annual Reports. Is it just me or have the size of Annual Reports got substantially larger in the last few years? The latest report received is for Spirent Communications (SPT) which is only a mid-sized company (profits last year of £106 million) but the Annual Report spreads to 210 pages – Cover Photo is above. That includes 29 pages for the Remuneration Report alone! Are we really expected to read all of this? When one has a large portfolio such as I have, the volume of reading required is more than can be justified.

Annual Reports are likely to get even longer in future with more ESG reporting being mandated. Some of the detail is important but a lot of it is simple “boiler-plate” stuff. For example the Independent Auditors Report of 10 pages mainly consists of statements such as “We have nothing to report in respect of these matters”. Why do we need telling that?

No doubt auditors love all the work required to put these statements together but the company management must also waste time on putting together such extended Annual Reports – including 4 pages on “stakeholder engagement” in the case of Spirent.

It surely is time to take an axe to these over-voluminous Annual Reports. This could be done by having reporting only on exceptions, or by off-loading non-essential detail to an on-line page. The objective should be to get all Annual Reports down to under 100 pages in size, even for FTSE-100 companies, with small companies as low as 50 pages.

Too much information clouds the picture for any reader and enables important detail to be lost in the welter of trivia.

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

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Persimmon, the Cost of Houses, and Why I Don’t Invest in Banks

As I mentioned in a previous blog post, I made the mistake of buying some shares in housebuilder Persimmon (PSN) last October. I am pondering what to with them after reading the Annual Report which I received over the weekend. It’s full of glowing references to future prospects but the share price is way down on my purchase price meaning the shares are now on a prospective p/e of 8.2 and a yield of 11.4%.

Clearly the price of shares in housebuilders have been falling due to worries about higher interest rates, which could make mortgages much less affordable, while the Government threatens them about the rectification costs of high-rise buildings. The latter may be less of an issue than the former, particularly for Persimmon, but will some increase in the cost of mortgages really put off people from buying houses? I doubt it. There is such an unsatisfied demand for more houses to get people off high rental prices and for bigger houses to cope with Working from Home that price will be a relatively small factor in my view. In any case so long as house price inflation is greater than mortgage interest rates, it is a simple argument that you should buy a house if mortgages are available.  

We bought our first house in 1976 for about £10,000 with a cheap mortgage from the local council when the interest rate was way below inflation. A bit of a no-brainer at the time. Inflation can be good if you are borrowing money rather than lending it! Our sons have managed to buy houses with small contributions from us but we now have grandsons who will no doubt need some assistance soon. Clearly we are moving back into the era of the 1970s in terms of financial planning.

I voted my shareholding in Persimmon electronically as Computershare provide an easy voting system for registered shares, but I voted against the Remuneration Report. Pay is still too generous at this company – the CEO earned in total £2.6 million last year. For 2022, fixed salary will be £746,000 plus 9% for a pension, plus up to 200% of salary for the annual bonus plus up to 200% for the LTIP. Real world economics have not yet sunk in so far as the Remuneration Committee is concerned it seems.  

The fact that Persimmon performed well last year and prospects are claimed to be good does not excuse this generosity.

Why I Don’t Invest in Banks

Reading the FT today reminds me why I don’t invest in banks. Barclays (BARC) have apparently managed to lose £450 million due to a technical error in their structured products unit. It will have to compensate customers after issuing $15.2 billion more Exchange Traded Notes than were registered for sale. The loss will affect Barclays share buy-backs and the share price was down 4% at the time of writing.

Another FT article reported on how National Westminster (formerly the Royal Bank of Scotland) has reduced the Government stake to less than 50%. The Government has of course lost many billions of pounds on its investment in RBS after it thought it could turn a profit by forcing RBS to give it an equity stake in the 2008/9 financial crisis. They were following the Swedish model which was successful in that country’s previous banking crisis. But HM Treasury was no better at understanding the accounts of banks and their risk profile than any other investors.

Paying for Share Tips

I see one of my former sparring partners is complaining about share tipsters who are paid to puff companies – apparently by being issued shares in the companies they talk about. It’s certainly a disreputable practice. Let it be stated now that I am not paid by anyone to talk about the companies I mention. I am not paid and never have been since I started commenting on financial matters!

This blog is not just free to readers, it also does not pay contributors.                                                                                                                                         

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

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Is the Investment World Changing?

With the war in Ukraine continuing and inflation hitting over 6% (and likely to go higher), it seems a good time to review one’s investment strategy. My thoughts on this were prompted by watching the panel discussion at the Mello Trusts and Funds webinar on Tuesday. Some members argued that now is the time to move into commodities and out of the high growth technology stocks that have been such winners in the last few years. Is growth going to go out of fashion?

It’s certainly very clear that high inflation in basic commodities such as food (likely affected by the war in Ukraine who are a major producer) and oil/gas (also affected by the war and the associated sanctions on Russia) will have a big impact on consumers in the UK in the coming year. We are already seeing this in the shops and in on-line stores from my brief shopping experience yesterday.

As the Chancellor’s Spring Statement indicated yesterday, the UK is facing its biggest drop in living standards on record as wages fail to keep pace with rising prices. His measures to relieve this by raising the National Insurance threshold and cutting fuel duty will help a few people but not the retired or those not in work. The basic rate of income tax will fall slightly in 2024 in time for the next general election but the country will remain a high tax environment. Perhaps the Chancellor has decided he cannot protect people from the world economy which is undoubtedly true so he has just made a few gestures.

Economies might grow less rapidly or recessions hit as a result of these adverse economic winds, or we might see the dreaded “stagflation” return to the UK. But does this mean I should change focus on the types of companies I invest in?

I don’t think so and I shall repeat what Investment Manager of Smithson Investment Trust (SSON) said in their Annual Report which I was reading today: “One might then ask, if interest rates are so obviously on the rise, and this so obviously creates a more favourable environment for value companies rather than quality or growth companies, shouldn’t we adapt our strategy to buy the companies which stand to benefit? Well, no. Owning high quality companies with sustainable growth is a winning strategy over the long term, has been shown to work through several economic cycles, and is one which we know we can execute successfully. Whilst other managers may be able to run a value strategy, we believe it is inherently more difficult, as you cannot hold value companies for the long term if all you are doing is owning a poor quality company at a low price, which you hope will re-rate in the future. If this does happen (there is no guarantee), you then have to sell the company to find another such investment, and so on. This means that unlike our strategy, time is not your friend, because the longer you are holding the company and waiting for it to re-rate, the lower your annualised returns become, and if you’re particularly unlucky, the worse the company becomes. On the other hand, it matters less if it takes more time for the market to appreciate the value of the type of companies we hold in our strategy, because the highest quality companies are constantly getting better, or at the very least bigger, owing to their growth. So, once we have found the right companies, all we have to do is wait. We think that patience is one of our competitive advantages, because with the strategy we employ, it tends to pay off”.

Commodity companies go in an out of popularity as their profits depend on the commodity demand and prices. But the production of most commodities responds to price changes so in a year or two the boom is over and the bust follows as over-capacity has been created. Chasing these rotations requires a large amount of time and effort when I prefer to purchase companies that one can stick with for many years.  

The impact of high inflation does mean that one has to be careful in selecting companies with high margins and pricing power, i.e. the ability to raise selling prices when their costs rise. But that is a truism in all economic circumstances. Those are two factors that differentiate quality companies from the pedestrian ones.

Companies that have index-linked contracts with their customers might be worth looking at now that inflation is heading to 10%. That applies to many infrastructure investment companies for example and another sector is property companies who often have inflation linked rent reviews. I hold a few shares in Value and Indexed Property Income Trust (VIP) which is one such company.

Incidentally Smithson noted they had sold their holding in Abcam (ABC) which I also commented on negatively recently. They are concerned about the uncertain paybacks on the investments being made which I completely agree with.

Changing my investment strategy which has developed over the last twenty years and has made me an ISA millionaire does not seem to be wise. There was an interesting article published today in the Daily Telegraph on ISA millionaires of which there are apparently over 2000 in the country now according to HMRC. There may be more than that as Hargreaves Lansdown alone claim to have 973. See article here: https://www.telegraph.co.uk/investing/isas/meet-millionaires-made-fortune-using-isas/

The average age of ISA millionaires is apparently 71 and the article reports that the top three stocks favoured by these investors are pharmaceutical company AstraZeneca, insurer Aviva and oil giant BP. Popular funds include Artemis Income, Fidelity Global Special Situations and Fundsmith Equity. That tells you that you don’t need to be a speculator to become an ISA millionaire. You just have to invest the maximum possible every year in a diverse portfolio and stick with it.

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

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Comments on Abcam Results Webinar and Fonix Mobile

It’s nine months since I last commented on Abcam (ABC) but I still hold some of the shares so I watched the results webinar today. This covered the results for both the 12 and 18 month periods ending December 2021 as they moved the company’s year end – for no good reason that I could see.

The reported profit was up at 7.1m in the 12 month period which is a substantial improvement and revenue was up by 17% but the company preferred to talk about adjusted profits which were given as 60.4m “adjusted operating profit”. Adjustments comprise everything the company wants to ignore and even extends to “systems and process improvement costs” and “integration and reorganisation costs”.

In summary the results were not brilliant in essence for what is supposed to be a growth company in a hot sector (biotech).

I have commented negatively in the past about the slow and expensive implementation of a new ERP system and on this it is stated that “roll-out of the final states of the ERP renewal programme continued”. In other words, it’s still on-going.

The webinar comments from the CEO effectively said the company had been building for the future in the last couple of years. I hope that is the case. The strategy in many regards makes sense but a lot of costs are being incurred which have been capitalised. The share price has not moved far in the last three years but the company has been impacted by the Covid epidemic.

One question put by an analyst was for more explanation of the comment in the announcement that “The Board continues to review options to increase share liquidity and intends to consult with shareholders on these options in due course. Is this an indication of a placing particularly to attract more US shareholders? I suggest it might be. But the analyst did not get an answer to his question.

Another company that reported results this morning was Fonix Mobile (FNX). There was a good profile of this business published in Small Company Sharewatch last week. I can do no better than repeat some of the comments by Paul Scott of Stockopedia on the results:

“I’m impressed with these numbers. Fonix floated on AIM in Oct 2020, and amazingly for a fairly recent float, it has not collapsed after a profit warning, nor run out of money!

I remember having a video call with the CEO around the time it floated, and thinking what an impressive business this is – dominating a niche of payments/votes for reality and charity TV shows (e.g. X-Factor, Children In Need), Fonix has the infrastructure for taking those payments/votes, and the customers tend to be very sticky, coming back year after year – on the basis of if it ain’t broke, don’t fix it.

That results in a cash generative business, with high margins, which is able to pay out decent divis, with a yield of c.4%”.

It is a relatively small business but looked reasonable value to me although the costs of the AIM flotation were high and directors were selling as part of it but I did read the prospectus so did purchase a few shares. The interim results are excellent.

This is the kind of business I like – good return on capital, high recurring revenue and positive cash flow. The prospects look good.

But like any e-payment business its accounts can be difficult to follow and there is a regulatory risk for the business if the FCA decided to tighten its rules.

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

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Accounting in Alternative Energy Suppliers

No doubt like many of my readers, I have been buying a few shares in alternative energy suppliers – those that own solar and wind farms or grid stabilisation/battery operations. The move to decarbonise the economy has been made even more urgent by the likely reduction in gas supplies from Russia.

I have been studying the accounts of The Renewables Infrastructure Group (TRIG) in which I own a few shares, and I have some concerns. This company is an investment company which owns wind and solar farms (one example is above). A wind farm is in essence a facility where a windmill is installed to generate electricity which is then sold on to the grid, i.e. a capital asset is purchased and installed which then generates revenue. This is rather like a manufacturing company so one might expect that the traditional accounting for such a business is used, i.e. the assets are capitalised on the balance sheet and then written off through the P&L statement over the life of the asset. Income is simply the sales of the electricity.

But this model is not used at TRIG. It actually owns 50 wind projects, 32 solar PV projects and one battery storage project. There are some minority interests but most of them are 100% owned. The ownership is structured via independent companies in which TRIG has equity investments.

Those investments are valued in the accounts on the directors estimates of future revenues and cash flows. This is actually what is said in the last Annual Report on page 62:

For non-market traded investments (being all the investments in the current portfolio), the valuation is based on a discounted cash flow methodology and adjusted in accordance with the European Venture Capital Association’s valuation guidelines where appropriate to comply with IFRS 13 and IFRS 10, given the special nature of infrastructure investments.

The valuation for each investment in the portfolio is derived from the application of an appropriate discount rate to reflect the perceived risk to the investment’s future cash flows to give the present value of those cash flows. The Investment Manager exercises its judgement in assessing the expected future cash flows from each investment based on the project’s expected life and the financial model produced by each project entity. In determining the appropriate discount rate to apply to a given investment the Investment Manager takes into account the relative risks associated with the revenues which include fixed price per MWh income (lower risk) or merchant power sales income (higher risk). Where a project has both income types a theoretical split of future receipts has been applied, with a different (higher) discount rate used for an investment’s return deriving from the merchant income compared to the fixed price income, equivalent to using an appropriate blended rate for the investment”.

In summary, the profits that the company declares, and its net asset value, are based on the managers future estimates of cash flows.

The Annual Report also contains this statement in the Audit Committee Report: 

Valuation of Investments – key forecast assumptions

 The Audit Committee considered in detail those assumptions that are subject to judgement that have a material impact on the valuation. The key assumptions are:

Power Price Assumptions. A significant proportion of the wind and solar projects’ income streams are contracted subsidy receipts and power income under long-term PPAs; some of which have fixed price mechanisms. However, over time the proportion of power income that is fixed reduces and the proportion where the Company has exposure to wholesale electricity prices increases. The Investment Manager considers the forecasts provided by a number of expert energy advisers and adopts a profile of assumed future power prices by jurisdiction. Further detail on the assumptions made in relation to power prices and other variables that may be expected to affect these are included in the Valuation section of the Strategic Report.

Macroeconomic Assumptions. Macroeconomic assumptions include inflation, foreign exchange, interest and tax rate assumptions. The Investment Manager’s assumptions in this area are set out and explained in the Valuation section of the Strategic Report.

Other Key Income and Cost Assumptions. Other key assumptions include operating costs, facility energy generation levels and facility remaining operating life assumptions.

The Audit Committee considers the remaining operating life assumptions in light of public information provided by the Company’s peer group and reports provided by the Operations Manager during the year considering the remaining operational lives for investments and considering any potential extension of those lives and the recognition of additional value resulting to be appropriate. The independent valuation carried out in June 2021 also supported the assumed operating lives.

The Investment Manager has discussed and agreed the valuation assumptions with the Audit Committee. In relation to the key judgements underpinning the valuation, the Investment Manager has provided sensitivities showing the impact of changing these assumptions and these have been reviewed by the Investment Manager and the Audit Committee to assist in forming an opinion on the fairness and balance of the annual report together with their conclusion on the overall valuation.

Valuation Discount Rates. The discount rates adopted to determine the valuation are selected and recommended by the Investment Manager. The discount rate is applied to the expected future cash flows for each investment’s financial forecasts derived adopting the assumptions explained above, amongst others, to arrive at a valuation (using a discounted cash flow methodology). The resulting valuation is sensitive to the discount rate selected. The Investment Manager is experienced and active in the area of valuing these investments and adopts discount rates reflecting its current extensive experience of the market. It is noted however that this requires subjective judgement and that there is a range of discount rates which could be applied. The discount rate assumptions and the sensitivity of the valuation of the investments to this discount rate are set out in the Valuation section of the Strategic Report.

The Audit Committee discussed with the Investment Manager the process adopted to arrive at the selected valuation discount rates (which includes comparison with other market transactions and an independent review of valuation discount rates by a third-party valuation expert both at December 2020 and at December 2021) and satisfied itself that the rates applied were appropriate. The Company uses a bifurcated discount rate approach (as more fully explained on page 62)”.

The key point arising from this is that the valuations (and hence reported profits of the company), are very dependent on the discount rates applied to future cash flows.

In summary we have a business where reported profits are based on estimates of future cash flows and the discount rates that are applied, not on actual historic profits or cash flows. To my mind this creates a great deal of uncertainty.

What would the accounts look like if all the investments the company has were consolidated? That’s not an easy question to answer because the information is not readily available, and neither am I an accountant. But perhaps TRIG could supply such an answer.

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

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Is Location Important?

The issue of where a company chooses to locate itself came to mind on reading an FT article about the Financial Conduct Authority (FCA). They have moved to Stratford in East London when they were previously at Canary Wharf. It seems that some staff are unhappy.  Will the FCA really recruit high quality staff when based in Stratford? I doubt it.

This issue also arose when I spoke to DotDigital CEO Milan Patel after their results webinar last Friday. The discussion made it clear, as I thought, that all had not been well with their US business which is why forecasts had to be downgraded. DotDigital chose to set up their US headquarters in Manhattan, New York City and they are still there. To my mind that is the worst possible US location for a technology company. It would make recruitment difficult and expensive. It now seems they have staff mainly working from home.

I do get the impression that DotDigital have made the same mistakes as many British companies entering the USA, i.e. not understanding the culture, not spending enough on marketing, not talking in American rather than English, etc. But they are learning.

Does it matter where the office is located if everyone is working from home to avoid catching Covid? I think it does. Not meeting colleagues regularly, if not everyday, is very important for motivation and for management to understand their concerns. I speak from experience of both managing remote teams and working in the USA. OK we can hold Zoom meetings but those are not quite the same as they are more formal events. They do not provide the opportunity for casual conversations.

Another webinar I attended today was a results presentation by Bango (BGO). At least I got my question answered this time which was: “The big loss in the associate was of some concern. Please explain the reason for that and its prospects”. The brief answer given was that the joint venture was still in the development phase and revenues were starting to come through. But a lot more explanation would have been preferable.

The stock market seems to have stabilised as the news from the Ukraine does not get much worse and I perceive glimmers of a possible peace settlement on the horizon – along the lines of what I suggested in a previous blog post. But I don’t think the comments of my M.P. Bob Neill about the pursuit of war crimes by Russia were helpful. They might have made for good politics for UK listeners but are not likely to encourage peace to break out.

With oil/gas prices at record levels this week should I have piled into their producers as others have done? I think not as I hate commodity businesses. Earnings are volatile and unpredictable. But there certainly will be a big focus by Governments to ensure countries are less reliant on imports of oil and gas. I have therefore been investing in alternative energy suppliers (wind farms, grid stabilisation, etc).

There are also possibilities in the defence sector where there will be an increase in expenditure no doubt as people come to realise that peace does rely on strong defences.

In the Ukraine they did have a big nuclear weapons arsenal which they inherited from the USSR after its break-up. But they gave them up after assurances by major powers (including Russia) of their security. What a mistake that was!

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

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A Week to Forget in the Stock Market and DotDigital

Last week was certainly one to forget with Friday particularly bad for most portfolios (the FTSE-100 was down 3.5% on Friday and tech stocks were again hit – Nasdaq was down 1.7% on the day). With the war in the Ukraine continuing the economic outlook looks bleak. We already had sharply rising inflation and sanctions against Russia are driving up the price of oil and gas which is never good for the economy. As anyone who has received a utility bill of late will realise, consumers and industry are going to be hit by sharply rising prices in the next few weeks which will affect many businesses.

There was already a downward trend in the market and I expect this will continue unless peace breaks out in the Ukraine which does not look likely until Russia has achieved its objectives which might take some weeks, if ever. Taking over a country where the population is totally opposed to you is never easy, particularly when outside assistance is being provided and sanctions are biting. Ukrainians are not apparently going to accept defeat.

One of my investments which was worst hit last week was DotDigital (DOTD) but not because of the war. The company provides an “omnichannel marketing automation platform” as they call it (email and sms messaging). The share price fell by 60% after an interim announcement on Wednesday that suggested the forecasts for the second half were not going to be met. In addition the CFO and Chairman are departing (the latter on health grounds).

This is a company I have held for some years first buying at around 8p in 2011 and selling some at around 200p in 2021 when enthusiasm for technology stocks drove the price up to unsustainable levels. The price now is 58p.

The company is profitable, has no debt and lots of cash on the balance sheet and has shown steady growth so there is much that is positive about the company. But clearly the expansion of US operations on which forecasts relied has gone seriously wrong. I attended the results webinar on Friday and submitted the following question:

“Clearly one of the reasons for reduced forecasts is the disappointing figures from the USA. Why after several years has DotDigital not established itself well there? Why has the management of that region not been changed as a result?  There does not seem to be anyone on the board with experience in the USA. As you are looking for a new Chairman could you please ensure that a suitable person is appointed with some knowledge of operating in the USA”. The question was not answered but there was enough information disclosed to make it clear that all was not as it should be.

A question on margins got a response that margins will be lower in the second half because marketing spend will be going up. As regards the US management issues, it was indicated that a couple of management teams had been poached by competitors offering higher salaries. Lots of money from VCs and private equity was going into competitors. It was mentioned that “customer attrition had stabilised” which was a remarkably negative comment. With this kind of product (which I use myself) where there is high recurring revenue people are generally reluctant to change platforms. They should not be losing customers! But the figures suggest they are losing some customers and gaining very few new ones in the USA.

So it would seem that after some years of trying to make a success of the US market they are back at square one with a new management team. It looks like another example of a UK business entering the USA but falling flat on its face in terms of marketing approach.

I will try and find out more next week but I have not quite given up on the company completely as yet. These issues might be minor ones if they take appropriate steps.

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

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Warren Buffett Letter and Culture

Warren Buffett has published the latest Berkshire Hathaway letter to shareholders (see https://www.berkshirehathaway.com/letters/2021ltr.pdf ). As usual it makes for an amusing and educational missive including his comment on the $3.3 billion the company paid in taxes. He says “I gave in the office” is an unassailable assertion when made by Berkshire shareholders.

The company improved its per share value by 29.6% in 2021 which was slightly ahead of the S&P 500 with dividends included. That’s a big improvement on the previous two years when Berkshire lagged the index.

What has been one of the key reasons for the success of the company over the last 55 years? I would suggest culture is one. A culture of honesty, integrity and rational behaviour if you read the latest and prior newsletters.

Meanwhile the Chartered Institute of Internal Auditors (CIIA) have published a report entitled “Cultivating a Healthy Culture” (see https://www.iia.org.uk/policy-and-research/research-reports/cultivating-a-healthy-culture/ ). It suggests based on research among its members that culture is important and that 66% believe that the UK Corporate Governance Code should be strengthened in regard to the responsibilities of company directors. The Financial Times reported this as one of the causes of several company collapses in recent years such as at BHS, Carillion, Greensill and Patisserie Valerie. But if you read the reporting on this issue there is discussion of Environmental, Social and Governance issues (ESG) and equality issues as if adding those to the Governance Code might assist.

Yes I suggest culture is important but the key question to ask when looking to invest in a company from my experience is simply this “Is the Management Competent and Trustworthy?” (that’s a quote from my book on investing). If you don’t trust the management walk on by. And if you are holding shares in a company and news comes out that undermines your confidence in the directors, then sell the shares. Don’t wait for them to reform.

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

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