Cloudcall Investor Meeting, Sophos, RPI and Brexit

Yesterday I attended a “Capital Markets Day” for Cloudcall (CALL), a company in which I hold a few shares. But not many because it has been one of those technology companies with fast growing revenue but it has been slow in actually reaching profitability. The result has been multiple share placings, the last one in October 2017, to plug the negative cash flow hole. So cash flow was no doubt on investors minds at the meeting, as you will see.

The company sells unified communications technology to businesses using CRM systems. A couple of their major partners are Bullhorn (a recruitment/staffing software business) and Microsoft with their MS Dynamics product and there were speakers from both companies at the meeting. They helped to explain the attractiveness of the product to their customers, which I do not doubt.

CEO Simon Cleaver covered the latest product enhancements which will potentially enable them to integrate with 4 or more new CRM products in 2019. It will also include broadcast SMS messaging and mobile support which their customers need. Apparently there will be an increased focus on the US market, but the company is also looking at the APACS region and Brazil from later comments, where there are obvious opportunities. Pete Linas from Bullhorn made an interesting comment that the company has been missing out on business growth due to lack of finance – suggesting perhaps that a more aggressive strategy be adopted as per early stage US technology companies, i.e. ignore the losses and negative short-term cash flow and raise more finance.

CFO Paul Williams, covered the recent trading statement which was positive. Group revenue up 29% but cash burn was £1.5m in H2 2018, i.e. still consuming cash rather than generating it. Cash available was given as £2.75m. Paul also covered how the growth in users converts into revenue and future profits but they seem to have a relatively high churn rate for this kind of business, i.e. customers dropping out subsequently. It was not made clear why they lose some customers/users and what the customer contract durations actually are. However in response to one of my questions it was stated that forecast revenue growth for this year will be 40% (that’s higher than analyst’s forecasts so far as I can see).

Paul also said cash burn was reducing and Simon said that it was down to £240k per month, with sufficient cash to break even, if the sales numbers are met. He suggested that if more cash was needed (e.g. to fund US expansion) then they could raise their existing debt level from £1.8m to £3.0m and the board would prefer to raise the debt than more equity. The impression was given that conversations around that had already taken place and Paul Scott questioned whether the bankers would want to lend to a loss-making business – it seems they might. Comment: they might but at a hefty cost and with tight mandates. I simply don’t believe that companies like this should be financed via debt. Equity is what is needed for early stage, high-risk technology companies as I said to Simon later. But another placing may not be enthusiastically welcomed by investors at this time.

One interesting comment from the audience questioned whether the company was charging too little for the product. But it appears that they need more functionality to be able to charge more, and that would require more investment of course. But will the company ever become such an essential part of the customers’ business operations that they cannot do without, or even more to the point switch to a competitor? That was not really clear.

Concluding comment: The company is making progress and Simon communicates his enthusiasm well, but I suspect the business will continue to burn cash and financing that with debt makes no sense to me.

Sophos (SOPH) is another technology company that issued a trading statement today. The good news is that it has reached profitability and revenue has increased by 14% year-to-date. The share price promptly dropped by more than 25% in early trading! The reason was no doubt the lackluster growth in “billings” (i.e. invoiced sales) of 2%. Why is that different to the revenue figure? Probably because the revenue includes some accrued from last year on subscription billings. It otherwise looks like it is likely to meet the year-end targets forecasts of analysts. With the share price fall it’s starting to look relatively cheap for a high-growth software business so the key question investors have to ask is whether growth will return? It was no doubt exceptional last year because of IT security scares and new product releases, but is it simply nearing market saturation? An article in Shares magazine has questioned whether the cause of billings slowing is increasing competition from new market entrants so that’s certainly an issue to look at also. There is more explanation of the reasons for billing trends in the audio presentation available here: https://investors.sophos.com/en-us/events-and-presentations.aspx . I have a small holding in Sophos and bought more on the dip today.

RPI concerns. A House of Lords committee has apparently questioned the continuing use of the “discredited” Retail Price Index (RPI) when CPI is a more accurate reflection of inflation. RPI is still used for many purposes, such as rail fare costs, and for index-linked savings certificates and gilts. Personally having just signed up to extend my investment in savings certificates even with minimal real interest on them, I would be most concerned about any change and I would not have done so if the index used changed to CPI which typically gives a much lower figure.

Brexit. Everyone else is giving their views on Brexit so why not me? Here’s some.

Firstly, in case you have not noticed, MPs have apparently been advised that it might take over a year to organise another referendum. So those who are calling for another one are surely misguided. Putting off the EU exit that long, with the uncertainty involved surely makes no sense. And most people are fed up with debating Brexit even if the questions in a new referendum could be decided. Parliament and the executive Government alone need to come up with a solution.

Should we rule out a “no-deal” Brexit? No because it would not be a nightmare as remainers are suggesting. As I was explaining to my wife recently, grapes and bananas might become cheaper because EU tariffs would be removed on food from the rest of the world. What about UK farmers who would face problems in exporting to the EU? Well that just means that beef would also become cheaper in the UK. Secondly to rule out a no-deal Brexit would totally undermine our negotiating position to obtain a good Withdrawal Agreement with the EU. Only the threat of a no-deal Brexit with the risks to exports from the EU to the UK (where of course the trade flow is in their favour at present) will focus the minds of EU politicians. So Jeremy Corbyn’s insistence on ruling out “no-deal” before he will discuss the matter just looks like an attempt to throw a spanner in the works in the hope of getting a general election.

Can Mrs May get enough support for the Withdrawal Agreement as it stands? Undoubtedly not. She has to go back to the EU with proposals for substantial changes to meet the concerns of MPs and the public, e.g. over the Irish “backstop”. If she acts quickly and decisively, I think that could achieve success. If she cannot do so then surely someone else who can provide the required leadership needs to take over – including someone willing to support a no-deal Brexit if required. The current Withdrawal Agreement is not all bad, but contains some significant defects, probably because it appears to have been written by EU bureaucrats rather than as the result of mutual negotiation. It needs revising.

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

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Political Turmoil, Investor Confidence and Brexit

With the latest news that Theresa May faces a leadership challenge and recent events in Parliament, it’s worth commenting on the impact on the stock market. These gyrations have generated an enormous amount of uncertainty among investors. The result is that few investors are buying even after share prices have fallen substantially.

The general trend in the UK market is down, the pound is falling and overseas investor confidence (which is key to prices of large cap stocks) must have been damaged by the headlines that they see. Will the UK face a “hard” and damaging Brexit, or even a change to a Labour Government? Overseas investors will have even less of a handle on those risks than UK investors so are running scared.

The fall in the pound should help the profits of many UK listed companies. But even the shares prices of those companies who might benefit have been falling. That applies particularly to small cap companies. Many small cap stocks have limited liquidity and the liquidity provided by private shareholders has been disappearing as those with limited stock market experience have suddenly realised that the markets are not a one-way system where you consistently make money after ten years of positive market trends. They are taking their profits and sitting on their hands.

We are in a “negative momentum” situation where falling share prices drive further falls as trend followers ignore fundamental valuations and sell regardless. This will not change until share values start to look very cheap. The decline in US markets has also undermined investor confidence generally, and has a big influence on the UK market.

There could be a sharp recovery in share prices if confidence returns – after all the UK and worldwide economies are doing well. But confidence will not return until there is some sight as to how the Brexit problem will be resolved.

Theresa May has certainly got herself and her party into a very difficult situation. She signed up to an agreement with the EU over withdrawal that many in her party, and in the DUP who she relies upon for votes, do not like at all. Instead of simply telling the EU that the deal has to be renegotiated, as any firm leader would have done, all she has been doing is going around Europe asking for “reassurances” on the back-stop. The EU bureaucrats (Juncker et al) might have said that they won’t renegotiate it – so would I knowing that Mrs May does not have enough support to take a firm position and time is rapidly running out. But the EU needs a deal to protect its economic interests. They might hope that Britain will reconsider and stop the Brexit process altogether but that is not consistent with the views of the majority of the UK population so is unlikely to happen. Even if a general election was called over the issue, it is not clear that Labour would run on a manifesto committing to rejoin the EU as a lot of their traditional supporters do not like the EU and are affected by the unlimited immigration that has resulted from free movement of people.

The answer therefore is to replace Mrs May with someone who can provide firmer leadership including taking a risk on a “hard” Brexit with no withdrawal agreement if necessary. The latter would not nearly be so damaging as some predict and would put the UK in a very strong position to negotiate a trade deal that is in our interests (and with no complications over Northern Ireland as that issue could then be simplified to avoid a hard border).

My view is all deals are renegotiable if either party no longer supports it. Therefore we need to “withdraw from the withdrawal agreement”, i.e. repudiate it and start again. There are many aspects of the EU Withdrawal Agreement and the proposed future relationship that make sense, but some aspects of the former need changing.

Well those are my views on the political situation. Others might disagree. But so far as investors are concerned, improving confidence in the future economic and political landscape is the key to improved share prices. That seems unlikely to happen under Mrs May’s leadership however much one recognises that she has been trying her best in difficult circumstances.

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

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Autonomy, FRC Meeting, Retailers and Brexit Legal Advice

The big news last Friday (30/11/2018) was that former CEO Mike Lynch has been charged with fraud in the USA over the accounts of Autonomy. That company was purchased by Hewlett Packard who promptly proceeded to write off most of the cost – see this blog post for more information: https://roliscon.blog/2018/06/02/belated-action-by-frc-re-autonomy/. As this was a UK company, are we anywhere nearer a hearing in the UK over the alleged “creative accounting” that took place at the company and the failure of the auditors to identify anything amiss? That’s after 8 years since the events.

As I was attending a meeting held by the Financial Reporting Council (FRC) for ShareSoc and UKSA members yesterday, I thought to review the past actions by the FRC on this matter. In February 2013 they announced an investigation but it took until May 2018 to formally announce a complaint against auditors Deloitte and the former CFO of Autonomy Sushovan Hussain who has already been convicted of fraud in the USA. On the 27th November, the action against Hussain was suspended pending his appeal against that conviction, but other complaints were not. But why the delay on pursuing the auditors?

The FRC event was useful in many ways in that it gave a good overview of the role of the FRC – what they cover and what they do not cover which is not easy for the layman to understand. They also covered the progress on past and current enforcement actions which do seem to have been improving after previous complaints of ineffectiveness and excessive delays. For example PWC/BHS was resolved in two years and fines imposed are rising rapidly. But they still only have 10 case officers so are hoping the Kingman review of the FRC will argue for more resources.

It was clear though that audit quality is still a major problem with only 73% of FTSE-350 companies being rated as 1 or 2A in the annual reviews when the target is 90%. The FRC agreed they “might be falling short” on pursuing enforcement over poor quality audits. So at least they recognise the problems.

One useful titbit of information after the usual complaints about the problems of nominee accounts and shareholder rights were made (not really an FRC responsibility) was that a white paper on the “plumbing” of share ownership and transactions will be published on the 30th January.

There were lots of interesting stories on retailing companies yesterday. McColl’s Retail Group (MCLS) published a very negative trading update which caused the shares to fall 30% on the day. Supply chain issues after the collapse of Palmer & Harvey are the cause. Ted Baker (TED) fell 15% after a complaint of excessive hugging of staff by CEO Ray Kelvin. This may not have a sexual connotation as it seems he treats male and female staff similarly. Just one of the odd personal habits one sees in some CEOs it seems. Retail tycoon Mike Ashley appeared before a Commons Select Committee and said the High Street would be dead in a few years unless internet retailers were taxed more fairly. He alleged the internet was killing the High Street. But there was one bright spark among retailers in that Dunelm (DNLM) rose 14% after a Peel Hunt upgraded the company to a “buy” and suggested that they might be able to pay a special dividend next year. There was also some director buying of their shares.

Before the FRC meeting yesterday I dropped in on the demonstrations outside Parliament on College Green. It seemed to consist of three fairly equally balanced groups of “Leave Means Leave” campaigners, supporters of Brexit and those wishing to stay in the EU – that probably reflects the composition of the Members in the House across the road. You can guess which group I supported but I did not stay long as it was absolutely pelting down with rain. There is a limit to the sacrifices one can make for one’s country.

But in the evening I did read the legal advice given to Parliament by the attorney-general (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/761153/EU_Exit_-_Legal_position_on_the_Withdrawal_Agreement.pdf

Everyone is looking very carefully at the terms of the Withdrawal Agreement that cover the Northern Ireland backstop arrangements. The attorney-general makes it clear that the deal does bind the UK to the risk of those arrangements continuing, although there is a clear commitment to them only lasting 2 years when they should be replaced by others. There is also an arbitration process if there is no agreement on what happens subsequently. However, he also makes it clear that the Withdrawal Agreement is a “treaty” between two sovereign powers – the UK and the EU.

Treaties between nations only stick so long as both parties are happy to abide by them, just like agreements between companies. But they often renege on them. For example, the German-Soviet non-aggression pact in 1939 was a notorious example – Hitler ignored it 2 years later and invaded Russia. Donald Trump has reneged on treaties, for example the intermediate nuclear weapons treaty last month. Similarly nations and companies can ignore arbitration decisions if they choose to do so.

What happens after 2 years if no agreement is reached and the UK insists on new proposals re Northern Ireland? Is the EU going to declare war on the UK? We have an army but they do not yet have one. Are they going to impose sanctions, close their borders or refuse a trade deal? I suspect they would not for sound commercial reasons.

Therefore my conclusion is that the deal that Theresa May has negotiated is not as bad as many make out. Yes it could be improved in some regards so as to ensure an amicable future agreement but I am warming to it just like the Editor of the Financial Times recently. He did publish a couple of letters criticising his volte-face when previously he has clearly opposed Brexit altogether, but changing one’s mind when one learns more is just being sensible.

Note: I have held or do hold some of the companies mentioned above, but never Autonomy. Never did like the look of their accounts.

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

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Blue Prism, GB Group, Gooch & Housego, Greggs, IDOX, Pets at Home, Victoria, Brexit and Pre-Pack Administrations

Lots of results and trading statements this morning of interest. Here’s a few brief comments on some of them in alphabetic order (I hold some of these stocks), with the share price movement on the day at 14:00 hours (at the time of writing):

Blue Prism (PRSM) – down 12.3%. This was one of the ultimate go-go technology stocks until mid-September when it started a sharp decline like many other such stocks. It has some very interesting technology to automate business processes which is why everyone wanted to buy the shares. The trading statement had some positive comments about sales and cash flow (without giving any specifics which is annoying), but it also said “The EBITDA loss is expected to be larger than current expectations due to continued investments into the Group’s growth strategy and increased sales commissions arising from the strong fourth quarter”. With rising losses already forecast and no prospect of a profit in sight, the share price predictably fell. This company has a market cap of over £1 billion when revenue in the current year might be £55 million. I have seen technology companies before (e.g. in the dot.com boom era) that managed to grow sales at a terrific rate but with rising losses. Often they never did manage to show they had a profitable business as competition eroded their USP before they got there.

GB Group (GBG) – up 5.0%. Half year results much as expected taking into account the big one-off deal in the previous half year. Like Blue Prism the share price was down by 30% since early September in the technology stock rout. The valuation is now back down to a more sensible level and with revenue growth of 9%, cash up by £14.5 million and a positive outlook statement there seems to be little to be concerned about. The company provides on-line id verification and location services which is clearly a growth area at present and accounts for the consistently high valuation of the company.

Gooch & Housego (GHH) – down 1.8%. The share price fell sharply after the market opened but that seems to be a frequent occurrence after announcements by small technology stocks as a few insiders take the opportunity to sell. But the new chairman bought a few shares today. The shares in the company are also thinly traded which means they tend to be volatile. The preliminary results were slightly better than forecast on an “adjusted” basis although the reported accounts of this company are heavily distorted by the number of exceptional items including a large write-off of goodwill, restructuring costs (including a site closure) and transaction fees on acquisitions. The share price has been declining like other technology stocks and the announcement today about the departure of the CFO, but not until summer 2019, may not help the share price. The company has moved into a net debt position due to heavy investment in property, plant and equipment and an acquisition but it’s still quite lowly geared.

Greggs (GRG) – Up 11.6%. The share price jumped after the company reported sales up 9.0% in the last eight weeks – no particular reason was supplied. Also forecasting profits to be substantially ahead of forecasts. Greggs went through a share price dip in the middle of the year probably due to poor figures after bad weather hit this “food-on-the-go” seller. But it seems junk food is still a growth market if you adapt to sell it in new locations and less on the High Street, and the weather is good – not that Greggs are not into selling healthy options now of course.

IDOX (IDOX) – up 1.6%. A year-end trading update showed declining revenues even ignoring the disposal of the loss-making Digital business which will have a negative impact on the final results. The company is in cost-cutting mood so as to increase profitability and so as to “align the cost base more directly with its re-focused business model”. There was a new Chairman appointed recently with a very relevant industry background. The business should at least report a profit this year unlike last, and the valuation is lowly due to past problems. But investors may be getting impatient for better results.

Pets at Home (PETS) – down 0.1%. Interim results reported good like-for-like growth in both the retail business and the vet practices but a restructuring of the vet business is going to result in very substantial write-downs including cash costs of £27 million. The reason the share price did not fall is probably because of the positive trading figures and a commitment to hold the dividends both for the interim and future final ones. It’s on a prospective yield of 6.5% at present. With a new management team this may be a good share for those who like “value” plays but being in the general retail sector which is a bloodbath for many such stocks does not help.

Treatt (TET) – Up 5%. This manufacturer of flavourings issued very positive final results – revenue up 11% and adjusted earnings up 10%, with positive comments about likely future results in addition. This is one of John Lee’s favourite stocks and no doubt he will have been talking about it in the last couple of days at the Mello London conference. Unfortunately I could not attend that event, which is one reason for this long blog post today.

Victoria (VCP) – up 1.6%. Interim results were generally positive and they look to be on target to make the full year estimates. But Exec Chairman Geoff Wilding probably summed it up well with this comment: “Finally, I am acutely aware that Victoria’s share price is not where I believe it should be given our current trading and prospects. As one of the largest shareholders, you can be assured that I, and the other directors and management, are focused on building the confidence of investors and delivering the financial results expected of Victoria. It is important to remember, together we own a very robust, well-managed, and growing business with over 3,000 employees who manufacture and sell some of the finest flooring in the world. The events of the last couple of months have not distracted management from delivering and for that reason I am highly confident of Victoria’s continued long-term success”. The events he refers to were the growing concerns about the level of debt in the company and the aborted proposal to convert bank debt into a bond. Floor-covering businesses can be somewhat cyclical, as results from the Australian subsidiary in these figures indicate. Investors can get nervous about high debt and what will happen when it is due for repayment. You need a lot of confidence in Geoff Wilding for him to steer through this situation to buy the shares even at the current level.

It is remarkable looking back over these results and the share price performance of the companies over the last few months that share prices seem to have been driven by emotion and trend following even more than usual. Brexit also seems to be making investors nervous and overseas investors particularly so. That explains why the dividend yield on the market overall is at record levels. Current yield is not everything of course as future growth is also important to market valuations which depends on profit growth. But apart from Brexit there are few clouds on the horizon at present.

Brexit. Mrs May is apparently trying to sell her agreed Brexit deal directly to the general public, i.e. over the heads of politicians. But with no unanimity in the Conservative party nobody sees how she can get the Withdrawal Agreement through Parliament even if she manages to persuade the DUP to support it. It’s not easy to see how even a change of leader would help unless they can tweak the Agreement in some aspects to make it acceptable to the hardliners. That might just be possible whatever the EU bureaucrats currently say but otherwise we are headed for a “hard” and abrupt exit in March. Am I worried about such a prospect? Having run a business which exported considerably into Europe before we joined the Common Market, the concerns about the required customs formalities are exaggerated. The port facilities may suffer temporary congestion but it is always remarkable how quickly businesses can adapt to differing circumstances. For those who think we should simply go for a hard Brexit and stop debating what to do there is an on-line Parliamentary petition here: https://petition.parliament.uk/petitions/229963/signatures/new . With the Brexit Withdrawal date set for March 29th 2019, I confidently predict that the matter will be settled by March 28th or soon after, probably based on Theresa May’s Agreement which actually does have many positive aspects. It’s just the few glaring stumbling blocks in the deal that are annoying the Brexiteers.

Incidentally Donald Trump was incorrect in suggesting that the current Agreement would prevent the UK signing a trade deal with the USA. See https://brexitfacts.blog.gov.uk/2018/11/27/response-to-coverage-of-the-uks-ability-to-strike-a-trade-deal-with-the-us-when-we-leave-the-eu/ . There’s just as much fake news from politicians than there is from digital media platforms these days.

Pre-Pack Administrations. There was an interesting article on the subject of Pre-Pack Administrations in the Financial Times yesterday (26/11/2018). I have covered this topic, many times in the past, always negatively. For example on the recent case of Johnston Press – see https://roliscon.blog/2018/11/19/johnston-press-trakm8-and-brexit/ where creditors were dumped and a payment into the pension scheme due in just days time was not made with the result than the Pension Protection Fund is likely to pick up the tab. That not just means pensioners in the Johnston scheme will suffer to some extent, but the costs fall on all other defined benefit schemes so you could be contributing also.

They are not the only losers though. The FT article pointed out that one of the biggest losers are HMRC as it seems some pre-packs are done to simply avoid paying tax due to them. There is now an advisory group called the “Pre-Pack Pool” that was set up to try and stop the abusive use of pre-packs, but it is reported that even when they gave a pre-pack proposal a “red card” many were put through regardless. This looks another case where self-regulation does not work and abuses are likely to continue.

That’s not to say that all administrations could result in a better return to trade creditors and the taxman than zero, but a conventional administration with proper marketing and the sale of a business as a going concern is much more likely to do so. The insolvency regime needs reform to stop pre-packs and provide better alternatives.

Have I got a bee in my bonnet about pre-packs because of suffering from one or more? No, but I know people who have even though they are relatively rare in public companies. But I just hate the duplicity and underhand shenanigans that go along with them.

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

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Brexit Agreement – Is it a Fair Deal?

I promised in my last blog post to read all 585 pages of the proposed Brexit agreement before commenting. I got to page 365 before concluding I had got a reasonable understanding of it. The “draft” agreement is certainly one of the longest and most complex documents I have ever read. It reads like a lot of documents that come out of the EU – generally incomprehensible to the layman. Indeed, it could have been written by an EU bureaucrat – perhaps it was.

The agreement covers primarily the immediate withdrawal issues and the two-year transition period, but it actually extends many years past then in some provisions. It’s hardly a clean break from EU regulations and bureaucracy.

If you don’t wish to read the 585 pages, there is a much shorter document, only 7 pages, that is an “Outline of the political declaration setting out the framework for the future relationship between the European Union and the United Kingdom” – available on the web. This spells out that the intention is to ensure close adherence by the UK to EU policies on customs and product regulations, on state aid policies, on financial services regulations, on intellectual property rules, on transport regulations, and many other areas. The draft agreement itself also ensures compliance on such matters as state aid and environmental policies. Just one example of this is the fudge over fishing in our future territorial waters where we should have control but will not – rules on that have to be agreed with the EU.

The claim by Government Ministers is that the agreement ensures there will be no disruption in the free movement of goods, thus protecting our industries, and it will enable us to regain control of our borders and the movement of people. But in reality we will still be subject to EU regulations in many areas, and some in perpetuity it seems.

The Irish border problem and the proposed solution is a complete fudge. I respect the desire of the Irish to ensure no hard border between North and Southern Ireland – as there has not been ever since we were both part of the EU and the 1998 Agreement to promote the peace process – but the basic problem is that Northern Irish politicians wish to have their cake and eat it. They want to remain full members of the United Kingdom which all that entails in terms of no customs barriers within but some at the borders and conformance to UK regulations while retaining free movement with southern Ireland.

Even though the proposal for what is effectively a “customs union” embodied in the agreement may be attractive to business, it effectively cedes control to the EU of what goods are permitted to be traded within the UK. At least that’s the way I read it. The EU has taken great care to ensure there is no “unfair competition” from the UK after Brexit by binding us to EU rule conformance.

Let’s just take one example which is the recent GDPR regulation enacted by the EU. Under Article 71 of the agreement. The United Kingdom is binding itself to “ensure a level of protection of personal data essentially equivalent to that under Union law” in perpetuity. So the EU could invent even more daft regulations than the current GDPR ones and the UK would have to adopt them with no say in the matter.

Another example is the issue of Competition Law and State Aid. New state aid in the UK can be challenged by the EU up to 4 years after the transition period (see Article 93). Is that a trivial matter? Hardly because for example the European Court of Justice (ECJ) just issued a judgement stopping the UK from paying for power plants to stay open so as to provide emergency power when required. This was providing certainty of supply and minimising price peaks in severe weather conditions. The ECJ can also interfere in interpretation of the agreement for 8 years after the transition period (see Article 158).

In summary the withdrawal agreement is far from being a “declaration of independence” for the UK as Brexit supporters wanted. It will not enable us to set our own rules and regulations on social policies, labour regulations or environmental standards. In effect it’s a Brexit in name only.

Surely it would be much better to have cut out this bureaucracy and save a lot of the money we have promised to pay the EU under the withdrawal agreement by pushing for a clean break followed by a free trade agreement with the EU. That is what the Leave-means-leave campaign (see https://www.leavemeansleave.eu/ ) are pushing for and that makes more sense to me also than accepting this very poor deal negotiated by weak politicians. This hardly seems to be the best deal that could have been negotiated as the Prime Minister is claiming.

Postscript: After writing the above I read this morning’s Financial Times. It seems their writers agree with me in an article headlined “Accord leaves Britain bound to Brussels”. It not just points out the problems in the “transition period” but on such matters as “state aid” where it says “the UK authority must take ‘utmost account’ of commission advice on all decisions, and can be overruled by Brussels or the ECJ”. Similarly their writer Philip Stephens headlines an article with “Parliament should reject a rotten deal”. Looks like the FT journalists may have actually read the agreement also. I certainly agree with Mr Stephens.

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

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ShareSoc Seminar, new Patisserie CEO and Brexit

I attended the ShareSoc AGM and Company Presentations Seminar last night. The AGM was routine but a couple of points are worth noting: 1) Total membership increased to almost 4,000 in 2017 and I gather it has increased further since – partly from the Beaufort campaign; 2) Lord Lee, a well-known writer for the FT on small cap stocks, has become “Patron”. Anyone reading this who has not yet become a full, subscribing Member of ShareSoc should do so because they do an enormous amount of good work for investors.

As regards the company presentations, here is some brief coverage of the first three:

Ilika (IKA): This company produces solid-state batteries which have advantages over other battery types for certain applications. I first saw this company present to investors a couple of years ago. Revenue is creeping up but losses still exceed revenue. As last time, there seem to be some business opportunities but major revenue growth and profits do not appear to be likely in the short term. They might have interesting technology but can they sell it at a profit and in volume? Until they can prove this, I don’t think it’s a company in which I will consider investing.

Pelatro (PTRO): This company provides marketing software to telecoms companies. The company was only incorporated in January 2017 and listed on AIM in December of that year. They did a placing to raise more funds in August 2017. It’s clearly early days yet but revenue is forecast to grow rapidly. The CEO was a glib and fast talker which somewhat put me off, but he did explain the business reasonably well. This is definitely one I will do more research on. The AIM prospectus is of course available on their web site which is always worth reading for newish listings. However, attempting to print their last Annual Report caused Internet Explorer to hang twice, which is somewhat annoying.

Forbidden Technologies (FBT): This company provides technology to edit and manage videos using a proprietary codec. At least that is so far as I could understand it. The company has been listed on AIM for years but has been consistently loss making and revenue last year was still less than £1 million. There were a couple of existing disgruntled shareholders in the audience. The company came across as having some interesting technology but no very clear focus on who they were going to sell it to, what the USP was, what the competitors are, etc. Was it to be sold to major platform operators, or consumers? Looks like a typical company founded by technologists who don’t have strengths in sales and marketing – a very typical UK story. I could not see that the outlook will change because the presenters could not even sell the company to investors.

Perhaps I am being harsh on Ilika and Forbidden Technologies. But technology companies and their managers do need to learn that there is more to business than having a good idea and some bright technical staff.

The interesting news today was that Patisserie Holdings (CAKE) CEO Paul May has departed and a new CEO with a CV as long as your arm on “turnarounds” has been appointed with immediate effect. It’s hardly surprising that Paul May has left. The previous CFO went promptly after the alleged fraud was discovered but internal systems seem to have been very lax with the CEO not knowing about winding-up petitions and bank overdrafts. I hope he will be returning the bonus shares he obtained based on the false accounts.

Incidentally there will be a discussion on Patisserie at the Mello London event run by David Stredder on the 26th November – see http://melloevents.com/mello-london/ . The Mello events are always interesting for investors in small cap companies.

Brexit

One reader of my blog suggested that politics was off topic for this blog and I should stick to investment matters. But the blog does cover wider issues occasionally including economics, politics, corporate governance, management, transport, art, London events and other issues. Yes I do have a very broad range of interests! But Brexit is so key to the future financial health of the UK economy, and hence to investors in it, that it would be remiss not to cover it to some degree. No doubt that it is the reason why the Financial Times goes on about it endlessly.

Now I think the best comment on the current position was given in this tweet by my M.P., Bob Neill: “With all respect to some of my colleagues, pontificating about the draft deal Theresa May has secured before they have even read the text does not do justice to the seriousness of the issues at stake. The country deserves better than that and any proposals deserve a fair hearing.

I am therefore going to defer comments myself in detail until I have read the whole 585 pages of the draft withdrawal agreement and a couple of associated documents. You can find them here: https://www.gov.uk/government/publications/progress-on-the-uks-exit-from-and-future-relationship-with-the-european-union . I will also listen to what Mrs May has to say and other intelligent commentators before coming to any conclusions.

Although I am keen on many aspects of Brexit and hope it can be achieved without too much in the way of compromises, and with a practical solution, we certainly should not rush into any decision on the matter. This is not the time for emotion, or grandstanding.

Anyone who has read the whole 585 pages of the draft withdrawal agreement is welcome to post some comments on this blog of course. There’s a challenge for you!

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

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Restaurant Group Rights Issue and Brexit Gloom

Restaurant Group (RTN) have announced the terms of the rights issue that is required to even part finance their proposed acquisition of Wagamama. I made some somewhat negative comments on that deal in a previous blog post and the general media comment has likewise been negative.

The rights issue is to raise £315 million at a price per share of 108.5p which is a discount of 57% discount to the last trading day price. Net debt will also increase substantially and the current dividend will be very much reduced. The high dividend yield was one of the reasons investors might have bought the shares in the last year so they will be very disappointed.

Investors Champion suggested that investors might have been “stitched up” and that buying anything from private equity owners is a recipe for a poor outcome. All I know is that I am very wary about buying rights issues that are at a steep discount since I got suckered into buying shares in RBS back in 2008. It usually means that advisors have told the company that there is little appetite for the issue because it is perceived as risky, and hence nobody is going to take up the rights offer, or underwrite it, without a very big incentive.

The share price has been falling further today after the announcement and is down over 5% at the time of writing.

Brexit Gloom

The pound has been falling and so has my portfolio today despite the fact that a lower pound will help many of the companies I hold – but when markets are falling there is nowhere to hide. Apparently this is over concerns that Mrs May won’t be able to either agree a deal with the EU; or even if agreed, won’t be able to get it through her cabinet or Parliament. Cannon to the right of her, cannon to the left of her, cannon behind her, volley’s and thunder’d, stormed at with shot and shell … but still she pushed forward with the Chequers deal into the valley of death (to paraphrase Alfred Tennyson).

Personally I thought the Chequers proposal was a good basis for a deal with the EU but the Irish border issue is a likely deal breaker. Time for a rethink perhaps? But I don’t mean another referendum as I don’t believe the general public have any enthusiasm for another lengthy political campaign and there is little time for one.

The Financial Times (FT) had the usual negative Brexit stories today which is getting very tiresome. I would cancel my subscription if it was not for the occasional useful article they publish. With news short over the weekend I think the editor might be instructing his staff to produce articles to fill the space on Monday focused on Brexit. This time it was how Brexit is weakening productivity growth, Ramsgate being on standby for a crisis at Dover, immigration curbs that worry meat processors and an editorial focused on the “serious” Jo Johnson. Apparently meat processors employ more than 60% of staff who come from the EU. I am not scared.

Will we run out of fried chicken or beef-burgers? Probably not because as the article points out some of the tasks can be automated. They clearly have not been to date because cheap foreign labour makes it uneconomic. My conclusion is that Brexit will improve productivity enormously to the benefit of the economy and help those low-paid workers whose wages have been depressed by immigration.

But there was one interesting article in the FT today. That was about the popularity of “proxy resignation services” in Japan. These are organisations that will take on the task of telling your boss you have quit if you are too embarrassed to do so. Fed up with your company, your work or the bullying boss. Just call “Exit” to give your notice on the required date and they handle it from then on. No need to even face your colleagues or be accused of being a quitter.

This is simply the reverse of the amusing George Clooney film “Up in the Air” where he ran an outplacement service for companies, i.e. took on the task of firing people in a way that avoided difficult conversations.

There should be a market for such services in the UK, but perhaps it should be extended to helping you dump your girlfriends or wives? So much better than having emotional confrontations. So there’s an idea to pursue for some entrepreneurial web developer. Even Mrs May’s cabinet might find such a service useful in the next few weeks.

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

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