Market Crash and Abcam Impact from Coronavirus

This morning my stock market portfolio was a sea of red – down 5.6% at the time of writing at 9.30 am.  Not only have most shares fallen, but spreads have widened so it’s not even easy to pick up those shares that are now undervalued at a fair price. I think the answer here is to wait until the immediate panic is over before making any more decisions to buy or sell.

The major impacts on shares have been the threat of the coronavirus Covid-19, where the reality of the possible economic impact is finally sinking in, and the other has been the oil share price decline. It might be only short term but the impact of Covid-19 on China and northern Italy is clearly going to be substantial.

I don’t actually hold any oil company shares and it was just propitious that I said on February 14th when discussing electric vehicles that one should “sell BP and Shell perhaps”. The price of oil is down over 25% since Friday and the share prices of BP and Shell are down 16% and 18% respectively today at the time of writing. These declines have a major impact on the FTSE-100. Does that make them a bargain? Perhaps to dividend seeking investors but these are companies whose share prices are driven by oil/gas prices so they are not the kinds of companies I like to own.

One company I do own is Abcam (ABC) who published their interim results this morning. Revenue up 11% but adjusted profits down 20% with the share price down 7% after a sharper initial drop this morning. They report a £3 million revenue reduction from the Covid-19 virus from its early spread in China. But the broader China activity is now returning although still below pre-outbreak levels. The supply chain has been largely unaffected to date.

Cash generated from operations increased but free cash flow is down slightly mainly because of high levels of expenditure still being applied to “new ERP systems and processes” which is capitalised and which I have commented negatively on in the past. Well at least that expenditure is down from last year.

Notwithstanding the short-term impact of the virus, they give a positive outlook statement – “pleased with progress, strong fundamentals, confident in our future prospects, attractive long-term dynamics” are some of the phrases used. I think we might see a lot of similar statements from companies over the next few months. But adjusted earnings per share forecasts for this year are surely going to be downgraded somewhat at Abcam.

I am also not optimistic that the UK, USA or other western economies are going to avoid a widespread outbreak of the disease which will disrupt our lives and economy even if it is a relatively short-term impact.

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

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When Major IT Projects Go Wrong – Abcam Results

Abcam (ABC) published their full year results this morning. I have commented negatively on this company as a holder of the shares in the past, particularly after the last AGM in which I expressed concerns about the cost and delays to the major Oracle ERP system which they were building to replace legacy systems. Clearly over budget and running late. I was also not impressed by the failure to answer questions by the Chairman.

Now we see the real outcome – namely a write-off of £12.8 million on the ERP project. That is actually for work on the new Oracle cloud ERP system “following a detailed review of this programme undertaken during the year”. This is what they also said in the announcement:

“With the installation of the latest modules of our global ERP system, we have concluded the programme that initiated in 2015/16 to provide more scalable back-office systems at Abcam. Many global functional areas have been improved by the programme including process and data management in Human Resources, Customer Experience, Finance, and non-stock Procurement. We are already seeing benefits to scale, better data and better controls from these changes.

Manufacturing and Warehouse Management remain functional areas not yet addressed by this IT upgrade programme. Following an extensive review of business requirements and the current state of Oracle Cloud software as well as other best-in-class software providers, we have decided to make some changes to the approach and software used in these areas.”

This looks to be putting a positive gloss on a very negative result. Clearly the failure to implement Oracle for manufacturing and warehouse management including a write-off of work put in on that project, or so it appears, is a major and costly failure. They are now back at square one.

The overall financial results show that revenue is up 9.2% but profits are down by 28% on the reported figures. Even after the write-down mentioned above, the intangible assets on the balance sheet increased slightly and £22.7 million of cash was spent on the purchase of intangible assets, i.e. software development expenditure capitalised no doubt.

This looks to be a typical example of a “big-bang” approach to IT project development failing to deliver the goods, particularly in critical areas of the company’s operations. At least the company seems to have finally accepted that this project was misconceived and needed a major rethink.

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

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New Stockopedia Version and Abcam Trading Update

Like many private investors, I use the Stockopedia software to provide me with a summary of key financial information on a company. I also use it to provide “alerts” on price changes and for occasional stock screening. It’s one of the key elements in my share portfolio management. It has always been quick and easy to use, without too much complexity. They have just released a new version of the software that now supports mobile devices much better – that was certainly an issue with trying to use it previously on my mobile phone.

I have spent a few minutes trying the new version and reported quite a number of issues with it to Stockopedia support. Here’s a few of the key ones:

  • Portfolio holdings and alerts only show 40 stocks when my portfolio has many more than that, so cannot easily scroll up and down the whole portfolio.
  • Not supported on Internet Explorer which is still my default web browser.
  • Printing a stock page uses more pages – for example printing a report on Abcam now uses 5 sides in Chrome, i.e. 3 pages on a duplex printer instead of one page on Explorer with the old version. Print format screwed up also at top left. As with many new software versions, testing of print functions seems to have been limited.
  • Cost of holdings sometimes shows nil.

In general the testing of the new version seems to have been too little, even if I am very experienced at picking up bugs in software. As a result I won’t be switching to the new version just yet until they sort out some of these problems. However it is very easy to switch back and forwards between the versions. Let us hope they do not abandon the old version until all the problems are resolved.

On the subject of Abcam (ABC) yesterday the company issued a trading update for the year ending June. It looked fairly innocuous to me but the share price promptly fell sharply and finished the day down 13.3%. The only possible issue mentioned was the announcement that CFO Gavin Wood was stepping down “over the next year in order to continue his career closer to his family home”. He has been with the company for 3 years.

Did that justify the investor panic? Surely not. The FT commented that the company’s expansion plans had unsettled investors, but the announcement really only suggested a continuation of the growth strategy and formulation of plans to achieve that. Perhaps it was simply that investors had realised that a prospective p/e of 40 for the current year after a strong recent share price run was a bit too high. Or perhaps it’s that summer season problem where liquidity is low and hence share prices tend to be volatile. Anyway the share price is recovering today at the time of writing and my portfolio loss on Abcam yesterday was mostly offset by the rise in Learning Tecnologies (LTG) which issued a very positive trading update. It’s share price rose about 20% on the day.

Abcam is of course a producer and distributor of antibodies. On a personal note, last week I was injected with monoclonal antibody named Prolia from Amgen to control osteopenia. If I had looked at the side effects and user reports on the internet beforehand I might have chosen not to have it, but no concerns so far. Only costs about £1,000 per shot apparently for six months. No wonder the NHS needs more money.

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

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Abcam Interims, Brexit Amusement and Superdry

Abcam (ABC) published their Interim Results this morning (4/3/2019). The share price promptly dropped 20% although it has recovered half of that at the time of writing. What was the reason for the price drop? A major profit warning, totally unexpected results or other issues? None that I could see. Before giving you my analysis, you may care to read what I said about the company after attending their last AGM – see https://roliscon.blog/2018/11/07/persimmon-departure-abcam-agm-and-over-boarding/ .

I expressed concerns about the cost and delays to the major Oracle ERP system which they are building to replace legacy systems. Clearly over budget and running late. I was also not impressed by the failure to answer questions by the Chairman.

The latest results did not seem exceptional to me – the IT project is still bogged down it seems with financial and procurement modules only “on-track for implementation in Summer 2019” but that’s hardly surprising. There is one more major module to do after that. Revenue growth was 10.8% which is better than they achieved for the whole of last year but slightly less than forecast for the full year.

Perhaps the major concern for investors was the decline in net margins although gross margins were up. Clearly administrative expenses are up, partly as the result of a move of their headquarters to a new site in Cambridge and product development costs have apparently increased.

One amusement was that it was mentioned that they are opening a new distribution facility in Holland to avoid any disruption post Brexit. This generated a question in the on-line analyst presentation (which you can see a recording of on their web site) on the cost, and the answer mentioned the new “HQ”. That was rapidly corrected to “Logistics Centre”, but the costs were not indicated as being of significance.

Another negative was the mention of a new banking facility of £200 million when they don’t seem to be particularly short of cash. This might be used for “future corporate transactions” and it was made clear they are looking for acquisitions.

A further issue is no doubt the typical bad habit of referring to “adjusted figures”. What does that mean? Here is what it says: “Adjusted figures exclude systems and process improvement costs, costs associated with the new Group headquarters, amortisation of acquired intangibles, the tax effect of adjusting items, and in respect of the six months ended 31 December 2017, one-off tax arising from new US tax legislation”. It sounds like there is a lot thrown in there that might be dubious.

One only has to look at the cash flow figures to see what is happening. Overall cash decreased by £7.8 million after £11.9 million spent on acquisitions. Purchases of “property, plant & equipment” and “intangible assets” almost doubled. Clearly costs have been ramped up as part of the aggressive growth strategy pursued by CEO Alan Hirzel since he joined. That required a major rebuild of internal systems and facilities which is proving costly.

The shares are still highly rated after this hiccup which looked somewhat of an over-reaction to me, but we seem to be in one of those markets where the share prices of companies can collapse on the hint of possible problems even though overall market trends are up. Investors are nervous.

Another company that has suffered sharp share price declines in recent weeks has been Superdry (SDRY), a retailing and brand company. Last Friday the company announced the requisition of a General Meeting to appoint two new directors, including founder Julian Dunkerton who left the board last year. He and another founder, James Holder, are clearly unhappy with recent events which includes more than one profit warning and a 65% drop in the share price. Between them the founders hold almost 30% of the shares and it looks like this is shaping up for a big proxy battle. The company has rebuffed any return of Mr Dunkerton or the appointment of an experienced independent non-executive director suggested by the founders.

Such a prompt rebuff with the likely costs that will be involved in a proxy battle as a result never seems a good idea to me. It tends to destroy any chance of an amicable resolution.

I may write more on this situation after obtaining more information on the key issues which seem to be other than the difficulties faced lately by many clothing retailers.

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

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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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Horizon Discovery – Ripe For Some Activism?

Horizon Discovery Group (HZD) announced their interim results this morning. Still not making any profits although the EBITDA losses improved “before exceptional items”, i.e. before depreciation and amortisation which they prefer to ignore.

As I mentioned in a previous blog post, this is one of my speculations in the field of gene biotechnology. In this mornings’ announcement the new CEO said: “In light of this rapid change, and since my appointment as CEO, we have taken the opportunity to refresh our five-year strategic plan. Horizon is uniquely positioned to capitalise on rapidly growing market demand through our scientific and commercial leadership. With limited direct competition, Horizon has strong prospects for growth and is moving swiftly to capitalise on these opportunities. Our goals remain ambitious:  to harness the power of the cell in order to be the ‘go to’ provider of IP-rich cell engineering solutions and to establish leadership positions in our key markets, based on a highly scalable and repeatable business model.”

Sounds like they are going to spend more cash, whereas I suggested previously that this is one company that might be nearing profitability in this sector. I also attended the last AGM of Horizon in June and it was clear to me then that this was a company that could be turned profitable very easily (see blog report here on that: https://roliscon.blog/2018/06/19/horizon-discovery-agm-and-chrysalis-vct/ ).

The company also received a tentative bid from Abcam not long ago which they rejected as undervaluing the business.

The interesting thing is that the FT reported today that activist investor ValueAct had acquired another 5% of the company (they already held 5%) from Woodford Investment Management. Between these two companies they now hold 28% of the shares. Although ValueAct may be one of the less aggressive activist investors, it does suggest that change might be afoot.

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

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