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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Changes Proposed at Companies House

The Government BEIS Department have recently proposed a number of important changes to the way Companies House operates in a public consultation entitled “Corporate Transparency and Register Reform” (see https://tinyurl.com/yysf9gdn ). Here’s a brief summary of the main points:

This consultation will be of interest to anyone who is a director of a private or a public company, or a major shareholder in such a company (i.e. those People with Significant Control). Even directors of the smallest companies could be affected.

A major proposal is to verify the identity of directors and to collect more information on them (although not their email address apparently, which I have suggested be added). This can now be done very quickly and at minimal cost electronically using various verification services (e.g. listed GB Group in which I hold shares). This will help to prevent fraud and they even hope to be able to link all directorships in various companies together. For example, this might make it easier to track the past activities and record of directors which even in small listed companies can be very informative as to their competence and reliability.

They propose to continue to retain the records of dissolved companies for 20 years which many investors consider important and is useful for investigators of all kinds.

They also plan some changes to improve the protection of personal information held at Companies House. Bearing in mind that there are well over 6 million records of directorships, with significant personal information, this is clearly important.

For public company investors there are two significant proposals:

1 – Improved digital tagging standards for accounts, which might make it simply to provide information services based on them.

2 – A possible cap on the number of directorships any one person can hold. There are common complaints about “overboarding” where directors take on too many roles. I have suggested a maximum of 5 in public companies, with some possible exemptions, should be imposed.

In general the proposals seem eminently sensible and I suggest they be supported on the whole. You can see my detailed comments in a response submitted to the consultation here: https://tinyurl.com/y6j9u4do 

But you should of course submit your own comments on those points of interest to you.

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

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Offer for Share Centre Canned and Changes at Charles Stanley

Interactive Investor Services have announced they do not intend to make an offer for the Share Centre (Share Plc – SHRE) as previously mooted. That’s probably a relief for users of that platform.

But users of the Charles Stanley (CAY) broking services may have concerns as the company announced this morning that they are going to simplify and standardise their service to cut costs and improve the service to clients. Some staff will be cut but the impact on customers is not yet clear.

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

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International Biotechnology Trust Performance Chart Incorrect

International Biotechnology Trust (IBT) have acknowledged that their Interim Report contained a major error after I pointed it out to them.

The Figure 4 chart showing their share price performance against the FTSE AllShare showed them massively underperforming when the opposite is in fact the case. The chart lines were wrongly labeled. A corrected version is now on their web site.

I was about to review my holding in this company after looking at the incorrect version until I realised it could not be right. I hope other investors were not confused or confounded by this error.

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

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Trump Tariffs, 4Imprint AGM and Purplebricks Apologies

US President Donald Trump has created some havoc in world stock markets by threatening in a tweet to impose 25% tariffs on a wider range of Chinese goods from Friday. He is apparently getting impatient with the progress on trade talks between the USA and China, but is pursuing international diplomacy via tweets a good idea?

One company that might be affected by higher tariffs on Chinese products is 4Imprint (FOUR) whose AGM I attended this morning. 4Imprint is an AIM-listed retailer of promotional products (sold via catalogues and the internet). Most of its business arises in the USA with only a relatively smaller operation in the UK, and it imports a considerable proportion of the merchandise from China. I asked the Chairman after the AGM whether this was a concern. He said they discussed tariffs at every board meeting but as their competitors would be in the same position the impact might not be high.

There was a trading statement from the company this morning before the AGM. Revenue up 16% in the first four months and the board is confident that the Group will deliver full year results in line with market expectations.

This is the kind of company I like. Revenue growing, no debt, profits turn into cash and return on equity was 82% last year. Like a lot of retailers, they sell the products and collect the cash from customers before they have to pay the suppliers. In essence a simple business and the AGM in the City was a quite brief affair – duration about 15 minutes.

Only I asked any questions in the formal part of the meeting and one was: what is their market share in the USA? About 4% was the answer, and it’s still increasing. The competition is also fragmented so there is room for growth. You can see the kind of products they sell here: https://www.4imprint.co.uk/ . Having used the company in the past I can recommend them.

I also asked whether there were any substantial numbers of proxy votes against any of the resolutions (this is a question to ask when the Chairman says proxy votes will be disclosed at the end of the meeting as happened here!). Yes there was one. Remuneration Committee Chairman Charles Brady only got 93% support. I later asked him why. He said one institutional investor voted against him because the company does not have an LTIP.

I actually voted for the Remuneration Report because they have a simple remuneration scheme and pay of the executive directors is not unreasonable bearing in mind they are based in the USA. This is the kind of pay scheme that should be applauded, not voted against.

Another AIM company of a very different nature that made an announcement this morning is Purplebricks (PURP). A trading statement gave a financial update but included several very negative points. The Australian operation is being closed down, the US operations are now the subject of a “strategic review” with bad news being hinted at, and founder/CEO Michael Bruce is “stepping down with immediate effect”. That usually means the person named has been fired.

The board acknowledges that performance has been disappointing over the last 12 months and “we sincerely apologise to shareholders for that”. The company blames too rapid geographic expansion and poor operational execution.

The company is still losing money and the share price graph is one of those downward facing ski-slopes that investors hate. The share price is down another 7% today at the time of writing. Still an unproven business model in my view. I do not hold shares in the company for that reason.

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

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How Damaging Would a Labour Government be to Water Companies?

The Labour Party has long argued that some utility companies should be renationalised and a prime target would be water companies if they got into power. If they were nationalised would current shareholders expect to get compensation and if so at what level? An article in the Financial Times over the weekend covered this issue and anyone holding the shares in water companies should be aware of the implications.

Shadow Chancellor John McDonnell said recently that he expected a compensation bill of only £14.8 billion based on paying the “book value” of the companies. That’s on the basis that shareholders should not be compensated for future profits, only what they have put into the business historically.

The two largest listed water companies are United Utilities (UU.) and Severn Trent (SVT). The comparison of the current market capitalisation of those companies with the book value (i.e. shareholders equity) shown on the last Annual Report Balance Sheet shows the following:

United Utilities: Book value: £2.95 billion, Market Cap: £5.56 billion.

Severn Trent: Book value: £0.99 billion, Market Cap: £4.76 billion.

In other words, shareholders might expect to receive only 21% of the current market share price in the case of Severn Trent and 53% in the case of United Utilities. The book value is not a basis for the valuation of companies because shareholders value companies on the basis of future profits, cash flows and dividends. The book value is, for most companies, of more interest to accountants than investors.

It would appear that the Labour Party would ignore the normal principles of independent valuation of companies and rig the valuation process to obtain the lowest possible figure. Is this legal one might ask or could it be challenged in law?

It’s worth pointing out that this is exactly what happened the last time the Labour Party was in power when Northern Rock and Bradford & Bingley were nationalised. In those cases shareholders received nothing because the valuation was based on artificial terms of reference. The valuer was forced to assume that they were worthless based on the companies having received financial support from the Government.

A fair valuation of any company is what a willing buyer is willing to pay a willing seller. In the case of listed companies, that is clearly what the market price of the shares is based upon. The shareholders in Northern Rock challenged the artificial assumption in the UK courts but lost in the Supreme Court based on the presumption that Parliament had the right to set the valuation assumptions. The European Court of Human Rights (ECHR) refused to hear the case.

So shareholders in the UK listed water companies need to consider these facts very carefully. The risk of future water company nationalisation seems not to have been reflected in the share prices of water companies even though Mrs May’s leadership of the Conservatives has improved the electoral chances of the Labour Party while Corbyn compounds the difficulties of the former by frustrating a decision on the Brexit Withdrawal Agreement with the apparent objective of prompting a General Election. How the politics will work out is anybody’s guess but those investors who have purchased shares in these companies because of their high dividend yields should surely not ignore the capital risk.

Institutional investors are some of those most exposed because you only have to look at the portfolios of high-income funds to see they are stacked up with the shares of such companies. Pension funds held by millions of people would be some of those most affected.

Let us hope that this threat never comes to pass.

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

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Share Plc Offer and Improving Corporate Reporting

There was a surprise announcement this morning of a possible offer for Share Plc (SHRE) who run the Share Centre. That is a very popular platform with private investors because it is low cost and administratively efficient but also because it is one of the few investment platforms that makes it easy to vote your shares held in nominee accounts such as ISAs. Takeovers of investment platforms are never popular with customers because it means having to learn one’s way around a new web/IT system and charges may also change. More consolidation of platforms will also reduce competition in this sector.

The offer is from Interactive Investor but it looks like they may have some difficulty even if founder Gavin Oldham supports it. He, his family and associated trusts held 69% of the share in December 2018 but there was also 18% held by staff and customers.

Yesterday I attended a roundtable at the Financial Reporting Council (FRC) to discuss the “Future of Corporate Reporting”. It was mainly attended by experienced private investors who I won’t name individually. But there was a consensus on many of the issues discussed. I will highlight some of the interesting points that arose:

  • There was widespread concern about the size of Annual Reports and the excessive “padding” and use of “boiler-plate” content. It was clear that most of the investors attending skipped large sections of most Annual Reports.
  • One even went so far to say that he always went to the accounts filed by a company at Companies House which often differed from that in the Annual Report and also contained more information. This is surely an issue that should be looked at by the FRC. It is surely not acceptable that there should be any difference.
  • There was a general view that commentary by the Chairman or CEO tended to be over-optimistic and that risk reporting was full of platitudes while ignoring the really big risks that a company faced. The Macando oil-well disaster at BP and the recent problems at Boeing with the 787Max were mentioned as examples.
  • Other particular issues raised were the valuation of intangibles on the balance sheet, the long-standing complaint that IFRS standards were inconsistent with Company Law (but the FRC has limited input to IFRS standards), the lack of disclosure of long-term debt terms, and the failure to disclose banking covenants.
  • There were also complaints about private investors being excluded from receiving some information disclosed to analysts by companies, and refusal for attendance at company presentation events. The lack of an equivalent rule to that in the USA (Regulation FD on Fair Disclosure) was a major problem.
  • As regards excessive size of Annual Reports, the FRC staff suggested that splitting up the Annual Report into sections might assist although I said that did not really solve the problem of excessive size and irrelevant content.
  • Reporting of ESG factors was discussed but this seemed to be a difficult area due to the lack of standards and the ability of companies to only present positive information.
  • The FRC does undertake quality reviews on large company audits and perhaps a scoring system for Annual Reports could be introduced to raise standards. But it is all too easy at present for company directors to throw masses of superfluous information into the Annual Report to distract investors from the really important facts. I suggested that there be a word or page limit on sections of the Annual Report to ensure that only key information was communicated. For example, do we really need 30+ pages of Remuneration Report as we are now getting at some companies? Where companies wished to provide more detailed information, that could perhaps be given on their web site.

In summary this was a useful meeting to raise the concerns of experienced and knowledgeable investors. Let us hope that the FRC will take up some of these issues.

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

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