National Grid, Johnston Press, Crown Place VCT, Lloyds Bank, LoopUp and Brexit

I had a busy day yesterday, but let me first comment on the news today. National Grid (NG.) published their half year results this morning. They reported “Adjusted operating profit, excluding timing up 4%….” but statutory earnings per share were down by 12%. What exactly does “adjusted for timing” mean? I have no idea because the announcement does not explain it in any sensible way. For example, it says under “UK Timing”: “Revenues will be impacted by timing of recoveries including impacts from prior years”. Why are these revenues not being booked in the relevant period? Why are they not being recognised as revenues in the period concerned? Looks like a simple “fudge” to me as “adjustments” to reported figures in accounts often are. Many analysts seem to have a negative view of the stock, and I am coming to the same conclusion. I sold some of my holding in the company this morning.

I have previously mentioned the requisition of an EGM at Johnston Press (JPR), but the company has rejected this on the basis that it is “not valid”. It seems this is because the shareholder who requested it holds their shares in a nominee account (i.e. are not on the register). Yet another example of the obstruction caused by the use of nominee accounts. Changes to the law in this area are required to fully enfranchise all shareholders. See the ShareSoc Shareholder Rights campaign for more information: https://www.sharesoc.org/campaigns/shareholder-rights-campaign/

Yesterday morning I attended the AGM of Crown Place VCT, managed by Albion Capital. No excitement there. Just a competently managed VCT and a well run AGM with a presentation from one of their investee companies (PayAsUGym) who have developed an innovative business selling gym sessions. Crown Place made a total return of !4% last year and currently provide a tax free dividend yield of 6.9% which is covered twice by earnings. The expense ratio is 2.4% which is certainly better than many of the VCTs I hold. Previously this company had a strong focus on “asset-based” investments but they are now restricted by the new rules for VCTs so they are moving into more “exciting” fields. There are also concerns about further rule changes or removal of tax reliefs in the budget next Wednesday. Investors in tax incentivised vehicles seem to be getting nervous.

After lunch with representatives of AGMInfo, I filled an hour or so before the ShareSoc AGM by dropping into the Lloyds Bank legal action nearby which I have mentioned in previous blog posts. On the witness stand was former CEO of Lloyds TSB Eric Daniels being cross examined by the littigants QC. He gave a confident performance and was clearly well prepared. He said he was “bitterly disappointed” over the need to raise £7 billion in capital and was also disappointed that they would end up more highly capitalised than other banks. It was clear from his other comments that there was a certain momentum to go through with the deal (the acquisition of HBOS) and that they did not revisit the benefits of the transaction at every turn (e.g. as more information came out of the due diligence work for example).

He disclosed that in a conversation with the FSA there were real concerns that they could lose the vote of shareholders. This could be because there were views that HBOS could remain independent, although the Government had already indicated that it was promptly going to be nationalised if no rescue deal could be done; and because Lloyds TSB shareholders might vote against it.

The case continues. Lloyds Bank and the former directors continue to say that the claims have no merit of course.

It was then onto the ShareSoc AGM. Again no great excitement there. Mention was made of a possible merger with UKSA and as a former director of both I spoke in favour of that. Spreading the fixed costs over two organisations of a similar size makes a lot of sense. It should never have been necessary to set up a rival organisation to UKSA, but interesting to note that ShareSoc has more members now so my efforts in recent years were not in vain.

The ShareSoc AGM was followed by one of their company presentation seminars. Of interest to me (being current holders) were the two by LoopUp (LOOP) and Ideagen. I reported on Ideagen recently on coverage of their AGM so will only cover LoopUp herein. The presentation by their joint CEO Steve Flavell was slick but it was more a sales pitch for the product/service to customers than one to investors. The issue of them having two joint CEOs was raised in a question later.

The emphasis was on the simplicity of the service, so anyone could take it up easily and quickly. This is the major USP as there are lots of other conferencing products around. Most interesting was his explanation that they leapfrogged the “chasm” by ignoring the early adopters (who often like techy products) by aiming straight for the “mainstream majority”. His reference to “Crossing the Chasm” is from a book of that name by Geoffrey Moore which is essential reading for all sales/marketing executives in the software field, or investors in early stage technology companies likewise. Just had a chat with an Uber driver about this book – he has a degree in marketing – that’s the modern world for you. It will be a great shame if Sadiq Khan manages to put Uber out of business – might miss out on intelligent conversations with cab drivers. I read the book when it first came out back in the 1990s and Mr Flavell had read it also. I highly recommend the book. LoopUp is clearly a sales/marketing driven organisation but the technology is sophisticated enough to make it all look simple.

On the current valuation, the company has obviously a long way to go to grow into that valuation. Questions were raised about whether growth could be accelerated (revenue only up 39% in 2016m and 44% in the interims this year). But I expressed scepiticsm on attempts at a faster growth rate to Flavell after the meeting.

The Financial Times continue to publish anti-Brexit stories and editorial every day. My letter to the editor on the dubious bias, which they published, has obviously had no impact whatsoever. Tim Martin, CEO of JD Wetherspoon, had a lot to say about the subject of the impact of Brexit on food costs in his latest trading statement. He accused the media, and the Chairman of Sainsburys and that of Whitbread, and the head of the CBI, for completely distorting the facts. Rather than food prices rising after Brexit, he suggests they will fall. For his arguments see:

https://www.investegate.co.uk/wetherspoon–jd–plc–jdw-/rns/fy18-q1-trading-update/201711080700068513V/

My conclusion is quite simply that some foods might become more expensive, others might become cheaper, and home-produced products might also be cheaper; plus the Government might be able to save a lot of money on contributions to subsidising inefficient farmers. But that of course means that food buying habits might change as consumers react to price changes. Is that a bad thing? Readers can ponder that question.

Whether the Chairmen or CEOs of public companies should be making comments on essentially political issues, one way or the other, is also a question to consider. I suggest that might best be left to bloggers like me. Sainsburys and Whitbread (Costa, Premier Inns) might find they disaffect half their customers while having minimal impact on public opinion.

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

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ADVFN Results and More on Lloyds

ADVFN Plc (AFN) published their results for the year to June yesterday. I have a very small holding in the company (acquired for reasons I won’t go into). ADVFN are information providers on the stock market, primarily to private investors. Many people monitor their bulletin boards although like many such boards frequented by private investors, they are somewhat of a curate’s egg so far as serious or sophisticated investors are concerned.

But they certainly have a large following – they say they have 4 million registered users. Does this enormously large mailing list ensure they have a profitable business? In reality no.

Indeed last year they barely managed to break even (£47k operating profit) on £8.2 million of turnover. That is however a massive improvement on the previous year when they lost £650k on similar revenues.

At least they showed postive cash flow but the net assets of the company are £1.7 million so they have a long way to go before they show a decent return on the capital employed. Current liabilities also exceed current assets. At least they have changed their strategy so as to stop further investing with a focus on “profits rather than growth”.

Regretably this kind of business model just shows that private investors are reluctant to pay money for good information provision. Folks can sign up a lot of “free subscribers”, which is no doubt ADVFN’s customer base, by spending money on marketing but monetising those eyeballs is another matter altogether. Relying on advertising to do so is also getting more difficult as Google and social media platforms are tending to dominate that market.

The other moral of this story is that one needs to be wary of investing in companies with unproven business models. It’s easy to spin a good story about the enormous demand for a given service, but the real proof of the pudding is when the model generates profits (and cash as well of course). Companies like Uber and Deliveroo appear to be chasing the same mirage. Lots of people like the services and are willing to pay their low prices, but whether they can compete profitably is another matter.

Lloyds TSB/HBOS case. My previous blog post was on the topic of the current legal case being heard in the High Court. One of the witnesses called in the case is Hector Sants, former head of the Financial Services Authority (FSA) at the time of the takeover of HBOS by Lloyds. His evidence is to be heard in secret, for reasons unknown. Indeed, even the fact that this was to be so, was kept secret until challenged by media organisations.

Why is this relevant? Because it was suggested at the time that without the takeover of HBOS, Lloyds would not have had to raise extra capital (and it was that which diluted shareholders interests). But the FSA told them they would still have to raise more capital even if they did not proceed with the takeover. Some shareholders allege that this was a forceful encouragement by the Government to go ahead, regardless of the interests of their shareholders. Perhaps that might have been in the public interest, as was similarly argued on the re-capitalisation of the Royal Bank of Scotland (RBS) and other banks, which was effectively a partial nationalisation. But many shareholders are more concerned with their own immediate interests rather than the public interest although it could possibly be argued that ensuring no melt-down of the UK financial sector took place was also in their interests. So Mr Sants evidence might be very revealing about the motives and actions of the Government, but the public may not learn much about it, even at this late date.

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

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Brexit, and the Finances of the Young

The national media continue to try to turn news into controversy. Their words are often incendiary and designed to provoke debate and therefore attention – as a means no doubt of promoting their publications. So their headlines become “verbal click-bait”.

As most people now read news on the internet, the publishers could be considered as acting as “trolls”. Here is the definition in Wikipedia of an internet troll: “In Internet slang, a troll is a person who sows discord on the Internet by starting quarrels or upsetting people, by posting inflammatory, extraneous, or off-topic messages in an online community with the intent of provoking readers into an emotional response or of otherwise disrupting normal, on-topic discussion…….”

Written words are not the only example. Laura Kuenssberg of the BBC has adopted a similar verbal approach in her reporting. It’s not just Labour party members who should be complaining about her hysterical style.

There were a couple of news items this week that caught my attention in this area. There were several comments on the report issued by the FCA on family finances. The report indicated that half of UK adults were “financially vulnerable” and that those in their 20s and 30s were reliant on borrowing (personal loans and credit card debt). It reported that one fifth of 25-34 year olds have no savings at all with many struggling to pay bills. But this was interpreted by some of the media as the new “generational divide”.

But was it not always so? I certainly don’t recall having much in the way of savings at the age of 30 and lived from month to month, sometimes using credit card debt. In other words, I doubt that the situation has been changing over time; although the elderly have become better off lately due to rising state pensions I am not convinced the young have been getting poorer. But the media like to put a “spin” on any news item to grab attention.

As the report shows, the elderly do have more savings as one might expect but they are not evenly distributed. One amusing statement in the report is “A high proportion of retirees do not know how much savings they have”.

It’s a report well worth reading although rather long at almost 200 pages. Here is one useful titbit of information from it: “Around one in five (22%) 45‑54 year olds hold a stocks and shares ISA and the same proportion hold shares or equities directly”. It would have been good to obtain more detail information on that but it just shows there are a lot of shareholders out there.

Another example of media hysteria is the reporting on the Brexit negotiations. Will it be a hard or soft Brexit? Will the bill be £20 billion or £100 billion? Are Tories threatening to quit if there is any compromise, or revolt against the rule of Theresa May? Will Jeremy Corbyn scupper the whole affair by underming the Bill going through Parliament to support it? Who really knows, but it all makes for good headlines.

The Financial Times has become one of the leaders in scare mongering over Brexit with regular articles of a polemic nature by Martin Wolf and Simon Kuper on the topic. The latest example was by Martin Wolf in yesterdays FT. Now I have never thought much of Mr Wolf’s opinions on financial matters since he supported the nationalisation of Northern Rock, but his latest article (headlined “Zombie ideas about Brexit that refuse to die”) is pure hysteria. I don’t mind the occasional editorial opinion piece on Brexit, or some reporting on the potential technical difficulties if not slanted, but this piece was just propoganda in essence. It pointed out all the difficulties associated with a “hard” Brexit where no trade deal is agreed beforehand, but that is well known and most folks do not think that is likely. It certainly did not give a balanced view of the arguments for or against Brexit and what our negotiating stance should be. In reality there is likely to be a compromise of some kind – that is what politics usually ends up being about – compromise after compromise. Indeed it is one of the frustratations of anyone in the political world that achieving revolutions, rather than compromise, is not just difficult but exceedingly time consuming.

It is certainly regrettable that the Financial Times, since its takeover by Nikkei in 2015 has become much more politicised, and there is less factual reporting and more opinion. Perhaps it is just pandering to the views of most of its readers (the London-centric financial players and international businessmen) but if they expect to influence politicians or the wider community they will be disappointed.

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

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Theresa May’s Speech, Housebuilding and Organ Donation

Theresa May’s speech to the Conservative Party conference was indeed a debacle in terms of presentation. But the content was worthy of more analysis.

The shortage of houses, particularly in the South-East of England, is a persistent and major political problem. Young voters have great difficulty in finding accomodation, while the old profit from rising (and unaffordable to the young) house prices. This leads to divisions in society that populist and left-wing leaders can exploit.

So what is the Prime Minister and the Government going to do about it? They have promised to spend another £10bn on the “Help to Buy” scheme which has improved the share prices of the housebuilding companies I own already. This may well enable some people to buy houses that they could not otherwise manage to do, but it is also likely to increase house prices rather than reduce them.

In addition, she has committed to spending £2bn to fund more affordable housing with measures to ensure councils release more land for housing, and encourage developers to actually build more homes.

These are positive moves, but it’s only tackling one end of the supply-demand equation. One of the core problems is over-population in the South-East and a concentration of business activity in London, which creates a need for more housing, more social infrastructure, more transport, and more land use that simply cannot be satisfied quickly enough, if at all. Rapid growth in population, driven partly by immigration, is one cause that needs to be tackled if this imbalance is ever to be rectified. And a policy to redistribute economic activity more broadly across the country would make a lot of sense surely.

One little reported item in Mrs May’s speech was the announcement that the Government is to make a presumption in favour of organ donation legal. So instead of an “opt-in” system, you will be required to “opt-out” if you do not wish to become an organ donor.

As a kidney transplant patient myself, I view this as a positive step forward to increase the number of donations. As Mrs May said in her speech, 500 people died last year because of a lack of suitable donors. That particulary affects heart donations, but even kidney disease patients have a much shorter life expectancy on dialysis as against having a transplant. The economics are that transplants are cheaper than dialysis, and the quality of life much improved. So I hope this measure will go through unimpeded.

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

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Brexit, and Ryanair

The media continue to try and blow up stories out of all proportion. Lately it has been on the likely terms of a Brexit deal with the EU, and Boris Johnson’s claims about the £350 million per week paid to the EU at present.

The reality on the latter is that the Daily Telegraph article by Boris claimed we would “regain control” over £350 million paid to the EU (which was based on a Treasury paper on the full EU membership fee (£19.5 billion per annum, which I think everyone will agree is a lot of money). However, that’s not the net cost to the UK because we get a rebate on membership as negotiated by Mrs Thatcher which reduces it to £14.6 billion, plus we get a lot back in the form of subsidies and grants – for example from the Common Agricultural Policy (CAP). A rough estimate is that we get back between £5 and £6 billion from those. So the net figure is more like £9 billion per annum, but that’s still a lot of money. For example, the NHS budget for this year is £124 billion, so you can see the impact that an extra £9 billion might have.

But Boris was accurate in the sense that we have little control over the £5 to £6 billion of grants and subsidies. The UK has long wanted to reform the CAP which is more designed to subsidise inefficient continental European farmers than keep food prices low in the UK. Subsidies of some kinds to some farmers might continue in the UK post Brexit, but in a different form and possibly lower. But only with Brexit will the UK regain control so we can manage these matters more rationally. What most “remainers” seem to ignore is that a lot of the Brexit voters voted to leave because of wanting to get out of the undemocratic EU where UK voters had no significant influence, we were a small fish in a big pond, and likely to be outvoted on any major issues. Mr Juncker’s recent speech made it clear that the EU was headed for a closer political and economic union which many UK voters have found abhorrent. Historically most UK voters supported joining the “common market”, but they never wanted to join a “United States of Europe” with EU laws and bureaucrats dominant and were misled by UK politicians who did. That certainly applied to the existing EU structure and calls for democratic reform have gone nowhere.

There was a very good article in the FT yesterday by former Chancellor Nigel Lawson (no relation) on Brexit where he points out that the Office of Budget Responsibility forecasts the cost of EU membership to fall from £12.6 billion in 2018/19 to zero in 2019/20. Nigel also said “Those who say that a good trade deal is in the best interests of the EU and the UK alike fail to understand what the EU is about. It is not about economics at all. It is a political enterprise, dedicated to the achievement of full political union”. He discounts the problem of “no trade deal” based on the ability to trade under WTO terms. James Dyson recently indicated he saw little problem with that also.

Should we pay to access the Common Market, in a “transition” phase or permanently? It obviously depends on what deal is put on the table, but the attitude of the EU Commission so far suggests it won’t be a good one. In my view the UK can prosper without close involvement with the EU and without paying anything other than contractually committed minimums as part of the exit process. The UK can prosper based on its own resources and the trade with other international partners than the EU, so if they don’t want tariff free access to the UK, then we can give up tariff free access to theirs. It might just stimulate UK manufacturing so we don’t have to rely on buying German cars, washing machines, refrigerators, et al.

Ryanair

One of the folks complaining about the possible impact of Brexit is Michael O’Leary, CEO of Ryanair. He suggests flights from the UK to Europe may be halted unless a deal is done to cover flight access.

But Ryanair has been hit lately by problems with crew scheduling that have resulted in cancellation of many flights. The service to the affected passengers has also generated numerous complaints. It just looks like an operational cock-up, compounded by abysmal management responses thereafter to mollify customers.

Now I have a motto of never flying Ryanair after an event over 15 years ago. I was booked to fly on Ryanair out of Stansted but a hijacked plane was diverted to land there. The radio news said the airport was closed so I diverted to another airline via City airport to get to Dublin on time for a business meeting. Ryanair claimed Stansted was never closed (not true I believe) and refused to pay compensation.

Anyone who follows the news will know of repeated complaints from passengers about the behaviour of Ryanair. Being low cost surely does not justify the low quality of service. It’s the kind of company I would not just avoid flying with, but also investing in.

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

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Hate Crime, Fake News and Market Abuse

Yesterday saw a lot of media coverage after the Crown Prosecution Service announced that online offences of “hate crime” would in future be treated as seriously as offline offences. This is in response to the rising volume of such abuse on social media.

What is a “hate crime”? In summary, it is abuse based on race, ethnicity, religion, disability, sexual orientation or gender identity. Why just those categories? Don’t ask me – I am looking forward to abuse of baldies and fatties being made hate crimes. But this is just one aspect of the problems created by social media where anonymous posters can attack anyone whose views they do not like. Anyone in public life now regularly suffers the most vile comments from people who do not like their opinions – just ask any Member of Parliament who can tell you about it. Indeed, I have suffered from it myself.

Sometimes they do this because they know they can hide behind an anonymous google or hotmail account on the net, or by using a fictitious name. But even when it is clear who they are, there is little legal or social pressure to inhibit them. Indeed a new word has been invented to cover such behaviour – internet “troll”, which Wikipedia defines “as a person who sows discord on the Internet by starting quarrels or upsetting people, by posting inflammatory, extraneous, or off-topic messages in an online community (such as a newsgroup, forum, chat room, or blog) with the intent of provoking readers into an emotional response or of otherwise disrupting normal, on-topic discussion, often for the troll’s amusement.”

In extremis this can degenerate into “harassment” which is now a criminal offence in the UK, in addition to being subject to civil claims. For example, repetition of false allegations that cause alarm or distress is harassment. Again this is so much easier to propagate on the internet and in social media. Indeed one problem is that it can be going on without the victim being aware of it because there are now so many different platforms on which it can appear that even monitoring for it is not easy.

Another very topical subject which is linked to the above is that of “fake news” which allegedly had an impact on the US Presidential election and the Brexit vote in the UK. In effect, social media can be used maliciously to distribute false information with the intention of changing public opinion.

This can also be seen in financial markets where fake news can be used to affect share prices. Just create a rumour about a takeover bid on social media and the share price of a company will take off before the company can even deny it. Profits can be made from such behaviour, and even if the company denies it they may not be believed. Now simple cases like this are undoubtedly offences under the Financial Services and Markets Act but there are very few convictions for it. Social media have become impossible to police by the authorities in practice.

A Commons Select Committee was inquiring into fake news before the General Election caused the inquiry to be abandoned (along with all other business in Parliament). See https://www.parliament.uk/business/committees/committees-a-z/commons-select/culture-media-and-sport-committee/inquiries/parliament-2015/inquiry2/ . No report will be produced, but there was a substantial number of submissions to the inquiry. One that is particularly worth reading as it covers the abuses of financial commentators is present here: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/culture-media-and-sport-committee/fake-news/written/48219.html

For example, it says: “Short selling and market abuse – FN (Fake News) is a short sellers dream.  Before the advent of online FN short sellers had to rely on word of mouth rumour and the occasional share tipster. Today the magnification possible wields instant and widespread damage.”

Note that I see no problem with short selling so long as it is not “naked” and where the seller has a genuinely held view on the financial prospects of a company. But the ability to affect market activity by issuing slanted news commentary from the market operator is surely dubious.

Bloggers and other “financial journalists” who comment on companies are often not regulated by the FCA, can operate behind anonymous front operations or from foreign jurisdictions that are not subject to UK libel laws. In any case UK libel laws are ineffective in tackling the abuses that can be propagated as the aforementioned article explains.

Such writers and their publishers actually have a financial motive sometimes to generate the most debate by making the most outrageous claims because this will generate more hits and links to their web site. That helps to sell advertising on the site, to attract more visitors, which generates more publicity and so the circle continues.

Regrettably the law is only slowly catching up with the problems created by social media. A story put on social media can get around the world several times in a few hours, while any legal action can take months.

These problems created by “fake news”, or simply somewhat inaccurate news, might be helped if there was some way to get the news corrected. But try asking Google to remove a false story or outrageous claim. They are unlikely to do so. They even resisted strongly the EU demand to support the “right to be forgotten” about the past history of individuals (even when palpably false) and even as implemented it is of limited use.

Now the defenders of this new world argue that it is necessary to avoid regulation so as to preserve free speech. But we have surely reached the point where fuller consideration of these issues needs to be undertaken. At present, the risk of abusive attacks is likely to inhibit people getting involved in public life so free speech and democracy will be undermined rather than protected.

These are undoubtedly complex issues, difficult to cover in a short article, let alone suggest some solutions. But what do readers think, without getting into a debate on the merits of short selling?

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

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First blog post

This blog is written by Roger W. Lawson and covers topical news and comment on investment (particularly stocks and shares), on corporate governance, on company management, on economics, on transport, on art, on events in London and on local and national politics. It will also cover anything else that I feel may be of general interest to my readers or where I have a burning desire to discuss a topic.

As some readers may know, I have been writing articles and blog posts on stock market investment for many years, more recently mainly for ShareSoc – an organisation for private investors. I will continue to do so as I support the objects of ShareSoc, therefore you may find similar blog posts on their web site as appear here.

This blog may cover a wider remit though in that I won’t shy away from controversial issues as much as a “responsible” national organisation has to do. In this case you are simply getting my personal opinions, but I will of course always try to get the facts straight to support any stance. If that offends some people then so be it. One cannot produce interesting and lively articles while pandering to the sensitivities of everyone in this world.

It will also cover some other areas of interest to me than stock market investment.

I hope you find it a good read.  Review what it says in the “About” section for more background information.

Roger Lawson