Ocado Trading Update, Coronavius Apps, EMIS AGM, IDOX Pay, Segro Dividends

Ocado (OCDO) issued a trading update today, and it shows their joint retail venture with M&S is benefiting from the coronavirus epidemic. In the second quarter revenue was up 40% on the prior year. They have had to ramp up capacity significantly to meet this demand, and they have suspended delivery of mineral water so as to cope with the needs of additional households. The announcement gives the distinct impression that they need more warehouses (or CFCs as they call them).

On a personal note, my family has been using Sainsburys’ on-line delivery system and as a “vulnerable” person we get priority. The result has meant neighbours asking us to shop for them. But at least I don’t need to accept the offer of food parcels sent to me yesterday by the local council!

There has been good coverage of coronavirus apps in the national media in the last couple of days. This UK Government has chosen one that relies on a centralised system and it looks distinctly insecure and not good enough to protect privacy. Robert Peston pointed out another flaw in it that someone could maliciously chose to report themselves as suffering from symptom thus causing everyone they might have come into contact with in the last two weeks to self-isolate. I am not at all clear why the Government has chosen this approach, which may deter take-up anyway, when Google and Apple are implementing a different system with fewer privacy concerns. That has been adopted by other countries so there will be problems with international travel.

EMIS (EMIS) held their AGM today. Nobody allowed to attend and no on-line session which is not good enough for an IT company. EMIS operates in the healthcare sector. Recurring revenues have held up but new business sales have been lower. They still expect to meet full year expectations.

However, they did get 15% of votes AGAINST the remuneration report. That included my votes as a holder as it looked a typical complex scheme with total pay too high in relation to the size of the business.

Another example of a poor pay scheme is that of IDOX (IDOX), an AIM listed company that operates mainly in the provision of software to local authorities. Reviewing the Annual Report, the Chairman acquired 585,000 share options last year (current price about 40p, exercise price 1p) based on a share matching scheme. The CEO acquired 3,512,400 share options under an LTIP with an exercise price of 0p (nil). The CFO also acquired 1,000,000 share options, again with an exercise price of 0p, but with a performance condition of the share price being greater than 45p. In summary I think this is way too generous so I have voted against the remuneration report. The AGM is on 28th May, so other shareholders have plenty of time to submit their votes.

Another item of annoying news I received recently was from Segro (SGRO) the property company. They will no longer be sending out dividend cheques from next year. I still prefer dividend cheques for my direct holdings because it is easy to check that the dividends are received and you know exactly when the money is in the bank because you pay them in yourself.

However looking at a report published by the Daily Telegraph last year, it quotes registrar Equiniti as saying that up to 30% of dividend cheques do not get presented which is a rather surprising statistic and must create a lot of extra work. Kingfisher, Marks & Spencer and Vodafone have already stopped dividend cheque issuance, forcing you to give the registrar your bank details. I may have to accept this as a reasonable change even if I don’t like it.

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

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Why I Am Optimistic

The UK death count from the Covid-19 virus is now 25,785 and continues to grow, albeit at a slower rate. There is a lot of bad news about the economy still being reported – new car sales have fallen to the level last seen in 1946 and according to the Daily Telegraph the state is now paying more than half of all adults. The same dire economic picture is also seen in the USA and most other countries. But I am still optimistic for the following reasons.

Apart from being a naturally optimistic person, which is a required attribute for any entrepreneur, the medical scene is looking better for several reasons. Below is a chart issued by the Government today which shows the daily number of confirmed Covid-19 cases.

Reported Covid19 Cases 2020-05-05

It is clear that the spread of the disease is falling rapidly and hence the “R” (reproduction) rate is probably less than 1. If the same conditions persist then the disease will gradually die out. Emergency “Nightingale” hospitals are already closing because of a lack of patients. With fewer new cases, the spread of the disease declines. Tracing of infected people and ensuring they are isolated, plus the new phone App to help identify contacts, are two ways the Government hopes will assist in this process. That’s ignoring the potential vaccines or medical treatments on which a lot of money is being expended worldwide at present. It has even been suggested that taking Vitamin D supplements might avoid the worst symptoms of the disease.

But the Government is concerned that if the “lock-down” restrictions are relaxed to enable people to get back to work then the virus may stage a resurgence and we will be back at square one.

Bearing in mind that the current very severe restrictions are causing enormous financial damage to the economy and costing the Government (and by implication, you and me) billions of pounds in paying the wages of furloughed staff and providing loans to companies, the question is how to make a rational decision on when to relax the restrictions and by how much. One way to look at this is how much you value a life. If you know what that value is then you can do some calculations to see what the cost might be and whether it is justified to relax the restrictions.

The Government already has that figure. For example, when calculating the benefit of road safety measures a figure of about £2 million is put on the benefit of saving one life. That is a somewhat optimistic figure though because it not just includes the cost of lost economic contribution and the cost of medical treatment but also what people say they would pay to avoid the loss of life, i.e. it’s a subjective figure to a large extent. However, it is a good starting point.

In the case of Covid-19 deaths, many of the cases are of the elderly or those with existing medical conditions who cost the state money rather than contribute. So the loss might be much less than £2 million from a Covid-19 death. Maintaining the existing strict lock-down might actually be causing some deaths from lack of attention to the early symptoms and treatment of some diseases such as cancer.

You can see therefore that it might make some sense to do some calculations on the impact of relaxing the restrictions to enable the majority of people to get back to work even if it means the deaths might increase. I won’t even attempt to do such a calculation but the Government should.

Those people who are particularly vulnerable could of course choose to continue to self-isolate but there is no reason to have a lot of the economy shut down. It would also be wise to have a phased relaxation of the restrictions so that meetings of people in confined spaces are still banned until the picture is clearer.

There would still be some sectors of the economy that will be severely affected. So restaurants other than those providing take-aways would need to remain closed and hotels be very restricted. Even if they opened they might have few customers. Airlines and trains would also suffer and it’s perhaps no surprise that Warren Buffett has sold all his shares in airlines. He had acquired stakes of about 10% in American Airlines, Southwest Airlines and United Airlines in 2016 which rather surprises me as surely he used to say these were typically bad businesses. I would guess he lost a few billion dollars on that punt. It seems most people don’t expect airlines to recover for at least a couple of years and aircraft leasing companies are in major difficulties as are aircraft and engine producers such as Boeing and Rolls-Royce. Nobody will be buying new planes for a while.

But a lot of the economy can surely get back into action over the next few months if the Government makes some sensible decisions which is surely good news for investors – so long as you are selective about the companies you hold.

In conclusion the panic should be over. We are not all going to die from Covid-19 although a few of us might do so. But in comparison with the normal hazards of living it may not be significant. For example, about 6,000 deaths happen each year from accidents in the home which is many times the figure for accidents on our roads but little attention is paid to the former mainly because the cost of preventing them would be very high and they do not attract much public attention. Average UK deaths from common influenza are 17,000 but it can be as high as 30,000 in some years.

The Government just needs to take some rational economic decisions on lifting the restrictions.

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

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Exemplary Remuneration at Judges Scientific

I recently commented negatively on the remuneration section of the Annual Reports of Greggs and Avast. Today I read another Annual Report from Judges Scientific (JDG) and it’s a completely different story.

I have held shares in this company which is a scientific instrument maker since 2010. The share price then was 327p. It’s now 4940p. Led by CEO David Cicurel in that period, as the Annual Report says the “Management is focused on shareholder value – profitability, cash generation, debt reduction, dividend growth and return on capital”. Return on Total Invested Capital last year was 31.4% and according to ShareScope my compound annual return from holding the shares has been 25.6% per annum.

What more could shareholders want? Perhaps a directors’ remuneration scheme that is simple and reasonable! Judges certainly meets that requirement.

The Remuneration Report is only 3 pages which is all we could wish for. For executive directors there is a reasonable base salary plus an annual bonus of 25% of salary if earnings per share targets are met and are higher than a previous high watermark. They also receive share options issued at market value (not at zero cost note), and there is also a performance condition attached to those.

In total the remuneration of all directors, including the non-executives, was £816,000 when post-tax profits were about £11 million. The CEO received £243,000. Another good point is that there is a vote on remuneration at the AGM which many AIM companies choose to omit. I don’t think there will be many Judges shareholders voting against that resolution.

Why cannot all public companies have such simple remuneration schemes? And with a level of remuneration that is not excessive?

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

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Dividends Slashed, Investing for Income, NMC Health and Finablr

Many companies are announcing cancelled, reduced or postponed dividends – two of the latest were Shell (RDSB) and Sainsburys (SBRY). This will hit investors hard who rely on dividends for retirement income. But should they be doing so?

Terry Smith of Fundsmith had an article published in the Financial Times today under the headline “Investors: never let a crisis go to waste” in which he attacks income funds. In particular he questions whether the Investment Association should allow funds with “income” in their name to only have a yield greater than 90% of the average fund yield, i.e. less than the average! Even that requirement has now been suspended for 12 months. Terry calls this a “ridiculous piece of deception” and I can only agree.

If you invest in individual shares, there is a strong temptation in times of stock market crises to run for the hills and start buying what are viewed as defensive businesses with high dividend payouts. You argue that the dividend yield will keep the share price up even if all other news is bad. But this is a fallacy. All you do is put yourself at risk of a sharp decline in the share price when the dividend is chopped.

As Terry Smith also pointed out in his article, dividend cover in many companies that are on high yields are inadequate. In reality they are not maintaining the businesses, or certainly not growing it, by not investing enough of their profits back into the business. Sometimes it indicates that they are operating in a declining sector and many have an abysmal return on capital. Should you really be investing in such companies is the question you should ask yourself?

The simple rule should be: Never invest in a company solely for the dividend. Invest in it because it is a quality company with positive prospects and management dedicated its long-term future for the benefit of all stakeholders.

I have mentioned NMC Health (NMC) and Finablr (FIN) in previous blog posts along with many other frauds. It’s not that I am trying to put off people from investing in the stock market which is one of the main sources of what little wealth I have. Likewise when I criticise those who invest in income funds or high yielding shares. But my desire is to educate people about how to get positive rather than negative results. NMC and Finablr have both been chaired by Dr B.R.Shetty and he made a rather surprising comment in a letter which was published by Finablr yesterday. He said: “The preliminary findings provided by my advisors from my own investigations indicate that serious fraud and wrongdoing appears to have taken place at NMC, Finablr PLC (‘Finablr’), as well as within some of my private companies, and against me personally. This fraud also appears to have been undertaken by a small group of current and former executives at these companies”. He goes on at some length on how the frauds were committed. This all sounds rather unlikely but we will no doubt see in due course whether what he says is true.

The shares of both companies are currently suspended and NMC is already in administration. Finablr also had this to say: “The results of this exercise currently indicate that the total net indebtedness of the Finablr Group may be approximately $1,300 million (excluding any liabilities of the Travelex business). This is materially above the last reported figure for the Group’s indebtedness position as at 30 June 2019 and the levels of indebtedness previously disclosed to the Board. The Board cannot exclude the possibility that some of the proceeds of these borrowings may have been used for purposes outside of the Finablr Group”.

The outlook for shareholders in both companies looks very bleak indeed. Let us hope that the investigation of these frauds is quicker than it normally is, but I doubt it will be. The larger and more complex the company, and the bigger the fraud, the longer it takes regulatory authorities to pin the tail on the donkey. Think of Polly Peck for example.

As I said in my previous blog post that mentioned false accounting at Lookers, “Such events totally undermine investor confidence in the accounts of public companies and suggest much tougher action is required to ensure accounts reported by companies are accurate and not subject to fraud or misrepresentation”.

For investors the motto must be ““Let’s Be Careful Out There” (as said by the sergeant in Hill Street Blues) because the financial world is full of shysters. You need to research companies as much as possible before investing in them, but even that is not fraud-proof unfortunately. Only improved regulation and accounting can really solve the problem of corruption in the financial scene.

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

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Stock Market Trends, Covid-19 Treatments, Burford Results, Lookers Accounting and Medica

The stock market seems to be returning to normal with a positive trend over the last month despite the economy being in a complete shambles as a result of the “lock-down”. The Government is incurring massive costs to bail-out companies, support the NHS and pay workers to do nothing. We have yet to see the real economic impact of those measures on the Government’s finances. But investors seem to be euphoric because they now realise we are not all going to die from the Covid-19 epidemic and there are signs we will be able to get back to work soon.

There are also indications that vaccines to prevent the disease, or treatments for it, may be available in the next few months. One of the best commentators on the epidemic because of his scientific background is Matt Ridley who I met many years ago in circumstances he probably prefers to forget. He publishes a blog which is here: http://www.rationaloptimist.com/blog/ plus he has several good books published which I can recommend. His latest blog article is entitled “The contenders – and challenges – in the race to cure Covid” and is a good review of the field.

One interesting suggestion is the possible use of monoclonal antibodies to replicate antibodies from those infected with the disease and use them to treat other people. This might be very expensive from my knowledge of other such treatments but if the treatment is effective it might only require an injection every few months. It might be affordable for developed countries.

The diversion of NHS resources to treat Covid-19 patients is creating many problems though. Minor operations and non-urgent consultations are being cancelled. You can see the impact of this in the results reported by Medica Group (MGP) earlier this month. The company provides teleradiology services to the NHS and others. This is what it said: “In terms of Routine activity, the Company is experiencing a decline of around 90% in activity with many NHS hospitals having already suspended non-urgent elective procedures”. Reduced A&E admissions are also having an impact. But the company remains positive and can reduce its cost base substantially. ShareSoc has organised a webinar with this company this evening which may be interesting as I do not hold it.

Another company I do not hold is Burford Capital (BUR) which announced results this morning. This company has been in the news a lot because of a shorting attack. This is what the Chairman had to say: “2019 was a year of contrasts, marked by the continued expansion of our business yet also by the disruption of a meritless short attack.  Though our business fundamentals remained strong, investor confidence was dented, causing shareholders to urge changes to our governance”. The announcement contains many positive comments about the progress on litigation, the future prospects, and balance sheet strength.

The accounts are not easy to understand and the Annual Report consists of 163 pages so I have not read it all. No doubt other people will comment on it in detail. But one simple thing I did do was look at the income and cash flow statements.

This is a company where the profits do not turn into cash. Comprehensive income was down from $342 million to $194 million but after changes in “capital provisions” the net cash outflow was $8.3 million. There are also doubts as to whether the legal awards which are recognised in the accounts can actually be collected. The share price is up over 25% today at the time of writing.

Another company worth mentioning as I like to cover cases of defective accounts is that of motor dealer Lookers Group (LOOK) – I have never held it. A few days ago the company gave a “Trading and Operational Update”. It included coverage of the fraud investigation which is now expected to result in a non-cash charge of £4 million in the 2019 financial accounts. Those have now been delayed until June. The investigation has also been extended across all divisions and more charges are expected.

The share price of Lookers was 185p in early 2016. It’s now about 21p. Such events totally undermine investor confidence in the accounts of public companies and suggest much tougher action is required to ensure accounts reported by companies are accurate and not subject to fraud or misrepresentation. Auditors surely are one group who need to take a lead on this as frequently when frauds are identified they have been running for several years.

As I said in my book Business Perspective Investing, “financial accounts don’t matter because they cannot be relied upon”. That’s certainly the case at present and it’s better to look at other measures of the quality of a business.  That is particularly the case at present when the Covid-19 epidemic is distorting the results of companies and making it very difficult to forecast future financial numbers.

Better to look at other factors such as your trust in the management, the market position of the company and its future prospects.

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

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Does Stock Trading Need New Rules?

There is a very good opinion piece in the Financial Times today from short-seller Marc Cohodes. It suggests that the fairness of capital markets is under threat in the new digital age and opens with this paragraph: “We live in an era where some stock promoters and short sellers open large positions prior to publishing market-moving information about a company, and rapidly close those positions after inducing a buying or selling frenzy”.

The author suggests that there should be a rule requiring a ten-day minimum holding period for any stock promoter or short seller who opens a large position and disseminates market moving information. That would give markets the time to evaluate the claims made while if the espoused views turn out to be true the publisher could still make profits. That seems an eminently sensible suggestion to me.

See https://www.ft.com/content/01b765c2-854e-11ea-b6e9-a94cffd1d9bf for the full article which is well worth reading.

What might be the objections to this proposal?

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

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Porvair and Segro AGMs

I “attended” the Annual General Meeting of Porvair Plc (PRV) this morning. This was of course not a conventional meeting with minimal numbers there in person. But there was a telephone conference call before the legal meeting to enable shareholders to ask questions, although there were less than half a dozen investors who chose to dial-in.

The Chairman, John Nicholas, made some brief comments to begin with. He mainly just summarised the recently issued trading statement. But he did say all plants were open and they expected to be modestly cash generative for the balance of the year except in extreme circumstances. There was no AGM statement, so we then went straight into questions.

One investor asked about the impact of the problems in the aviation sector. Answer: too early to say.

I asked about the impact of the oil price decline, which in case you had not noticed briefly went negative yesterday. There was no clear answer to that but their recent acquisition Royal Dahlman obviously might be affected.

I also asked whether they could do something about the extreme volatility of the share price and the wide spread. All shares are volatile of late but Porvair is one of the worst in my portfolio and the spread this morning was 7%. That is unusual for a company of this size. They will talk to their broker Peel Hunt about this.

Another shareholder suggested they should do more to raise awareness of the company and it was admitted that they do not spend much time on promoting the company to investors. It might certainly help liquidity if they did so.

As the AGM itself was done on a poll with all resolutions passed, the “meeting” was over in 15 minutes. However it was still a useful event.

The other AGM held today which I could have attended in normal circumstances was that of Segro (SGRO). That was at exactly the same time as Porvair, but they also did not provide any way for shareholders to attend electronically. Questions could be submitted in writing via email but that is hardly a good alternative. I hope they publish the questions and answers.

Note that ShareSoc have just published a blog post concerning the letter written by ShareAction to FTSE-100 companies complaining about the lack of provision of virtual AGMs this year by many companies. Their complaints are very justified. The technology is simple to use and a simple conference call would suffice for many companies.

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

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