On-Line Estate Agents & Crowdfunding

I was watching the BBC television news last night when a story appeared on the wonders of a 19 year old who was already alleged to be worth £10 million after developing an on-line estate agency called Doorsteps. Yes it was great free publicity for the company.

Bearing in mind the continuing debate among investors about listed company Purplebricks (PURP) I thought it was worth a quick look. Purplebricks has a stock market valuation of £950 million despite rising losses. Will the business model work, particularly in the USA where it needs to be successful to justify the valuation? Nobody knows.

Some commentators have suggested that there are few barriers to entry into the on-line estate agency business (i.e. anyone can get into it as evidenced by the fact someone still at school did so).

A traditional estate agent will charge several thousand pounds to sell an average house (but you only pay if they do so). Purplebricks charges £1200 in the London area, and £850 elsewhere. But Doorsteps charges only £99!

Doorsteps raised £390,000 from investors via crowdfunding platform Crowdcube at a pre-money valuation of £12 million from over 490 investors. But if you look at who owns Doorsteps it is a company called Upside Capital Ltd that was only incorporated at the end of December 2016. Not exactly a long track record then is it.

Will Purplebricks put traditional estate agents out of business, or will Doorsteps put Purplebricks out of business? I suspect the answer to those questions will be a complex one but I’ll have a stab at it.

Firstly can Doorsteps conquer the market while still charging so little? Bearing in mind that they will have high marketing expenditure, still need to employ local “agents”, and pay management, admin and IT overheads, I rather doubt it. With few barriers to entry, there will no doubt be other entrants offering to do it for £95 rather than £99. Result, lots of companies with little business individually and all losing money. Who might win out on that race to the bottom is anyone’s guess. For investors it looks like an area where you are likely to lose money irrespective of which horse you back.

This myriad of low-priced entrants might also damage Purplebricks business model, who in addition already have other competitors such as Yopa, Tepilo, Housesimple and Emoov operating at different price points. It’s beginning to look like a market which has grabbed the public’s, and investors, imagination and which will soak up enormous amounts of capital as the companies all try to out-spend each other to grab market share.

One interesting aspect is the ease with which Doorsteps managed to raise money on Crowdcube. Crowdcube have over 400,000 registered users and the few hundred who invested in Doorsteps probably put in a few hundred pounds each. In effect they were punting on an investment in a private company (and hence with limited investor protections), on a company with no track record, and with an inherently risky business plan.

I fear that the crowdfunding approach to raising capital from investors as evidenced in this example will lead to a lot of disappointed investors in due course.

But having said all of the above, it is very clear that the estate agency market is changing rapidly. Some people won’t wish to pay upfront to sell a property, but others may be happy to take the chance of “no-sale”. Paying £1200 on the chance that a sale will be made and quickly may be attractive to some house sellers, particularly when their past experience of traditional agents may not be great (estate agents have a reputation for sharp practice over many years). So if Purplebricks can establish a good reputation (which has yet to be proven), and spend enough to grab a decent share of the market, they may establish a sound business, but how profitable it will be is anyone’s guess. In addition, traditional agents will react to do more on-line offers at lower cost as some are already doing. One can see that this market will become a price battleground as there seems to be little differentiation between the differing on-line competitors. That’s a recipe for low returns on capital and poor returns to shareholders in the long-term.

When the product being offered is the same, service and reputation will be a key differentiator I suggest in this market. Competing on price alone looks like a dubious business strategy however.

Note: I have held Purplebricks in the past but do not do so presently because the more a company is debated on bulletin boards and by share tipsters the less attractive an investment it tends to become. It just leads to irrational speculation, both up and down.

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

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Accrol and Pricing Power

I won’t be the first to comment on the events at Accrol (Kate Burgess covered it well for example in this mornings FT), but the surprise suspension of the shares from AIM on the 8th October caught a lot of investors by surprise. The latest announcement this morning said: “The Directors believe that the current challenges facing the Company relate largely to FY18 and are likely to have less of an impact on the Company’s trading performance in FY19. The Board are therefore confident that, whilst there can be no guarantee, a solution will be found to the Company’s short term funding requirements. The Directors continue to review the position and, as part of this review, the Company is engaging with its major shareholders and its bank.” 

To paraphrase the above, “we’re in a hole, our bankers are unhappy and we are talking to everyone about a way out but it may all come good in the end”.

To remind you Accrol (ACRL) is a company that listed on AIM in June 2016. The full year results published in July 2016 were very positive, but the Chairman also mentioned the following: “The listing has reduced the Company’s debt burden….” and “The listing also provided a partial exit for the founders, the Hussain family, and NorthEdge Capital who invested in Accrol in July 2014. The family will continue to support the management team as external consultants and I would like to thank both the Hussain family and NorthEdge Capital for their support and commitment”.

On the 7th September, the company announced the appointment of Gareth Jenkins as CEO to replace Steve Crossley “who is leaving the Company and stepping down from the Board with immediate effect….”.

On the 8th October, the company warned that profits were down, margins had fallen, debt was rising and the dividend was under review. In addition, it warned about a possible large fine over a Health & Safety issue that was apparently not disclosed in the listing prospectus.

Accrol processes paper rolls into toilet paper, paper hankerchiefs and kitchen rolls. It sits between the large paper mills and the large retailers who are their customers for “own-label” products. Now having looked at the prospectus back in 2016 it appeared the company was growing rapidly, albeit debt had been high, but I declined to invest in it. That was not just because I am very wary of all IPOs – these are events where the sellers have more knowledge of the product being sold than the buyers. For investors it’s rather like buying a used car. Is that newly polished vehicle a good runner, or is it a tired beast with hidden problems in the chassis? Only the seller really knows.

In addition, the company is “puffed up” to look attractive to the investors who take up such initial public offers. So my tactic is even if I like a company based on its prospectus, I would probably leave it for some months, or even years as good companies will likely remain so, to see how it fares as too many IPOs, particularly AIM ones, run into problems quickly. But there were several other aspects that concerned me about Accrol.

In this case, one of my other concerns was how defensible were its profit margins. In essence the pricing power of an intermediate processor, buffeted between the big supermarkets and the paper manufacturers is bound to be low. They may simply have been making hay while there was a surplus of paper being produced (paper production requires large capital investment, rather like steel mills, with long lead times on new plant so production volumes are lumpy as more capacity is built, or older inefficient plants are closed down). Paper is also a commodity product subject to the vagaries of commodity pricing.

This appears to be the source of their current problems, apart from the little (maybe big) issue of a possible large regulatory fine that will impact their cash substantially. Is this going to be another case where the investors launch legal action over the failure to disclose all the relevant facts in the prospectus one wonders?

Is my analysis of this company sound, or have I missed something? As Kate Burgess said in her article, “management will have a lot of explaining to do to investors” as will the Nomad no doubt (Nomad is Zeus Capital). With the shares still suspended, which always annoys investors and frequently leads to worse news in due course, there is not much investors can do at present.

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

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Abcam, Voting and Non-Executives

I am a long-standing holder of Abcam (ABC) and have been very happy with my investment – a compound annual return of 33% p.a. since I first purchased the shares in 2006 according to Sharescope. But the notice of this year’s AGM (to be held in Cambridge as normal) has made me unhappy for other reasons.

Firstly, I tried to vote. Rather than use the paper proxy voting form (I am on the register so I get one) I thought it would be easy to do so electronically using the Equiniti ShareVote service. Even though there were no obvious instructions on the paperwork, I found the web site, entered the required three pieces of id information, and pressed submit. But it would not accept it because I have a pop-up blocker turned on. Grrr…..

Why do companies and their registrars make it so difficult to vote? They will be wasting money now because I will use the pre-paid voting card instead.

I then studied the resolutions:

  • Remuneration too high and the usual horribly complex mix of bonuses and LTIPs – but I told them that at the 2015 AGM. The only saving grace is that as an AIM company they don’t need to disclose all the information or have a vote on it, so it was good of them to do so. But I will be voting against the Remuneration Report.
  • What also attracted my attention is the presence of three non-executive directors (other than the former CEO) who are all women. One is the Chair of the Remuneration Committee so she gets a vote against for that reason alone. But all three have numerous other jobs/roles which exceed the ShareSoc guidelines and some seem to have little relevant experience of the markets in which Abcam operates. So I am voting against all three. Now I know that experienced female non-executives to fill public company boards are in short supply now that everyone wants to be “gender” balanced, so such ladies can line up numerous jobs with ease. But this is simply not good enough.

This is of course the result of the “box ticking” syndrome to keep the institutional shareholders and proxy voting advisors happy. But no non-executive director can do a good job if they have more than 4 or 5 positions.

I think I will have to attend the AGM again this year to make some of the above points.

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

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Interest Rates and the Gig Economy

You probably don’t need to be told that interest rates are at their lowest for several centuries, if not in recorded history. The fact that the Bank of England is making noises about possibly raising base rate could just be a way to try and rein back inflation (a higher base rate, or prospect of it, causes the pound to rise and that makes imports cheaper – and import costs have been one of the factors in inflation rising). But unemployment is also at its lowest level for 40 years which usually indicates a booming economy and the prospect of higher inflation to come.

Inflation is now at 2.9% measured by the C.P.I., or 3.9% based on R.P.I. which a lot of us like to use instead. Now to me the really astonishing item of news last week was that the large City of London Investment Trust managed to borrow £50 million at a fixed rate of 2.94% for 32 years (I do hold some of their shares). That’s must be one of the best deals ever surely, and shows how investment trusts have the advantage of being able to gear up by borrowing money – and why not when interest rates are so low?

In reality, the lender is not even getting a real positive rate of interest at current inflation rates, and is also betting that it won’t get any worse for the next 32 years. Astonishing, and just shows how the world economy is awash with cash.

Another couple of interesting items of news last week were that Deliveroo lost £129 million in 2016 according to accounts filed at Companies House, on revenue of £129 million. In other words, for every pound paid by customers, they lost a pound. It’s raised $472 million from investors to achieve this wonderful business model (source: FT).

Deliveroo use “self-employed” bike couriers to deliver restaurant meals. Another exponent of this “gig-economy” model is Uber who received the bad news last week that Transport for London were terminating their license to operate in London. More information on that in this blog post I wrote for the ABD: https://abdlondon.wordpress.com/2017/09/23/uber-kicked-out-of-london/ . In there I praised the merits of the service and suggested people sign the petition against it (which is rapidly heading for a million signatures).

But one reason that it is so low cost is because like Deliveroo, Uber loses money in a big way at present. To quote from one report on its financials, “Uber is cheap because the company is heavily subsidising each trip” where it was suggested that Uber’s losses as a percentage of revenue were 129% in the last quarter of 2016. Like Deliveroo, revenue is rising rapidly though.

Do we mind if these companies lose money hand over fist? If they are fool enough to do so in the race to dominate a new market why not let them. But the long term viability of both when there are obviously lots of competitors providing similar services does raise doubts about these businesses, even if London Mayor Sadiq Khan relents over Uber’s license.

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

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Brexit, and Ryanair

The media continue to try and blow up stories out of all proportion. Lately it has been on the likely terms of a Brexit deal with the EU, and Boris Johnson’s claims about the £350 million per week paid to the EU at present.

The reality on the latter is that the Daily Telegraph article by Boris claimed we would “regain control” over £350 million paid to the EU (which was based on a Treasury paper on the full EU membership fee (£19.5 billion per annum, which I think everyone will agree is a lot of money). However, that’s not the net cost to the UK because we get a rebate on membership as negotiated by Mrs Thatcher which reduces it to £14.6 billion, plus we get a lot back in the form of subsidies and grants – for example from the Common Agricultural Policy (CAP). A rough estimate is that we get back between £5 and £6 billion from those. So the net figure is more like £9 billion per annum, but that’s still a lot of money. For example, the NHS budget for this year is £124 billion, so you can see the impact that an extra £9 billion might have.

But Boris was accurate in the sense that we have little control over the £5 to £6 billion of grants and subsidies. The UK has long wanted to reform the CAP which is more designed to subsidise inefficient continental European farmers than keep food prices low in the UK. Subsidies of some kinds to some farmers might continue in the UK post Brexit, but in a different form and possibly lower. But only with Brexit will the UK regain control so we can manage these matters more rationally. What most “remainers” seem to ignore is that a lot of the Brexit voters voted to leave because of wanting to get out of the undemocratic EU where UK voters had no significant influence, we were a small fish in a big pond, and likely to be outvoted on any major issues. Mr Juncker’s recent speech made it clear that the EU was headed for a closer political and economic union which many UK voters have found abhorrent. Historically most UK voters supported joining the “common market”, but they never wanted to join a “United States of Europe” with EU laws and bureaucrats dominant and were misled by UK politicians who did. That certainly applied to the existing EU structure and calls for democratic reform have gone nowhere.

There was a very good article in the FT yesterday by former Chancellor Nigel Lawson (no relation) on Brexit where he points out that the Office of Budget Responsibility forecasts the cost of EU membership to fall from £12.6 billion in 2018/19 to zero in 2019/20. Nigel also said “Those who say that a good trade deal is in the best interests of the EU and the UK alike fail to understand what the EU is about. It is not about economics at all. It is a political enterprise, dedicated to the achievement of full political union”. He discounts the problem of “no trade deal” based on the ability to trade under WTO terms. James Dyson recently indicated he saw little problem with that also.

Should we pay to access the Common Market, in a “transition” phase or permanently? It obviously depends on what deal is put on the table, but the attitude of the EU Commission so far suggests it won’t be a good one. In my view the UK can prosper without close involvement with the EU and without paying anything other than contractually committed minimums as part of the exit process. The UK can prosper based on its own resources and the trade with other international partners than the EU, so if they don’t want tariff free access to the UK, then we can give up tariff free access to theirs. It might just stimulate UK manufacturing so we don’t have to rely on buying German cars, washing machines, refrigerators, et al.

Ryanair

One of the folks complaining about the possible impact of Brexit is Michael O’Leary, CEO of Ryanair. He suggests flights from the UK to Europe may be halted unless a deal is done to cover flight access.

But Ryanair has been hit lately by problems with crew scheduling that have resulted in cancellation of many flights. The service to the affected passengers has also generated numerous complaints. It just looks like an operational cock-up, compounded by abysmal management responses thereafter to mollify customers.

Now I have a motto of never flying Ryanair after an event over 15 years ago. I was booked to fly on Ryanair out of Stansted but a hijacked plane was diverted to land there. The radio news said the airport was closed so I diverted to another airline via City airport to get to Dublin on time for a business meeting. Ryanair claimed Stansted was never closed (not true I believe) and refused to pay compensation.

Anyone who follows the news will know of repeated complaints from passengers about the behaviour of Ryanair. Being low cost surely does not justify the low quality of service. It’s the kind of company I would not just avoid flying with, but also investing in.

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

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Sophos, Interquest and the Government

Yesterday I missed the Sophos (SOPH) AGM due to having a clashing engagement, but I noticed that in the announcement of the voting results that there were substantial votes against the Remuneration Report (29.8% against) and also high votes against most of the directors. One only needs to glance at the Remuneration Policy to see why.

The maximum bonus opportunity is 200% of salary, and the maximum LTIP award is 500% of salary in normal circumstances and up to 750% in exceptional circumstances. So total incentive payments can reach nearly 10 times normal salary. That’s the kind of scheme I always vote against.

For what is actually a relatively small company that has never reported an annual profit, the actual pay figures are way too high – CEO got a base salary of $695,000 last year and total single figure remuneration of $2.32 million. Other directors, even the non-execs, have similar generous pay figures. It might be a rapidly growing company in a hot sector (IT security) but I am beginning to regret my purchase of a few shares.

Although I missed the AGM, I did “attend” the previous days Capital Markets Day. I was refused physical access but anyone could log into the web cast of the event. Not quite the same thing but it was exceedingly boring with a lot of the time spent on the wonders of their technology rather than important business questions. Is it not despicable though that companies and their PR advisors try to keep such events solely to institutional investors?

Interquest (ITQ) is an AIM listed company that received an offer for the company from some of the directors but they only got 58% committed support. That’s not enough to delist the company under the AIM Rules which requires 75% so the offer was abandoned. What did the directors do then? They notified their Nomad of termination of their contract and subsequently said they would be unlikely to appoint another Nomad within the one month period allowed. This means the shares will automatically be suspended from AIM and subsequently delisted if no Nomad is appointed.

The moral is that if directors or anyone else control 58% of the company then minority shareholders are in a very difficult position because they will have the ability to do lots of things that prejudice the minority shareholders – for example pay themselves enormous salaries. A legal action for prejudice of a minority is available but as my lawyer said yesterday, these are complex cases, as I well know from having run one myself in the past, and successfully (we were discussing my past legal cases). It’s difficult enough in a private company, and even more so in a public one. In summary, having an AIM Rule about delistings may not help if one cannot win a vote of shareholders on other matters that require just 50%.

Having control of a public company in the effective hands of a concert party of a few people is something to be very wary about, and something all AIM company investors should look at.

Government policy on tackling excessive pay levels for the directors of public companies has taken a step backwards this week. Tougher measures which Theresa May threatened have been watered down, and the core of the problem – the fact that Remuneration Committees consist only of directors, whose appointment and pay is controlled by other directors, has not been tackled. In addition, the potential to control pay by votes at General Meetings has been undermined by the disenfranchisement of private shareholders as a result of the prevalence of the nominee system and the dominance of institutional voters who have little interest in controlling pay.

Another bit of news from Government sources this week is that the hope of some change in shareholder rights that might have improved private shareholder voting is fading away after a decision to postpone yet again the issue of “dematerialisation”. The staff involved in that project have been moved and expertise will be lost. This is likely to be the result of both lack of interest in tackling a difficult and complex problem, and the need to put in effort on Brexit matters at the BEIS Department.

Will we ever get a proper shareholder system where everybody is on the share register and automatically gets full rights, including voting rights? It remains to be seen but I will certainly continue to fight for that. Without it we will never get some control over public companies and their directors. I suggest readers write to their Members of Parliament about this issue.

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

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Northern Rock 10 Years After

Both the Times and Financial Times covered the tenth anniversary of the nationalization of Northern Rock today. Dennis Grainger is still fighting to get some compensation for shareholders from the nationalization and says the Government stands to make billions of pounds profit from the bank after paying zero compensation to shareholders. He is undoubtedly right that the Government will turn a good profit on these events, as they always planned to do.

He and others such as Pradeep Chand described in an article in the FT Weekend supplement lost hundreds of thousands of pounds. Was the bank a basket case, or do they have a genuine grievance? The fact that they and other investors are still fighting for compensation ten years later tells you how aggrieved they feel. Mr Grainger hopes to put his case to Theresa May.

Incidentally the shareholders in Bradford and Bingley (B&B), led by David Blundell, are also still fighting a similar case over the nationalization without compensation of that company. The same legislation was used to do so.

As I was involved in the campaign and subsequent legal case, let me give you a few simple facts about the case:

Northern Rock was not balance sheet insolvent, but ran out of cash after a run on the bank by depositors (driven by media scare stories) and their inability to raise more money market funds (nobody was lending to anyone else at the time).

This would normally have caused the Bank of England to step in as “lender of last resort” to provide liquidity but then Governor Mervyn King declined to do so because of the “moral hazard” risk. That was a fatal mistake not likely to have been made by his predecessors.

The then Labour Government subsequently passed legislation to nationalise the bank and ensured there was no independent and fair valuation of the shares by writing the Nationalization Act with wording that ensured an abnormal and artificial valuation process which guaranteed a zero valuation. So the ensuing claims that it was a “fair and independent” valuation are nonsense. The Treasury is reported as repeating that claim in the FT article today.

In reality Labour politicians decided to ensure that two large hedge funds who had invested in the company and were willing to support it should get nothing because they were the kind of people they hated. Smaller shareholders in Northern Rock were not recognized as being of importance.

The nationalization legislation used against Northern Rock and B&B ensures that if the Government has lent any sum of money to a bank, then they can nationalize it without compensation. This made UK banks untouchable by many foreign lenders or investors with dire consequences later for other banks such as RBS. In the case of B&B they even concealed that they had lent it money until much later so as not to scare investors. Incidentally while that legislation is still available to the Government, that is one reason why I won’t be buying shares in UK banks – it increases their risk profile very substantially.

A legal case was pursued to the Supreme Court on the nationalization (a Judicial Review), but they would not overturn the will of Parliament. A claim to the European Court of Human Rights was submitted but they refused to even hear the case which was very unexpected as they had ruled in other nationalization cases that fair compensation should be given.

Those are the key facts and all the other mud that was slung at Northern Rock claiming it was a dubious business by a concerted campaign of disinformation was most unfortunate, and basically inaccurate.

A company that cannot meet its debts when they become due, and is hence cash flow insolvent, can be argued to be worth little. But there was funding available to Northern Rock (it was trading for months after the “run” and before it was nationalized). But salvage law sets a good precedent for what is fair compensation when someone rescues a sinking ship. The same should have applied to a sinking bank.

So in summary, I support the efforts of Dennis Grainger and others to get compensation to the ordinary shareholders out of the profits that have accrued to the Government as a result.

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

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The Internet of Things – Telit and Tern

Most investors in AIM will have noted the unfolding news at Telit Communications (TCM) last week. It has culminated today with an announcement from the company that CEO Oozi Cats (a.k.a. Uzi Katz) has resigned after an independent review did indeed find that he was the subject of a US indictment 25 years ago which had not been disclosed to the board. However, they denied that other allegations about the operations and finance of the company were true. Specifically, they said “there is no substance to the speculative and accusatory articles that have been published and that it stands behind the Group’s audited accounts to 31 December 2016 and the most recently published interim statement”. Will the publisher receive yet another threat of legal action as a result? We will see, although companies are reluctant to spend time and money on such cases and it is more difficult for them (as opposed to individuals) following recent changes in libel law.

Is this yet another example of how AIM regulation is defective? The simple answer is no. Both I and ShareSoc have campaigned for improvements in that area, and the LSE have recently published a paper entitled “AIM Rules Review” which has some helpful suggestions.

But the alleged legal problems of the CEO and his wife were 20 years before the company even listed on AIM in 2015 so no amount of due diligence was likely to have discovered that issue. The more recent allegations – which are about possible fraud at the company – are not an issue of AIM regulation. Possibly more an auditing issue if any such problem exists, which the company clearly denies. However, one has to question the willingness of AIM to list companies based in foreign countries some years back. Why did they list on AIM rather than in Israel or the USA for example? Possibly because they thought there would be less scrutiny. There does appear to be more examination of new listings of late and it’s covered in the paper mentioned above also.

Now I have never invested in Telit, although I have looked at it more than once in the past. There were several aspects about this company (other than the country of residence) that put me off. The nature of the product was one – albeit it’s operating in a hot sector but was there good protectable IP? Others were the lumpy nature of hardware orders, the directors and their pay, the issue of director share sales, the failure to turn profits into cash, the repeated fund raisings…..I could go on.

In summary, this is the kind of company I do not want to own.

It’s probably just another example of a persuasive CEO encouraging investors, often unsophisticated private investors, to punt on a concept of rapid growth in a hot technology sector.

Interestingly another company focused on the “Internet of Things” sector is investment company Tern (TERN) who raised some funds via platform Primary Bid over the weekend via a placing and open offer. The latter closed early due to the demand. Indeed, the COO of Primary Bid said: “We are delighted to have facilitated the fundraise for Tern plc. It was good to see such strong demand for this Offer, demonstrating how popular Technology related companies can be with tech savvy PrimaryBid Investors. More than 50% of all investors subscribing for this offer did so via a mobile device”. Note particularly the last sentence.

I had a quick look at Tern, but had great difficulty in valuing the company because it’s largest investment by a long way is a holding in a company named Device Authority Ltd. Is there any information provided on the revenue or profits of that company in the announcements about the fund raising or in recent past company announcements, or are there any recently published accounts filed at Companies House for this UK registered company? Apparently not, so any “due diligence” is difficult. But Tern does not look expensive at face value because of their revaluation of the investment in Device Authority last year by the company in the same way as any other private equity investment is valued.

Is this another case of over-enthusiasm by private investors to get into this high tech world? We shall no doubt see in due course.

There is another thing which Telit and Tern have in common. They have both been harassed by the same “journalist”. Indeed, director Angus Forrest of Tern even went so far as to report him to the police for harassment in 2015 although the matter was not pursued (harassment can be both a criminal law and civil law case).

Investors are recommended to take a cold shower whenever anyone talks about hot technology sectors. A lot of businesses in them never turn a profit, or give a decent return on investment. You just have to look at the early history of Apple – now the largest company in the world by market cap – to see how tortuous and extended can be the path to success. And most of their early competitors simply disappeared.

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

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Departures – AA and Blur

Yesterday was the start of many people’s holidays. But two company chief executives are going to be taking longer holidays than they expected.

The Executive Chairman of the AA Plc (AA.) Bob Mackenzie has gone. The announcement from the company said he “has been removed by the board….for gross misconduct, with immediate effect”. According to press reports, this arose from a fracas in a bar, although there is also a suggestion that he may be suffering from a mental illness. Some newspapers just suggested it was a “Jeremy Clarkson moment”.

The share price of the AA dropped 14% on the day, which probably reflects the problems that can arise when you have an Executive Chairman dominating a business. It’s not recommended corporate governance practice and personally I tend to avoid companies who have them.

The AA is an interesting organisation which provides breakdown cover and other services for many motorists. Back in 1905, it was formed to warn drivers about speed traps. It later transmogrified into a commercial organisation when the members sold out. Now it is one of the largest operators of driver education programmes such as speed awareness courses. That has become a booming industry and more than a million drivers are now attending speed awareness courses each year. This has resulted in the funding not just of commercial organisations such as the AA but more than £40 million per year goes to the police and local authorities. For the first time in English law, it is now allegedly legal to pay the police to drop prosecutions – all you have to do is promise to attend such a course. There is no evidence that it has any benefit in road safety. More information on this dubious practice is present here: http://www.speed-awareness.org (a campaign run by the ABD against it).

The other departure yesterday was of founder and CEO of Blur Group (BLUR) Philip Letts. This was a company that listed on AIM more than 5 years ago and in 2014 traded at a price as high as 665p. It’s now 3p.

This was a company that was a typical “concept” stock. It was going to revolutionise the commissioning by SMEs of services which is still very much an informal market by introducing an internet market. Mr Letts must be a very persuasive person to keep the business alive this long by repeated fund raisings. But it’s a typical example of how unproven business models are very risky investments. Most companies would have changed the business focus and the CEO long ago, or simply wound up, but Mr Letts persisted.

Yesterday the temporary suspension on AIM was lifted as they finally published some accounts. The results were slightly improved in that losses were reduced, but it still looks an unviable business unless the new management can make substantial changes. Mr Letts was removed from the board effective on the same day.

Incidentally I do hold a few Blur shares – market value now £6 so I hope that has not prejudiced my comments. If you get enthused by the hype surrounding some early stage companies, and the persuasiveness of the management, there is one simple thing to do. That is to only invest a very small amount until the company proves its business model and actually shows that the business is likely to be profitable. Revenue alone is not enough, because anyone can generate revenue by spending lots of your money.

The other protection is when the company fails to achieve its stated business plan, to simply sell and move on. Ignore the tendency to “loss aversion” where you hold the dogs in case of recovery. Or if you fear missing out on a big recovery, simply reduce your holding to a nominal level as I did on Blur and saved myself even more money.

So I invested a very small amount initially and then reduced it later to a miniscule level.

Just one point to note is that the company actually spells its name “blur” rather than “Blur” as I have used above, thus ignoring the rules of English grammar. Such affectations in companies to be “different” are always a bad sign in my experience.

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

Disclaimer: Read the About page before relying on any information in this post.

Utilitywise Profit Warning

A trading update from Utilitywise (UTW) caused the share price to fall another 18%. It’s already down from over 350p in May 2014 to 48p the last time I checked. A pretty disastrous investment for many. This was one of those go-go small cap stocks that lots of share tipsters were promoting back in 2013/14. Revenues and profits were apparently on a strong upward trajectory from their sales of utility services to commercial users.

I even bought a few shares myself. But I sold when I came to realise that their revenue recognition practices were in my view somewhat aggressive. So far as I understood it, they were recognising profits on contracts when the customer signed up for an annual or longer contract. From today’s announcement that even included recognising profits on signature rather than contract commencement. But the real problem to my mind is that instead of most businesses where profits are taken on amounts invoiced, which is shortly before cash is paid on them, in this case the cash was received very much later. So I got cold feet and bailed out. I simply don’t like imprudent accounting and aggressive revenue recognition (Quindell was a similar example).

That is basically what is so damaging in today’s trading statement where they cover a change in accounting policy to IFRS 15 which has tougher rules on revenue recognition from contracts. Who were the auditors of Utilitywise? BDO LLP.

Respected investor Leon Boros has already tweeted that with the adjustments to their accounts required, all the historic profits of the company will disappear. As he says “always follow the cash”.

I did write a report on a Mello event for ShareSoc where Utilitywise was one of the companies presenting back in 2013, but it was not a particularly complimentary one – it mentioned possibly regulatory problems, aggressive sales practices and director share sales for example. The revenue recognition issues only became apparent at a later date.

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

Disclaimer: Read the About page before relying on any information in this post.