Category: Stock market

The Internet of Things – Telit and Tern

Most investors in AIM will have noted the unfolding news at Telit Communications (TCM) last week. It has culminated today with an announcement from the company that CEO Oozi Cats (a.k.a. Uzi Katz) has resigned after an independent review did indeed find that he was the subject of a US indictment 25 years ago which had not been disclosed to the board. However, they denied that other allegations about the operations and finance of the company were true. Specifically, they said “there is no substance to the speculative and accusatory articles that have been published and that it stands behind the Group’s audited accounts to 31 December 2016 and the most recently published interim statement”. Will the publisher receive yet another threat of legal action as a result? We will see, although companies are reluctant to spend time and money on such cases and it is more difficult for them (as opposed to individuals) following recent changes in libel law.

Is this yet another example of how AIM regulation is defective? The simple answer is no. Both I and ShareSoc have campaigned for improvements in that area, and the LSE have recently published a paper entitled “AIM Rules Review” which has some helpful suggestions.

But the alleged legal problems of the CEO and his wife were 20 years before the company even listed on AIM in 2015 so no amount of due diligence was likely to have discovered that issue. The more recent allegations – which are about possible fraud at the company – are not an issue of AIM regulation. Possibly more an auditing issue if any such problem exists, which the company clearly denies. However, one has to question the willingness of AIM to list companies based in foreign countries some years back. Why did they list on AIM rather than in Israel or the USA for example? Possibly because they thought there would be less scrutiny. There does appear to be more examination of new listings of late and it’s covered in the paper mentioned above also.

Now I have never invested in Telit, although I have looked at it more than once in the past. There were several aspects about this company (other than the country of residence) that put me off. The nature of the product was one – albeit it’s operating in a hot sector but was there good protectable IP? Others were the lumpy nature of hardware orders, the directors and their pay, the issue of director share sales, the failure to turn profits into cash, the repeated fund raisings…..I could go on.

In summary, this is the kind of company I do not want to own.

It’s probably just another example of a persuasive CEO encouraging investors, often unsophisticated private investors, to punt on a concept of rapid growth in a hot technology sector.

Interestingly another company focused on the “Internet of Things” sector is investment company Tern (TERN) who raised some funds via platform Primary Bid over the weekend via a placing and open offer. The latter closed early due to the demand. Indeed, the COO of Primary Bid said: “We are delighted to have facilitated the fundraise for Tern plc. It was good to see such strong demand for this Offer, demonstrating how popular Technology related companies can be with tech savvy PrimaryBid Investors. More than 50% of all investors subscribing for this offer did so via a mobile device”. Note particularly the last sentence.

I had a quick look at Tern, but had great difficulty in valuing the company because it’s largest investment by a long way is a holding in a company named Device Authority Ltd. Is there any information provided on the revenue or profits of that company in the announcements about the fund raising or in recent past company announcements, or are there any recently published accounts filed at Companies House for this UK registered company? Apparently not, so any “due diligence” is difficult. But Tern does not look expensive at face value because of their revaluation of the investment in Device Authority last year by the company in the same way as any other private equity investment is valued.

Is this another case of over-enthusiasm by private investors to get into this high tech world? We shall no doubt see in due course.

There is another thing which Telit and Tern have in common. They have both been harassed by the same “journalist”. Indeed, director Angus Forrest of Tern even went so far as to report him to the police for harassment in 2015 although the matter was not pursued (harassment can be both a criminal law and civil law case).

Investors are recommended to take a cold shower whenever anyone talks about hot technology sectors. A lot of businesses in them never turn a profit, or give a decent return on investment. You just have to look at the early history of Apple – now the largest company in the world by market cap – to see how tortuous and extended can be the path to success. And most of their early competitors simply disappeared.

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

Disclaimer: Read the About page before relying on any information in this post.

Departures – AA and Blur

Yesterday was the start of many people’s holidays. But two company chief executives are going to be taking longer holidays than they expected.

The Executive Chairman of the AA Plc (AA.) Bob Mackenzie has gone. The announcement from the company said he “has been removed by the board….for gross misconduct, with immediate effect”. According to press reports, this arose from a fracas in a bar, although there is also a suggestion that he may be suffering from a mental illness. Some newspapers just suggested it was a “Jeremy Clarkson moment”.

The share price of the AA dropped 14% on the day, which probably reflects the problems that can arise when you have an Executive Chairman dominating a business. It’s not recommended corporate governance practice and personally I tend to avoid companies who have them.

The AA is an interesting organisation which provides breakdown cover and other services for many motorists. Back in 1905, it was formed to warn drivers about speed traps. It later transmogrified into a commercial organisation when the members sold out. Now it is one of the largest operators of driver education programmes such as speed awareness courses. That has become a booming industry and more than a million drivers are now attending speed awareness courses each year. This has resulted in the funding not just of commercial organisations such as the AA but more than £40 million per year goes to the police and local authorities. For the first time in English law, it is now allegedly legal to pay the police to drop prosecutions – all you have to do is promise to attend such a course. There is no evidence that it has any benefit in road safety. More information on this dubious practice is present here: http://www.speed-awareness.org (a campaign run by the ABD against it).

The other departure yesterday was of founder and CEO of Blur Group (BLUR) Philip Letts. This was a company that listed on AIM more than 5 years ago and in 2014 traded at a price as high as 665p. It’s now 3p.

This was a company that was a typical “concept” stock. It was going to revolutionise the commissioning by SMEs of services which is still very much an informal market by introducing an internet market. Mr Letts must be a very persuasive person to keep the business alive this long by repeated fund raisings. But it’s a typical example of how unproven business models are very risky investments. Most companies would have changed the business focus and the CEO long ago, or simply wound up, but Mr Letts persisted.

Yesterday the temporary suspension on AIM was lifted as they finally published some accounts. The results were slightly improved in that losses were reduced, but it still looks an unviable business unless the new management can make substantial changes. Mr Letts was removed from the board effective on the same day.

Incidentally I do hold a few Blur shares – market value now £6 so I hope that has not prejudiced my comments. If you get enthused by the hype surrounding some early stage companies, and the persuasiveness of the management, there is one simple thing to do. That is to only invest a very small amount until the company proves its business model and actually shows that the business is likely to be profitable. Revenue alone is not enough, because anyone can generate revenue by spending lots of your money.

The other protection is when the company fails to achieve its stated business plan, to simply sell and move on. Ignore the tendency to “loss aversion” where you hold the dogs in case of recovery. Or if you fear missing out on a big recovery, simply reduce your holding to a nominal level as I did on Blur and saved myself even more money.

So I invested a very small amount initially and then reduced it later to a miniscule level.

Just one point to note is that the company actually spells its name “blur” rather than “Blur” as I have used above, thus ignoring the rules of English grammar. Such affectations in companies to be “different” are always a bad sign in my experience.

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

Disclaimer: Read the About page before relying on any information in this post.

Utilitywise Profit Warning

A trading update from Utilitywise (UTW) caused the share price to fall another 18%. It’s already down from over 350p in May 2014 to 48p the last time I checked. A pretty disastrous investment for many. This was one of those go-go small cap stocks that lots of share tipsters were promoting back in 2013/14. Revenues and profits were apparently on a strong upward trajectory from their sales of utility services to commercial users.

I even bought a few shares myself. But I sold when I came to realise that their revenue recognition practices were in my view somewhat aggressive. So far as I understood it, they were recognising profits on contracts when the customer signed up for an annual or longer contract. From today’s announcement that even included recognising profits on signature rather than contract commencement. But the real problem to my mind is that instead of most businesses where profits are taken on amounts invoiced, which is shortly before cash is paid on them, in this case the cash was received very much later. So I got cold feet and bailed out. I simply don’t like imprudent accounting and aggressive revenue recognition (Quindell was a similar example).

That is basically what is so damaging in today’s trading statement where they cover a change in accounting policy to IFRS 15 which has tougher rules on revenue recognition from contracts. Who were the auditors of Utilitywise? BDO LLP.

Respected investor Leon Boros has already tweeted that with the adjustments to their accounts required, all the historic profits of the company will disappear. As he says “always follow the cash”.

I did write a report on a Mello event for ShareSoc where Utilitywise was one of the companies presenting back in 2013, but it was not a particularly complimentary one – it mentioned possibly regulatory problems, aggressive sales practices and director share sales for example. The revenue recognition issues only became apparent at a later date.

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

Disclaimer: Read the About page before relying on any information in this post.

AIM Rules Review

The London Stock Exchange have published a document entitled “AIM Rules Review”. ShareSoc, including me personally, have criticised the LSE in the past for poor regulation of the AIM market. Many investors view it as a casino because of the numerous problems of fraud, poor disclosures, many delistings or simple bankruptcies in AIM companies. See the ShareSoc campaign page here for more information: https://www.sharesoc.org/campaigns/campaign-improve-aim-market/

As you can see we made a number of recommendations on how to improve the AIM market, and had meetings with AIM management where we put these proposals forward. The LSE regulates the AIM market but their responsibility lies primarily in ensuring the AIM Rulebook is adhered to and that Nomads meet their responsibilities. Other aspects of the market such as market abuse or false accounting are covered by other regulatory bodies, which many private investors do not understand.

So have any of the ShareSoc proposals been covered in the latest document? In summary, yes they have been. Here’s a quick review:

The AIM Rules Review does emphasise the improved recent performance of the AIM market and the fact that the average size of companies listed on it is growing. That has helped to improve the quality of the market.

Vetting new listings. One proposal we made was that new listings should be vetted by an independent panel because many investors considered some of the new listings in the past to be very dubious businesses. They have not taken this up directly but are proposing to formalise the “early notification process”. In addition, they propose to give more guidance to Nomads (whose role it is to perform due diligence on prospective listings) on what they need to take into account. For example, the “good” character of directors or managers, the corporate structure and business model, risky contractual arrangements and “related party” interests. This looks to be one way to tackle past problems, but one suggestion I would make is to add to that list the “regulatory structure and upholding of the rule of law in the countries where the candidate is listed or operates”. For example, it has proved very difficult to pursue fraud in China, and even Greece creates difficulties in that regard.

Free float. One concern they cover is the issue of low free floats which is a concern of some investors. For example, many of the companies that have turned out to be problem ones are those where there is an executive Chairman who holds a majority of the stock (or their close relations or associates do). This gives that person enormous power to prejudice minority shareholders, ignore the views of other board members and ultimately commit major frauds. The LSE’s response on this issue though is simply that the LSE would like to understand the position on new applications and the Nomad’s consideration of it. That surely is open to abuse, but the LSE does ask whether more specific free float rules should be brought in (the LSE document is a public consultation one so you can submit your own comments).

Minimum Fundraising. They also propose the introduction of a minimum fundraising rule and pose some questions on that. This would help to ensure institutional involvement in a company.

Composition of Boards. They mention this, but give no specific suggestions. That is surely an omission when ShareSoc made some specific suggestions in that regard.

Disclosure and Corporate Governance Codes. The document covers the issue that AIM companies can avoid any adherence to a specific corporate governance code. ShareSoc suggested a specific code should be available and applied by all AIM companies. The LSE asks a question on this at least.

Education and Breaches of the AIM Rulebook. The LSE asks how the market, particularly individual investors, can be further educated as to what the LSE can and cannot do. A good question indeed, which I will ponder.

Breaches of the AIM Rules. But one issue we raised with AIM management was the failure to enforce the existing Rules, or penalise and publicise those who break them. Indeed the document spells out how poor this has been by giving some statistics. There were 93 recorded breaches or where “education” was required, but only 16 warning notices or private censures/fines issued on average over the last three years. There were zero public censures apparently. They do ask a question about possibly imposing automatic fines on breaches of the AIM Rules, and invite suggestions for other changes. I will have some, but the basic problem is “self-regulation” and the resulting unwillingness to take tough action. Both firmer rules on penalties and a cultural change is required.

In summary, this Discussion Paper on the AIM Rules is a useful step in the right direction and does appear to tackle some of the issues about AIM that I and ShareSoc raised. It is though only a discussion paper and hence that does not mean necessarily that action will be taken. In some regards it is still quite weak but regrettably AIM management have an uphill battle to get change adopted when many market participants consider everything in the garden is rosy. However, it is surely necessary to improve the reputation of AIM if the market is to attract more listings and reduce the number of complaints from investors.

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

Disclaimer: Read the About page before relying on any information in this post.

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