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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Arron Banks on Leave.EU, Smithson and Patisserie

The Andrew Marr interview of Arron Banks was all good knock-about stuff but there was no knock-out blow inflicted. Andrew Marr was interviewing Arron Banks about his £8 million funding of the Leave.EU campaign. The Electoral Commission have recently asked the National Crime Agency (NCA) to investigate the matter as they apparently do not believe his story about the source of the funding. The suggestion has been made that the funding came from Russian sources or from a company registered in the Isle of Man (Rock Holdings) which would not have been permitted under electoral law.

You can watch the full interview here: https://order-order.com/2018/11/04/arron-banks-marr-interview-full/

Mr Banks made it clear that the money came from Rock Services Ltd and strenuously denied it came from other sources. Andrew Marr suggested Rock Services was a “shell” company and that neither that company nor Mr Banks had sufficient financial resources to cover the £8 million in funding.

It is of course a simple matter to look at the accounts of Rock Services Ltd at Companies House (it’s free to do so – go here: https://beta.companieshouse.gov.uk/search?q=rock+services+ltd ).

Rock Services Ltd hardly looks like a “shell” company which is normally used to describe a company with no revenue and no assets apart from possibly some cash. Rock Services had Turnover of £50 million for the year ending December 2017 but little in the way of profits or net assets. But it did have fixed assets of over £1 million. This is hardly a “shell” company in the normal usage of the word. The “Strategic Report” says the company’s “principal business activity is that of performing a recharge function for services for the Group and other related parties”. The profit of the company is generated from service charges added to costs and salary recharges.

Aaron Banks has been running motor insurance companies for many years and is involved in a group of companies which includes Rock Services, Rock Holdings and UK registered Eldon Insurance. I vaguely recall he was involved in a company called Brightside I held shares in from 2012/2014 which was publicly listed before being taken over. The accounts of Eldon Insurance can also be read at Companies House and indicate revenue of £77 million and profits of £1.8 million in 2017. Another substantial company in the Group is Southern Rock Insurance which is based in Gibraltar. You can see a complete list of group companies and their transactions through Rock Services Ltd on page 15 of their accounts.

In summary the allegation that Mr Banks or his UK companies did not have the financial resources to make the donation to Leave.EU is not reasonable, and Andrew Marr and his researchers should have looked into the background more before making the allegations he made.

As Mr Banks said in the interview, other donations were made to the remain campaign from subsidiaries of foreign companies. Why were they not being investigated? It certainly looks like a witch-hunt to me. It would seem to be more about politics than election regulation.

Note that Companies House is an invaluable source of information on companies and their directors. All investors should be familiar with it. It can be useful in other ways – for example I recently obtained a bid from a company to provide web site development work. That was done from the email address of a company that was different to that from which they suggested would do the billing. When I looked the former company up at Companies House it had actually changed name a couple of years ago and under its latest name had got appallingly bad references on the internet. Needless to say I decided not to do business with them.

Smithson Investment Trust (SSON) is now trading at a remarkable premium to net asset value of 7.4% according to the AIC after its recent IPO. Bearing in the mind the state of the market and the fact that it can hardly have yet invested the money raised (one might call it a “shell” company), it would seem investors are putting a high premium on the name of Terry Smith and his involvement in this trust. There must be investors out there who are purchasing shares at that premium to maintain this “discount” but that seems very unwise to me when most investment trusts have historically traded at a discount. The reason for this is quite simple – investment trusts incur costs in management and administration which reduces the yield and returns on the underlying shares they hold. Investors can always buy the underlying shares directly to avoid those costs. In the recent bull market and recognition of late of the merits of investment trusts, some have been trading at small premiums but a premium of 7.4% when the company has no track record and will be mainly holding cash seems somewhat unreasonable.

As I said when reviewing the IPO, it may be best to wait and see what transpires for this trust.

Patisserie (CAKE) and the recent General Meeting have been covered in several previous blog posts. I have previously mentioned that I was not happy that Luke Johnson did not answer my questions – he ruled them out along with a lot of others. When can a Chairman refuse to answer questions in a General Meeting? It was always judged to be matter of common law that questions should be answered but that has now actually been put into a Regulation.

I have written to Mr Johnson and my letter includes these paragraphs:

  1. As regards the conduct of the General Meeting, I suggest you not only handled it badly as Chairman but that refusing to answer my questions was a breach of The Companies (Shareholders’ Rights) Regulations 2009. There are valid grounds on which you can refuse to answer questions at General Meetings but the reason you gave for not answering mine (refusal to answer any questions that might prejudice the investigations) was not a valid one.
  2. Holding a meeting a 9.00 am is also not good practice. This note published by ShareSoc (and partly written by me) gives guidance on how to run general meetings, and includes references to the law on the subject: https://www.sharesoc.org/How_To_Run_General_Meetings.pdf

If you study the aforementioned regulations, you will see that the directors can refuse to answer questions that would require disclosure of confidential information or “if it is undesirable in the interests of the company or the good order of the meeting that the question be answered”. That may be quite broad but it hardly covers the questions I posed and the answers to my questions would certainly not have prejudiced any investigations.

I have therefore asked him to answer the questions in my letter. He may have other things on his mind, but all company directors should be aware of the law, or take legal advice when required.

Shareholders should not allow directors to ignore their responsibility to answer reasonable questions.

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

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Budget Summary – Austerity Coming to an End

Philip Hammond’s budget today can be summarised as:

  • More money for the NHS.
  • More money for the MOD.
  • Money for schools.
  • More money to fix potholes.
  • More money for housing.
  • More money for the Universal Credit scheme.

Yes “austerity” is being relaxed. Changes to taxation are relatively minor, but there will be a new tax on “digital platforms” which is clearly aimed at large companies such as Facebook and Alphabet (Google) who generate large revenues from their operations in the UK but pay very little tax on the resulting profits. There will also be a new tax on plastic packaging (comment: that could have been tougher if the problem of plastic pollution is to be tackled). These new taxes may be at relatively low rates initially but once a new tax regime is in place, the rates tend to go up if history is any guide.

Fuel duty is frozen, beer and cider duty are frozen, spirits duty is frozen but wine duty will rise to match the increase in the cost of living. Tobacco duty will rise also.

There will be a new Railcard for the 26-30 age group to help the millenials.

Personal income tax allowances will rise in April 2019 – £50,000 for higher rate taxpayers. And capital gains tax allowance will rise to £12,000.

All the suggestions about changes to pension tax relief, inheritance tax and AIM tax advantages seem to have been ignored, so there is little to dislike about this budget for stock market investors.

In summary a confident performance from Mr Hammond with an avoidance of unnecessary changes to taxation which helps with longer term planning.

More information available from the Treasury here: https://www.gov.uk/government/news/budget-2018-24-things-you-need-to-know

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

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Frying in Hell and Investing in Oil Companies

Last night and this morning, the national media were dominated by the news from the Intergovernmental Panel on Climate Change that we are all going to fry in a rapidly rising world temperature unless we change our ways. CO2 emissions continue to rise and even to limit temperature rises to 1.5 degrees Celsius requires unprecedented changes to many aspects of our lives.

The suggested solutions are changes to transport to cut emissions, e.g. electric cars, eating less meat, growing more trees, ceasing the use of gas for heating and other major revolutions in the way we live.

So one question for investors is should we divest ourselves of holdings in fossil fuel companies? Not many UK investors hold shares in coal mines – the best time to invest in coal was in the 18th and 19th century. That industry is undoubtedly in decline in many countries although some like China have seen increased coal production where it is still financially competitive. See https://ourworldindata.org/fossil-fuels for some data on trends.

But I thought I would take a look at a couple of the world’s largest oil companies – BP and Shell. How have they been doing of late? Looking at the last 5 years financial figures and taking an average of the Return on Assets reported by Stockopedia, the figures are 2.86% per annum for Shell and 0.06% per annum for BP – the latter being hit by the Gulf oil spill disaster of course. They bounce up and down over the years based on the price of oil, but are these figures ones that would encourage you to purchase shares in these businesses? The answer is surely no.

The figures are the result of oil exploration and production becoming more difficult, and in the case of BP, having to take more risks to exploit difficult to access reserves. It does not seem to me that those trends are likely to change.

Even if politicians ignore the call to cut CO2 emissions, which I suspect they will ultimately not do, for investors there are surely better propositions to look at. Even electric cars look more attractive as investments although buying shares in Tesla might be a tricky one, even if buying their cars might be justified. Personally, I prefer to invest in companies that generate a return on capital of more than 15% per annum, so I won’t be investing in oil companies anytime soon.

But one aspect that totally baffles me about the global warming scare is why the scientists and politicians ignore the underlying issue. Namely that there are too many people emitting too much air pollution. The level of CO2 and other atmospheric emissions are directly related to the number of people in this world. More people generate more demand for travel, consume more food, require more heating and lighting and require more infrastructure to house them (construction generates a lot of emissions alone). But there are no calls to cut population or even reduce its growth. Why does everyone shy away from this simple solution to the problem?

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

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Pay-outs from Labour’s Dividend Plans

I said in my last blog post that the Labour Party’s plans to take 10% of a company’s shares and pay the dividends into an employee trust did not make much sense. I have actually worked out what the implications of such a scheme would be on a few large UK public companies. These are the figures (after 10 years and assuming 10% of the total dividend is therefore paid to employees):

  • BP pays £6.15bn in dividends and has 74,000 employees: £8,310 per employee.
  • Shell pays $10.87bn in dividends and has 92,000 employees: £9,846 per employee.
  • M&S pays £304m in dividends and has 84,000 employees: £360 per employee.
  • Tesco pays £82m in dividends and has 448,000 employees: £18 per employee.

The latter two do of course have many part-time employees. How they might be treated is unknown so I have assumed they get an equal share. Tesco has also been paying a low dividend of late because of past financial difficulties but even if it returned to previous levels, the pay-out to each employee would be low – hardly sufficient to motivate them.

In the case of the oil companies where they have relatively few employees in a capital- intensive business, the pay-out would exceed the £500 cap in year one, so it would be mainly the Government that benefited.

This seems a perverse result to say the least. Are M&S and Tesco employees so much less worthy than BP and Shell employees? Whether an employee got any worthwhile share of the dividends would much depend on the kind of company they worked for.

Another odd result is that the Government would collect a lot more in tax (the amount above the £500 cap) from capital intensive companies than from those with lots of employees.

The more one looks at this, the more perverse this scheme turns out to be.

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

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