Ten Entertainment Placing and Porvair AGM Arrangements

Ten Entertainment (TEG) did a placing yesterday. It was done at 155p to raise £5 million and represented about 5% dilution. Although I hold some of the shares I was not too unhappy because I only have 50 shares left worth less than £100 having sold most of my holding at 270p and higher. I suspect this is one of many placings we are going to see in the near future to enable companies to strengthen their balance sheets and avoid going bust. TEG runs bowling alleys which are now closed so as I pointed out yesterday, valuing such companies is getting very difficult.

Porvair (PRV) another of my now miniscule holdings have made an announcement about their Annual General Meeting (AGM). It’s now going to be held in their offices in the remote location of Kings Lynn. Although the company points out that under its Articles the company cannot hold virtual meetings, it advises shareholders not to attend in person. Instead they are asking shareholders to vote via proxy and are planning to provide a conference call facility to enable shareholders to ask questions.

This seems to be an eminently wise approach that should be adopted by other companies until the virus epidemic is over. I will certainly not be attending any physical meetings for the foreseeable future being one of those quarantined on the basis I am exceptionally vulnerable. It’s equivalent to being on gardening leave, which I did some of yesterday.

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

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Profit Warnings at XP Power and Ted Baker, plus Mercia Placing

A number of profit warnings this morning. The most interesting to me was at XP Power (XPP) although I do not hold it. It was interesting because as a former IT Manager it is a good example of how to screw up a business by poor IT management.

In this case their problem is an implementation of a new SAP Enterprise Resource Planning (ERP) system. The announcement this morning says that some short-term disruption to shipments “will result in revenues and adjusted profits before tax for 2019 being below current market consensus”. However they say the outlook for 2020 is unchanged. The fact that this may be only a temporary situation and that investors look ahead is no doubt why the share price has not fallen but has actually risen slightly at the time of writing.

As I said in my recently published book: “Many businesses fail, or perform badly, because their internal systems and operations are defective. Reliable and effective IT systems are enormously important in the modern world….”. It is something that investors do need to look at and when a company says it is implementing a new ERP system you need to be wary. Just look at the costs of a failure of new IT systems at Abcam for example.

Ted Baker (TED) issued another profit warning (I do not hold it). The share price has dropped another 15%. They report that “trading over November and the Black Friday period was below expectations, with lower than anticipated margins and sell through”. They anticipate that difficult trading conditions will continue. This looks like another casualty of the problems on the High Street, but even their e-commerce sales fell slightly. That result is even after more promotional activity which has cut margins. The dividend has been suspended and costs are being cut.

It’s worth commenting on the placing by Mercia Asset Management (MERC) to partly fund the acquisition of NVM Private Equity and for other purposes. Mercia invests in smaller unlisted companies, in other words it’s a private equity investor. I do not hold the shares although I did invest alongside them in an EIS company back in 2013. It was a start-up fintech business which is now moribund so both they and I have written it off, but I don’t hold that against them. It just proves how risky such investments can be and hence the difficulty of valuing the investments they hold. This kind of investment company deserves to trade at a substantial discount to their claimed NAV in my view (as do most VCTs which are similar companies).

NVM manage the Northern VCTs (NVT and NTV) which I do hold so I have an interest thereby in the acquisition. I have no objection to that acquisition and it certainly looks a sensible strategic move for Mercia as it will grow their assets under management very considerably and provide a much more stable source of income. However, the placing to fund this acquisition, which as usual private investors were not able to participate in, was done at a 23% discount to the pre-announcement share price. This kind of large discount does not give me confidence in the management that minority shareholders will not get screwed again in the future.

This placing also received severe criticism from Simon Thompson in Investors Chronicle. He has previously tipped the shares partly on the basis that there was value here because of the high discount to NAV. Well he is now disillusioned because the placing was at a discount of 40% to NAV, with a large dilution of existing shareholders! He recommends voting against the placing at a General Meeting on the 20th December and I cannot disagree with him.

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

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City of London IT, Equals Interims, Paypoint CEO, Downing One VCT and Parliamentary Pandemonium

Having been away on holiday in the North of England last week, this is a catch up on news that impacted my portfolio.

I received the Annual Report for City of London Investment Trust (CTY) which is one of my most boring holdings. This is large cap equity growth/income trust managed for many years by Job Curtis and I have held since 2011 – it seems longer. Total return last year was 2.7% which beat most of the comparable indices. But a look at the overall return (including dividends) on my holdings in Sharescope shows an annual return of 15.0% which is very pleasing. It has reduced its management overheads to a cost of 0.39% (the “on-going” charge).

It is particularly worthy of note that the Chairman, Philip Remnant, says this in the Annual Report: “In February 2019 the AIC published an updated Code of Governance which largely mirrors the provisions of the UK Corporate Governance Code issued by the FRC save that the strict nine year cap on the Chairman’s tenure contained in the FRC’s code has been disapplied by the AIC. I see no reason why the rules which apply to the length of time which the chairman of an investment company can server should be more relaxed than those that apply to other listed companies, and so I will be stepping down as Chairman during 2020”.

I completely agree with Mr Remnant and have raised this point at AGMs of a number of trusts where directors are permitted to hang on for much too long. The AIC should not pretend that investment trusts are exempt from the UK Corporate Governance Code.

Equals (EQLS), formerly called FairFX, issued their interim results on the 26th September. Revenue was up by 21.4% and Adjusted EBITDA up by 78% but EPS was down. The share price fell, although the Chairman bought some shares soon afterwards.

However as reported on at the AGM (see https://tinyurl.com/y5j58dd6 ) there is a large amount of software development work being capitalised at this company and as expected, it went up in the half year. Another £4.8 million to be exact. That is a very large amount of development work and suggests either a very large team or an expensive one. It does raise doubts in my mind, and possibly others, about the accounts.

Paypoint (PAY) reported a “temporary leadership change” on the 26th September. CEO Patrick Headon is taking a leave of absence to receive treatment for a medical condition and he is expected to be absent for 3 months. The share price barely moved during the week but these kinds of reports which give no details can often conceal worse news. I recall the recent events at Wey Education where Executive Chairman David Massie received some open-heart surgery and subsequently died. Shareholders were not informed of this problem until he resigned and this was a significant problem for the company. I suggest there should be some clear rules developed on when medical incapacity needs to be reported to shareholders, and what level of detail is provided so that investors can judge the risks and possible impacts.

Downing One VCT (DDV1) issued a circular concerning the raising of up to £40 million in additional equity. This is justified so as to increase the size of the company to better cover the fixed running costs and to enable the company to make new investments and diversify its portfolio.

It always surprises me how Venture Capital Trusts can often raise more money even when they have a very patchy performance record. According to the AIC, this VCT achieved a NAV total return of 9.4% over the last 5 years. I won’t be increasing my holding in this company therefore by subscribing for it. However, how should I vote on the fund raising? Should I support it on the basis of pulling in more suckers to support the overhead costs? Or oppose it on the basis that giving more cash to the manager will hardly improve performance in the short term and simply give more fees to a poorly performing fund manager?

They are also proposing to introduce a Performance Incentive Fee – 20% of gains subject to a hurdle rate. But performance fees do not improve performance so I always oppose them. I hope other shareholders will do the same.

It was of course difficult to get away from events in Parliament and Brexit issues while on holiday. But I did manage to read a book in the hotel library – The History of the Decline and Fall of the Roman Empire by Edward Gibbon – just a part of it of course as it’s a multi-volume book. Gibbon was a Member of Parliament in the 1770s but disliked the place which he called “Pandemonium”. Nothing changes it seems.

As regards the decision of the Supreme Court over Prorogation, having read the full Judgement of the Court, I do not find it particularly surprising. People do tend to jump to conclusions about court judgements, often declaring they are biased, when a full reading often shows that the judges are not so perverse as imagined. I fear the advice of the Attorney General on prorogation was defective in that it cannot be purely at the whim of the prime minister to suspend Parliament for a long period of time and without good reason.

It was also unnecessary as Boris Johnson has other options to ensure that Brexit takes place on the 31st October as he wishes. Most investors are surely now of the same view of many of the public that we need to get this matter settled. Delaying resolution by a further extension of the Brexit date or by another referendum would simply cause more uncertainty and difficulty for businesses and for investors. Businesses cannot plan adequately and the value of the pound is dropping while investors are nervous. None of these things are helpful to investment returns.

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

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AB Dynamics Placing, and Metro Bank Troubles

AB Dynamics (ABDP) announced a placing to raise £5 million this morning. The money will be used to finance potential acquisitions, add production capacity and meet working capital requirements. This company provides vehicle testing systems and has been rapidly expanding recently. The share price has also been rising like a rocket in the last few weeks and on fundamentals the company is now very highly rated – prospective p/e for the current year is 47. So perhaps the company just saw this as a good opportunity to raise some money.

The new shares are being placed at 2200p though which is a discount of 13% to the share price last Friday. However although this is being done via a placing to institutional investors there is also an “open offer” for those such as private shareholders who cannot participate in the placing. This is the way to do such things and as a holder of the shares I will probably take up the open offer just so as to avoid dilution, although I don’t consider the price as particularly attractive. The share price dipped first thing this morning on the news but has subsequently recovered most of that fall.

Metro Bank (MTRO) has been in trouble since the start of the year when it disclosed it had wrongly risk-weighted some of its loans which meant its capital ratio was wrong. Metro is one of the so-called “challenger banks” that aim to tackle the dominance of the big high-street banks in the UK. The company did a placing to raise another £350 million last week to shore up its balance sheet.

But depositors have been spooked by the news and apparently there were queues of customers withdrawing money from branches in West London recently. Is this another run on a bank, as happened at Northern Rock? Where a falling share price and collapsing confidence in the bank caused depositors to panic? The FT ran an editorial saying it was not similar but it looks very much so to me. Although the Financial Services Compensation Scheme (FSCS) now protects deposits up to £85,000 that will not help many retail customers and the delays in obtaining compensation will encourage depositors to move all of part of their funds elsewhere and promptly. Corporate clients have no such protection anyway. When confidence in a bank is lost, even if it is technically solvent, depositors don’t hang around.

Here’s a good quote from eminent Victorian author Walter Bagehot: “Every banker knows that if he has to prove he is worthy of credit…in fact his credit has gone” (in another letter in the FT today).

From my experience of trying to open an account with Metro Bank recently, I have doubts about the quality of this business anyway. I gave up in the end. Needless to say I don’t hold shares in Metro. But all banks are becoming exceedingly difficult to deal with. My long-standing (over 50 years) bank recently made me visit a branch to prove who I was. There was a letter complaining about the service from banks in the FT on the 15th May. It suggested that “something has gone badly wrong” with frontline bank service. I had similar problems with a business account at HSBC who proved impossible to talk to other than by visiting one of their branches – and even then they were unable to resolve difficulties. It is extremely annoying that banks are becoming paranoid about KYC and security checks so that they won’t even talk to you on the telephone about simple queries.

If any readers can recommend a bank who acts more reasonably and sensibly, let me know.

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

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