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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Big Audit Firm Break-Up and Northern VCT AGM

A report commissioned by the Labour Party has advocated the break-up of the big four audit firms that dominate the audits of FTSE-350 firms. The report, co-authored by Prof. Prem Sikka et al, even goes so far as to suggest that their share of that market should be limited to 50% and that joint audits be promoted. In addition it argues that audit firms should be banned from doing non-audit work for the same company, and an independent body to appoint audit firms and agree their remuneration should be set up.

It also calls for the auditors to owe a duty of care to shareholders, not just the companies they audit, which would enable shareholders to pursue litigation over audit failings which they have great difficulty in doing at present. It is surely sensible to reinstate what was always assumed to be the case before the Caparo judgement.

These are revolutionary ideas indeed to try and tackle the problems we have seen in recent years and it seems to be now generally accepted by investors, if not the audit profession, that there have been too many major failings and the general standard is low. Even the Financial Report Council (FRC) seem to accept that view at a recent meeting with ShareSoc/UKSA.

But would breaking up the big four, effectively forcing some larger companies to use smaller audit firms improve the quality of audits? I rather doubt it. In my experience problems with smaller audit firms are just as common as in large ones – it’s just that the big companies and their audit failings get more publicity. Larger firms do have more expertise in certain areas and more international coverage. So there are good reasons to use them. But this report is certainly worth reading because if Mrs May continues to make a hash of Brexit and proves unable to stop dissension within her party we may see a Labour Government looking to implement these policies. See http://visar.csustan.edu/aaba/LabourPolicymaking-AuditingReformsDec2018.pdf . I may make more comments on the report after I have read the whole 167 pages.

Note that this issue of audit firm size came up at the Northern Venture Trust (NVT) Annual General Meeting which I attended today. This is a long-established Venture Capital Trust – it was their 23rd AGM, many of which I have attended. One shareholder voted against the reappointment of KPMG on the “show of hands” vote, and there were 1.2million votes against them on the proxy counts (versus 10.9 million “for”). It is unusual to see so many voted against such resolutions. When I asked the shareholder why he voted against I was told it was because he thought that a smaller audit firm might do better as VCTs are relatively smaller investment companies. However I pointed out that VCT legislation is very complex so it makes sense to use an audit form that is more knowledgeable in that regard.

The other possible reason for high proxy votes against the auditors is that Nigel Beer, who chairs the Audit Committee is a former partner in KPMG although he told me later that he had departed many years ago. Anyway I did raise this issue in the meeting and the fact that both Nigel Beer and Hugh Younger had just passed 9 years of time on their board. In addition, Tim Levett, who is Chairman of NVM, the fund manager, is on the board. So according to the UK Corporate Governance Code that’s three directors out of 6 who should be considered non-independent.

I urged the Chairman to look at “refreshing” the board although I did not doubt their experience and knowledge. It was also pointed out to me after the meeting that there are no women on the board. So effectively this is really a stale, male, pale board. However the Chairman said they do regularly review board structure and succession.

Other than that there were some interesting comments given by Tim Levett in his presentation. He said that due to the change in the VCT rules in 2016 they have changed from being a late stage investor to being an early stage one. In the last 3 years they have built a new portfolio of 22 early stage companies and are probably the most active generalist VCT manager other than Titan. NVM have opened a new office in Birmingham and built up the Reading office. There were also a number of new staff who were introduced at the meeting.

He also said that like all the top 10 VCTs, an awful lot of special dividends had been paid in the last three years. This was because of realisations and the VCT rules that prevented them from retaining cash. This has meant a reduction in the NAV of the trust but in future they will try and maintain that at the same time as maintaining a 5% dividend. Note: that historically it means that capital has been paid out in tax-free dividends that investors might have reinvested in the trust and hence collected a second round of up-front income tax relief. One can understand why the trust does not want to continue doing that as it may otherwise spark some attention from HMRC. I also prefer to see VCTs maintain their NAV as otherwise the trusts shrink in size which can create problems in due course as we have seen with other VCTs.

NVT are doing a new share issue in January which will of course improve their NAV and I was glad to hear that at least some of the directors will be taking up shares in the offer and adding to their already considerable holdings. That inspires some confidence that they can cope with the changes to the VCT rules that mean there will be more emphasis on investing in riskier early stage companies.

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

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EMIS Investor Event

On Thursday (29/11/2018) I attended the EMIS Group (EMIS) Capital Markets Day at the London Stock Exchange. Having held shares in the company since 2011, this was a great opportunity to get an update on the situation of the company and its future plans.

First some background. EMIS is best known as the provider of software that general practitioners use – EMIS Web (primary care). That has more than 50% of the UK GP market. But the company also has many other solutions for other healthcare sectors such as secondary and acute care, pharmacy services and diabetic eye screening. Many of these services are sold to the NHS but there is also private income. The company has also been investing in development of a Patient app and web site for providing information and services directly to the general public (https://patient.info/ ).

It goes without saying that the healthcare sector is growing as the population increases and the age profile rises – particularly now the baby boomers are entering retirement. The population seems to be becoming generally less healthy and one example of this is the growth in diabetes sufferers.

EMIS has certainly managed to grow revenue both as a result of increasing demand for medical services but also because of the provision of new services and minor acquisitions over the years. Revenue has almost doubled in the last 5 years £160 million, but profits have not shown the same growth. Reported profits fell in 2017 to £8.8 million mainly due to £5.8m of reorganisation charges, £11.2m of “Service Level” charge provisions (see below) and high amortisation charges of £15.2m mainly relating to past software development costs. Perhaps that is why this event barely covered the financials of the business, either historic or future projections, but concentrated on software and business developments. That was somewhat surprising considering the audience must have been mainly investment professionals.

The share price has been trending down since January 2016 and is now on a prospective p/e of 20.3 for the current year ending in December according to Stockopedia (analyst consensus forecasts are actually given on the company’s web site).

What was the exceptional Service Level provision of £11.2 million for? That arose because the company discovered that it had not been meeting the service level agreement terms for EMIS Web with the NHS. They expect to conclude a settlement soon within the terms of the provision. I asked the CFO about this matter because my own GP was certainly not aware of any failings in support of EMIS Web. His answer was that certain reports of minor bugs had simply been lost rather than been progressed. This all seems rather odd to me that this had ever happened yet alone required financial compensation when the client was not apparently aware of it.

There were a number of demonstrations of the software and solutions on display for attendees both before and after the presentation. The latter was very slick and well-rehearsed with two very professional videos on trends in healthcare (ppt slides available from the company’s web site). It covered:

  • Financial progress of the business since IPO which of course looks a lot better than over the last 5 years.
  • Improved relationship with NHS Digital which is good to hear as future renewal of the EMIS Web contract is very important.
  • Current leadership team including relatively new CEO Andy Thorburn appointed in May 2017. Also clear they have added substantially to the team lately.
  • Intention is to build sales momentum including rapid growth of private sector business to 50% of group and margin improvement.
  • Acceleration of technology roadmap which is to be “self-funded” (by customers and “operational leverage”).

Comment it is clear that the company has committed to very substantial development in software and technology with staff numbers growing as a result (will be up by 150 this year). The focus is to transition from just being number 1 or 2 in lots of individual healthcare sectors to providing an integrated platform where applications can communicate with each other – including partner or even competitor solutions. So for example, EMIS Web is to become EMIS-X and enable an integrated view of multiple practices so you could book appointments with other GPs in your local area. In addition the Patient App will provide access to GP appointments and other services such as repeat prescriptions (it was noted that 45% of the UK population have such prescriptions which helps to explain why the NHS is so costly to run).

The objective is to make EMIS the centre of healthcare. They also see opportunities to grow by entering new markets. They expect their addressable market to double by 2022. The plans are aligned with NHS initiatives and the provision of more “joined-up” healthcare which everyone is demanding – there is still too much paper in the NHS and lots of independent systems and medical practitioners who cannot easily communicate, e.g. hospital systems with GPs and social care providers.

EMIS-X will be an “open” platform and enable the sharing of information between “tenants” (i.e. authorised users) and will help to reduce development costs and be a scalable solution. Technically it will be a cloud-based service using Amazon Web Services (AWS). This raised one question concerning security concerns which might be a roadblock to wide adoption. Certainly there are concerns about this in the healthcare professionals I know and by some patients.

As regards the Patient App, it was noted that we have been “patient” with the Patient App but “next year will be the year”. Personal note: I had an old copy of the Patient App on my i-Phone which I could not update for unknown reasons. Had to delete and download a new version which I did after the event – but was unable to do so without entering credit card info so gave up. Don’t see why that should be required until needed.

Included in the presentations was one on the management of medicines where there is an opportunity. Some 23,000 deaths per annum are from prescribing errors which cost £1.6 billion, but only one third of patients adhere to taking their prescriptions after a few weeks.

Another question raised was how are they going to compete with Babylon which I covered in a previous blog post: https://roliscon.blog/2018/11/13/should-you-give-up-fags-and-booze-plus-coverage-of-babcock-and-babylon/ . Babylon is providing a GP service and triage capability. They have been receiving a large amount of venture capital funding. The answer was that EMIS does not need external funding because they already have the customers so don’t need to spend on customer acquisition and on people. They claim to have more App users also. EMIS is not going to provide GP services themselves, but solutions to support GPs. An interesting comment from CEO Andy Thorburn at this point was that the EMIS model will be similar to BTs (where he used to work) where they will have both wholesale and retail customers where wholesale provides the infrastructure which other suppliers might use. The focus will be on development of a “partner ecosystem”.

It was disappointing that insufficient time for Q&A was given.

Demonstrations included the new video GP appointment service which will be available very soon in some GP practices, and booking appointments using AI capabilities in EMIS-X. Another one was talking to a smartwatch to access GP services via the Patient App.

In conclusion, the event provided good coverage of the technology direction that EMIS is pursuing. It was unclear though how that would be turned into revenue and profits. It was more of a technology presentation than a business presentation with little mention of target markets and segmentation.

However, the company already has a dominant and key position in the NHS and in medical services in the UK in general. Their future plans should enhance that position and be in alignment with NHS priorities. Profits are forecast to grow but the rate of growth is not great (revenues are expected to provide “mid-to-high single-digit annual growth” according to one presentation slide which seems to be relatively unambitious to me and analysts forecast is for only 5.9% this year).

Bearing in mind the cost pressures in the NHS and the reliance by the company on that one customer to such a large degree, you can see why the company is keen to develop its private sector business and why the shares are not currently more highly rated.

But for heavy personal users of medical services like myself, it gave a useful overview of what we soon might be seeing in the real world. Not having to repeat one’s past medical history to numerous medical professionals could save the NHS an enormous amount of money alone, and improve safety in many areas. The key for EMIS is how to turn that and other opportunities into profits.

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

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Black Hole in Patisserie Holdings, Audit Reviews, Telford Homes and Brexit

Let’s take the really bad news first. AIM listed Patisserie Holdings (CAKE) shares have been suspended following an announcement of “potentially fraudulent accounting irregularities” which will significantly impact the company’s cash position. The CFO, Chris Marsh, has been suspended.

Media reports suggest there may be shortfall of as much as £20 million. The auditors are Grant Thornton which won’t improve their reputation much but as the company’s year end is September they may not yet have looked at last year’s results. According to the interim accounts in March they had cash of £28.8 million on the balance sheet and showed positive cash flow. Is this going to be another case of even the cash vanishing? I hope not.

Patisserie mainly operate cafes and should in essence be a simple business. Taking another look at their accounts, the only suspect item in March was possibly the £63 million in “plant, equipment, fixtures and fittings” at cost and another £16 million in leasehold improvements. In March they were trading from 206 stores so that suggests £380,000 invested in each store ignoring subsequent depreciation. Is that realistic? After depreciation there was £42 million on the balance sheet.

There was also £11.6 million in trade receivables (they sell cakes via Sainsbury’s for example) which I guess might be suspect. Or is it another Tesco case which is currently in court where payments from suppliers were incorrectly recognised? The last Annual Report says this under revenue recognition: “The Group has multiple revenue streams, with revenue received from wholesales, online sales, vouchers and third party funded discount schemes”. The Audit Report also said ““revenue recognition has been identified by the audit team as a significant risk”. This caused me to ask a question on this at their last AGM and you can see my report on it here: https://roliscon.blog/2018/01/30/revenue-recognition-patisserie-valerie-utilitywise-and-cryptocurrencies/ . I concluded that there was unlikely to be a problem in this area but perhaps I was wrong. With the shares suspended we shall just have to wait and see.

Luke Johnson, a well known commentator on the financial scene, is the Executive Chairman of the company and a major shareholder – he holds 38% of the shares. But he has lots of other business interests. Has he taken his eye of the ball?

Audit Reviews

Coincidentally the Government BEIS Department and the FRC have announced that Sir John Kingman is going to extend his review of the audit profession to cover how audit firms are procured. In addition he will be looking at how the interests of the users of accounts can be promoted by ensuring quality, rigour, independence and scepticism among auditors. I am certainly in favour of that although it seems likely the focus will be on larger companies rather than AIM ones. In addition the Competition and Markets Authority have launched an investigation into the audit market amid suggestions that the big four audit firms have formed an oligoply.

Telford Homes

Another announcement this morning was from Telford Homes (TEF). They are a housebuilder mainly focused on “lower cost” homes in East London. They have also moved into the “build to rent” sector as houses have become unaffordable to buy for many people in London.

I put “lower cost” in quotes because if you read the announcement their definition of “affordable” is houses that cost £540,000 on average. But they do admit that they still have to shift 25 homes priced at over £600,000. Just to explain how mad the house price market is in London, a simple calculation of affordability will suffice. I always used to think that a mortgage to income multiple of 3 was reasonable, although it seems some companies are offering 4 or 5 times now after taking into account the current low interest rates. But even on a multiple of 4, that means a first-time buyer with little deposit has to have an income of over £130,000 per annum to buy their “average affordable” home.

And what do you get for your money? The announcement mentions their new development at Gallions Point. A quick look at a map tells you that appears to be between the flightpath of City Airport and Beckton sewage works in East London. It’s not even a short cycle ride to the City Canary Wharf from there. You’ll no doubt get an apartment with a good view of the Thames though.

House prices have been mad in London for a very long time and that might continue to be so. Certainly Telford Homes depends on it. The company still expects to increase first half profits over the previous first half and are proposing to increase the dividend.

I am of course a holder of both Patisserie and Telford Homes shares.

Brexit

The FT printed a response to my letter in yesterday’s edition. The latest correspondent suggested I wished to “shut down debate” on Brexit which is not exactly true although some might have interpreted my previous comments as an attack on the whingers. Certainly I think many people are tired of the subject and simply wish the Government to conclude the matter, but my letter was actually on the false analysis and factual errors of previous correspondents. If folks wish to continue to debate the issue of Brexit, I have no issue with that, but to fill the pages of the FT with it when I pay for the publication to cover real news, is somewhat annoying.

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

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