Voting Shares via Link Asset Services – It’s Infuriating!

For reasons not worth explaining, I have three Personal Crest accounts for one of the companies in which I hold shares. If I had not opted in for electronic communication, I would therefore have received three identical copies of their Annual Report, three AGM Notices, and three paper proxy voting forms.

So to save the postman some effort, and the company some money, I opted out of paper communications, i.e. opted in to electronic communication, for two of the holdings, just leaving one in paper as I prefer to read annual reports on paper.

The result this year was one complete set of paper documents, and two single page letters for the others giving me the date of the meeting and pointing to a web site where it was claimed I could “log-in” to their share portal and vote. Why they could not include a paper proxy form with those letters, which would have simplified matters, I do not know. I am not registered for the Link (formerly Capita) share portal and don’t wish to do so. I just wished to vote.

The first problem was that when I typed in the company’s name to their portal software, their software could not find it. The company has an apostrophe in its name and I had to type that in to find. So that is stupidity number one.

It then insisted I needed to register – that’s stupidity number 2 when all I wanted to do was vote. Why could they not use the same system as Equiniti who have a much simpler system? I have surely spoken in the past to Capita about this issue and still they have not fixed it.

So I phoned Link and asked them to send me a paper proxy voting form. They refused to do so. The lady I spoke to said I can only vote personal crest holdings via my Crest sponsor. Even after consulting her supervisor, she insisted that was the case. They are simply wrong as I vote my Crest holdings via post all the time, and as I have pointed out they sent me a voting form for the single “paper” holding I have which I have used.

It is very obvious that they know less about voting systems and registration than I but I will be educating the next manager at Link I speak to – there should be a call back tomorrow. If they cannot figure out any other way to solve this problem, I will tell them to convert all three holdings to “paper communication”. That should please my local council who make money from selling the waste paper of residents.

This is a typical example of the obstruction faced by private shareholders when they try to vote their shares. And don’t even talk to me about the abomination that is the nominee system that defeats most people. It is simply not good enough that in the modern age that we have such unintelligent IT systems and customer relations staff who do not seem to know their job.

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

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Chancellor’s Statement, EIS Funds and EMIS Results

The Chancellor’s Spring Statement yesterday was generally positive but there are some aspects that it’s worth talking about. Mr Hammond was right to be cautious because although new Government borrowing is falling, the total debt is still rising. It’s only forecast to fall as a proportion of national income by 2020-21 because of rising GDP. There is “light at the end of the tunnel” as the Chancellor put it, but it’s still some distance away.

GDP is only rising slowly and it is forecast by the Office of Budget Responsibility (OBR) to be rising at near 1.5% in the next few years which is not exactly rapid. The OBR also forecast that we will have to pay £41 billion to the EU after Brexit as a settlement of our obligations, although it will also free up £3bn or more per year that can be spent on other things, i.e. they suggest in the long term we will save money but the impact of changes in migration and trade terms might be more significant.

The Labour party wants the Chancellor to free up the purse strings and increase expenditure on the NHS and other areas. The Government could only do that by borrowing more which would not only increase the cost of their debt but would seem unwise given the economic outlook and the uncertain impact of Brexit. Because of an ageing population, but a growing one, more money will need to be spent on local authorities and the NHS anyway but the growth in productivity remains poor which ultimately determines the wealth of the nation.

Will the estimated figures have an impact on likely future interest rates (which have a significant impact on stock market investment)? Interest rates might need to rise somewhat to make Government debt continue to be attractive but it is not obvious that the economy is overheating as yet – inflation seems to be driven more by rising import prices as the pound has fallen rather than wage rises. The Government will no doubt be keen not to increase the cost of its debt, even if it has only indirect influence on the rate. Interest rates lower than real inflation are a good way for the Government to reduce its debts however much it prejudices savers.

One interesting mention for investors was a mention of a consultation on EIS funds that includes several options for more tax reliefs to encourage investors to put money into early stage “knowledge-intensive businesses”. That might include tax free dividends (only available on VCTs at present), or capital gains exemptions. I may write some more on this topic after reading the full consultation document which is here: https://www.gov.uk/government/consultations/financing-growth-in-innovative-firms-enterprise-investment-scheme-knowledge-intensive-fund-consultation . Investors interested in this subject should of course respond to HM Treasury’s consultation.

Some Venture Capital Trusts (VCTs) have fallen in price today. Perhaps because they might be perceived as less attractive to investors if such new EIS funds were introduced. But they would surely be very different beasts even if they might provide more competition for new investor subscriptions.

Comment: having invested in both EIS funds and directly in EIS qualifying companies in the past, I have vowed only to do the latter in future. Finding an experienced fund manager in early stage companies who can pick out the good EIS businesses is not easy and the lemons they pick ripen quickly (a common VC adage) while the good investments can take years to mature. If there is very generous tax relief (at a level where investors ignore the merits of the underlying investee companies because the tax reliefs are so generous it looks like they can’t lose money), then this will encourage all kinds of dubious promoters to enter the field.

One company that is sensitive to Government spending on the NHS is EMIS Group (EMIS). They announced their Final Results this morning. They previously warned in January that they had breached their service level obligations to the NHS and the cost might be “in the order of upper single digits of millions of pounds”. I commented on the company then and still hold some shares in it. The actual damage is a provision of £11.2 million in these accounts for a “financial settlement and costs to remedy past issues”. The share price rose today perhaps in relief that the news was not worse.

Few more details of the contract breach are provided and when I talked to my GP who uses EMIS-Web and used to be active in their user group, he knew nothing about any service failures. All rather odd.

Even excluding that item which is being treated as an exceptional cost, the figures were disappointing though. Revenue was only up 1% and adjusted earnings were down 4%. The CEO commits to a “robust management of legacy matters” and a commitment to being “more performance-led with greater accountability, improved operational execution and an increased focus on our customers”.

Dividend has been increased though which suggests some confidence in the future, putting the shares on a yield of 3.5% and a possible forecast p/e of 16, but the company certainly needs to show better signs of growth if the share price is to get back to where it used to be a couple of years ago.

The Government might spend more in the Autumn budget, but whether EMIS will see much benefit remains to be seen.

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

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The Dangers of Share Tipping, Alliance Trust and AIM Regulation

Share tipping is a mug’s game. Both for the tipsters and their readers. More evidence of this was provided yesterday.

Investors Chronicle issued their “Tips of the Week” via email during the day. It included a “BUY” recommendation on Conviviality (CVR). Unfortunately soon after the company issued a trading statement which said the forecast EBITDA for the current year (ending 30th April) will be 20% below market expectations. Conviviality is a wholesaler, distributor and retailer of alcohol and it seems there was a “material error in the financial forecasts” in one part of the business and that margins have “softened”.

The share price dropped by almost 60% during the day and fell another 10% today at the time of writing. This puts the business based on the new forecasts on a prospective p/e of less than 6 and a dividend yield of over 10% (assuming it is held which may be doubtful). Is this a bargain?

Having had a quick look at the financial profile I am not sure it is. Although net debt of £150 million may not be too high in relation to current revenues or profits, their net profit margin is very small and their current ratio is less than 1, although this is not unusual in retailers who tend to pay for goods after they have sold them.

(Postscript: Paul Scott of Stockopedia made some interesting comments on Conviviality including the suggestion that they might be at risk of breaching their banking covenants and hence might have to do another placing. Certainly worth reading his analysis before plunging into the stock. He also commented negatively on the mid-day timings of the announcements from Conviviality and Fulham Share which I agree with, unless there was some compulsive reason to do them – perhaps they were aware of the Investors Chronicle commentary being issued).

Another tip Investors Chronicle gave yesterday was on Fulham Shore (FUL) which they rated a SELL on the grounds that “growth looks unsustainable”. They got that one right. The company issued a trading statement on the day which also said EBITDA would be below market expectations. Their London restaurants are simply serving fewer customers. The share price dropped 17% on the day. This looks to be symptomatic of the problems of restaurant chains – Prezzo are closing a number of outlets which I was not surprised at because from my visits it seemed rather pedestrian food at high prices. Restaurant Group also reported continuing negative like-for-like figures recently, perhaps partly because of price cutting to attract customers back. Restaurants are being hit by higher costs and disappearing customers. Boring food from tired formulas is no longer good enough to make money.

Another announcement yesterday was results from Alliance Trust (AT.). This is a company that I, ShareSoc, some investors in the trust and hedge fund Elliott Advisors spent a lot of effort on to cause a revolution a couple of years ago so it’s good to see the outcome has been beneficial. Total shareholder return was 19.1% which was well ahead of their benchmark. There was a lot of doubt expressed by many commentators on the new multi-manager investment strategy adopted by the board of directors and the involvement of Elliott, who were subsequently bought out, but it has turned out very well.

The only outstanding issue is the continuing problems at Alliance Trust Savings. They report the integration of the Stocktrade business they acquired from Brewin Dolphin has proved “challenging”. Staff have been moved from Edinburgh to Dundee and the CEO has departed. Customer complaints rose and they no doubt lost a lot of former Stocktrade customers such as me when they decided to stop offering personal crest accounts. So Alliance have written down the value of Alliance Trust Savings by another £13 million as an exceptional charge. No stockbrokers are making much money at present due to very low interest rates of cash held. It has never been clear why Alliance Trust Savings is strategic to the business and it’s very unusual for an investment trust to run its own savings/investment platform. Tough decisions still need to be taken on this matter.

AIM Regulation. The London Stock Exchange has published a revised set of rules for AIM market companies – see here: http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/aim-notices/aim-rules-for-companies-march-2018-clean.pdf .

It now includes a requirement for AIM companies to declare adherence to a Corporate Governance Code. At present there is no such obligation, although some companies adhere to the QCA Code, or some foreign code, or simply pick and choose from the main market code. I and ShareSoc did push for such a rule, and you can see our comments on the review of the AIM rules and original proposals here: https://www.sharesoc.org/blog/regulations-and-law/aim-rules-review/ and here is a summary of the changes published by the LSE: http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/aim-notices/aim-notice-50.pdf (there is also a marked up version of the rule book that gives details of the other changes which I have to admit I have not had the time to peruse as yet).

In summary these are positive moves and the AIM market is improving in some regards although it still has a long way to go to weed out all the dubious operators and company directors in this market.

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

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Beaufort, OFGEM and National Grid

As a postscript to my last blog post on the administration of Beaufort, an interesting article was published by the FT this morning. They had clearly had a chat to administrators PWC. The article reports that the 14,000 investors affected will get no more than 85p in the £1 invested and that no money would be returned for at least a month.

PWC said that that Beaufort’s own funds were very limited and therefore clients will have to cover the cost of recouping their own money and assets. It seems it is a “complicated” administration and there are a number of challenges including assessing the accuracy of financial records. In other words, it’s a typical such mess where the administrators will run up enormous bills sorting it out. As I said in the last blog post, “past experience of similar situations does not inspire confidence”.

It will be months if not years before PWC can sort out who owns what and in the meantime the assets will be frozen. But anyone thinking of taking legal action over the alleged fraudulent practices of the company might find it not worth doing because the cupboard is bare, unless they can target individuals and their assets. Meanwhile there have already been 600 complaints to the Financial Ombudsman apparently but investors might find share dealing by “sophisticated” investors is not covered, and neither are they by the Financial Services Compensation Scheme.

The energy market regulator OFGEM issues a press release this morning. Here is some of what it said: “Ofgem proposes significantly lower range of returns for investors. Tougher approach would deliver savings of over £5 billion to consumers over five years.

Ofgem has today set out proposals for a new regulatory framework from 2021 which is expected to result in lower returns for energy network companies and significant savings for consumers.

This includes a cost of equity range (the amount network companies pay their shareholders) of between 3% and 5%, if we had to set the rates today. This is the lowest rate ever proposed for energy network price controls in Britain. Ofgem also proposes to refine how it sets the cost of debt so that consumers continue to benefit from the fall in interest rates.”

This is very negative news for National Grid (NG.), but surprisingly the share price has risen today. It is possible that analysts and institutional investors were expecting it to be worse, so it’s a “relief” rally. Meanwhile some chatter on twitter from private investors talks about how cheap the shares are on fundamentals. That may be one view, but just look at 2021, when Corbyn and John McDonnell might be in power and to me there look to be very substantial risks. If equity investors are getting less than 5% return, then in any nationalisation the valuation of the equity could be very low even if the Government pays a “fair” price – which no recent Government did on nationalisations. They used totally artificial valuation rules to come out with the figure the politicians wanted. Investors should not trust politicians, but I think we all know that.

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

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FCA Action, Shareholder Rights and Beaufort

Better Finance, the European representative body for retail investors have issued a couple of interesting announcements this morning. The first compliments the UK’s Financial Conduct Authority (FCA) for their action over “closet index trackers”. They are investment funds that pretend to be active managers and charge the higher fees that normally apply to such funds, while in practice they hug their benchmark index. Other European regulators have been less than prompt in taking action on this problem it transpires.

It’s not quite as positive as that though as although a number of UK asset managers have voluntarily agreed to compensate investors in such funds at a cost of £34 million, and enforcement action may be taken against others for misleading marketing material, this appears to be a voluntary scheme rather than a formal compensation arrangement.

Which are the funds complained about? I could not find any published list. But back in 2015, the Daily Telegraph reported the following as being the worse ones: Halifax UK Growth, Scottish Widows UK Growth, Santander UK Equity, Halifax UK Equity Income and Scottish Widows UK Equity Income – all bank controlled business you will note.

The second report from Better Finance was on the publication of the final draft of the EU Shareholder Rights Directive. This was intended to improve the rights of individual shareholders but is in reality grossly defective in that respect. Even if implemented into UK law, it will not improve the rights for UK investors. Indeed it might worsen them. For example Better Finance said this: “Important barriers to cross-border shareholder engagement within the EU virtually remain in place, since intermediaries will by and large still be able to charge higher fees to shareholders wanting to exercise their cross-border voting rights (admittedly subject to certain conditions) and beneficial owners of shares in nominee and omnibus accounts will still not have any voting rights (with the exception of very large shareholders), to name but two of the remaining issues.”

Let us hope that the UK Government and the FCA take more positive steps to improve the rights of UK investors which have been undermined by the use of nominee accounts and other market practices adopted in recent years.

Another recent news item from the FCA was about the forced administration of Beaufort Securities and Beaufort Asset Clearing Services. Beaufort specialised in promoting small cap companies such as those listing or listed on AIM to private investors. But the US Department of Justice investigated dubious activities in relation to US shares and has charged the firm and some individuals involved with securities fraud and money laundering. These allegations appear to be about typical “pump and dump” schemes where share prices are ramped up by active trading of the shares by the promoters of companies, such that the prices of the shares sold to investors bear little relation to fundamental value, and then the insiders sell their shares leaving private investors holding shares which the market rapidly revalues downwards. On twitter one person published charts showing the share prices of companies that Beaufort promoted to investors and it does indeed look convincing evidence of abusive practices.

These kinds of share promotions by “boiler rooms” staffed by persuasive salesmen were very common a few years back and they seem to be coming back into favour as there are a number of other companies promoting small cap or unlisted stocks to investors. Regulations might have been toughened, and such companies are more careful to ensure investors are apparently “sophisticated” or can stand the possible risks and losses, but the FCA still seems slow to tackle unethical practices. Should it really have taken US regulatory authorities to take down this company? The FCA has been aware of the market abuse in the share trading of AIM shares for some time but no action has been taken. It’s just another example of how small cap shares, and particularly the AIM market, attracts individuals of dubious ethics like bees to a honeypot.

If you have invested via Beaufort in stocks, are your holdings likely to be secure? As they may be held in a nominee account it rather depends on the quality of the record keeping by Beaufort. Past experience of similar situations does not inspire confidence. It can take years for an administrator to sort out who owns what and in the meantime the assets are frozen. The administrators are PricewaterhouseCoopers (PWC).

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

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Chrysalis VCT AGM Report

Last week (27/2/2018) I attended the Annual General Meeting of Chrysalis VCT Plc (CYS) in the City of London. Here’s a brief report on the event. There were about half a dozen ordinary shareholders present, the three directors and fund management representatives despite the difficult travel conditions.

Chrysalis is of course a venture capital trust but somewhat different to many VCTs. It has a good performance record in recent years but does not undertake share buy-backs. As a result the shares trade at a high discount to NAV (about 20% at the time of writing). With a dividend yield of about 8% (and no tax on VCT dividends), many of the current shareholders may have purchased their shares in the market although some of my holdings date back to the year 2000 when I claimed capital gains roll-over relief.

The company is relatively small in size for a VCT, and the new VCT rules which require such companies to focus on early stage investments are causing the board some concerns apparently. There is reference in the Annual Report to “a review of the options available to the Company” and there was considerable discussion on that topic at the AGM.

Should the company wind-up? Or simply become an ordinary investment company rather than a VCT? Or perhaps look for a merger with another VCT? As regards the latter possibility, this company seems to be getting into the same situation as Rensburg AIM VCT which eventually merged with Unicorn but rather late in the day and after a lot of encouragement from me to take action. I likewise encouraged the directors of this company to make decisions fairly soon on the future of the company.

One matter discussed at the AGM was the company’s large investment in Coolabi where they hold debt repayable in 2020. Having looked at the Annual Report of that company available from Companies House before the meeting, I have a pretty jaundiced view of the value of that business. Although Chrysalis increased the valuation of their loan in the accounts, they actually wrote down their equity stake to zero it transpired (holders of Edge VCT who have a big equity stake in Coolabi should note). However, fund manager Chris Kay did make some very positive comments about the value of the intellectual property in Coolabi.

Chris also commented on the difficulty of making new investments at present with small companies now valued very highly and lots of competition for the good ones. The new VCT rules are making it more difficult and it seems that there are still long delays on getting pre-approval (advance clearance) from HMRC (now 3 to 6 months).

Obviously what the company decides to do affects different shareholders in different ways, depending on their tax status, whether they claimed roll-over relief on investment, and their desire to convert their holdings into cash. The company may do a survey of shareholders but they are not sure they will get a good response.

Those present gave their views on the situation and there were some differences. I plan to write to the Chairman giving my views in more detail. For example, I will probably suggest a “shareholder committee” that might act as a consultative group.

If you are holding shares in Chrysalis, are interested in discussing the future of this company, or would like a copy of my letter to the Chairman, you can contact me via this web page (my company’s web site): http://www.roliscon.com/contact.html

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

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It’s a Bleak Mid-Winter

It’s a bleak mid-winter, everybody is hunkering down against the icy winds, Royal Mail have given up delivering post even in the London suburbs, and retailers are suffering. Well no, actually it’s the second day of Spring but the first was the coldest one on record. It’s not surprising that many people have a jaundiced view of the science of global warming.

But the stock market is drifting down and the news from many companies is dire. Let’s review some of those to start with. Note: I hold or have held some of the companies mentioned.

Safestyle (SFE) sell replacement plastic windows. You would have thought households would be rushing to replace their tired and leaking windows in the bad weather but apparently not. On the 28th Feb they announced a profit warning and the share price fell 37% in the next two days. Is that because of difficulties in installing in the bad weather? No, that will come later no doubt. The problem was lack of order intake so far this year. The real problem is “the activities of an aggressive new market entrant” in an “already competitive landscape” – the latter presumably referring to consumers cutting back on big ticket items. Historically the company showed great return on capital and good profits but the old problem of lack of barriers to entry of competition seems to be the issue.

Carpetright (CPR) also issued a profit warning yesterday. They now expect a loss for the year and blame “continued weak consumer confidence”. It seems they need to have a chat with their bankers about their bank covenants, but the latter “remain fully supportive”. I suspect the real issue here is not consumers (most buyers replace carpet in one room at a time so they are not exactly big purchases) but competition, including from Lord Harris’s son (Phil Harris was the founder and Chairman of Carpetright for many years). Other carpet suppliers (such as Headlam which I hold) have not seen such a major impact, but perhaps they are not as operationally geared as Carpetright. Or the bad news will come later.

Many retailers have faced a changing market – the market never stands still, with internet sales impacting many. Both Toys-R-Us and Maplin have gone into administration. The latter have no doubt been particularly hit by the internet and Amazon, but they have also suffered by private equity gearing up their balance sheets with very high levels of debt. Neither seemed particularly adept at keeping up with fashion. Might just be a case of “tired” stores and dull merchandise ranges. But why would anyone buy from a Maplin store when they could order what they needed over the internet (from Maplin, Amazon or thousands of other on-line retailers) and get it delivered straight to their door in 24 hours? In addition, many such on-line suppliers avoid paying VAT so Maplin was going to suffer from price comparisons.

But there has been some better news. IDOX (IDOX) published their final results yesterday – well at least there was no more bad news. They issued previous profit warnings after a dreadful acquisition of a company named 6PM, and the CEO, Andrew Riley, then went AWOL on health grounds. In addition there were problems with inappropriate revenue recognition, a common issue in software companies. Mr Riley has now definitely departed permanently and former CEO Richard Kellett-Clarke continues to serve as interim CEO.

The latest financial figures report revenue up 16% for the year although some of the increase will be from acquisitions. The profit figures reported on the first page of the announcement are best ignored – they talk about EBITDA, indeed “adjusted EBITDA” and “adjusted earnings”. I simply skipped to the cash flow statement which indicated “net cash from operating activities” of £13.4 million. That compares with a market cap at the time of writing of £152 million, so the cash earnings yield might be viewed as 8.8%.

They did spend £24.3 million on “investing activities”, mainly financed by the issue of new shares, last year and much of that might effectively have been wasted. But cash flow going forward should improve. Unadjusted diluted earnings per share were very substantially reduced mainly due to increased overheads, higher amortisation and high restructuring and impairment costs. These certainly need to be tackled, but the dividend was increased which shows some confidence in the future.

The share price perked up after the results announcement but some commentators, such as my well-known correspondent Tom Winnifrith, focused on the balance sheet with comments such as “negative current assets” (i.e. current ratio less than one) and less polite phrases – he does not pull his punches.

Any accountant will tell you that a company with a current ratio (current assets divided by current liabilities) of less than 1.4 is likely to go bust simply because they risk running out of cash and will not be able to “meet their debts as they become due” (i.e. will become insolvent).

Am I concerned? No because examination of the balance sheet tells me that they have £19.8m of deferred income in the current liabilities (see note 18). This represents support charges which have been billed in advance for the year ahead. Such liabilities are never in fact crystalised in software companies. So deducting that from the current liabilities results in a current ratio that is a positive 1.7.

The balance sheet now does have substantial debt on it, offset by large amounts of “intangible” assets due to capitalisation of software development costs which many folks would ignore. The debt certainly needs to be reduced but that should be possible with current cash flow, and comments from the CEO about future prospects are positive. That is why the share price rose rather than fell I suggest on the announcement, plus the fact that no more accounting issues had been revealed.

There are promises of Spring next week, so let us hope that this will improve the market gloom that seems to be pervading investors of late. Even retailers may do better if shoppers can actually get to their shops. We just need the sun to come out for a few days and flower buds to start opening, for the mood to lighten but I fear my spring daffodils have been frozen to death.

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

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