Category: Companies

Segro Results, BP Acquisition and Boltholes in Portugal

Segro (SGRO), a property company with large warehouses, issued their final results this morning. Adjusted profit was up 8.4% but IFRS earnings per share were down substantially. This curate’s egg of results arose because the assets were revalued down by 11% to reflect the general fall in commercial property valuations particularly in the second half of the year, while rental income was up by 18.9%.  Rental income rose due to strong like-for-like rental growth (a 23% average uplift on rent reviews and renewals) and development completions. The full year dividend is increased by 8.2%.

Comment: These results would look really good if the fall in the value of their properties was ignored. They have no control over the latter of course which are affected by macroeconomic conditions, the cyclical nature of property investments and investors’ general view of commercial property which is very negative as other assets such as offices and retail have declined while interest rates have risen. The market has responded positively to these results after an initial hiccup. For the longer-term it’s starting to look very positive.

Energy company BP (BP.) yesterday announced they were acquiring TravelCenters of America for $1.3 billion. TravelCenters operate a network of EV charging points in the USA.

BP is paying about six times Travelcenters EBITDA and their share price rose by 71% on the news. BP is also planning to invest $1 billion in electric vehicle charging across the USA by 2030. This is part of BP’s five “transition growth engines”.

As a shareholder in BP, this looks a sensible investment and is a rebuttable of those who say big oil companies are not doing enough to move away from oil.

Tesla is also expanding its charging network and making it accessible to other vehicle makes. The electric vehicle revolution is clearly accelerating in the USA partly due to US government encouragement.

The bad news today for wealthy investors was that according to the FT Portugal is scrapping its golden visa scheme that gives non-Europeans the right to claim residency in return for investment. With Portugal having low tax rates and a good climate this was a good location for the moderately rich (it only required property investment of Euro500,000).

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

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Legal Action Against Shell Directors for Dragging Feet over Climate Change

The FT and other newspapers have reported the threat of a legal action against big oil company Shell (SHEL) and specifically against its directors individually for failing to prepare for the risk of climate change. The threat is based on a possible breach of company law by not acting in the best interests of the company and not taking into account the foreseeable risks from climate change. Wikipedia reports that this is a “derivative” action where shareholders are invoking the company to pursue actions against the directors.

The legal action is being promoted by ClientEarth, an environmental campaign organisation and is allegedly supported by a few institutions. Shell lost a similar case in the Netherlands but it is appealing that decision.

Comment: As a shareholder in Shell, I suggest this is an unwise attempt to get the courts involved in overruling the decisions of the directors. The directors are appointed to manage the affairs of the company in the interest of all stakeholders and they will be put in an impossible position if all their decisions might come under scrutiny in the courts. Judges are not qualified to decide on the merits of the business decisions of company directors.

In summary, this is a misconceived legal action and I hope the application for a hearing is rejected. Companies such as Shell and BP have already taken major steps to reduce their carbon emissions and to stay within the law of the land.

They not only provide oil and petrol which are essential for the next few years, but also provide a range of essential chemicals, plastics and fertilizers which cannot be otherwise created.

The Government is aiming for “NetZero” carbon emissions when they have not calculated the full cost or practicality of achieving it. It’s driven by sentiment not economics and belief in a false reality. The ClientEarth organisation is clearly being run and funded by extremists who have no understanding of the underlying issues.

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

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Unintelligent AI Wipes $120 Billion off Google Share Price

The strangest financial story yesterday was surely the fall in the Google share price after their new Bard AI tool gave the wrong answer to a question. This allegedly caused the share price to drop by 8% and damaged the whole technology sector with it apparently impacting the share prices of big technology trusts such as Polar Capital Technology and Scottish Mortgage.

Search engines are becoming a new battleground for Google and Microsoft with the latter owning ChatGPT. The addition of AI features is seen as a way to improve the answers that search engines produce and might undermine the dominance of Google if Microsoft can develop the technology and incorporate it into their products such as Bing.

To remind readers, Google became such a successful business after they were the first to produce a search engine that was based on keywords and which articles were most referenced by others. Microsoft have been playing catch-up ever since but still haven’t managed to undermine the dominance of Google.

ChatGPT can already be used to generate somewhat anodyne articles when prompted with a few questions and keywords so allegedly is being used by students to cheat in essay writing examinations. Both Bard and ChatGPT are using the information on the internet to construct “intelligent” answers to questions.

In the case of Bard it was asked the following question: “what new discoveries from the James Webb telescope can I tell my 9-year old about”? It answered “JWST took the very first pictures of a planet outside of our solar system”. This is not correct. This is surely simply a case of garbage in and garbage out. There was probably an internet article it relied upon. ChatGPT and Bard are interesting mainly because they attempt to interpret and understand natural language and phrase the answers using it. But that does not mean they are infallible because they rely on unverified information on the web. Also they may not be really intelligent but just rely on improved heuristic methods.

This is not as revolutionary as it is made out to be so the fact that they sometimes give the wrong answers is hardly surprising. Google’s dominant market position may not be undermined even if ChatGPT can help Microsoft and Bing to improve their technology. Google has become such an intrinsic part of the internet eco-system not just because of its great technology but also because of its business and marketing strategy.

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

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BP Results + BEIS Restructure

BP (BP.) produced some great financial results yesterday and the share price rose 8% on the day and is still rising. Other oil companies rose in unison. What I particularly liked as a holder was the improvement in Return on Capital which is forecast to grow to 18% in 2025 and 2030. This is after many years of quite mundane returns when I judge such a metric to be a key factor in any investment decision.

With increasing share buy-backs and dividend increases you can see why shareholders are happy. Their view might also have been affected by the following comment from the company CEO: “It’s clearer than ever after the past three years that the world wants and needs energy that is secure and affordable as well as lower carbon – all three together, what’s known as the energy trilemma. To tackle that, action is needed to accelerate the transition. And – at the same time – action is needed to make sure that the transition is orderly, so that affordable energy keeps flowing where it’s needed today”.

He is in effect saying that BP will continue to invest in oil/gas production while also investing in “transition growth engines” which includes “bioenergy, convenience and EV charging, hydrogen and renewables and power”. Production of oil/gas will be around 25% lower than BP’s production in 2019, excluding production from Rosneft, compared to the company’s previous expectation of a reduction of around 40%. BP correspondingly now aims for a fall of 20% to 30% in emissions from the carbon in its oil and gas production in 2030 compared to a 2019 baseline, lower than the previous aim of 35-40%.

It is good to see that reality has crept into their plans and forecasts. But the company’s results are clearly very dependent on the price of energy whose cost has shot up sharply because of the war in Ukraine, There is a worldwide energy shortage and investors should keep a close eye on trends in that market if they hold companies such as BP and Shell.

There was an amusing post on Twitter by Philip O’Sullivan pointing out that the Annual Report of Shell in 1944 was all of 8 pages long – see first page above. Last year it was 359 pages!

That would be a good example for Shell and other companies to follow when annual reports are now way to long and voluminous in most cases. This is partly down to increased regulation and expanded accounting standards driven by increases in bureaucracy emanating from the Government BEIS Department  (“The Department for Business, Energy and Industrial Strategy”). For many years this used to be called the Department of Trade and Industry (the DTI) before politicians decided it was a good idea to rebrand it.

Now the Government has decided to split it up into three new Departments to be called “the Department for Science, Innovation and Technology, the Department for Energy Security and Net Zero, and the Department for Business and Trade”. What the benefit of this restructuring will be is not at all obvious and the name “Department for Energy Security and Net Zero” is a particular oxymoron as aiming for Net Zero is not going to improve energy security.

The downside is likely to be another year of musical chairs for civil servants in these departments when one of the issues is lack of continuity of expertise in specialist areas of government such as company law and stock market regulation.

Shuffling responsibilities does not help.

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

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The New Realities and Private Healthcare

The editorial in this week’s Investors Chronicle was full of doom and gloom. Under the headline “Facing up to new realities” the editor said “The threats identified by the WEF (World Economic Forum at Davos) include climate change, the cost of living crisis, geopolitical confrontation, high debt levels, recession, low growth, social unrest and cyber crime. These crises are converging, it says, to shape a unique, uncertain and turbulent decade to come”.

All I can say is that I have seen all this before and the problems we face are actually relatively minor in comparison with the difficulties faced in previous decades. Having lived through the 1970s when the UK economy was on its knees, we only face minor handicaps now in my view. The WEF is talking us into a recession as when confidence in the economy falls then businesses stop investing for the future. But this is a temporary phenomenon and when we get out of the gloom of winter the picture may be a lot brighter.

Another interesting article in Investor’s Chronicle was on private healthcare which had the headline “Private care likely to boom amid NHS crisis” and I would not dispute that comment. It covered Spire Healthcare (SPI) one of the few medical companies that are UK listed. I was particularly interested in the article because Spire have recently acquired The Doctors Clinic Group who provide private GP services mainly in the London area. I actually used the service a month ago when I got fed up with trying to book an appointment with my NHS GP who have a dysfunctional web site and hopeless phone service. Doctors Clinic was a very efficient, slick and relatively low cost service which I would recommend. Appointments can be made and in person relatively quickly.

But the acquisition by Spire was a relatively small one for them. The financial results of Spire over the last eighteen months do not inspire confidence. Profit margins are poor with only “unadjusted” profits of £4.2 million on revenue of £598 million in the last 6 months. The results were apparently hit by cancellations due to the covid epidemic and staff absences for the same reason.

There is clearly great potential to expand the private GP service as people give up on the NHS but Spire seem to be no better than the NHS at operating a service that more than covers the costs of provision.  And this is one of those companies that “polishes” their financial figures by reporting Adjusted EBITDA and even adjusted cash flows so interpreting their financial figures is not easy.

Investors would have more confidence in the company if they focussed on unadjusted financial figures plus better profit margins and return on capital which have never been brilliant in the last decade.

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

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GB Group Webinar plus Spirent and Paypoint Trading

I watched the Capital Markets Event webinar yesterday of GB Group (GBG), a company whose shares I have held for a number of years. As one of the speakers said, identity verification is the key for trusted e-commerce and GB has exploited the growing demand for that.

The event lasted over 2 hours and was full of marketing hype including four presentations from customers saying how wonderful the company was. But I learned very little that was new about the company’s activities.

Future guidance was reiterated. According to Stockopedia that puts the company on a prospective p/e of 19.2 for the current financial year (year end of March) and 17.1 for next year which does not seem expensive. The half-year results recently announced showed positive growth in revenue but earnings per share down and debt risen no doubt due to the recent large Acuant acquisition.

I would have liked much more information on their competitive position, market share, integration progress etc.

This morning there was a trading statement from Spirent (SPT). This said 2022 results were in line with expectations but also included the comment “the Group’s performance is now likely to have a heavier than usual weighting to the second half of 2023”. That was enough to scare the market and the share price is down 16% at the time of writing. Investors have learned to be very wary of such comments – it usually simply means sales targets are not being met.

Yesterday did produce some better news at another of my holdings – Paypoint (PAY). They said “Group net revenue from continuing operations increased by 9.8% in the quarter to £32.5 million”. The share price perked up yesterday and it looks fundamentally not expensive but a large holder (Sanford DeLand Buffettology Fund) has been selling recently and still holds a big stake so the share price may remain under pressure.

The other good news yesterday was that inflation fell slightly to 10.5%. Will it continue to fall? Probably but at that level it’s still rapidly eroding the value of the pound in our pockets. Food price inflation is a particular problem. Killing off inflation is not going to be easy as labour shortages and strikes means there will be pressure to increase wages and hence prices for some time.

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

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Lifting the Gloom, But Not at Halfords

I think I have been suffering from Seasonal Affective Disorder (SAD). It seems to have been raining and cloudy since before xmas and the stock market did not perk up until the last few days.

Even today one of my holdings, Halfords (HFD) issued a profit warning which caused the share price to drop by 20%. But the losses on that were offset by significant rises in a number of my other holdings including some technology stocks and property REITs.

Is this the end of the bear market? I don’t know but I doubt it. The economic prospects are still poor. However I have cautiously purchased a few small AIM company shares including GB Group (GBG), Eckoh (ECK) and RWS (RWS). These are not share tips but more a strategic move to increase my holdings in smaller companies which now seem good value when I have a large cash balance at present.

What was the problem at Halfords? Softer than expected cycling and tyre markets was one aspect but enthusiasm for cycling is bound to fall in very cold and wet weather. Another problem was difficulty in recruiting skilled labour in Autocentres.

These might both be temporary problems so I am not planning to reduce my holding which was mainly purchased before the recent ramp up in the share price after it was enthusiastically tipped in several publications. That shows the danger of following the crowd.

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

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Fundsmith Annual Investor Letter

Terry Smith has published his thirteenth annual letter for investors in the Fundsmith Equity Fund (which I hold). As usual it’s a good mixture of sound analysis of market events and witticisms. I’ll cover a few significant points:

The fund underperformed the MSCI World Index with a total return of minus 13.8%, which was better than my own portfolio. As he points out the only way to beat the market last year was to hold energy stocks and nothing else. But both I and Fundsmith have a focus on growth companies so we have been under-weight in the dinosaurs of the investment world.

As Terry says: “Whilst a period of underperformance against the index is never welcome it is nonetheless inevitable. We have consistently warned that no investment strategy will outperform in every reporting period and every type of market condition. So, as much as we may not like it, we can expect some periods of underperformance” which is a fair comment.

Terry points out that we have gone through a period of “easy money” when central banks ignored the consequences of their actions. He says “One of the problems of easy money is that it leads to bad capital allocation or investment decisions which are exposed as the tide goes out”.

He is particularly critical about the management of Paypal and Facebook  (Meta) plus makes negative comments on Alphabet and Amazon and their expenditure on non-core businesses. He is scathing about the failure of some companies in which the fund has holdings to engage or even to provide information about the return they are getting on investments. He says: “What I am complaining about is the bipolar response some companies have to long-standing shareholders versus newly arrived activists”.

He has a particular attack on Unilever as in previous years and makes this acerbic comment on their marketing of soap: “When I last checked it was for washing. However, apparently that is not the purpose of Lux, the Unilever brand, which apparently is all about ‘Inspiring women to rise above everyday sexist judgements and express their beauty and femininity unapologetically”.

Lastly he attacks the exclusion of share-based compensation from financial reporting which can completely distort comparisons with other company’s figures.

In summary, another thoughtful report from Terry Smith and I am happy with the funds continued focus on investing in companies with a high return on capital and high margins with good cash conversion.

The Fundsmith EquIty Fund letter can be read in full here: https://www.fundsmith.co.uk/media/bm0lyc22/annual-letter-to-shareholders-2022.pdf

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

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EDGE Performance VCTs, REITs and Paypoint

I am glad to read that Edge Performance VCT (EDGH) is planning to wind-up. I have written about this VCT several times in the past despite never holding it and I always considered it a basket case which seemed to be run more in the interests of the management and advisors than shareholders. ShareSoc ran a campaign on the company to try and get it reformed, but ultimately without success.

It has now been revealed that they paid dividends illegally for which they are asking shareholders to vote through a “whitewash”. The latest announcement also says: “As Shareholders will be aware, the Company’s net asset value has significantly reduced in recent months, with, among other things, market-related reductions in the portfolio valuation, a dividend paid on 6 May 2022, share buy-backs and the payment of advisers’ fees having substantially depleted the Company’s cash. As a result, the Board and the Investment Manager are of the opinion that the Company is sub-scale and that the Company’s ongoing charges ratio will be too high at approximately 14.89 per cent.

Following lengthy discussions with the Investment Manager as to the Company’s current position and the overall market outlook, the Board does not foresee any reasonable opportunity for the Company to grow in the short term. Accordingly, after careful consideration the Board believes that it is in Shareholders’ best interests that the Company be placed into a members’ solvent voluntary liquidation, with the intention that there will be an orderly winding down of the Company, realisation for cash of the Company’s assets and a return of that cash to Shareholders in a manner which will be intended to preserve VCT tax-reliefs”.

This decision is several years too late in my view while in the meantime managers and advisors have extracted large amounts of cash.

On another subject, my portfolio is down again today mainly because the share prices of property funds/trusts including REITs have fallen sharply. This is no doubt due to the rise, and prospective more rises, in interest rates. This might impact property companies when their debts need to be refinanced. This has affected all property companies, even those who have fixed their interest on debt at low levels and have many years to run before they need refinancing.

In a few years time, the position on interest rates may be very different as inflation is forecast to fall rapidly next year. Property companies should be long-term holding so I won’t be panicking over the latest share price falls.

Another share that has fallen today is Paypoint (PAY) which I hold. That’s despite recent director share buying including another deal today. What do they know that I don’t is the question one asks oneself in such circumstances. Perhaps they are convinced that the recently announced bid for another company is really a good deal when the market seems to think otherwise.

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

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The Cult of We – Book Review

If you want a good read over Christmas, I can highly recommend the book “The Cult of We” by Eliot Brown and Maureen Farrell. It covers the history of the WeWork company (later renamed the We Company) and its founder Adam Neumann.

WeWork was valued at over $50 billion at the peak of euphoria and received many billions of dollars in venture capital funding from Softbank and other private equity investors. It eventually ran into difficulties as the funding failed to keep pace with mounting losses. Indeed apart from it’s very early years it is doubtful it ever made a profit.

This was a company that pretended to be a technology business but in reality was simply leasing large office space and sub-letting it to small businesses and start-ups. One might say it was leasing long and letting short as there was a high churn of customers.

Adam Neumann was a messianic character who promoted the idea that he and his wife were inventing a new social order with a focus on “we” not “me” where small business could share resources and build a social network. In reality they barely talked to each other.

It’s a great example of how investors can be fooled by a glib and charismatic personality. Investors jumped in for fear of missing out (FOMO) in the boom years of venture capital funding without doing proper due diligence or standing back and looking at the reality of the business model.

There was certainly a demand for these kinds of “serviced” offices for small businesses or large ones that urgently needed more space. But it was an easy concept to copy with many imitators quickly springing up. No barriers to entry is the key phrase!

The story of wasted cash with non-existent corporate governance takes some beating. A private jet purchased, big parties with free booze for staff, pot smoking by Adam, and other uncontrolled excesses make for amusing reading. Diversifications into schools for kids (WeGrow) and other unrelated ventures followed.

But it’s not only a good story about the growth and collapse of a company but a good overview of the US venture capital industry in the last 15 years and some of the personalities involved. We may not see the like again I suspect.

I won’t tell you how the story ends so as to avoid spoiling your enjoyment of the book, but there is certainly much to be learned from it. One is beware of charismatic founders/CEOs. They are not all as visionary as Steve Jobs and can easily become megalomaniacs.

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

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