Electric Vehicles, Pod Point IPO and Bulb Rescue Cost

If the Government has its way, we’ll all be driving electric cars (EVs) soon. One of the concerns of drivers though is they might run out of battery power so the provision of chargers is of key importance in driving acceptance of electric cars.

There is clearly a big potential market for chargers, not just in homes but also in public places, at office car parks, supermarkets and other venues. One of the providers of chargers is Pod Point Group (PODP) who recently undertook a public stock market listing (IPO). The prospectus they issued (see link below) gives a very good overview of the market for electric vehicles and the charging infrastructure in the UK.

Pod Point was founded in 2009 and has installed over 100,000 charge points mainly in the UK. There are government grants available (OZEV) for home installations although those are likely to be withdrawn or altered from 2022. The government is also funding from 2022 large on-street charging schemes and rapid charging hubs across England. Meanwhile car manufacturers are focussing on production of new electric only (Battery Electric Vehicles – BEVs) and hybrid models. Some 6.6% of new vehicles sales were EVs in 2020 and by 2040 it is estimated that 70% of all vehicles on our roads will be EVs.

Chargers fall into two main categories – AC and DC with the latter providing more rapid charging. Home charging is typically via slow AC because UK homes do not have 3-phase electricity supplies. There are several different connector types. Pod Point estimate they have 50-60% of the UK home charge points and 29% share of public installations. But there are a number of competitors include BP Pulse. Petrol station forecourts are one location where chargers are being installed but it is unclear where the dominant charging location (home, office, etc) will be in future.

Those people with homes with no off-street parking will need to charge at public locations unless viable “pavement” chargers are developed. London-based Connected Kerb plans to install 190,000 on-street chargers by 2030.

Pod Point owns some installations under commercial arrangements with venue locations and that includes 396 Tesco sites where slow chargers are installed. Is that to encourage shoppers to spend more time in the store while their vehicle is recharging one wonders?

Pod Point doubled its revenue in 2020 and more than doubled its revenue in the first six months of 2021, but still made a large operating loss. The market cap of Pod Point at the time of writing is about £380 million.

How the market for the provision of EV chargers will develop is unclear and there are the usual numerous risk warnings in the prospectus. Government interference in the sector is clearly one risk and when a market is growing rapidly there are often folks willing to plunge in regardless of short-term profitability. The big oil companies are also moving into the sector and might provide significant competition.

An example of the problem caused by misguided Government interference in free markets is the collapse of Bulb which is apparently going to cost £1.7 billion to keep it afloat and ensure customers remain connected to gas supplies. It could be more if the market price of gas continues to rise. The cost to the Government will mean it is one of the largest bail-outs they have had to provide since the banking crisis in 2008, and they are unlikely to get their money back in this case.

As for most IPOs I will be avoiding investing in Pod Point until the company is clearly profitable and its market more established but the company has certainly come a long way in a short period of time. Trying to forecast the future profitability of Pod Point is exceedingly difficult – there are just too many variables.

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

Pod Point Group Prospectus: https://investors.pod-point.com/prospectus

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Utility Prices and the Cost of Net Zero

I commented previously on gas prices, price caps and reckless pricing. I thought it best to check how much my utility bills (gas plus electric prices) have gone up since I last changed supplier to Telecom Plus 8 years ago. My bill totals have gone up by 63% over that period whereas the Retail Price Index has only gone up by 23%. Extra roof insulation and cavity wall insulation was done before the start of that period and the number of residents has not changed. So that’s a substantial increase over RPI in total charges.

How much is that increase down to subsidies that we all pay to encourage low carbon electricity production (such as wind farms) and how much to the worldwide change in gas prices?

According to Lee Drummee, an analyst at Cornwall Insight, in 2020 over 30% of the typical electricity bill was accounted for by renewable subsidies and policies. In other words, much of the excess increase in utility bills over RPI has been caused by Government low carbon policies.

The price of natural gas on worldwide markets has gone up by 48% in the same period, but the market price for gas is extremely volatile. It was almost as high as it is now in February 2014 (see  https://tradingeconomics.com/commodity/natural-gas). On a longer term view, the market price of natural gas does not explain the increase in my utility bill over the last eight years.

Lord Matt Ridley has recently published a very good article on the energy crisis. It includes this comment: “It is almost tragi-comic that this crisis is happening while Boris Johnson is in New York, futilely trying to persuade an incredulous world to join us in committing eco self-harm by adopting a rigid policy of net zero by 2050 – a target that is almost certainly not achievable without deeply hurting the British economy and the lives of ordinary people, and which will only make the slightest difference to the climate anyway, given that the UK produces a meagre 1 per cent of global emissions”.

He also suggests the UK could have been self-sufficient in gas if we had not banned fracking with this comment: “We, meanwhile, decided to kowtow to organisations like Friends of the Earth, which despite being told by the Advertising Standards Authority to withdraw misleading claims about the extraction of shale gas, embarked on a campaign of misinformation, demanding ever more regulatory hurdles from an all-too-willing civil service”. I saw no reason to ban fracking so long as it was well regulated.

See Ridley’s blog here:  https://www.rationaloptimist.com/blog/the-root-of-the-energy-crisis/

Meanwhile the Global Warming Policy Foundation has explained how Parliament was misled over the cost of the net zero carbon emission target we are aiming for by 2050. It’s worth reading here:  https://www.thegwpf.com/climate-change-committee-misled-parliament-about-the-cost-of-net-zero/

It certainly appears to me that Government policies on these matters have been seriously misinformed. They have been driven by eco-fanaticism from those who think they can save the world from extinction by adopting extreme policies.

Meanwhile, and as I have said before, controlling the growth in population is the only sure way to reduce emissions and improve the environment. Our Government has done nothing about that issue at all, and few other Governments had done anything about it either.

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

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Grant Thornton Fined Trivial Amount over Patisserie Valerie Audits

The interesting news today, at least for a former shareholder in Patisserie Holdings (CAKE) as I am, was the announcement by the Financial Reporting Council (FRC) of fines on Grant Thornton and their Audit Partner over the defective audits of the company in financial years 2015, 2016 and 2017. The company subsequently collapsed in 2018 when it became apparent that the accounts were a work of fiction.

This is what the FRC had to say: “This Decision Notice sets out numerous breaches of Relevant Requirements across three separate audit years, evidencing a serious lack of competence in conducting the audit work. The audit of Patisserie Holdings Plc’s revenue and cash in particular involved missed red flags, a failure to obtain sufficient audit evidence and a failure to stand back and question information provided by management. As a result of this investigation, GT has taken remedial actions to improve its processes and to prevent a recurrence of these types of breaches. The package of financial and non-financial sanctions should also help to improve the quality of future audits.”

The sanctions imposed include fines of £2.3 million on Grant Thornton and £87,500 on audit partner David Newstead, after taking into account mitigating circumstances and the financial resources of GT.

But the detail of the case makes for interesting reading, which can be obtained in the link from here: https://www.frc.org.uk/news/september-2021/sanctions-against-grant-thornton-uk-llp-and-david where the Final Decision Notice can be read.

It shows that not only did the audit fall down in many ways but that accounting practices at Patisserie were amateurish in the extreme with apparently no proper oversight by the directors. It includes such problems as:

  • Large amounts of revenue recorded from voucher sales near the year end without being queried.
  • Cash growth that was significantly larger than growth in revenue or profit, with repeated inconsistencies in bank statements and dormant bank accounts being reactivated but the auditors not informed.
  • Reconciling items and journal entries being misused or without proper explanation. For example journal entries being used to record sales transactions, employee costs, etc. As a result there were many thousands of journal entries each year.
  • Additions to fixed assets being miscategorised and wrongly capitalised. For example, motor car purchases being treated as “plant, equipment, fixtures and fittings”.
  • Documents used as supporting evidence containing obvious errors or oddities such as lack of corporate logos, or invoices for vehicles with no vehicle identifications, remittance advices that looked like invoices, and alleged bank statements that appeared to be Excel spreadsheets.

The auditors failed to obtain sufficient evidence to support queried items or to challenge management’s explanations. Professional scepticism in the auditors was clearly lacking.

The liquidators of the company are pursuing a legal claim against Grant Thornton but according to a note in the FT they will continue to defend against that claim on the basis that it “ignores the board’s and management’s own failings in detecting the sustained and collusive fraud that took place”. GT claim that “our work did not cause the failure of the business”. At the end of the day that might have been so but if the defective accounts had been identified in 2015 or 2016 before the fraud became totally out of hand, perhaps the company could have been saved. It would certainly have saved me and many other investors from investing in the company’s shares after 2015.

The financial penalties for such incompetence are of course still trivial. Grant Thornton’s trading profit last year was £57 million.   

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

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Education, Education and Education

Education, education, education” were Tony Blair’s stated priorities for the country in 1997. Note for public speakers – the recital of words in groups of three always reinforces your message – for example, Veni, Vidi, Vici from Julius Caesar. In the current investment world, there is certainly a shortage of education so Blair’s phrase, which became very well known at the time, is worth remembering. Tony considered education was the key to future development in the country and the same applies to the investment world. The best investors never stop learning.

The recent growth in the number of retail stock market traders, particularly in the USA, is of major concern because many of them seem to lack education about the investment sphere. A recent article in the FT suggested that amateur “traders” were transforming markets and is certainly leading to higher volatility. Many such traders (it is doubtful that you should call them “investors”) were using fee-free platforms such as Robinhood and frequently buying on margin (i.e. increasing leverage by borrowing to finance a trade).

The FT article mentioned that in some weeks last year as much as half the trading in Apple was by retail investors, and many who have received cheques from the US Government as part of the economic stimulus in response to the Covid pandemic put the cash straight into the market. New retail investors are moving markets.

But they have a different mentality to traditional retail investors. They are more speculators than investors. As Charlie Munger of Berkshire Hatchaway has said  “The frenzy is fed by people getting commissions and other revenues out of this new bunch of gamblers, and, of course, when things get extreme, you have things like that short squeeze … and it’s really stupid to have a culture which encourages [so] much gambling in stocks by people who have the mindset of racetrack bettors and, of course, it will create trouble, as it did.”

Today I watched a couple of webinars which are relevant to this subject. Firstly I watched the ShareSoc AGM having missed attending the meeting when it took place. As the Chairman said, there is lots of supposed investment education on the web but it is mainly provided by people trying to sell you something. It is therefore good to hear that ShareSoc is putting a lot of effort into developing education materials. It was always the intention of ShareSoc from when it was founded exactly 10 years ago by me and others to provide education for retail investors. It has of course done that in many ways already but some more formalised material is probably needed. It does of course do a lot of good work in other areas such as on campaigns on particular issues. Please do join if you are not already a member – see:  https://www.sharesoc.org/membership/ . There is always more you can learn about the complex world of investment.

Another webinar I watched was the Fundsmith Annual Shareholder Meeting where manager Terry Smith answered questions – see https://www.youtube.com/watch?v=IojZCeUjhRg . His comments at these annual events are always very educational (I do hold the fund). He makes some interesting comments on the events of last year when it was impossible to predict at the start of year what would happen in financial markets. But he still managed to achieve a return of over 18% for the Fundsmith Equity Fund, well ahead of the MSCI world equities index. Two simple tips from him were: don’t take profits but run with your winners, and Return on Capital is a very important financial measure for any company. Of course he has said that before but they are worth repeating.

Terry has some interesting comments on inflation which everyone is worrying about of late. He says pricing power in the companies he owns is important. High return on capital and margins can help to offset inflation. But he gives some interesting data on debit/credit card expenditure and the savings ratio.

He takes another poke at value stocks versus growth stocks. He buys shares in a foggy environment but it’s better to look through the front window rather than the rear-view mirror.  So he does not intend to own any oil and gas companies. He dislikes commodity businesses, and his analysis of car companies suggests he considers them to be of the same nature.

As regards other education the Investors Chronicle often runs good articles of that nature. For example an item on “Finding Hidden Value” by Algy Hall a couple of weeks ago. He pointed out that antiquated account rules have eroded the usefulness of many classic ratios (such as P/Es or Return on Capital). The big problems are intangibles recorded on balance sheets and the fact that a lot of investment never gets recorded but gets written off as an expense. For example, if you launch a new product with a large marketing budget, or open a new office in an overseas territory, there is a lot of expenditure associated which tends to only generate sales and profits in future years. But you will have difficulty convincing your accountants and auditors to capitalise that expenditure.

For high growth companies there is typically a lag between such investments and a good return. So such businesses tend to look poor value on historic financial ratios. As I pointed out in my book Business Perspective Investing, it can be more important to look at other aspects of the business than the conventional financial ratios. Conventional accounts tend to underestimate the value of intangibles such as brands, business partnerships and customer relationships which are so much more important than physical assets in the modern world.

The key is to look at the future prospects of a business rather than just the historic or immediate future financial ratios.

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

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Market Musings

The stock market seems to be positively benign at present, if not almost somnambulant. While certain sections of the economy have gone to hell in a handcart, the enthusiasm for technology stocks has not abated. My very diversified portfolio is up today at the time of writing by 0.4% helped by good news from Dotdigital (DOTD) today and a sudden enthusiasm for GB Group (GBG). Optimism about a more general recovery in the economy seems to be still prevalent.

It’s probably a good time to consider overall market trends with a view to adjusting portfolios for the future. It is very clear for example that the UK at least, if not the world, is heading for a “net zero” world, i.e. a world where we are not emitting any carbon which implies a very high reliance on electricity generated from wind, solar and hydroelectric sources.

Whether that can be achieved in reality, and in my lifetime, remains to be seen. Whether it is even rational, or economically justified, is also questionable. But now that the religion of zero carbon has caught on, I do not think it is wise for any individual investor to buck the trend. As with any investment fashion it’s best to jump on the bandwagon and as early as possible. So I hold no oil companies and few interests in coal miners, except where they are part of diversified mining companies who are also mining copper (essential for the new electrification) and steel (not easily replaced). But I have recently invested in “renewable infrastructure” investment companies of which there are several, and in funds that provide battery support and load smoothing systems. Wind farms and solar panels tend to generate intermittent electricity so there is a big demand for emergency sources of power.

There was a very good article by Bearbull in last weeks Investors Chronicle headlined “The Net Zero Perversion” on this subject. He commences by saying “It is surely the new paradigm – that economic recovery from the damage caused by the response to Covid-19 can only be achieved by a fundamental shift towards a zero-emissions future. This is stated as fact – that reducing greenhouse gas emissions to ‘net zero’ by 2035 will be the powerhouse of economic growth – when, of course, it’s just a contention; much like the complementary one that investing in companies that are wonderfully compliant in meeting their economic, social and governance (ESG) commitments will bring excess investment returns”.

He goes on to say, after some other comments that must have enraged the uneducated environmental enthusiasts: “Yet there is plenty of evidence that the pursuit of net zero is brimming with unintended consequences, which is what you might expect from a movement driven by a weird mixture of idealism and greed”. He points out that rewiring our homes and expanding the grid to cope with the new electricity demand might cost £450 billion, i.e. £17,000 per household. Similarly the banning of the sale of new internal combustion powered vehicles from 2035 just causes the pollution generated from the manufacture of electric vehicle power systems and associated mining activities to happen elsewhere in the world. But overall emissions might not fall.

This fog of irrationality and attacks on personal mobility via vehicles using the Covid-19 epidemic as an excuse is now happening in several London boroughs, encouraged by central Government “guidance” and funding. Roads are being closed. In the Borough of Lewisham, adjacent to where I live, road closures have caused increased traffic congestion, more air pollution and gridlock on a regular basis. There is enormous opposition as the elderly and disabled rely on vehicles to a great degree while in the last 75 years we have become totally dependent on vehicles for the provision of services (latterly for our internet deliveries). Councillors in Lewisham think they are saving the world from global warming and air pollution that is dangerous to health when they won’t have any impact on overall CO2 emissions and there is scant evidence of any danger to health – people are living longer and there is no correlation between local borough air pollution and longevity in London. Air pollution from transport has been rapidly falling while other sources (many natural ones) are ignored. Lewisham and other boroughs have partially backed down after a popular revolt but local councillors still believe in their dogma. There is a Parliamentary E-Petition on this subject which is worth signing for those who think that the policy is misguided: https://petition.parliament.uk/petitions/552306

The Bearbull article concludes with this comment which matches my opinion: “All of which means investors should preserve their scepticism. But they should also recall their purpose in investing – to make money, not to go to war with the climate change movement, however ridiculous they may see some of its follies. Sure, as consumers they should see much of the pursuit of net zero for what it is – another charge on their net income. But as investors they should see it as an opportunity to join the momentum and, at the very least, to park some of their capital in a fashionable part of the market”.

When it comes to investment, markets can be irrational for a very long time. That is surely the situation we are currently seeing with stock markets kept buoyant by a flood of cheap money and there being nowhere else to stash it. With traditional industries and businesses in decline, most of the money is going into technology growth stocks or internet shopping driven businesses such as warehousing. That trend surely cannot continue forever. But in the meantime, following market trends is my approach as ever.

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

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Terry Smith on Market Timing and PI World Presentation by David Thornton

David Thornton, who is the Editor of Growth Company Investor, did an interesting presentation for PI World this week. He made an interesting observation in that he likes to avoid stocks that are both highly valued and lowly valued, i.e. on high or low P/Es. This is very wise. The high P/Es are typically discounting a lot of future growth and show the enthusiasm by investors for the business. In reality the high valuation may be a mirage and is being driven by share price momentum and the keenness by retail investors to get on the bandwagon for small cap shares. At the other extreme, they may be lowly valued because the business has some fundamental weaknesses or big strategic problems. Growth at a Reasonable Price (GARP) may be a better investment strategy for overall long-term performance.

See https://www.piworld.co.uk/2020/07/03/piworld-webinar-david-thornton-small-is-beautiful-why-small-caps-what-to-buy-now/

Terry Smith of Fundsmith has written an interesting article on market timing for the Financial Times. He is very opposed to trying to time the market and suggests that taking your money out of the market, as many people did in March, was a bad mistake. He equates it to driving while only looking in the rear-view mirror.

For an institutional fund manager, who cannot move large positions easily, that may be wise. It has certainly worked out well for the Fundsmith Equity Fund which has bounced back, and more, from its low in March.

But I am not totally convinced that it is wise for all investors. Markets do not always recover rapidly as they have done from the Covid-19 epidemic – at least so far although that story may not yet be ended. In the case of the Wall Street crash of 1929 it took 25 years to fully recover. So taking money out of the market early on might have been very wise.

Hedging your bets by taking some money off the table and hence managing your risk exposure is surely a sensible thing to do when the market is heading down. There are three things to bear in mind though:

  1. Small cap shares such as those on AIM can be very illiquid and hence a few sellers can drive the shares well below fundamental value. These are not the kinds of shares to dump in a market sell off unless they are directly impacted by the negative news (e.g. by the virus epidemic closing their businesses and they are at risk of going bust).

 

  1. You also need to be wary about Investment trusts. These again are often not actively traded so they can suffer not just from declining share prices in their portfolio holdings but from widening share price discounts. When the discounts get very wide, it is time to buy not sell.

 

  1. If you have moved into cash, it is very important to know when to buy back into the market. You need to keep a close eye on the direction of the market because bounces from market lows after a crash can be very rapid. Many retail investors sell at the first hint of a crash, but miss out on the recovery which is very damaging to overall portfolio performance. They miss out because they are demoralised and have lost faith in stock market investment. You do need to take a view though on whether a bounce is just emotional reaction to the realisation that the world may get back to normal, and how the recovery may affect individual stocks. In other words, you may want to move your cash back into different holdings.

As a holder of the Fundsmith Equity Fund, I would not normally argue with his investment wisdom but he may be in a different position to many retail investors. I did take some cash out of the market after the peak bull hysteria of late 2019 and in March after it was clear some companies would be badly hit by the epidemic. This provided some funds for picking up other depressed companies. But Fundsmith was not one I dumped.

The Terry Smith article is here: https://www.fundsmith.co.uk/news/article/2020/07/02/financial-times—there-are-only-two-types-of-investors

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

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Electronic AGMs and Voting

Several companies in which I hold shares are proposing to adopt new Articles of Association at their Annual General Meetings. These typically are amended to enable the holding of “virtual”, i.e. electronic ones, or “hybrid” meetings where a physical venue (or multiple ones) are also used. They can do that legally at present under the emergency regulations put in place by the Government but they are clearly anticipating a more common use of such capabilities now that everyone is more practised in using video conferencing.

But finding out what the proposed new Articles actually are is often not easy. I simply could not find the one for JPM European Smaller Companies Trust anywhere so I sent them an email. No response to date.

In the case of Telecom Plus, the AGM notice points you to their investor web site for the new articles, but they were difficult to find there and the changes were not clear. This is where they can be found if you scroll down far enough: https://uw.co.uk/investor-relations

You will find the changes very unclear and convoluted. They look like they were written in a hurry. This paragraph is particularly problematic: “59.1 Each Director shall be entitled to attend and speak at any general meeting of the Company. The chairman of the meeting may invite any person to attend and speak at any general meeting of the Company where he considers that this will assist in the deliberations of the meeting.”

This does not give shareholders the absolute right to speak at a General Meeting as is the current position in Company Law so far as I understand it. The Chairman clearly has the right under the proposed new Articles to invite shareholders to speak, or not. That is not the same thing.

So I will be voting against the new Articles.

You might think the wording of a company’s Articles is a very technical matter of little concern. But in reality it can be a quite critical issue when important votes are required or a company is in difficulties.

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

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Wirecard Cash Missing and Black Reparations

I always have pleasure in reporting major accounting frauds as it backs up the argument in my book Business Perspective Investing that the accounts of companies cannot be trusted and you need to look at other things to judge the quality of a company. But investors in German payments company Wirecard will be very disappointed that €1.9 billion has gone missing. It seems that information on “spurious cash balances” had been provided to their auditors (EY) by a third party (a trustee supposedly holding it).

The Financial Times has been running a series of articles over several months questioning the accounts of this company, but the shares are now down another 50% and it raises questions as to whether the company can survive.

Another story in the FT today was of organisations such as brewer Greene King and the Lloyds insurance market offering donations to charities supporting “diversity and inclusion” and were apologising for their past involvement in the slave trade. That’s for events before 1807 in Britain and 1865 in the USA when slavery was abolished. Greene King left the stock market in 2019. I just hope none of the companies in which I hold shares participates in this nonsense. Trying to rectify historic wrongs from 200 years ago is just unrealistic and totally unjustified when the persons affected are long dead. History is full of past injustices and it’s simply impossible to compensate for all of them.

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

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Why the FCA Did Nothing About the Lloyds TSB Abuse

Those who were Lloyds TSB shareholders back in 2009 when they merged with HBOS to form Lloyds Banking Group (LLOY) thought it was bad deal at the time and it certainly turned out to be so. HBOS had many dubious loans to property companies and when the banking crisis arose they were in deep financial difficulty. There seemed very little benefit in the merger for Lloyds shareholders

Subsequently a legal action was launched by the disgruntled Lloyds TSB shareholders which was lost in the High Court in late 2019. I wrote the following to the Financial Conduct Authority (FCA) soon after:

“I refer to the recent judgement in the High Court in the case of SHARP and Others v BLANK and Others (the case concerning the takeover of HBOS by Lloyds TSB). Although the judge in the case rejected the claim by shareholders in Lloyds, he made it clear in his judgement that there were significant omissions from the prospectus that was issued at the time.

Specifically he says in his Executive Summary: “But I consider that the Circular should have disclosed the existence of the ELA facility, not in terms such as would excite damaging speculation but in terms which indicated its existence”; and “Likewise, I consider that the board ought to have disclosed the Lloyds Repo. The board assumed that because at the time of its grant it had been treated by the authorities as “ordinary course” business that provided an answer to all subsequent questions. But whether it should be disclosed in the Circular as material to an informed decision was a separate question. The Court must answer that question on an objective basis. The size of the facility, the fact that it was extended in tight markets, the fact that it was linked to the Acquisition and was part of a systemic rescue package showed that this was a special contract which ought to have been disclosed”  (see paragraphs 46/47 of the Executive Summary which can be obtained from here:  https://www.judiciary.uk/judgments/sharp-others-v-blank-others-hbos-judgment/

There were also possible other omissions from the disclosures which the judge did not consider but the above does provide prima facie evidence of a breach of the Prospectus Rules.  The directors of the company (Sir Victor Blank and others) would certainly have been aware of this funding and failing to disclose it was negligent.

Investors in Lloyds TSB (I was one of them) were misled by these omissions and the subsequent outcome was financially very damaging to those investors.

I suggest your organisation needs to look into these matters as a breach of the Prospectus Rules surely is a matter that makes the culprits liable to sanctions under the Rules and there is no statute of limitation in regard to these matters.”

Their response after 5 months delay can be summarised as follows:

  1. The Lloyds Circular was subject to the Listing Rules, not the Prospectus Rules. The FSA approved the Lloyds Circular under those rules.
  2. In the Judgement by Sir Alastair Norris he did not consider whether they breached the FSA rules.
  3. We will not be opening an investigation into these allegations as we are time barred from taking enforcement action (there is a 2-year limit for enforcement action).

In summary therefore, the shareholders were unable to obtain redress by civil action and the FCA proved to be toothless to deal with this matter also. It is very regrettable that the protection that shareholders believed they had against the abuse of directors not acting in their interests proved to be imaginary.

Shareholders were not given all the information to which they were entitled and that fact alone merited action by the FCA. But they have declined to pursue it. Considering the similar case of the Royal Bank of Scotland Rights Issue in 2008, it is very clear that shareholders should not rely on what is said in prospectuses or circulars.

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

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Babcock Dividend, Ocado Placing, AGM Reform and Why Are People So Angry?

To follow up on my previous blog post about Babcock (BAB) and the possibility of it “skipping” its final dividend, the company issued its Final Results this morning and spelled it out. This is what it said about the dividend: “Given the current level of uncertainty over the impact of COVID-19, the Board has decided to defer the decision on our final dividend for the year ended 31 March 2020. We recognise the importance of the dividend to our shareholders and the Board will keep this under review during the financial year as the impact of COVID-19 becomes clearer”. That is not what Shore Capital suggested at all.

Although the company appears to have met forecasts for last year, and says it has a record order book, the share price has fallen 5% at the time of writing. The market in general is down considerably also though.

Ocado (OCDO) announced an institutional placing yesterday together with an offer via Primary Bid to retail investors. Like the one for Segro I commented on yesterday, this is a fund raising for expansion and is at a relatively small discount and dilution. These arrangements are now becoming common but I still don’t like them. They give private investors very little time to decide whether they wish to take up the offer and they do not know what price is being offered. As a holder of Ocado, this is another one I declined to invest in. Ocado share price is down 5.7% this morning at the time of writing which is exactly the same as the discount in the offer to the previous closing price, i.e. you could pick up shares in the market just as cheaply. I suggest companies should do proper rights issues rather than this dubious method and that the FCA should regulate this area more robustly.

There was a good article in the Financial Times today under the headline “Coronavirus casts doubt on the future of AGMs”. It describes the debate over the reform of AGMs and the use of virtual AGMs. It also covered an initiative by organisation ShareAction who are raising money to fund research into the issue. They quote Catherine Howarth as saying “We hope to co-develop a robust framework for AGMs that would still include shareholder votes and which would also help companies interact with a wider range of their important stakeholders including employees, customers, suppliers and communities”. That may be a worthwhile initiative if it makes AGMs more vibrant and useful than they are now but bearing in mind the funding of ShareAction it may not be a totally unbiased proposal.

What we do not want is AGMs dominated by “stakeholders” with political views as happens already at some companies – such as oil and mining company AGMs with endless complaints from environmental activists or defence industry company AGMs dominated by those who believe the company should not be involved in that industry at all. Companies are not in business to right all the social wrongs in the world, but to provide a financial return to their shareholders. They just need to operate within the laws set by national governments. Company law in the UK already requires the company to take the wider interests of stakeholders such as employees or customers into account and they can be represented at AGMs easily enough now by just buying a few shares – you only need one share to attend an AGM.

The FT article does make some good points about virtual AGMs, one of which I commented upon yesterday (EKF Diagnostics). But it suggests that it might cost £10,000 to hold a “hybrid” meeting at a small company. That is surely a grossly excessive estimate if voting is done on a poll. It’s trivial to set up a Zoom meeting for the number of investors likely to attend such a meeting (only a dozen at EKF).

I don’t often comment on general political or economic issues, but I find the current hysteria about the death of George Floyd and the resulting demonstrations over “Black Lives Matter” in the USA and UK totally out of proportion. George Floyd was a very tall and heavy person who it is alleged resisted arrest. He had a past criminal record and was a drug user. The full facts of the case have not yet been revealed and it is way too early to say whether the police used excessive force or not, even if the result was very sad.

As to whether there is wider discrimination against black or coloured people in the USA or the UK is also doubtful. From my experience of working in the USA, there appeared to be very little direct discrimination. Did not Colin Powell become head of the US Army and Secretary of State? Did not Barack Obama become US President? But as in the UK, black people are disadvantaged often by the social and cultural backgrounds of their families. Righting that can only be done by education not by demonstrations or laws. Demonstrations actually make matters worse, and the recent violent ones and attacks on property such as historic statues actually make people less sympathetic to the cause. Meanwhile the failure by the police to stop these events undermines law and order in general, just as happened with the Extinction Rebellion demonstrations.

Why are people so angry that they feel the need to take part in such demonstrations, including many people who are not black and hence could not have personally suffered from any prejudice? You can see the same problem in the divisive politics of Brexit where rational debate soon flew out of the window and it degenerated into personal slanging matches on social media. In fact social media and national media reporting of news has actually coarsened political life. The BBC in particular has often seemed to be more interested in stimulating outrage to improve their readership or programme viewing and web site clicks than in reporting the facts in a neutral and unbiased way. This is not a useful national broadcasting service. It has become a medium for slanted propaganda and for stimulating social unrest. This is a problem that responsible politicians will need to tackle sooner or later. But in the meantime those such as Sadiq Khan in London seem more interested in stimulating political division over trivia with the objective of gaining a few votes.

As investors, my readers will have to face up to these issues sooner or later because when the social fabric of a country crumbles as the result of poor leadership, sooner or later the economy crumbles also.

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

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