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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Plus500 Share Price Dive and Betting Against Your Customers

My last blog post mentioned my brief holding in Petrofac. Another company I held briefly was Plus500 (PLUS). Yesterday its share price dropped over 30% following a profit warning in a preliminary results announcement. The cause is simply that tightening regulations are impacting revenue.

Plus500 is big CFD provider. That fact that most “investors” in CFDs lose money is widely acknowledged and the Financial Conduct Authority (FCA) and EU regulators have been tightening up on the rules that apply to Contracts for Difference. The reality is that most such “investors” are ill-informed speculators.

The FT said today that the announcement was most revealing as it showed “for the first time how much its earnings relied on betting against its customers”. Columnist Lex also described it as a “risky business” and that is one reason I sold the shares and have not considered reinvesting since. There are some companies that are simply too dubious to hold – rather like Petrofac, particularly if you also have ethical qualms about how they operate.

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

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AssetCo Case and the Grant Thornton Defense

I mentioned in a previous blog post yesterday the judgement in the case of the alleged breach of duty by Grant Thornton (GT) when acting as auditors of AssetCo Plc (ASTO) in 2009/10. See https://www.bailii.org/ew/cases/EWHC/Comm/2019/150.html for the full judgement. For those who have not had the opportunity to read all 300 pages of the judgement, here are some interesting points from it:

It was conceded that the audit was negligent in a number of respects, but GT’s defense against the damages claim was based on what it asserted were six “insuperable obstacles”. Some of the key points they made are below:

  1. They deny that if the true accounting position had been known they could have avoided an insolvent liquidation. Indeed they claim that AssetCo was better off not knowing, in 2009 and 2010, the truth of its own position.
  2. They claim that the steps that AssetCo took (a scheme of arrangement) mitigated all their losses and otherwise avoided all harm.
  3. That none of the damage claimed by AssetCo was caused by Grant Thornton but by the directors of the company.
  4. That the Letter of Representation supplied by AssetCo as part of the audits contained falsehoods and hence GT should be relieved of all liability.

They also disputed the quantum of losses suffered by the company and their entitlement to interest thereon.

The judge concluded that GT’s conduct was “not reasonable”, and upheld the claim. The defense that AssetCo were better off not knowing their true financial position is a very remarkable one indeed! How are companies expected to avoid losses if they do not know their true financial position?

But this case is a good example of how civil claims arising from company fraud are simply too expensive to pursue in most circumstances and take much too long to get into court. Expecting civil claims to discourage bad auditing and somehow police audit work is simply not a realistic proposition.

If GT’s defences had been upheld, it would effectively make it impossible to challenge any incompetent audit work however bad it was and however damaging the consequences. If the case does go to appeal, let us hope the judgement is upheld.

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

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CEO Quits, Should I Sell Tracsis?

It is always disturbing when the CEO of a successful investment quits out of the blue. That’s what has happened at Tracsis (TRCS) today. John McArthur is departing in the “first half of 2019 to focus on family and other non-business matters outside the Group”. That’s after 14 years of growing the company. I have held the shares since January 2013 with a compound total return of 21.8% per annum. Thanks John.

A replacement CEO has already been lined up in Christopher Barnes, previously with Ricardo. The Tracsis share price is down slightly today, at the time of writing.

In such circumstances I tend to wait and see if there is any impact. Good companies can survive a change of management and 14 years is a long time for anyone to stick in the same job. Boredom and desire to do something else are the symptoms and as companies grow the bureaucracy becomes more onerous.

A change of CEO can actually be a positive move if well executed as it helps to bring new experience and ideas into a company. Will just have to keep our fingers crossed on this one.

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

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