Learning Technologies AGM and Brexit

I went to the Learning Technologies (LTG) Annual General Meeting yesterday, only to find my son Alex was there also (we both hold the shares). So we did a joint report which can be found on the ShareSoc Members Network. What follows are a few particularly interesting points from it.

LTG was a workplace digital learning solutions provider up to the beginning of last month when it announced it was to buy PeopleFluent – a cloud based talent management platform. Chief executive Jonathan Satchell described the deal as “transformative” for LTG’s US presence and that is surely the case. He also noted that “learning and talent are closely aligned” with cross-selling opportunities adding possibilities for further growth.

When the formal business was considered the first resolution was to accept the annual accounts and directors report. This had a surprise vote of 56 million proxies against (12%). I asked why the large vote against a resolution that normally gets a high percentage “yes” vote. Chief exec Jonathan Satchell replied that ISS (a proxy advisory firm) had recommended shareholders vote against the resolution on the grounds that there was insufficient disclosure in the Directors remuneration report, and shareholders had not been given a chance to vote on directors’ remuneration. Jon felt the complaint by ISS was overblown, but that LTG had discussed the issue with ISS and will look to improve disclosure next year. Jon noted it was not necessary to hold a vote on remuneration although I pointed out it was preferable to do so and many AIM companies did have remuneration votes. ISS had also noted that the Chairman Andrew Brode was on the remuneration committee, which they didn’t like. Jon did say that Andrew would be more than willing to give this role up and so in the coming year Jon said to expect a change on this committee.

A shareholder asked if the £13.3m Civil Service contract was a one off. Jon replied that there is scope for a one year extension to the contract but at the moment the accounts are based on the contract ending with no extension.

I asked about the PeopleFluent acquisition and questioned the use of a “cash box” transaction as this ignores shareholder votes in prior resolutions. A cash box placing allows a company to issue new shares by bypassing pre-emption requirements – meaning without shareholder approval. It works by a company forming a new subsidiary into which it puts cash via a placing and then buys that shell, paying with shares priced at whatever level it deems suitable. In effect it sidesteps the legal requirements of Company Law, and the resolutions previously passed by shareholders re share issuance.

Jon replied that LTG was up against US private equity and it was felt this was the best way to get the right amount of funds needed in a timely fashion to give the highest quality offer LTG could make. Comment: with the Chairman and CEO holding over 45% of the shares any vote would have surely gone through so it may not be so prejudicial to shareholders interests. But it sets a bad legal precedent as I think such transactions should be made illegal. Apparently Numis, their Nomad/Broker, suggested they do this. Otherwise it was a placing with no open offer which prejudices private shareholders although the discount to the previous share price was minor.]

Jon talked about the recent Pluralsight IPO, a similar US business. The company lost $90m on $160m revenue. Valuation $2Billion. Comment: this is obviously a “hot” sector for investors.

Summary: The enthusiasm of the CEO for the future prospects of the business were very evident and this seems to have been communicated to shareholders in recent weeks. The share price has been motoring upwards so it’s now on a prospective p/e of 44 according to Stockopedia. Certainly the high recurring revenue feature of the PeopleFluent business is positive as I always like companies with high recurring revenues and I said that in the meeting. However there are significant risks in such a major acquisition of a US business where there may be cultural and management style differences. The business also seems to have some difficulties and they have already be making some management changes.

In addition to that the large civil service contract in the UK will probably not be extended – or at most by a year – so historic revenue may not be representative of future revenue, and in addition the change to adopt IFRS 15 (see page 12 of the Annual Report) will impact 2018 financial figures. The corporate governance and the way the placing was done are also negatives. In summary there are a number of negative aspects in this business and potential high risks from the acquisitions that have been made (not just the latest one). The enthusiasm of investors for this business might be ignoring the substantial risks now associated with it so investors should keep a close eye on the progress of the acquisitions and their associated restructuring.

But as always, I learned a lot about this business and the individuals involved from attending the AGM. There were less than a dozen ordinary shareholders at the meeting which is disappointing given the opportunity it provides to quiz the management.

Brexit: I have not said much on the hot topic of Brexit of late although it’s no secret that I am generally in favour of it. The regulations that have come out of Europe such as MIFID II, the Shareholder Rights Directive and GDPR might have had good intentions behind them but in practice the detail regulations that result have been horribly complex and bureaucratic. The result has been very high costs imposed on many businesses and often with ineffective results. The key problem has been bureaucrats in Brussels with little knowledge of the real world and the business environment in the UK designing regulations without adequate consultation (or ignoring feedback submitted) and producing gobbledygook which few people understand. GDPR had positive objectives but the law of unintended consequences has resulted in people receiving hundreds of pointless emails.

The latest example of ridiculous claims of the cost of Brexit was the statement by Jon Thompson the head of HMRC that the “maximum facilitation” (Max Fac) option could cost UK businesses as much as £20 billion per year. This is apparently based on the cost of filling out customs declarations (200 million per annum at a cost of £32.50 each, plus other form filling according to the FT). This seems to assume that forms are filled out manually when in reality that can be done by computer software surely. Business might also look to reduce the costs by bulking up orders, or simply choosing not to export or import, i.e. to do business in different ways or with different people.

Whether Max Fac is a sensible option it’s difficult to say without a lot more evidence but staying in the Customs Union simply to avoid a hard border in Ireland does not seem to make sense because it means our trading policies and practices will be dictated by the EU. That’s not what people voted for in Brexit. People voted for political and governmental independence. Many people accept there may be some extra cost involved as a result but scare stories about the costs are not helpful.

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

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Solving the Irish Border Problem, Harry for King of Ulster

On this bright sunny day, with crowds out for the Royal Wedding, my thoughts turned to a simple solution to the Irish border problem. That is the problem faced in the Brexit negotiations on how to maintain a frictionless border with the Irish Republic (Eire) from Northern Ireland.

Surely the simple solution is to make Northern Ireland an independent country while still retaining its connection to the UK by appointing Prince Harry and Meghan Markle as the King and Queen of Ulster. The latter has strong Irish connections in her ancestry so this could appeal to many. Such titles are surely more impressive than the Duke and Duchess of Sussex which they are otherwise going to be endowed with.

As an independent country Ulster could retain all its traditional ties with the UK including use of the Union Jack in some form, and all the existing UK legislation. It could negotiate free trade agreements with the EU and the UK to sidestep the border problem. If there is any border control required, it would solely be on the sea ferry crossings, not on the Irish land border and therefore much easier to manage.

Those sceptics in this world will no doubt think of numerous objections to this plan, but it’s surely worth considering.

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

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Good Growth and Why the London Plan is Strategically Flawed

NHS in crisis (queues in A&E, operations postponed and delays getting to see your GP), road network suffering from worse congestion, overcrowded trains and underground in London, air pollution still a problem, not enough schools to accommodate growing numbers of children and simply not enough houses to meet the demand for homes. These are simply symptoms of too many people and not enough infrastructure.

For those concerned about the future of one of the major financial capitals of the world, namely, London, here’s an editorial I wrote for the Alliance of British Drivers on the subject of the “London Plan” – on which there is a recently launched public consultation:

The population of the UK has been growing rapidly and particularly in London and the South-East. The latest figures from TfL show that the number of trips by London residents grew by 1.3% in 2016, up by 19.7% from the year 2000. The population of London grew by 21.4% in that period.

Forecasts for the future are for it to grow from the level of 8.8 million people in 2016 to 10.8 million in 2041 according to the Mayor’s London Plan, i.e. another 22%.

More people means more housing demand, more businesses in which they can work, more shops (or more internet shopping deliveries) to supply them, more transport to move them around and more demand on local authorities to supply services to them.

In addition more people means more air pollution – it’s not just transport that generates air pollution and even if every vehicle in London was a zero emission one we would still have major emissions from office and domestic heating, from construction activities, and from many other sources.

The London Plan and Mayor Sadiq Khan talk about “good growth” but unfortunately the exact opposite is likely to be the case. It will be “bad” growth as the infrastructure fails to keep up with population growth even if we could afford to build it.

In London we have not kept up with the pace of population growth for many years and the future will surely be no different.

London residents have suffered from the problems of past policies which condoned if not actually promoted the growth of London’s population. Indeed Mayor Khan insists London should remain “open” which no doubt means in other language that he is opposed to halting immigration – for example he opposes Brexit and any restrictions on EU residents moving to London which has been one source of growth in the population in recent years.

There are of course several policies that wise politicians might adopt to tackle these problems. Restrictions on immigration and the promotion of birth control are two of them that would limit population growth. China is a great example of how a public policy to discourage children has resulted in dynamic economic growth whereas previously China suffered from population growth that outpaced the provision of resources to support them – result: abject poverty for much of the population; that is now receding into history.

The other answer is to redistribute the population to less crowded parts of the country. It is easier and cheaper to build new infrastructure and homes in less populous parts of the country than London. Back in the 1940s and 1950s there was a national policy to encourage businesses and people to move out of London into “New Towns” such as Bracknell, Basildon, Harlow, Stevenage, Milton Keynes and even further afield.

Government departments that were based in central London were moved to places such as Cardiff or the North of England. The population of London fell as a result.

One way to solve the problems of traffic congestion and demand for housing in London would be to encourage redistribution. This could be encouraged by suitable planning policies, but there is nothing in the proposed London Plan to support such measures. In the past, businesses and people were only too happy to move to a better environment. Businesses got low cost factories and offices. People got new, better quality homes and there were well planned schools and medical facilities.

Despite the attitude of many non-residents to the New Towns, most of those who actually live in them thought they were a massive improvement and continue to do so. It just requires political leadership and wise financial policies to encourage such change.

These are towns with few traffic congestion or air pollution problems even though some of them are now the size of cities – for example Milton Keynes now has a population of 230,000.

It is worth pointing out that past policies for New Towns and redistribution of London’s population were supported by both Labour and Conservative Governments. But we have more recently had left-wing Mayors in London (Ken Livingstone and Sadiq Khan) who adopted policies that seemed to encourage the growth in the population of London for their own political purposes, thus ignoring the results of their own policies on the living standards of Londoners. So we get lots of young people living in poor quality flats, unable to buy a home while social housing provision cannot cope with the demand.

The Mayor’s London Plan is an example of how not to respond wisely to the forecast growth in the population of London. His only solution to the inadequate road network and inadequate capacity on the London Underground or surface rail is to encourage people to walk, cycle or catch a bus. But usage of buses has been declining as they get delayed by traffic congestion and provide a very poor quality experience for the users.

The London Plan should tackle this issue of inappropriate population growth. The rapid population growth that is forecast is bound to be “Bad Growth”, not “Good Growth” as the London Plan suggests. Population growth and its control should underpin every policy that needs to be adopted in the spatial development strategy of London.

For more background on the London Plan, see: https://abdlondon.wordpress.com/2018/01/07/london-plan-abd-submits-comments/

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

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South African Politics, Pan African Resources and Mondi

The election of Cyril Ramaphosa as the President of the ANC suggests that the country may be taking a positive step forwards. Under Jacob Zuma South Africa has become riddled with corruption and “state capture” where assets are sold off to favoured parties. Whether Cyril Ramaphosa can become President of the country in due course remains to be seen but it is worth looking at his background.

He has a legal qualification and became a trade union activist. After being active in politics, including helping to develop the “Black Economic Empowerment” policy that affects any company operating in the country, he became a businessman. Indeed he was for a time Chairman of gold miner Pan African Resources (PAF) which I held shares in for a while. This is a company registered in the UK and they hold their AGMs in London, although I don’t recall Mr Ramaphosa ever turning up for one. But with this and his other business interests he should have learned something about business to offset his left-wing sympathies.

There are of course other businesses operating in South Africa that are registered in the UK and the risk of political interference is always at the back of investors minds. One I currently hold is Mondi which is actually dual-listed on both the London and Johannesburg stock exchanges. This means it is subject to regulation in both the UK and South Africa (the South African financial regulations are actually very good), but one disadvantage is that a withholding tax is payable on dividends. It holds its AGMs in London.

Mondi (MNDI) is a paper and packaging producer with interests in many countries. Its share price does seem to be affected to some extent by political events in South Africa and one gets the impression that the valuation if slightly lower than other packaging companies for that reason (e.g. a somewhat lower prospective p/e than D.S. Smith). Goldman Sachs recently upgraded Mondi to a “buy” with a 2200 price target.

So apart from wishing Mr Ramaphosa well, investors do need to take into account the political risks of investing in South Africa. But my experience has been positive to date with the ANC seeming to take care not to damage large businesses overtly. However, the general economic trends in South Africa under Zuma have not been good even though the per capita wealth of the country at $11,300 is still the highest in Africa (excepting Mauritius).

A sound economy, rational economic policies and the rule of law are the key to generating wealth. Compare the wealth of South Africans with that of Zimbabwe where it is estimated to be as little as $200!

Perhaps the moral is that politics does matter!

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

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ADVFN AGM – How to Disenfranchise Shareholders, and OFCOM Interest

I was surprised yesterday to pick up an RNS Announcement from ADVFN Plc (AFN) stating that the company’s Annual General Meeting had taken place on that day and all resolutions were duly passed. I was surprised because as a shareholder in the company (and on the register), I had received no notification of the AGM and no proxy voting form either of course.

In addition there is no notice of the AGM given in any RNS announcement, and there is no information on it on the company’s web site. It’s an easy way to avoid folks from voting or turning up at the AGM – you simply don’t tell anyone about it!

Now admittedly I don’t hold many shares. I only bought a few in early 2017 because ADVFN were peripherally involved in a libel suit I was pursing (settled in the High Court on Thursday to my satisfaction – more on that another time). I thought it would be helpful to attend any General Meetings of the company to learn more about the business.

This might be one of my best investments in 2017. Share price when purchased was 27.4p, share price now is 39.5p (i.e. up 44%). But the price did fall 9% yesterday, so perhaps other folks did attend the AGM and asked some awkward questions. If any readers of this blog did so, a report on the meeting would be helpful.

ADVFN run investment information platforms including a popular bulletin board. Profits have been non-existent for most of the last few years, but revenue was £8.2 million last year so the current market cap of £10.5 million is not totally bonkers. The company also indicated it was now focusing on profits rather than growth so results might improve – or at least they might not run out of cash and need to do more fund raising although the picture is not totally clear. One reason for the share price rise was probably the announcement by the company of a cryptocurrency project, using blockchain technology. The application is for a digital wallet to support a social media cryptocurrency. Although it is not altogether apparent who might use that and what the benefits might be, it appears to possibly be a way to support micropayment services for blog contributions. Any company that can claim involvement in the blockchain/cryptocurrency world gets their share price inflated it seems. It’s another “bubble” just like the Bitcoin price.

There has been a lot of public debate about the problem of “fake news” on social media and the failure to remove abusive content or more generally censor irresponsible stories. Financial bulletin boards and blogs are one part of this world of dubious content often posted by anonymous contributors who frequently get their facts wrong. And sometimes possibly deliberately so.

One interesting comment last week was from the Chairman of OFCOM, the media regulator. Patricia Hodgson said internet businesses such as Google and Facebook are “publishers” and not simply “platforms”. In other words, they might be responsible for their content after all. Ofcom are considering the issues although she indicated it was for Government to decide on any action in this area and OFCOM probably do not have the resources at present to cover it. But businesses such as ADVFN might find they are caught up with any general media regulation even though they have so far avoided interference from financial regulators such as the FCA – why that is so I have never understood.

Freedom of the press is a meritorious policy, but the internet has introduced numerous problems such as “trolls” who abuse folks in public often for dubious motives. Politicians are frequently attacked now (death threats are common for example) so we might see some action from them once the politics of Brexit are out of the way.

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

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Brexit, HBOS, Globo and the FRC

Is it not heartening that the Brexit divorce bill, and other terms, have been settled? The exact cost is unclear but it could be up to £40 billion – a lot of money you may say! However, the fact that the key negotiators, Mrs May, Barnier et al, all looked somewhat glum about the deal when announced perhaps tells us that it was a compromise in which both sides had to concede ground. Or perhaps they were just tired. The terms of any future arrangements including trade deals still need to be worked out so it’s a long way from being concluded.

Now that £40 billion figure, sounds a lot, even if it is spread over some years. Hard line brexiteers will be unhappy. But it’s all relative. For example the annual UK Defence Budget is over £35 billion and rising. In addition, I have just read the Financial Reporting Council’s report on the HBOS audit and you can see there on page 7 that HBOS had to write off £63.3 billion in loan losses. That was only one smaller sized UK bank. According to the Bank of England, the financial crisis that affected HBOS caused £7.3 trillion of losses in total in the UK.

The report from the Financial Reporting Council (FRC) on the audit of HBOS is a quite tedious and turgid document. To remind you, HBOS was a bank that almost went bust after making imprudent commercial property loans financed by short term debt. When Lehman’s collapsed and debt became difficult to raise, HBOS had to be supported by the Government and then bailed out by a merger with Lloyds TSB. The latter’s shareholders are currently pursuing a claim against the company and its directors over that event.

The reason the audit of HBOS was examined by the FRC was because the company obtained an unqualified audit report suggesting that it was a “going concern” when it soon turned out to be otherwise. These events date back to 2008 – that’s 9 years ago which shows the speed with which the FRC typically operates.

One interesting comment made in the FRC report is that it suggests on page 11 that liquidity support from central banks may be considered “a normal funding source…..and therefore reliance on such support does not mean that the bank is not a going concern…..”. As banks with a positive balance sheet are usually assumed to be eligible for “lending of last resort” from the Bank of England that might mean that HBOS would be considered to be a going concern even if it ran out of cash (which is the reason most banks go bust, not because of defective balance sheets – Northern Rock is a good example).

The report also refers on page 29 to “market expectations” at the time. Market participants did not expect the financial crisis to get worse which affected the auditor’s views. So now we know why the FRC let the auditors of HBOS (KPMG) off the hook!

As I mentioned in a blog post a couple of weeks ago (see https://roliscon.blog/2017/11/22/standard-life-uk-smaller-companies-and-frc-meetings/ ), I attended a meeting with the FRC organised by ShareSoc/UKSA. One of the issues raised was the lack of feedback from the FRC on the progress of investigations. I followed up with one of the speakers after the meeting, specifically about the case of Globo. I asked what was the status on the investigation of the audit of their accounts by Grant Thornton. As readers may know, Globo was a company that went into administration in 2015 after it was revealed that the revenue of the company was probably fictitious (see https://www.sharesoc.org/campaigns/globo/ for details). The report of the administrators made it clear that the cash on the balance sheet of Globo plc seemed to have disappeared, bringing into doubt the preceding audit report on that ground alone let alone the revenue recognition issue.

The FRC announced an investigation in December 2015, i.e. two years ago. What have the FRC been doing, when will the investigation likely conclude, are there any preliminary conclusions, etc, etc? All of these questions are very relevant as the answers might provide the basis for legal action by shareholders against the auditors and others. After several email exchanges with FRC staff, the only answer I managed to elicit is that the investigation is on-going. It has not even been turned into a “Formal Complaint”.

The reason more information could not be supplied is that it might prejudice “the overarching requirement for fairness”. My response was “I really do suggest that the FRC needs to reconsider its policies in this area. You have too much emphasis on treating those who have been complained about (i.e. auditors) fairly, while those who have complained are treated unfairly. This rather suggests, as we already knew, that the FRC is dominated by auditors who are the people it is supposed to be regulating”.

You will be amused to read in the FRC’s Publication Policy document (para. 3) that “Transparency contributes to public confidence in independent disciplinary arrangements….” but then proceeds to spell out all the restrictions it imposes that thwart it.

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

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Brexit Bill – How It’s Worked Out

Here is an explanation of how the EU calculates the Brexit Bill, forwarded to me anonymously:

Mr Dave Davis is at the golf club returning his locker key when Mr Barnier, the membership secretary sees him. “Hello Mr Davis”, says Mr Barnier. “I’m sorry to hear you are no longer renewing your club membership, if you would like to come to my office we can settle your account”. “I have settled my bar bill” says Mr Davis.. “Ah yes Mr Davis”, says Mr Barnier, “but there are other matters that need settlement”

In Mr Barnier’s office Mr Davis explains that he has settled his bar bill so wonders what else he can possibly owe the Golf Club? “Well Mr Davis” begins Mr Barnier, “you did agree to buy one of our Club Jackets”. “Yes” agrees Mr Davis “I did agree to buy a jacket but I haven’t received it yet”. “As soon as you supply the jacket I will send you a cheque for the full amount”. “That will not be possible” explains Mr Barnier. “As you are no longer a club member you will not be entitled to buy one of our jackets”! “But you still want me to pay for it” exclaims Mr Davis. “Yes” says Mr Barnier, “That will be £500 for the jacket. “There is also your bar bill”. “But I’ve already settled my bar bill” says Mr Davis. “Yes” says Mr Barnier, “but as you can appreciate, we need to place our orders from the Brewery in advance to ensure our bar is properly stocked”.. “You regularly used to spend at least £50 a week in the bar so we have placed orders with the brewery accordingly for the coming year”. “You therefore owe us £2600 for the year”. “Will you still allow me to have these drinks?” asks Mr Davis.

“No of course not Mr Davis”. “You are no longer a club member!” says Mr Barnier.

“Next is your restaurant bill” continues Mr Barnier. “In the same manner we have to make arrangements in advance with our catering suppliers”. “Your average restaurant bill was in the order of £300 a month, so we’ll require payment of £3600 for the next year”. “I don’t suppose you’ll be letting me have these meals either” asks Mr Davis. “No, of course not” says an irritated Mr Barnier, “you are no longer a club member!” “Then of course” Mr Barnier continues, “there are repairs to the clubhouse roof”. “Clubhouse roof” exclaims Mr Davis, “What’s that got to do with me?” “Well it still needs to be repaired and the builders are coming in next week”, your share of the bill is £2000″. “I see” says Mr Davis, “anything else?”. “Now you mention it” says Mr Barnier, “there is Fred the Barman’s pension”. “We would like you to pay £5 a week towards Fred’s pension when he retires next month”. “He’s not well you know so I doubt we’ll need to ask you for payment for longer than about five years, so £1300 should do it”. “This brings your total bill to £10,000” says Mr Barnier. “Let me get this straight” says Mr Davis, “you want me to pay £500 for a jacket you won’t let me have, £2600 for beverages you won’t let me drink and £3600 for  food you won’t let me eat, all under a roof I won’t be allowed under and not served by a bloke who’s going to retire next month!” “Yes, it’s all perfectly clear and quite reasonable” says Mr Barnier. “Piss off!” says Mr Davis

Comment: Now you can understand what the Brexit bill negotiation is about, but it does depend of course on the membership terms when you sign up to join a club. Did anyone read the small print?

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

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