Persimmon Departure, Abcam AGM and Over-boarding

Persimmon (PSN) issued an announcement this morning saying that CEO Jeff Fairburn was stepping down at the request of the company because “the Board believes that the distraction around his remuneration from the 2012 LTIP scheme continues to have a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role”. They are undoubtedly right there.

To remind readers, their misconceived and uncapped LTIP potentially would have meant bonus shares being awarded to Mr Fairburn worth well over £100 million, and similar large sums to other managers. Part of the potential award was later given up but even so it was the most disgraceful example of how pay has been ramped up by LTIPs in recent years. Another example at Abcam (ABC) is covered below.

Persimmon also issued a third quarter trading statement today which was generally positive. They clearly have a good forward committed sales pipeline and the extension of the help-to-buy scheme was positive news in the budget. But I am still somewhat nervous that the housebuilding market may suffer as interest rates rise. New houses are becoming unaffordable for many people despite the demand for accommodation and growing population.

Yesterday I attended the Annual General Meeting (AGM) of Abcam. This is a company that sells antibodies and other life science products/services. It is operating in a high growth sector. I first invested in the shares of the company in 2006 and it has delivered a compound total return of over 32% per annum to me since based on Sharescope figures. I am therefore happy with the financial performance of the business as I said to the board at the AGM. That’s even allowing for recent declines in the share price as analyst forecasts were reduced and general market malaise affected high-flying technology stocks. But I am very unhappy about two aspects: 1) failure to answer simple questions at the AGM, which is the second time in a week where this problem has arisen (the previous being Patisserie); and 2) the remuneration scheme and revised LTIP.

What follows is a report on the meeting, summarised and paraphrased for brevity. The meeting was held at the company’s Cambridge offices at 2.00 pm, but not even a cup of tea was offered.

The recently appointed new Chairman, Peter Allen, introduced the board and there was then a very brief presentation from CEO Alan Hirzel. He said there were between £5 billion and £8 billion of opportunities for the company to grow which they were focused on. They had doubled revenue in the last 5 years, at 11.5% CAGR. There were lots of opportunities to continue to grow the business. They are now focused on 4 areas: 1) RUO Antibodies which are still growing; 2) Immunoassays where growth was 25% last year; 3) China for RUO tools (China could be as big a market as the USA in a few years and they now have 300 people there and are putting more investment in); and 4) CP&L (Abcam Inside). He said the company needs to invest in technology and IT to achieve their growth goals.

Questions were then invited. I commented on the absolutely massive expenditure on new IT systems. They have spent at least £33 million on the Oracle implementation with another £16 million to go and the project is clearly way behind schedule. This level of costs has even caused analysts to downgrade future profit forecasts. As the former IT manager of a large public company, this seemed disproportionate to me in relation to the size of the business. However much one recognises that IT is the key to the business, this looks like a typical project that is way out of control. Who is responsible for this, are they still with the company, who are the outside contractors and what is the current state of this project?

The Chairman first responded that any answers to shareholder questions could only relate to information already in the public domain. This is simply legally wrong and I will be writing to him on this subject and the other issues below.

However Alan Hirzel did respond and accepted the IT project was over budget and covered the history of the project. It was essential to replace some of the legacy systems which were unmaintainable. Many had been built in-house (even an email system apparently) and they had multiple different HR systems in different countries. HR was the first project completed (partner Hitachi as systems integrator) followed by a communication system (part CRM perhaps – it was not clear) but finance and supply chain (manufacturing) projects were yet to be done. He said the CIO had been replaced and a new system integration partner appointed. He assured me that the project was under control now.

I asked who the new IT contractor was, at which point the Chairman refused to answer as that was not in the public domain. I complained that this was a breach of company law as questions must be answered unless there are good reasons to do otherwise. For example, answers can be refused if it is confidential information, not in the company’s interests to do so or may affect the good order of the meeting. The relevant Regulation is here: http://www.legislation.gov.uk/uksi/2009/1632/pdfs/uksi_20091632_en.pdf (see Section 12).

I can see no reason why my question could not be answered as I said to the Chairman and to their lawyer, neither of whom seemed to be aware of the Regulations or the common law principle about answering questions at general meetings. The Chairman also suggested that they could not disclose some information because they would have to issue an RNS announcement to cover it. This of course only applies to “price sensitive” information and I don’t see how knowing who their IT contractor is would be price sensitive. Very annoying and feeble excuses were being given in essence from someone who is supposed to be a very experienced company Chairman. This is the second time in a week (the other was at Patisserie) where the law on answering questions was ignored which is exceedingly annoying.

After that debate, which I will be following up including with a complaint to the FCA as it is not acceptable for companies to ignore the law, we moved on to the Remuneration Resolutions.

I said the following: “Remuneration also seems to be out of control. Although the CEO seems to be generally doing a good job, his pay last year was £1.8 million. This is also out of proportion to the revenue and profitability of the business. Not only that but his basic pay has been increased by 22%, and the maximum award under the LTIP increased from 150% to 400% of base salary. This is obscene and totally unnecessary. Such highly geared schemes promote risky behaviour as we saw with bankers in the financial crash of 2008. I always vote against remuneration policies where the maximum award under LTIPs is more than 100% of base salary and I will be doing the same here. I encourage my fellow shareholders to do likewise”.

There was a response from Louise Patten, chair of the Remuneration Committee to the effect that they could be “traduced” for underpaying rather than overpaying (“criticised” I think she meant). A review had shown that the CEO was underpaid in comparison with market rates in the sector. The LTIP was only a temporary measure as a new policy would be adopted in 3 years’ time.

I also asked whether they had received representations on the subject of remuneration from proxy advisory services and fund managers. She indicated there had been but mainly focused on other issues than the LTIP (in fact they got only 67.1% FOR the Remuneration Report, and 86.7% for the Remuneration Policy which are very low numbers). I said I had no objection to an increase in base pay if justified, but the LTIP was an example of how pay is ratcheting up and it sets a very bad precedent that other companies will follow to have a 400% bonus maximum. I have of course argued with Ms Patten before on the remuneration schemes at this company to no effect, so I chose to vote against her and her two colleagues on the Remuneration Committee but she still collected most of the proxy votes. No other shareholders in the meeting, other than my son Alex who holds the shares also, voted against the remuneration resolutions or the directors which rather demonstrates that when shareholders are happy with a company’s financial performance, they will vote for anything.

There were few other questions from shareholders at the meeting, but after the formal part had finished I asked the Chairman why he only managed to achieve 79.6% of votes in support of his appointment. He said this was because of complaints of “over-boarding”, i.e. that he had too many roles. In fact he has 4 other Chairman roles and one other non-executive directorship which I certainly think is too many and is contrary to ShareSoc’s guidelines. He argued that it was no problem and he did not agree with the current attitude of some proxy advisory services. I disagreed. The duties of directors are more onerous than ever, particularly if the job is to be done properly. Even small difficulties at a company can create a lot of extra work. One of course only has to look at Patisserie Holdings and their recent difficulties where Luke Johnson had lots of other commitments and failed to pick up what appears to be a massive fraud executed by the finance director. Peter Allen seems to think that all he has to do is turn up for a few board meetings each year, let the executive directors get on with business and do not much else. But Abcam is becoming a large company where the Chairman’s role is much more significant than that.

I voted against the Chairman anyway because I think Chairman should be familiar with company law and how to handle questions at meetings. Good ones do of course know how to answer questions without giving out sensitive information or avoiding direct answers but it is certainly not good for the Chairmen to start an argument with a shareholder in a meeting on any subject. Some Chairmen need to take a lesson in how to handle awkward folks like me who are not easily ignored.

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

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Abcam, Pay and Voting

As a long-standing shareholder in Abcam (ABC), I have just received the Annual Report and I am not happy.

Abcam rather surprised the market when they issued their preliminary results which showed a massive investment in a new Oracle IT system was in difficulties. Clearly the project is over-budget and over-schedule. Costs are ramping up in other areas also and the result was a lowered broker forecast and an instant collapse in the share price – down over 30% at one point on the day. It’s been recovering since but it certainly looked like a case of mismanagement of the IT function. As a former IT manager of a large public company, I have seen this kind of thing before so I am none too impressed. Massive commitments to a big-bang approach to a new IT system which is sold on the basis that it will solve all your problems, but rarely does. So that will be one thing to raise at the AGM which I plan to attend.

But remuneration will be another issue to be questioned. The CEO, Alan Hirzell, seems to be doing a good job but his pay last year was £1.8 million. The company is now proposing a new Remuneration Policy which will increase the maximum potential LTIP award from 150% to 400%. In my view this is outrageously generous – I normally vote against any bonus scheme that awards more than 100% of salary as it promotes risky behaviour of the worst kind as we saw in the financial crisis with banker’s bonuses. The CFO will also get an LTIP with a maximum 200% bonus. Although there will be performance targets the justification given is that it will “promote the underlying philosophy of share ownership among our Executive Directors and reward the sustainable delivery of long-term profitable growth”. Hogwash is my comment.

So I will be voting against Louise Patten who is Chair of the Remuneration Committee as I did last year, and against her two colleagues, Mara Aspinall and Sue Harris who also have too many “roles” at other organisations in my view – contrary to ShareSoc guidelines. Also I will be voting against the new Chairman, Peter Allen, who should know better than to allow this kind of pay package to go forward. Plus I will be voting against the Remuneration Report and Remuneration Policy recommendations. In addition, there is a resolution to approve a change to the 2015 Share Option Plan for staff which permits nil-cost awards which seems unjustified so a vote against that also.

Note that they are also introducing a new all-employee share purchase plan which is not even being put to shareholders – not required under AIM rules they say.

Incidentally Louise Patten has an interesting career history. To quote from Wikipedia “In 2006 she started as a non-executive director of Marks & Spencer plc. As chairman of the Remuneration Committee, she was responsible for approving a bonus scheme which was criticised for making it easier for executive directors to change the associated growth targets”. She was also a non-executive director of Bradford & Bingley when the company failed and was nationalised in 2008. There may be more interesting information that I could not see because in Google a search for “Louise Patten” retrieves only a few entries with the statement “Some results may have been removed under data protection law in Europe”.

I suggest other shareholders vote against the aforementioned resolutions likewise.

But it is easy to vote if you are on the register of the company and have been sent a proxy voting form. Equiniti, the company’s registrar, do provide an easy on-line voting system unlike other registrars, although for some peculiar reason they do not advertise the fact this year. All you need is the three numbers on the voting card and you can vote here: https://www.shareview.co.uk/views2/asp/VoteLogin.asp . No need to register or remember your log-in and password – just vote. As I said to a Link Asset Services representative at another AGM last week, why don’t they provide a simple system like that? They just wish to collect email addresses in my view by having people register and there is no security issue as they claim as it’s very unlikely that anyone would intercept the proxy voting card.

Registrars do need regulating by the FCA in my view, as I have said before, to put a stop to this kind of nonsense.

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

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Brexit, Abcam, Victoria and the Beaufort Case

Another bad day for my portfolio yesterday after a week of bad days last week when I was on holiday. Some of the problems relate to the rise in the pound based on suggestions by Michel Barnier that there might actually be a settlement of Brexit along the lines proposed by Theresa May. This has hit all the companies with lots of exports and investment trusts with big holdings in dollar investments that comprise much of my portfolio. But a really big hit yesterday was Abcam (ABC).

Abcam issued their preliminary results yesterday morning. When I first read it, it seemed to be much as expected. Adjusted earnings per share up 27.1%, dividend up 17.1% and broker forecasts generally met. The share price promptly headed downhill and dropped as much as 32%, which is the kind of drop you see on a major profit warning, before recovering to a drop of 15.2% at the end of the day.

I re-read the announcement more than once without being able to identify any major issues or hidden messages that could explain this drop. The announcement did mention more investment in the Oracle ERP system, in a new office and other costs but those projects were already known about. Indeed I covered them in the last blog post I wrote about the previous Abcam AGM where I was somewhat critical of the rising costs (see https://roliscon.blog/2017/11/15/abcam-agm-cambridge-cognition-ultra-electronics-wey-education-and-idox/ ). The Oracle project is clearly over-budget and running behind schedule. A lot of these costs are being capitalised so they disappear from the “adjusted” figures.

The killer to the share price appears to have been comments from Peel Hunt that the extra costs will reduce adjusted earnings by 9% based on reduced margins. The preliminary results announcement did suggest that the adjusted EBITDA margin would likely be 36% as against the 37.8% that was actually reported for last year. Revenue growth of 11% is expected for the current year so even at the reduced margin that still means profits will grow by about 5%. That implies only a slight reduction in adjusted e.p.s. on my calculations which implies a prospective p/e of about 34. That may be acceptable for such a high-quality company with an enviable track record (which is why it is one of my larger holdings) but perhaps investors suddenly realised that the previous rating was too high and vulnerable to a change of sentiment. That realisation seems to be affecting many highly rated go-go growth stocks at present.

The excessive IT project costs are of concern but if the management considered that such investment (£33 million to date) was necessary I think I’ll take their word on it for the present. At least the implementation of the remaining modules is being done on a phased approach which suggests some consideration has been given to controlling the costs in the short term.

I attended the AGM of another of my holdings yesterday – Victoria (VCP). They manufacture flooring products such as carpets, tiles, underlay and also distribute synthetic flooring products (I think that means laminates etc). There was a big bust-up at this company back in 2012 in which I was involved. The company was loss making at the time but some major shareholders decided they wanted a change or management and lined up Geoff Wilding who is now Executive Chairman. After an argument over his generous remuneration scheme and several general meetings, it was finally settled. After meeting Geoff I decided he knew more about the carpet business and what was wrong with the company than the previous management and therefore backed him – a wise decision as it turned out. Since then, with aggressive use of debt, he has done a great job of expanding the business by acquisition and this has driven the share price up from 25p to 760p. Needless to say shareholders are happy, but there were only about half a dozen at the AGM in London.

I’ll cover some of the key questions raised, and the answers, in brief. I asked about the rise in administration costs. This arises from the acquisitions and investment in the management team apparently. I also questioned the high amortisation of acquisition intangibles which apparently relates to customer relationships capitalised but was assured this was not abnormal. This is one of those companies, a bit like Abcam, where the “adjusted” or “underlying” figures differ greatly to the “reported” numbers so one has to spend a lot of time trying to figure out what is happening. It can be easier to just look at the cash flow.

Incidentally the company still has a large amount of debt because that has been raised to finance acquisitions in addition to the use of equity placings. In response to another question it was stated that the policy is to maintain net debt to EBITDA at a ratio of no more than 2.5 to 3 times. But earnings accretion is an important factor.

Geoff spent a few minutes outlining his approach to acquisitions and their integration which was most revealing. He talked a lot of sense. He will never ever buy a failing company. He wants to buy good companies with enthusiastic management. Thereafter he acts as a coach and wants to avoid disrupting the culture. He said a lot of acquisitions fail as people try to change everything wholesale. One shareholder suggestion this was leading to a “rambling empire” but the CEO advised otherwise.

The impact of Brexit was raised, particularly as there is nothing in the Annual Report on the subject. Were there any contingency plans? Geoff replied that if it is messy it will help Victoria as a lot of carpet is made on the continent and a fall in sterling will also help. He suggested they have lower operational gearing than many people think but obviously they might be affected by changing customer confidence. The CEO said that Brexit is on his “opportunity list”, not his “problem list”.

A question arose about the level of short selling in the stock which seems to have driven down the share price of late. Geoff suggested this was a concerted effort by certain hedge funds but he was confident the share price will recover.

Clearly Geoff Wilding is a key person in this company so the question arose about his future ambitions. He expects to do 2, 3 or 4 acquisitions per year and life would be simpler if he didn’t do so many. He tends to live out of a suitcase at present. But he still hopes to be leading the company in 5 year’s time.

In summary this was a useful meeting and I wish I had purchased more shares years ago but was somewhat put off by the debt levels.

Lastly, there was a very interesting article by Mark Bentley on the Beaufort case in the latest ShareSoc newsletter (if you are not a member already, please join as it covers many important topics for private investors). It seems that the possible “shortfall” in assets was only 0.1% of the claimed assets with only three client accounts unreconciled. But administrators PWC and lawyers Linklaters are racking up millions of pounds in fees when the client assets could have been transferred to other brokers in no time at all and at minimal cost. An absolute disgrace in essence. Be sure you encourage the Government, via your M.P., to reform the relevant legislation to stop this kind of gravy train in future.

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

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Abcam AGM, Cambridge Cognition, Ultra Electronics, Wey Education and IDOX

Yesterday I attended the Annual General Meeting of Abcam (ABC) in Cambridge as I often do as I have held the stock since 2006. Share price then (adjusted for consolidation) was about 50p and it’s now about 950p so I like most investors in the company, I am happy. Alex Lawson will be doing a full write-up of the meeting for ShareSoc so I will only cover a few points herein.

One shareholder expressed concern about the rising costs. The company is clearly making heavy investments in new infrastructure and more management. Although revenue was up 26.5% last year, earnings per share were only up 11.8% (unadjusted) and operating margin has been falling. Also Return on Capital Employed (ROCE) has been falling – only 12.3% last year when it used to be in the high teens.

Apart from opening a new building next year, they are implementing an Oracle Cloud software solution to replace their historic purpose-built legacy software systems. The total cost of that project is £44 million (see page 23 of the Annual Report) when profits last year were only £42 million post tax. In other words, all of last years profits could be taken to be consumed by this project. This project has been running for some time and I have asked questions about it in previous years. This year I asked: “is the project on schedule and on budget”. I did not get a straight answer. But it was said that initial cost estimates have expanded, and additional modules been added (for example warehouse management). It should “go live” in the current financial year. From those and other comments made, I got the impression that this is a typical IT project that is too ambitious and costs are escalating while delays have arisen. Those “big bang” IT projects rarely go according to plan, but management are often suckers for them.

Now it may be arguable that older systems need replacing (for example, the CEO mentioned it was impossible to bill in Swiss francs that at least one customer would prefer), and maintaining old code was clearly proving to be difficult. The massive investment in this area alone may be justified by the company’s ambitions to “double the 2016 scale by 2023 by investing in operating capabilities” as the CEO mentioned. The expectation is that growth will improve revenues and hence margins in due course.

One more way that costs have been rising is increased pay for management. CEO’s pay alone up from £614k to £1,378k in the last year (“single figure remuneration). In addition, I commented negatively on the fact that the LTIP target had been adjusted for the “scale and complexity of the transformational programme” of the new ERP system implementation, i.e. costs are much higher than expected so the LTIP target has been made easier to achieve!

At least Louise Patten (acting Chairman now after departure of Murray Hennesey for a proper job, and Chair of the Remuneration Committee) admitted later that LTIPs are often problematic but institutions like them. LTIPs at Abcam have rarely paid out, and management at many companies seem not to value them highly. There are better bonus scheme alternatives.

I also spoke briefly to a representative of Equiniti, the company’s registrar, about the difficulty of voting electronically. He is to look into it. Amusing to see the company slogan on his business card is “Our mission is making complex things simple”, exactly the opposite of my experience!

In the morning I also visited Cambridge Cognition (COG) who have offices in the village of Bottisham east of Cambridge. Although their offices are in what appear to be wooden huts, they are well furbished. The company specialises in cognitive health (brain function). Sixty per cent of its revenue comes from clinical trials for pharmaceutical companies, thirty per cent from research institutes and academia and ten per cent from healthcare and consulting.

On clinical trials they do about 15 deals a year so by their nature they are lumpy one-off deals. Total revenue was £6.8 million last year. Before last year revenue was flat but it grew last year and is forecast to grow this year.

A lot of pharma companies are actively researching alzheimers and other degenerative brain diseases, and developing products to assist – as the population ages such diseases are becoming more prevalent. Cambridge Cognition’s technology relies on historically well validated studies. The company provides a lot of consulting support in clinical trial sales.

Such deals include 30 to 40% of software which is billed and paid for on normal 30+ days terms, with the services paid for as provided. One issue that arose is that their accountants are likely to require them to change so as to allocate the software revenue over future periods due to IFRS 15 because they host the software. This is the same problem that Rolls-Royce have tripped up on, and it is also an issue at Ultra Electronics (ULE) according to a report in the FT yesterday. That company also issued a profit warning on Monday and the share price fell 19.5% on the day. I used to hold it but not of late. The FT writer suggested it was time to “exit”. Cambridge Cognition did suggest though that they would not need to restate last years accounts, and the change might actually smooth their revenue figures. IFRS 15 is an important correction to historic aggressive revenue recognition policies in some companies.

Otherwise Cambridge Cognition have some interesting technology – for example using smart watches to monitor brain function during the day, and using speech recognition to perform analysis. Whether these can be turned into profitable markets remains to be seen. One of the original ideas in the company was to provide their software on i-Pads for general practitioners to use in diagnosis but that never took off due to changes in purchasing arrangements in the NHS who of course are notoriously difficult to sell to (and budgets of late for technology seem to have been cut). If anyone wants more background on Cambridge Cognition you are welcome to contact me.

A few weeks ago I purchased a minute number of shares in Wey Education (WEY). Minute because although it looks an interesting business I thought the share price was way too high on any sensible fundamental view. This morning the company announced a share placing to make an acquistion. This will be at 22p which is a 33.3% discount to the price on the 14th November according to the company. Clearly advisors and institutions took the same view as me on the previous share price. Has the share price collapsed this morning as a result? It’s down but not by much so far. Wey Education does look like one to monitor (which is why I bought a few shares) but I think I’ll stand back from the speculation for the present while the market is so twitchy.

This looks like one of those hot technology stocks that are all the rage of late (the company provides education over the internet as an alternative to school attendance). But investors are clearly getting more nervous about many of those stocks in the last few days – it’s no longer “keep buying on momentum” as some share prices have fallen back from their peaks (Abcam is one example), so it’s now sell, sell, sell. And if a company indicates that the outcome for the year will not be as good as the optimistic broker forecasts suggest, as IDOX did mid-afternoon yesterday, then the share price gets hammered. Announcements mid-afternoon of this nature are never a good idea. Interesting to note that Richard Kellett-Clarke is to remain on the board after all as a non-executive. He was previously CEO. That might inspire more confidence in the business as these kinds of hiccups did not occur during his regime.

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

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Abcam, Voting and Non-Executives

I am a long-standing holder of Abcam (ABC) and have been very happy with my investment – a compound annual return of 33% p.a. since I first purchased the shares in 2006 according to Sharescope. But the notice of this year’s AGM (to be held in Cambridge as normal) has made me unhappy for other reasons.

Firstly, I tried to vote. Rather than use the paper proxy voting form (I am on the register so I get one) I thought it would be easy to do so electronically using the Equiniti ShareVote service. Even though there were no obvious instructions on the paperwork, I found the web site, entered the required three pieces of id information, and pressed submit. But it would not accept it because I have a pop-up blocker turned on. Grrr…..

Why do companies and their registrars make it so difficult to vote? They will be wasting money now because I will use the pre-paid voting card instead.

I then studied the resolutions:

  • Remuneration too high and the usual horribly complex mix of bonuses and LTIPs – but I told them that at the 2015 AGM. The only saving grace is that as an AIM company they don’t need to disclose all the information or have a vote on it, so it was good of them to do so. But I will be voting against the Remuneration Report.
  • What also attracted my attention is the presence of three non-executive directors (other than the former CEO) who are all women. One is the Chair of the Remuneration Committee so she gets a vote against for that reason alone. But all three have numerous other jobs/roles which exceed the ShareSoc guidelines and some seem to have little relevant experience of the markets in which Abcam operates. So I am voting against all three. Now I know that experienced female non-executives to fill public company boards are in short supply now that everyone wants to be “gender” balanced, so such ladies can line up numerous jobs with ease. But this is simply not good enough.

This is of course the result of the “box ticking” syndrome to keep the institutional shareholders and proxy voting advisors happy. But no non-executive director can do a good job if they have more than 4 or 5 positions.

I think I will have to attend the AGM again this year to make some of the above points.

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

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