Category: Companies

Low Margin Companies, and McColl’s AGM

Should you invest in companies with low profit margins? Phil Oakley of Sharescope wrote a very interesting article a few days ago which questioned whether they are likely to be good investments. This was one complaint about Conviviality which recently went into administration.

As Phil said, high margins suggest that a company has pricing power and limited competition while low profit margins make a company vulnerable to tough trading conditions or a weak economy. The reason for this is simple. If the overhead costs are relatively fixed but revenues fall even by a small amount, or costs rise, then profits can rapidly disappear. In addition if margins are already tight, then when competitors cut prices to retain volume, a company with low margins can find they simply cannot respond without incurring losses. Low profit margins are often linked to low returns on capital which is always something to avoid.

In essence, companies with low profits margins can be living on a knife edge and hence one needs to be careful about investing in them. A margin of 10% or higher is preferable, and a number of companies I am investing in have operating margins of over 50%. But what about retailers? Their operating margins are often very low. For example, Sainsbury’s is at 1.66% according to Stockopedia, Tesco is at 3.2%, ASOS is at 3.79%, Boohoo at 8.43% and Dunelm at 9.43%. The more specialist the retailer, or the higher the value items of sold, the greater the operating margin should typically be.

Carpetright which has just announced a major restructuring and refinancing was at minus 0.15% a year ago so their recent problems are perhaps no surprise. Likewise Conviviality was at 1.62% although they had both wholesale and retail operations. But ignoring all retailers because they report low profit margins is not a strategy I would follow.

McColl’s Retail Group whose AGM I attended yesterday are a convenience store operator. Their average “basket” size is only £5.62. Their operating margin is only 2.1%. Well at least it’s better than Sainsbury’s and I suspect it’s been low for many years – indeed when I first purchased the shares 2 years ago it was only 2.5%. But if you look at the more conventional valuation metrics it does not look so bad. Prospective p/e of 11.9, dividend yield of 4.7% and like many retailers it generates a lot of cash as it sells its merchandise before it has to pay its suppliers – at least that’s true until they go bust.

They are therefore companies that you need to keep a close eye on to see that margins are not falling, and that revenue on a like-for-like basis is not declining. That’s particularly so when we have a bad patch of weather affecting footfall as we had recently, or where they are vulnerable to erosion from internet retailers. Are McColl’s in that regard? Probably not because 60% of their customers live within 400 meters of their local shop and they provide both fresh/chilled food and services such as a post office. The company is looking to “engage” even more with their customers who typically visit very frequently.

It was a useful AGM with a number of good questions from the audience (less than 10 shareholders attending at the company’s head office in Essex). One question related to the success of the acquisition of 290 stores from the Co-Op which have now been fully integrated but the CEO rejected a suggestion the stores were below targets and said the deal “met the business case”.

However one problem the company has faced in the last year is the collapse of supplier Palmer and Harvey. The business was closed by the administrator almost immediately so McColl’s had to make alternative arrangements very rapidly. This resulted in analysts forecasts of profits being reduced from £54m to £50m according to the CFO. In future they will be reliant to a large extent on Morrisons who they have done a deal with to retail products under the Safeway name. It seems to me that these two companies might become so closely linked that sooner or later it might make sense for Morrisons to acquire the business. Morrisons sold off their own convenience store chain in 2015 which was losing money and not easy to scale up.

One shareholder complained about the remuneration arrangements – a typical complex scheme including LTIPs. He said “why do people need a bonus to do their job?”. The Chairman said there is competition for talent. I also discussed this with the CFO after the formal meeting closed and suggested there were better solutions to incentivise staff.

I also talked to the Company Secretary about the problems with voting via Link Asset Services (see previous blog post on that topic).

One unusual aspect of this AGM was the issuance of the Minutes of the last AGM and request for shareholders to approve. Companies normally do minute their AGMs but don’t publish them.

The votes were taken on a poll with the results only announced later in the day. About 13% of votes were against the Remuneration Policy, against the Chairman and Rem. Comm. Chair Georgina Harvey and over 18% against share allotment and pre-emption resolutions. Plus 13% against company share purchases and the change of notice of General Meetings. These are unusually high figures and the board has committed to look into the reasons why and report back. Note that Klarus Capital hold over 11% of the company having bought the stake held by former Chairman James Lancaster.

My conclusions about this company: The management seem to be making the right decisions but they do need to improve the profit margin and return on capital. However it seems one reason for the deal with Morrison’s was to obtain “improved commercial terms” so that suggests they recognize this. Moving into growing segments such as “food-on-the go” and out of declining ones such as newspapers and tobacco should help as will store refurbishments and the addition of a few more stores.

The share price of McColls has been picking up recently from a low point. But like a lot of my holdings it seems to be somewhat volatile of late. Is that as a result of the holiday period with lower trading volumes, a tax year end effect, or investors being nervous about war in Syria? Will it be war or no war? Investors never like binary bets. Perhaps Donald Trump should get on the hot-line to Russia and negotiate an alternative scenario. After all he has written a book called “The Art of the Deal” so he should know how to finesse a face saving way out of the problem.

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

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Conviviality Fire Sale

Conviviality (CVR) has now gone into administration, and the ordinary shares are probably worthless (they were suspended some days ago and are likely to remain so). The administrators have already sold the major parts of the business in “pre-pack” administration deals. That’s where arrangements are made to dispose of assets in advance of the appointment of administrators by the prospective administrators before they have in fact been appointed. Is that legal you may ask? Yes it is because of a past legal case however perverse the result might be.

It’s interesting to look at the deals done by the Conviviality administrators:

  1. Retail chains Bargain Booze and Wine Rack have been sold to Bestway for £7 million.
  2. The wholesale division comprising the former businesses of Mathew Clark and Bibendum has been sold to C&C (owners of Magners Cider) for £1, although it seems the new owners have taken on some of the debts owed.

Matthew Clark was bought by C&C for £200 million three years ago and Bibendum was bought for £60 million in 2016. You can see why I call this a “fire sale” when the administrator seems to have lined up buyers in just a few days and disposed of these businesses at a value that seems to be a great bargain for the buyers.

One of the problems with administrations is that often the administrators have an objective to sell the business absolutely as soon as possible. This is to protect their own financial interests it frequently appears to me as much as it is to protect the jobs of employees and maintain a business as a “going concern”. Administrators can only get paid out of the cash that is present in the business or can be collected. That’s why nobody wanted to take on the administration of Carillion and it went straight into liquidation.

Administrators have an obligation to market a business for sale but can that be done adequately and the best price obtained when the deal has clearly been done in just a few days? That obviously does not allow any time for the normal due diligence on a substantial deal so the buyers won’t have paid anywhere near the normal market price for the assets.

In summary, the buyers of the assets get a great deal, the jobs get preserved (at least to some extent), the bankers to the company often get their loans back and the administrators get well paid while minimising their risks. But the previous owners of the business (the ordinary shareholders) get left with nothing. Is that equitable?

In effect the current legal structure, and particularly the pre-pack arrangements, enable the rapid dismantling of a business when it might have been recoverable if the company had been able to have more time to refinance the business and stave off its creditors for just a few weeks.

This is why I argue that the current UK insolvency regime needs reform. It destroys companies in short order when ordinary shareholders have often invested in the company to grow the business in the past. In the case of Conviviality it only listed on AIM in 2013 and did subsequent placings to finance its expansion.

The reason for the invention of “administration” in the insolvency regime was to enable a more measured wind-up, disposal or restructuring of a business rather than a liquidation. But insolvency practitioners (i.e. administrators) seem to have changed it into a short-cut to wind-up. Reform is surely needed.

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

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Moneysupermarket and Private Eye

Fame at last. This week Private Eye published a letter of mine on the subject of Moneysupermarket.com Plc. This was in response to a somewhat inaccurate article on companies ditching their advertising agents. This is what the letter said:

“Sir, Contrary to your article on companies ditching their advertising agencies in EYE 1466, where it is stated that Moneysupermarket.com lost money last year, the truth is that they actually made profits of £78.1 million.

However, as an investor in the company, I applaud the action of the new CEO in firing their advertising agency. I always thought good advertising was about promoting the merits of the product or service you were offering. But Moneysupermarket’s recent campaigns, such as a prancing “twerking businessman with a giant arse” as you put it, was nothing of the kind. Perhaps the new(ish) CEO (he has been there a year) took a similar view. Particularly when the financial results for last year were indeed disappointing, albeit revenues and profits were up 4% – but that’s not much more than inflation.”

Private Eye often publish some revealing articles on financial matters and this latest edition contains one such by “Slicker”. It covers the “existential crisis in corporate governance” which he says has increased since the financial crisis of 2008 with no top bankers, auditors, lawyers or regulators in court. The article covers many of the scandals that have come to light in that period, and this is a particularly pertinent comment therein: “Non-executive directors, who supposedly oversee the executive directors, have too often become an over-rewarded mafia of mediocrity, exhibiting all the signs of Stockholm Syndrome, their captors being the domineering CEOs to whim they never say no”.

He suggests some remedies which include “a corporate vicarious liability law” as in the USA, a Sarbanes-Oxley style law, and the banning of LTIPs. All well argued and it’s certainly worth reading.

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

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GKN and Melrose – The Reality

Melrose has won the battle to take control of GKN although the Government might yet step in to halt the takeover. On what grounds is not exactly clear. Never having held shares in either company, I thought it worth looking at the facts rather than the hyperbole surrounding this deal as there seemed to be some myths being propagated.

Is GKN a key business in the UK’s engineering and technology infrastructure based on a long history of innovation? Or is it a financially poorly performing conglomerate that was vulnerable to a bid?

It has been said that GKN produced Spitfires in the Second World War but in reality they did not develop the plane but were just one of several assembly plants that were subcontracted to produce it in volume, In the 1960s I well remember the company under the name Guest, Keen and Nettlefold and in Birmingham they had large factories producing nuts and bolts. Hardly high-tech engineering even at that time. Later they did make a success of car parts production particularly with constant velocity joints (CVJs) as used in the Mini and other front wheel drive vehicles. But they are now proposing to split off the driveline business and merge it with another company. They plan to focus on the aerospace business. You can see a “polished” version of the history of the company here: https://www.gkn.com/en/about-gkn/history/ . In reality a long history of dubious diversifications, followed by later rationalisations.

The recent financial performance has been disappointing. Reported earnings per share in 2017 were the same as five years previously with a trough in between. Dividends in that period grew slowly and at the current share price equate to about 2% yield. Return on assets a measly 5.6% last year, and even that was an improvement on previous years. Although the financial prospects based on analysts’ forecasts might be slightly improving, is it not simply a case that institutional investors might have become disillusioned with the management in recent years and seen an opportunity in the Melrose bid to improve the financial returns?

There will no doubt have been some activity by share traders, arbitrageurs and hedge funds of late who might have influenced the outcome. But that’s capitalism in action. Holders, even long-term ones, sell to higher bidders.

Personally I oppose any suggestion that short-term holders should not be allowed to vote, and the use of other “poison-pill” mechanisms that can defeat takeovers. If I purchased a share in a company last week, I want to be able to vote it! I may not have known that a bid was coming and how I vote will depend on the arguments put by both sides. Clearly in this case GKN simply lost the argument.

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

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All Change at Intercede, and Drug Development Costs

An interesting announcement this morning was the news that founder Richard Parris is losing his role as Executive Chairman at Intercede Group (IGP). He is stepping down to the role of Non-Executive Director and they are looking for a new CEO.

The company operates in the digital identity area. I once held quite a few shares in it but became disillusioned with the leadership some years ago and the company’s remuneration arrangements, so I now only have a nominal holding. For a company with interesting technology in a hot sector, it has a disappointing financial track record. Slow growth and lumpy sales, and consistent losses in recent years.

It is surely good news that Mr Parris is stepping down, although the share price has fallen today at the time of writing. He and his wife do hold quite a significant proportion of the shares. Let us hope the new management is able to make this company a world beater after all – it seems to have suffered the problem of many UK technology companies in failing to develop a sales and marketing strategy to turn good technology into market leadership.

I spent an interesting day on Wednesday meeting with Professor Jonathan Barratt at Leicester University. He is researching IgA Nephropathy, a disease that can lead to kidney damage and ultimately the need for a kidney transplant (as in my case). It included a tour of the labs and attending a lecture he gave on the subject which was most interesting. It’s a worthy cause if any investors have surplus cash after the recent stock market rout as Prof. Barratt and his team are making significant progress. Remember there are tax benefits from charitable donations.

One of the things Prof. Barratt mentioned was the enormous cost of drug development. According to the Tufts Centre, they suggested the cost was $2.6 billion in 2016 to get a drug to the FDA approved stage. One can see why relatively rare diseases do not get a lot of interest from drug companies, particularly those like IgA Nephropathy where the progression of the disease can be so slow that clinical trials take years to complete. I also now know exactly why I don’t invest in drug development companies, where the chance of success and obtaining a good financial return is so low.

But one aspect that Prof Barratt is working on is the possibility of improved diagnosis by using blood tests based on antibodies to identify the disease at an early stage which might assist with prevention. This is an area where I am invested though with holdings in Abcam (ABC) and Bioventix (BVCP). The latter produced some unexpectedly good interim results due to one of their customers identifying some royalties due that had not previously been reported. But even without that the figures were good.

One important future revenue stream for Bioventix is a troponin test which is a marker for heart attacks. This might speed up the diagnosis of chest pain. That is important if you arrive in A&E with severe chest pain as there can be many other causes although doctors often focus on that to the exclusion of problems such as gall stones or gall bladder infections which I was once told were more common. Delayed or misdiagnosis is obviously a major issue here that the new test might prevent.

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

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Conviviality – More Bad News, and IQE

I commented on the profit warning from Conviviality (CVR) on the 9th of March and the dangers of share tipping. Today the news is even worse. They have overlooked a payment of £30 million to HMRC due at the end of the month, so their cash flow forecast is blown asunder. They will breach their banking covenants unless some short-term funding is obtained to fill the hole. Meanwhile the shares have been suspended, and the dividend that was due to be paid on Friday has been cancelled.

I hope my previous comments dissuaded some investors from picking up these “bargain-basement” shares, but not all it seems. One of the punters was Stockopedia commentator Paul Scott. To quote his latest comment on it: “What can I say? It’s total incompetence”. It seems he was persuaded that the situation regarding banking covenants was OK after reading a positive broker note. But it seems likely the broker was relying on what the company told them.

I think there is one thing to remember when investing in companies and that is always to ask the question “do you trust the management”. Any announcements by companies should be always doubted unless the management have built up a track record of delivering on their promises and giving you the unvarnished truth. Regrettably, comments from brokers and other company promoters are never trustworthy in the modern financial world. When folks are being paid to say the right thing, or are financially motivated to do so, then whatever they say is likely to be dubious, or not the whole truth.

I have not commented on events at IQE before (I have never held the shares because it’s a sector I don’t like). But there was an interesting article by the Editor of Techninvest on the subject in the last edition (this is a publication focused on small cap technology companies and always worth reading). He commented negatively on shorting efforts by two companies while they published analyses of IQE’s accounts – effectively saying they were dubious. The company then issued a strong rebuttal and the shares bounced back. The shorters did not it seems consult IQE management before publishing, a pretty basic journalistic principle, particularly if you are going to publish negative allegations. The editor of Techinvest suggests scepticism should be exercised “given the vested interests involved”. I completely agree. One of the dangers of the modern internet is that folks can publish damaging stories with impunity, to their financial advantage. The Government and regulatory authorities surely need to tackle this issue sooner or later.

Whether the claims about the accounts of IQE have any basis in fact I would not like to comment upon. It would only stimulate more debate to no purpose when the real truth may be unknowable at this time. Investors should consider my comment above. Do you trust the management?

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

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Chancellor’s Statement, EIS Funds and EMIS Results

The Chancellor’s Spring Statement yesterday was generally positive but there are some aspects that it’s worth talking about. Mr Hammond was right to be cautious because although new Government borrowing is falling, the total debt is still rising. It’s only forecast to fall as a proportion of national income by 2020-21 because of rising GDP. There is “light at the end of the tunnel” as the Chancellor put it, but it’s still some distance away.

GDP is only rising slowly and it is forecast by the Office of Budget Responsibility (OBR) to be rising at near 1.5% in the next few years which is not exactly rapid. The OBR also forecast that we will have to pay £41 billion to the EU after Brexit as a settlement of our obligations, although it will also free up £3bn or more per year that can be spent on other things, i.e. they suggest in the long term we will save money but the impact of changes in migration and trade terms might be more significant.

The Labour party wants the Chancellor to free up the purse strings and increase expenditure on the NHS and other areas. The Government could only do that by borrowing more which would not only increase the cost of their debt but would seem unwise given the economic outlook and the uncertain impact of Brexit. Because of an ageing population, but a growing one, more money will need to be spent on local authorities and the NHS anyway but the growth in productivity remains poor which ultimately determines the wealth of the nation.

Will the estimated figures have an impact on likely future interest rates (which have a significant impact on stock market investment)? Interest rates might need to rise somewhat to make Government debt continue to be attractive but it is not obvious that the economy is overheating as yet – inflation seems to be driven more by rising import prices as the pound has fallen rather than wage rises. The Government will no doubt be keen not to increase the cost of its debt, even if it has only indirect influence on the rate. Interest rates lower than real inflation are a good way for the Government to reduce its debts however much it prejudices savers.

One interesting mention for investors was a mention of a consultation on EIS funds that includes several options for more tax reliefs to encourage investors to put money into early stage “knowledge-intensive businesses”. That might include tax free dividends (only available on VCTs at present), or capital gains exemptions. I may write some more on this topic after reading the full consultation document which is here: https://www.gov.uk/government/consultations/financing-growth-in-innovative-firms-enterprise-investment-scheme-knowledge-intensive-fund-consultation . Investors interested in this subject should of course respond to HM Treasury’s consultation.

Some Venture Capital Trusts (VCTs) have fallen in price today. Perhaps because they might be perceived as less attractive to investors if such new EIS funds were introduced. But they would surely be very different beasts even if they might provide more competition for new investor subscriptions.

Comment: having invested in both EIS funds and directly in EIS qualifying companies in the past, I have vowed only to do the latter in future. Finding an experienced fund manager in early stage companies who can pick out the good EIS businesses is not easy and the lemons they pick ripen quickly (a common VC adage) while the good investments can take years to mature. If there is very generous tax relief (at a level where investors ignore the merits of the underlying investee companies because the tax reliefs are so generous it looks like they can’t lose money), then this will encourage all kinds of dubious promoters to enter the field.

One company that is sensitive to Government spending on the NHS is EMIS Group (EMIS). They announced their Final Results this morning. They previously warned in January that they had breached their service level obligations to the NHS and the cost might be “in the order of upper single digits of millions of pounds”. I commented on the company then and still hold some shares in it. The actual damage is a provision of £11.2 million in these accounts for a “financial settlement and costs to remedy past issues”. The share price rose today perhaps in relief that the news was not worse.

Few more details of the contract breach are provided and when I talked to my GP who uses EMIS-Web and used to be active in their user group, he knew nothing about any service failures. All rather odd.

Even excluding that item which is being treated as an exceptional cost, the figures were disappointing though. Revenue was only up 1% and adjusted earnings were down 4%. The CEO commits to a “robust management of legacy matters” and a commitment to being “more performance-led with greater accountability, improved operational execution and an increased focus on our customers”.

Dividend has been increased though which suggests some confidence in the future, putting the shares on a yield of 3.5% and a possible forecast p/e of 16, but the company certainly needs to show better signs of growth if the share price is to get back to where it used to be a couple of years ago.

The Government might spend more in the Autumn budget, but whether EMIS will see much benefit remains to be seen.

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

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The Dangers of Share Tipping, Alliance Trust and AIM Regulation

Share tipping is a mug’s game. Both for the tipsters and their readers. More evidence of this was provided yesterday.

Investors Chronicle issued their “Tips of the Week” via email during the day. It included a “BUY” recommendation on Conviviality (CVR). Unfortunately soon after the company issued a trading statement which said the forecast EBITDA for the current year (ending 30th April) will be 20% below market expectations. Conviviality is a wholesaler, distributor and retailer of alcohol and it seems there was a “material error in the financial forecasts” in one part of the business and that margins have “softened”.

The share price dropped by almost 60% during the day and fell another 10% today at the time of writing. This puts the business based on the new forecasts on a prospective p/e of less than 6 and a dividend yield of over 10% (assuming it is held which may be doubtful). Is this a bargain?

Having had a quick look at the financial profile I am not sure it is. Although net debt of £150 million may not be too high in relation to current revenues or profits, their net profit margin is very small and their current ratio is less than 1, although this is not unusual in retailers who tend to pay for goods after they have sold them.

(Postscript: Paul Scott of Stockopedia made some interesting comments on Conviviality including the suggestion that they might be at risk of breaching their banking covenants and hence might have to do another placing. Certainly worth reading his analysis before plunging into the stock. He also commented negatively on the mid-day timings of the announcements from Conviviality and Fulham Share which I agree with, unless there was some compulsive reason to do them – perhaps they were aware of the Investors Chronicle commentary being issued).

Another tip Investors Chronicle gave yesterday was on Fulham Shore (FUL) which they rated a SELL on the grounds that “growth looks unsustainable”. They got that one right. The company issued a trading statement on the day which also said EBITDA would be below market expectations. Their London restaurants are simply serving fewer customers. The share price dropped 17% on the day. This looks to be symptomatic of the problems of restaurant chains – Prezzo are closing a number of outlets which I was not surprised at because from my visits it seemed rather pedestrian food at high prices. Restaurant Group also reported continuing negative like-for-like figures recently, perhaps partly because of price cutting to attract customers back. Restaurants are being hit by higher costs and disappearing customers. Boring food from tired formulas is no longer good enough to make money.

Another announcement yesterday was results from Alliance Trust (AT.). This is a company that I, ShareSoc, some investors in the trust and hedge fund Elliott Advisors spent a lot of effort on to cause a revolution a couple of years ago so it’s good to see the outcome has been beneficial. Total shareholder return was 19.1% which was well ahead of their benchmark. There was a lot of doubt expressed by many commentators on the new multi-manager investment strategy adopted by the board of directors and the involvement of Elliott, who were subsequently bought out, but it has turned out very well.

The only outstanding issue is the continuing problems at Alliance Trust Savings. They report the integration of the Stocktrade business they acquired from Brewin Dolphin has proved “challenging”. Staff have been moved from Edinburgh to Dundee and the CEO has departed. Customer complaints rose and they no doubt lost a lot of former Stocktrade customers such as me when they decided to stop offering personal crest accounts. So Alliance have written down the value of Alliance Trust Savings by another £13 million as an exceptional charge. No stockbrokers are making much money at present due to very low interest rates of cash held. It has never been clear why Alliance Trust Savings is strategic to the business and it’s very unusual for an investment trust to run its own savings/investment platform. Tough decisions still need to be taken on this matter.

AIM Regulation. The London Stock Exchange has published a revised set of rules for AIM market companies – see here: http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/aim-notices/aim-rules-for-companies-march-2018-clean.pdf .

It now includes a requirement for AIM companies to declare adherence to a Corporate Governance Code. At present there is no such obligation, although some companies adhere to the QCA Code, or some foreign code, or simply pick and choose from the main market code. I and ShareSoc did push for such a rule, and you can see our comments on the review of the AIM rules and original proposals here: https://www.sharesoc.org/blog/regulations-and-law/aim-rules-review/ and here is a summary of the changes published by the LSE: http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/aim-notices/aim-notice-50.pdf (there is also a marked up version of the rule book that gives details of the other changes which I have to admit I have not had the time to peruse as yet).

In summary these are positive moves and the AIM market is improving in some regards although it still has a long way to go to weed out all the dubious operators and company directors in this market.

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

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Beaufort, OFGEM and National Grid

As a postscript to my last blog post on the administration of Beaufort, an interesting article was published by the FT this morning. They had clearly had a chat to administrators PWC. The article reports that the 14,000 investors affected will get no more than 85p in the £1 invested and that no money would be returned for at least a month.

PWC said that that Beaufort’s own funds were very limited and therefore clients will have to cover the cost of recouping their own money and assets. It seems it is a “complicated” administration and there are a number of challenges including assessing the accuracy of financial records. In other words, it’s a typical such mess where the administrators will run up enormous bills sorting it out. As I said in the last blog post, “past experience of similar situations does not inspire confidence”.

It will be months if not years before PWC can sort out who owns what and in the meantime the assets will be frozen. But anyone thinking of taking legal action over the alleged fraudulent practices of the company might find it not worth doing because the cupboard is bare, unless they can target individuals and their assets. Meanwhile there have already been 600 complaints to the Financial Ombudsman apparently but investors might find share dealing by “sophisticated” investors is not covered, and neither are they by the Financial Services Compensation Scheme.

The energy market regulator OFGEM issues a press release this morning. Here is some of what it said: “Ofgem proposes significantly lower range of returns for investors. Tougher approach would deliver savings of over £5 billion to consumers over five years.

Ofgem has today set out proposals for a new regulatory framework from 2021 which is expected to result in lower returns for energy network companies and significant savings for consumers.

This includes a cost of equity range (the amount network companies pay their shareholders) of between 3% and 5%, if we had to set the rates today. This is the lowest rate ever proposed for energy network price controls in Britain. Ofgem also proposes to refine how it sets the cost of debt so that consumers continue to benefit from the fall in interest rates.”

This is very negative news for National Grid (NG.), but surprisingly the share price has risen today. It is possible that analysts and institutional investors were expecting it to be worse, so it’s a “relief” rally. Meanwhile some chatter on twitter from private investors talks about how cheap the shares are on fundamentals. That may be one view, but just look at 2021, when Corbyn and John McDonnell might be in power and to me there look to be very substantial risks. If equity investors are getting less than 5% return, then in any nationalisation the valuation of the equity could be very low even if the Government pays a “fair” price – which no recent Government did on nationalisations. They used totally artificial valuation rules to come out with the figure the politicians wanted. Investors should not trust politicians, but I think we all know that.

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

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Chrysalis VCT AGM Report

Last week (27/2/2018) I attended the Annual General Meeting of Chrysalis VCT Plc (CYS) in the City of London. Here’s a brief report on the event. There were about half a dozen ordinary shareholders present, the three directors and fund management representatives despite the difficult travel conditions.

Chrysalis is of course a venture capital trust but somewhat different to many VCTs. It has a good performance record in recent years but does not undertake share buy-backs. As a result the shares trade at a high discount to NAV (about 20% at the time of writing). With a dividend yield of about 8% (and no tax on VCT dividends), many of the current shareholders may have purchased their shares in the market although some of my holdings date back to the year 2000 when I claimed capital gains roll-over relief.

The company is relatively small in size for a VCT, and the new VCT rules which require such companies to focus on early stage investments are causing the board some concerns apparently. There is reference in the Annual Report to “a review of the options available to the Company” and there was considerable discussion on that topic at the AGM.

Should the company wind-up? Or simply become an ordinary investment company rather than a VCT? Or perhaps look for a merger with another VCT? As regards the latter possibility, this company seems to be getting into the same situation as Rensburg AIM VCT which eventually merged with Unicorn but rather late in the day and after a lot of encouragement from me to take action. I likewise encouraged the directors of this company to make decisions fairly soon on the future of the company.

One matter discussed at the AGM was the company’s large investment in Coolabi where they hold debt repayable in 2020. Having looked at the Annual Report of that company available from Companies House before the meeting, I have a pretty jaundiced view of the value of that business. Although Chrysalis increased the valuation of their loan in the accounts, they actually wrote down their equity stake to zero it transpired (holders of Edge VCT who have a big equity stake in Coolabi should note). However, fund manager Chris Kay did make some very positive comments about the value of the intellectual property in Coolabi.

Chris also commented on the difficulty of making new investments at present with small companies now valued very highly and lots of competition for the good ones. The new VCT rules are making it more difficult and it seems that there are still long delays on getting pre-approval (advance clearance) from HMRC (now 3 to 6 months).

Obviously what the company decides to do affects different shareholders in different ways, depending on their tax status, whether they claimed roll-over relief on investment, and their desire to convert their holdings into cash. The company may do a survey of shareholders but they are not sure they will get a good response.

Those present gave their views on the situation and there were some differences. I plan to write to the Chairman giving my views in more detail. For example, I will probably suggest a “shareholder committee” that might act as a consultative group.

If you are holding shares in Chrysalis, are interested in discussing the future of this company, or would like a copy of my letter to the Chairman, you can contact me via this web page (my company’s web site): http://www.roliscon.com/contact.html

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

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