Company Refs Acquired

Slater Investments and Stockopedia have issued a press release saying they have acquired the Company Refs financial analysis service. Company Refs was devised by Jim Slater, the father of the current Slater Investments Chairman and was originally published in paper form as a summary of all the key financial information on public companies on one page. It was later digitised but active marketing of the service has not taken place in recent years. But it was a truly innovative solution to help both professional and private investors when first devised.

Stockopedia provides a very similar service and the press release suggests that current REFS subscribers will be integrated into the Stockopedia service while Slater will use the financial database and intellectual property for internal research purposes.

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

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Edge Performance VCT Sorted

The Edge Performance VCT (EDGH and EDGI) I have long considered to be a basket case of the first order. VCTs are typically owned only by private shareholders but I am always astonished by how those shareholders put up with dire performance and excessive management costs over many years. But in the case of Edge they have finally taken action – namely removed all but one of the directors at the AGM and voted down other resolutions. It was not even apparently necessary to call a poll as the resolutions were defeated on a show of hands vote according to the RNS announcement of the result, but the proxy votes were clearly of the same mind.

The sole remaining director is now apparently considering what to do next. See this report by ShareSoc on the meeting: https://www.sharesoc.org/blog/vcts/edge-another-vct-problem-case/

I would suggest the answer is simple: ask for volunteers with relevant experience from the shareholders to serve as directors before deciding on any future plans.

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

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Burford, Channel Island Registrations and Brexit

Firstly lets talk about Burford Capital (BUR). Tom Winnifrith, who has been complaining about the accounts and other issues at that company for a long time, sent a letter of complaint to the FCA and FRC (the Financial Reporting Council) asking them to investigate the allegations of Muddy Waters. The FRC have responded with this comment: “Burford Capital is incorporated under the Companies (Guernsey) Law 2008 and is accordingly not subject to the requirements of the Companies Act 2006”. They also said that the shares are traded on AIM which is not a regulated market. The FRC’s Corporate Reporting Review Team therefore does not have powers to make enquiries about the matters raised.

In summary, although the FCA and the FRC have some powers relating to the company’s directors and its auditor, Mr Winnifrith will have to complain to the Guernsey Financial Services Commission who are the regulatory authority.

As I said in my recently published book, company domicile does matter and is definitely worth checking before investing in a company. I specifically said: “In general for UK listed companies, any domicile outside the UK adds to the risk of investing in a company. Domicile in the Channel Islands or Isle of Man is also not ideal [see Chapter 7]”. So that’s yet another reason why I would not have invested in Burford, apart from my doubts about the prudence of their accounting.

Brexit

At the risk of offending half (approximately) of my readers, here are a few comments on the latest political situation and the prorogation of Parliament. Speaker John Bercow has said that “shutting down parliament would be an offence against the democratic process and the rights of parliamentarians….” while there was an editorial in the Financial Times today that said “it was an affront to democracy” and that Mr Johnson had “detonated a bomb under the constitutional apparatus of the United Kingdom”. But I tend to side with Leader of the House Jacob Rees-Mogg who called it “completely constitutional and proper”. Suspension after a near record long parliamentary session to allow the Government to put forward its programme in a new Queen’s Speech is entirely appropriate and not unusual. There is also time before the suspension, and after, for Parliament to debate whatever they want before Brexit date on October 31st. Also Parliament is often closed down in September for the party conferences so this is not unusual.

It’s simply a case of sour grapes from remainers who realise they may not be able to stop Brexit or cause further trouble in resolving the impasse in Parliament. John Bercow is particularly to be criticised because he is supposed to be independent and should not be making such comments on a well-established procedure supported by precedent.

Parliament has been debating Brexit for many months and it is time to draw such debates to a conclusion because it gives the false hope to the EU that the UK will change its mind over leaving. The UK voted to leave and we should get on it with, preferably with some kind of Withdrawal Agreement, or otherwise none. Business is damaged by the on-going uncertainty which is why the pound has been falling. Boris Johnson is simply forcing the pace which is quite right.

If the opposition parties or remainers in the Conservative party do not like what is happening they can call for a vote of no confidence. It that was passed then a general election would no doubt be called, which the Conservatives might actually win, or the election might take place after the Brexit date which would put the remainers in a very difficult position. That is why they are so clamorous. They simply don’t like the position they find themselves in which has actually been caused by those in Parliament who have wanted to debate the matter endlessly without coming to a conclusion.

There are some possible legal challenges but should, or will, the judiciary interfere in what is happening in Parliament? I don’t think they should and I doubt they will. Are Scottish judges, where one challenge is being heard, really going to attempt to rule on a matter of UK wide importance? This seems unlikely in the extreme.

In summary, I think everyone should calm down and let the matter take its course. Those who are not happy with the turn of events can challenge it in Parliament via their elected representatives if they wish. But Brexit needs to be resolved on Oct 31st, one way or another. Not delayed yet again. There are so many other issues that Parliament needs to deal with that more debate on the matter is simply unacceptable.

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

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Burford Governance Changes

Burford Capital (BUR) have announced a number of changes to their board to meet the concerns of investors about corporate governance at the company. It includes the CFO (wife of the CEO) moving to another role, and refreshing the board in due course.

This is what Chairman Sir Peter Middleton had to say: “Companies are owned by their shareholders, and when the shareholders speak, it is the role of boards and management to listen.  While we may take a different view on some of these points, shareholders have clearly spoken and we have listened, just as Burford has throughout its existence.  We trust that these governance enhancements operate to bolster investor confidence in Burford as it enters its next era of growth and success.”

I hope the directors of the Ventus VCTs (see previous blog post) are listening also.

Burford is also looking for a US listing (on the NYSE or Nasdaq) as investors have made it clear they do not support Burford being solely listed on AIM.

These changes will help to make the company more of a sound investment proposition but the question remains over whether their financial accounting is prudent, and has been historically accurate. Muddy Waters clearly suggested otherwise. The key question for investors is whether a new CFO will take a different approach to their accounting and decide it should be done differently.

Unfortunately the new CFO, Jim Kilman, was the former investment banker at Morgan Stanley for the company and has been acting as an advisor to the company since 2016. It hardly looks like they undertook a formal recruitment process but have just appointed someone they already know, and who knows them, to the position as a stop-gap measure. That is not the best way to reassure investors on financial prudence.

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

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National Grid Power Cuts

Last Friday the electricity network suffered a number of major failures with power cuts closing Kings Cross station and associated lines, traffic lights in South-East London being cut and other areas of the country affected. This caused me to consider whether National Grid (NG.) has been running too close to the wind in terms of capacity to cope with exceptional events.

I have not held shares in the company since late 2017/early 2018 but I do recall attending one of their AGMs when a shareholder questioned whether the country and the company had enough spare electricity capacity (National Grid has a monopoly on electricity distribution in the UK and also acts as a “system operator”). The shareholder concerned was reassured by the directors so far as I recall.

Keeping the power on is quite essential in the modern world. Heating appliances rely on it to operate, phone networks fail if the electricity supply is down (unlike some years ago when landlines operated on batteries), hospitals and other essential services rely on electricity being available and even cars will soon be reliant on the electricity supply. But it seems that the grid suffered three “near-misses” in the months before Friday’s disruption. On Friday the problem appears to have been caused by the failure of a gas power plant in Bedfordshire and a North Sea wind farm at the same time. This combination caused automatic systems to be triggered that cut supplies to certain parts of the country to avoid a wider shutdown. Note that this is nothing to do with reliance on unreliable supply sources such as wind power generation. It’s about network management, being able to get alternative supplies into action quickly and having spare capacity.

Has the company been under investing in capacity and system resilience while paying out enormous sums in dividends to investors, as some people allege?

It’s worth reading the company’s last Annual Report where the risks the company faces are covered in some depth. They have added “two new principal risks” one of which is given as “failure to predict and respond to significant disruption of energy that adversely impacts our customers and/or the public”, so it seems they were already aware of this issue.

They also cover the risk of state ownership if the Labour Party gained power and they say “The Government would have to pay fair compensation for the Company’s property….”. That is simply untrue. It would only have to pay what Members of Parliament considered fair which may be very different to a truly independent valuation or what the company’s shareholders might consider reasonable.

It would appear to me that the company has been excessively optimistic over its ability to maintain the supply network when an unusual combination of events arises, and has been discounting other major risks to shareholders.

It is surely time for the Government and National Grid’s regulator (OFGEM) to take a close look at the company.

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

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Bonmarché Update, FCA Grilling over Woodford and Amati AIM VCT AGM

Yesterday Bonmarché (BON) conceded defeat in its opposition to a takeover bid at 11.4p. On the 17th May it had rejected the bid because it “materially undervalues Bonmarché and its prospects”. The share price of this women’s clothing retailer was over 100p a year ago but the latest trading review suggests sales are dire because of underlying weakness in the clothing market and “a lack of seasonal weather”. Auditors might have qualified the accounts due to be published soon due to doubts about it being a going concern if sales did not pick up before then. Bonmarché looks to be another victim of changing shopping habits and changing dress styles.

Is the market for traditional men’s clothes any better? Not from my recent experience of buying two formal shirts from catalogue/on-line retailer Brook Taverner. Cost was zero although I did have to pay postage. Why was the cost zero? Because they had a special offer of 60% off for returning customers, and I had collected enough “points” from them to wipe out the balance. Smacks of desperation does it not?

On Tuesday the Treasury Select Committee interviewed Andrew Bailey of the Financial Conduct Authority (FCA) over the closure of the Woodford Equity Income fund and their regulation of it. It is well worth listening to. See https://parliamentlive.tv/Event/Index/34965022-ec99-4243-8d0b-ae3350c31fe4

It seems that technically the fund only made two minor breaches of the 10% limit on unlisted stocks twice in the UCITS rules which were soon corrected in 2018. But Link were responsible for ensuring compliance as they were legally the fund manager as they were the ACD who had delegated management to Neil Woodford’s company. But in the morning of the same day the Daily Telegraph reported that nearly half of the fund investments were actually illiquid including 20% that were nominally listed in such venues as Guernsey and not actively traded. In other words, they were perhaps technically complying with the UCITS rules but their compliance in principle was not the case. Mr Bailey suggested this is where regulation might be best to be changed to be “principle” based rather than “rule” based but surely that would lead to even more “fudges”? The big problem is yet again that the EU, who sets the UCITS rules, produced regulations that lacked any understanding of the investment world.

The Investment Association has suggested a new fund type be allowed which only allows limited withdrawals, e.g. at certain times or on notice. But that does not sound an attractive option to investors. When investors want to sell, they want to sell now.

Bank of England Governor Mark Carney has said open-ended funds are “built on a lie” in that they promise daily liquidity when it may not always be possible. He also suggested they posed a systemic risk to financial stability. Or as Paul Jourdan said at the Amati AIM VCT AGM: “Liquid investments are liquid until they are not”.

There is of course still no sign that Neil Woodford is taking steps to restore confidence in his funds, as I suggested on June the 5th. There needs to be a change in leadership and in name for that to happen. Once a fund has become a dog and untouchable in the minds of investors, and their financial advisors, redemptions will continue. Neil Woodford making reassuring statements will not assist. More vigorous action by Woodford, Link, and the FCA is required. Affected investors should encourage more action.

The Amati AIM VCT (AMAT) had a great year in the year before last as small cap AIM stocks rocketed but last year was a different story. NAV Total Return was down 10% although that was better than their benchmark index. AB Dynamics was the biggest positive contributor – up 93% over the year with Water Intelligence also up 93%. Ideagen was a good contributor (now second biggest holding) and Rosslyn Data was also up significantly. Accesso fell 36% but they are still holding. I asked whether they had purchased more AB Dynamics in the recent rights issue but apparently they could not as it was no longer VCT qualifying.

I also asked about the fall in Diurnal which wiped £1.2 million off the valuation. This was down to clinical trial results apparently. However, fund manager Paul Jourdan is still keen on biotechnology and pharmaceutical firms as he suggested that healthcare is being revolutionised in his concluding presentation – he mentioned Polarean as one example.

Other presentations were from Block Energy – somewhat pedestrian and not a sector I like – and Bonhill Group which was more lively. Bonhill were formerly called Vitesse Media but are growing rapidly from some acquisitions and clearly have ambitions to be a much bigger company in the media space.

It was clear from the presentations that the investee company portfolio is becoming more mature as the successful companies have grown. This arises because they tend to take some profits when a holding becomes large but otherwise like to retain their successful holdings.

All resolutions were passed on a show of hands vote but I queried why all the resolutions got near 10% opposing on the proxy counts which is unusual. It seems this is down to one shareholder whose motives are not entirely clear.

In summary, an educational event and worth attending as most AGMs are.

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

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Wey Education News

Wey Education (WEY) published a very positive half-year report his morning. This small AIM-listed company operates in the on-line education field and I have written about it several times in the past (you can search the blog for previous posts). Under its former Executive Chairman, David Massie, who sadly died, it launched an ambitious expansion programme including overseas ventures in Kenya, Nigeria and China. They have written off those and closed down operations in London (total cost £881k) and will be concentrating on their UK InterHigh and Academy 21 businesses in future.

The good news is that turnover is up 55% and adjusted profits on continuing operations is both positive and very substantially up. The share price is up over 50% today at the time of writing. Possibly helped by share commentator Paul Scott saying he had bought some recently.

There is a great need for the alternative education to conventional schools that Wey provides so let us hope they are now heading in the right direction, albeit that there is some competition in this sector.

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

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