Category: Companies

Annual Reports – Telecom Plus and Halma

It’s that time of year when summer gives us some time for reading and I have taken the opportunity to read the Annual Reports of a couple of my holdings:

Telecom Plus (TEP): This is an exemplary example of how to write and publish an Annual Report. At 151 pages it’s not too long although it could be shorter. On page 3 there is a useful description of “Why invest in Telecom Plus?” I reproduce it below:

Telecom Plus is a unique UK multi-service provider with a purpose: to stop households wasting time and money on essential services. We have partnerships with leading suppliers of energy, broadband, mobile and insurance, and a high quality customer base. This leads to a high growth, predictable, capital-light and cash generative business model supporting a clear capital allocation policy of high returns through dividends supplemented by share buybacks.

  1. The UK’s only multi-service provider We have a unique award-winning customer proposition providing multiple essential services including energy, broadband, mobile and insurance to over one million UK customers under the Utility Warehouse brand. This provides consistently larger savings than peers, and simplicity through a single bill and point of service.
  • Significant growth opportunity Our ability to offer lower prices than competitors, combined with award-winning customer service, means we are able to achieve sustainable double digit customer growth. We are the leading challenger in our markets and with a c.3% share of the UK energy market, around 1% of the broadband and mobile markets, and a nascent position in insurance, there is ample opportunity for growth.
  • Differentiated route to market Our business model is based on a unique and hard-to replicate word-of-mouth route to market. Our Partners refer UW to their friends, family and their personal networks, attracting loyal multi-service homeowner customers which other operators find hard to reach. Customer satisfaction and loyalty gives market-leading customer lifetimes and lower bad debts. Our Partners value the opportunity to earn an additional income, providing a high quality and low cost means of customer acquisition, while fulfilling our social purpose.
  • Structural cost advantage We have a structural cost advantage as we have multiple revenue streams but only one set of overheads, unlike our competitors. This allows us to offer the most attractive prices to our multi-service customers, permitting us to be more profitable and reinvest in the business to improve our value for money still further – reinforcing our competitive position and sustaining our superior growth rate.
  • Capital light business model We do not own any infrastructure, as we are a virtual service provider meaning we do not need significant capital expenditure to grow. We are able to offer high quality services from the best providers, benefiting from 20 year relationships and long term contracts. Our long track record increases supplier and Partner confidence in us. Our model means we differentiate on price, simplicity and service while not taking capacity or technology risk.
  • Proven financial track record with strong returns We generate predictable, growing earnings from the supply of essential services. We are highly cash generative due to our capital light model. Over the last ten years our gross profit has grown by 254%, adjusted profit before tax by 162% and dividend per share by 137%. We consistently generate strong returns with a ROCE of above 30%. We pursue a progressive distribution policy with a total payout of 80-90% of adjusted net income including a dividend rising modestly with inflation and supplemented by share buybacks, with an appropriate level of gearing.

It’s always good to be reminded as to why one bought the shares. My only comment is that with a revised bonus arrangements introduced last year the total pay of the directors (“Single figure of remuneration”) has increased from £4.5 million to £7.3 million. The company did well last year but I still feel this increase is unjustified.

The other company to comment on is Halma (HLMA). At 276 pages the Annual Report is way too long. If you obtain a paper copy as I prefer to do as it makes it more readable you get a heavyweight document  that is an inch thick.

Halma is a conglomerate of many individual companies they have acquired in recent years – mainly focussed on safety and environmental issues. They summarise it in a paragraph on page 8 which is headlined with “Sustainable growth with purpose”. The document is full of meaningless PR speak such as that. Another example is this paragraph:

Halma Cultural Genes. These are the unique cultural and behavioural principles that we require, protect and leverage to effectively optimise our organisational genes and deliver our purpose. • Live the purpose • Embrace the adventure • Be an entrepreneur • Say yes, and… • Just be a good person.

I fear this company has swallowed a dictionary of management speak which they could have done without. But despite this they have a good recent financial track record. How they control this now sprawling empire is not exactly clear though.

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

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Alliance and Witan Merger – Is It Wise?

Two large generalist global investment trusts – Alliance (ATST) and Witan (WTAN) have announced a proposed merger. Alliance is slightly larger with assets of £3.8 billion versus Witan at £1.8 billion. Both have relatively low charges – for example Alliance has an ongoing charge of 0.62% according to the AIC and one justification for the merger is that charges will reduce further on a larger combined portfolio. The relative portfolios already overlap to some degree.

Alliance Trust has produced better performance over the last 5 years and have done very well since the revolution in management a few years back with a particularly good performance last year – NAV Total Return up 21.6% and ahead of their benchmark.

I can see why the merger might be of benefit to Witan shareholders but as a holder of Alliance Trust shares I can see little benefit. A marginal reduction in charges will be offset by the negative aspect of having a larger portfolio. Stock-picking gets more difficult the larger the portfolio becomes.

I shall probably be voting against the merger on those grounds.

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

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Is U Dafter than X?

The latest news is that UKTV Play is changing its name to “U”. UKTV Play broadcasts several free to view channels such as Yesterday which I watch occasionally. But the change of name is surely as daft as Elon Musk renaming Twitter as “X”. 

A single character name is a very poor trade mark – unregistrable and hence unprotectable in the UK I believe. It’s also unprotectable from rip-off imitations such as “UTEEV” unless “passing-off” was alleged which gets you into more complex trade mark law and big legal bills.

One of the first principles when selecting a trade mark is that it should be both unique and memorable. What is memorable about “U” or “X”, when everyone knew what Twitter was and could locate it easily?

The owners of UKTV Play should surely have employed some branding consultants before deciding to change name.

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

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Failures in IT Services – They Should Not Happen

The big new story yesterday was the closure of Manchester airport due to power failures. All flights were cancelled on Saturday from two of the terminals with passengers left stranded and nowhere to go for many hours.

Now as a former IT manager I can advise this simply should not happen. Even 40 years ago when I ran the IT operations of a major UK retailer the object was to keep our IT systems up and running for 24-hours a day with minimal downtime and that was achieved. We had disaster recovery plans to cope with hardware and power failures. We needed 100% uptime to enable us to process shop orders. We were never out of action for more than a few minutes.

The NHS is plagued with similar problems of lack of provision for IT failures. The latest news is that the service who provide blood testing to Guys Hospital have been subject to a ransomware attack and have exposed my personal information on the web, presumably after they refused to pay. The service was out of action for some days. Did they not have a back-up and recovery plan they could invoke?

The exact reason for their exposure to a ransomware attack has not yet been revealed but it is probably due to hacks of password access or insecure web systems. Intercede (IGP), in which I hold shares, can improve the security of personal log-ins via identity verification which is essential for any large organisation which is vulnerable to attacks. The failure of the NHS to protect its systems and that of its sub-contractors is surely down to incompetent management which is a persistent theme in the NHS.

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

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Mike Lynch Acquitted

Dr Mike Lynch has been acquitted of fraud in a California Court over the alleged misleading accounts of Autonomy. This has been a long running legal case after the acquisition of Autonomy by HP who alleged Mr Lynch and his co-defendants illegally inflating revenues by backdating some of Autonomy’s contracts, using “round trip” deals to compensate customers for making purchases, and hiding the fact that some of its high-margin software revenue was really coming from unprofitable hardware sales (software revenue is typically valued higher than hardware revenue).

I have made negative comments on Autonomy’s accounts in the past but it would not be appropriate to discuss why the jury reached the latest verdict. Without studying all the evidence presented in court it is very easy to jump to the wrong conclusions based on media reports.

But after 13 years that this saga has been running, it will certainly be the case that directors of software companies operating in the USA will be a lot more careful about their revenue recognition practices which is surely a good thing.

For more information on the background to this legal case see:  https://www.ft.com/content/62b6af38-ff48-43a9-9403-2a18a1ddca3d?

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

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Raspberry Pi Listing and Nigel Farage

Raspberry Pi who sell very cheap single board computers are proposing to list on the main UK stock market. They have issued a “Pathfinder Prospectus” which is available from several brokers, although a lot of the detailed information needed to evaluate the business is not there.

However I thought I would give it a quick read although I hardly ever invest in new issues. I did buy one of their computers for my oldest grandson some years back and had a play with it. At the time it was clearly aimed at the educational/hobbyist market but has also been used to embed in other commercial IOT systems. You can use a Raspberry Pi product to learn programming although as a past programmer in my early career I am always sceptical about teaching kids to learn programming – it may put them off software development for life. Learning BASIC just seems very tedious and prone to simple grammatic errors but it teaches you that complex programs are built up from simple constructs.

The last time I wrote anything in BASIC was for my MBA course over 40 years ago but unlike most people on the course who had no IT background I managed to impress the course tutor with my perfectly crafted mortgage calculation program.

Raspberry Pi have come a long way in the last few years. They appear to be profitable with revenue of $265 million last year. The market value is likely to be over $500 million. The company which owns the IP was founded as an educational charity back in 2008 and it has partnerships with ARM and Sony so the legal structure is complex and it’s worth reading the “Risk Factors” carefully. The charity is still the ultimate parent company. It does not manufacture the hardware it sells.  I suspect it could be a popular listing as there are few high-tech companies that have built a market niche in the world like Raspberry. But the company has many competitors and no obvious barriers to entry in the markets it serves.

Investing in new IPOs is a recipe for underperformance as the listing price is based on optimism and opportunistic timing. But it’s certainly worth reading the Prospectus.

Political news. The big political news in the UK is that Nigel Farage is taking over leadership of the Reform Party and is standing for Parliament on the 4th of July. In a recent public opinion poll the Reform Party was only 2% behind the Conservatives so do stand a chance of winning some seats. And of course damaging the Tory vote.

I have met Nigel Farage a few times and he does make good speeches so I wish him the best of luck. Whether he can get elected is difficult to judge as he is divisive personality in some ways. Some people don’t like charismatic persons.

The policies of the Reform Party are sound and Richard Tice has been doing a good job leading the Party so I hope he will stick around.

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

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IHT Business Property Relief on AIM Shares and Computerised Brain Implants

There were a couple of interesting articles in the FT today. The first was on the issue of Business Property Relief on AIM shares. You only have to hold them for 2 years to get 100% IHT tax relief. Some people consider that too generous and based on FOI Act requests it has been discovered that 68 estates obtained £1.8bn in relief in 2020-2021. In other words, relatively few people who might be classified as very wealthy obtained the relief.

This relief was intended to help family led businesses to remain in the control of the family the same as it is available for unlisted companies. There are a number of possible problems with removing this relief. Firstly it would discourage family controlled businesses from listing on AIM and hence limit their ability to raise equity for expansion. Removing the relief would undermine the careful long-term tax planning of wealthy individuals and there might be a rush to sell AIM holdings thus damaging the AIM market which already has a few problems with poor historic performance.

As a potential beneficiary of this relief I would be very opposed to any change in this area and a desire to raise more tax is hardly a justification for restricting the relief. It would make investing in AIM shares very unattractive as they are already very risky and generally have given poor returns.

The other interesting FT article was on Computerised Brain Implants and explained how they might help disabled people to walk again – for example those with damaged spinal cords. Even Elon Musk has an interest in this new technology field as it is seen as a possible way to enhance people’s intelligence and memory.

I might have found it useful myself a few years ago when I suffered from Intensive Care Neuropathy and had to learn to walk again. Whenever I watch the film Reach for the Sky, which I did again last week, I am reminded of this. This is the story of Douglas Bader who lost both legs in a flying accident but learned to walk and fly again using artificial legs. He rejoined the RAF and fought in the Battle of Britain. A truly great film from 1956 and the story of a very brave man.

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

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Northern Rock Shareholders Action Group Still Active

The Northern Rock campaign to get justice for former shareholders is still active. This is what I posted on their Facebook page:

Northern Rock Nationalisation

This was a disgraceful action by the then Labour Government. The nationalisation was both unnecessary and at a zero valuation so shareholders got nothing. That was contrary to the accepted principles for nationalisation of companies and the enabling Act was written specifically to ensure a nil valuation. Yvette Cooper was the prime mover behind this and is still on the Labour front bench. She and other Labour Party members seemed to want to ensure that the hedge funds that had invested in Northern Rock would get screwed. In addition they wanted to make a profit by acquiring Northern Rock for nothing and later selling it for a profit, which is what subsequently happened.

The nationalisation ensured that international investors would not trust the UK Government which meant they were reluctant to support UK banks and increased their borrowing costs. Altogether a disastrous political and economic decision based only on political dogma.

<END>

Go to the campaigns web site here: https://www.nrsag.co.uk/  or their Facebook page here : https://www.facebook.com/nrsag for their latest news.

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

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BT Results and Move to Fibre

BT Group (BT.A) announced their final results for the year ending March this morning. The share price is up 11% at the time of writing, perhaps mainly based on the positive comments of the CEO. Although revenue was pretty well unchanged and pre-tax profit fell. EPS was down 55% as was free cash flow. Net debt rose to £19.5bn and the massive pension deficit also increased.

The CEO said: “This delivery and greater capex efficiency gives us the confidence to provide new guidance for significantly increased short term cash flow and sets out a path to more than double our normalised free cash flow over the next five years. This enhanced cash flow allows us to increase our dividend for FY24 by 3.9% to 8.0 pence per share. We’re also setting a further £3bn of gross annualised cost savings to be reached by the end of FY29”.

The dividend increase means the yield is 6.3% on the current share price, which may be one of the few reasons to buy the shares. This is clearly a no growth business. This is the comment made on Stockopedia: “Huge net debt and giant pension contributions mean that the balance sheet has negative NTAV. Should it be paying such generous divis, when it has a mountain of debt?”. My answer would be NO.

The company is moving rapidly to replace its copper wires by fibre-optic cables and coincidentally BT changed our home/office broadband/phone line to fibre yesterday. They did not have to dig up too much of the garden. That went very smoothly so far although the phone line is still not working. Use the Roliscon contact page if you need to get an email to me: https://www.roliscon.com/contact-us

We also have a fibre service from Virgin to support our home TV service and home phone. The TV service suffered from picture break-up for the last three weeks and was only fixed a couple of days ago. I have complained and asked for a subscription refund particularly as they have become too expensive. Alternative suggestions would be welcomed.

Broadband and phone providers have been ratcheting up prices by having automatic increases to match retail price inflation in their contracts which I find unjustifiable as their costs don’t increase in that way.

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

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Alliance Trust AGM 2024 Report

I attended the Annual General Meeting of Alliance Trust (ATST) this morning using the Lumi AGM platform. It was physically held in Dundee which is their traditional location and they intend to continue with that in future apparently.

The Lumi platform normally works well although there was a hiccup during the Chairman’s introduction and I had to log in again.

I have held shares in this trust since 2015 and am very happy with recent performance.  The Chairman, Dean Buckley, reported a “very strong investment performance” last year – total return up 21.6% and significantly better than their benchmark plus better than their competitors. Good performance has continued in 2024. The trust has increased dividends for 57 years and the discount to NAV is only 5.4% and heading down.

Craig gave an overview of their investment approach – a global stock picking based on “high conviction” choices but diversified. They were underweight the “magnificent 7” technology stocks last year but that was offset by good performance in other holdings.

I will only report on the question I asked which was “According to page 9 of the Annual Report you seem to be selling the winners and increasing exposure to losers. Please comment as this is contrary to my investment philosophy”. The answer given was that “Individual stock pickers may have different views on this. But it only applies to stock pickers overall performance. It is just a matter of rebalancing the portfolio, avoids a big bias to growth and helps manage risk while lowering volatility.

Comment: It seems to work.

The meeting was well organised and managed by the Chairman. I am happy to continue holding the shares as a foundation holding which I don’t have to continually monitor. As their Annual Report says “Our ready-made portfolio does all the hard work for you….We provide a simple, high-quality way to invest in global equities at a competitive cost”.

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

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