Is it Elecosoft or Eleco? And Electronic Meetings.

One company I hold is building software company Elecosoft (ELCO). I have just received the notice of the Annual General Meeting and one oddity is that they have a resolution on there to change the name of the company to Eleco.  But surely the company used to be named that but amended it when they changed to focus on the software side of the business. So why the reversion? No explanation is provided so far as I can  see.

Another confusion in the notice is that there is a proposed change to the Articles to permit electronic general meetings. That will be solely at the discretion of the Chairman but reading the detail it is not at all clear how electronic meetings are supposed to work. For example, they still include provision for a “show of hands” vote but how does one show one’s hand electronically?

As with many other companies, they are not permitting anyone but two people to attend the AGM. You may be able to attend electronically but no questions are possible. But they may be hosting an event later in the year where shareholders will be able to ask questions in person.

It would certainly be helpful to have clarity on the above issues, and as most companies are dispensing with physical meeting, at least temporarily, it would surely be a good idea for the FCA to lay down some regulations on how electronic meetings should operate rather than letting every company to make up their own.

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

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Serco Charges, Unilever Trading and DotDigital AGM

I like to report on the latest evidence of fraudulent accounting just to remind folks how little one can trust the accounts of companies. I have not mentioned Serco (SRP) previously but it is now reported that two executives of the company have been charged with fraud and false accounting by the Serious Fraud Office (SFO).

The charges related to false reporting of tagging of offenders to the Ministry of Justice and the company has previously entered into a deferred prosecution agreement over the allegations which date back to 2010-2013. They agreed to pay over £20 million in fines and costs.

The two defendants deny the allegations but is it not good to see the SFO pursue such cases, even if they could do so a lot quicker! Justice has to be swift if it is to an effective deterrent.

Unilever (ULVR) provided a “Sales Update” this morning. It said business was challenging in South Asia and West Africa and as a result underlying sales growth would be “slightly below its guidance” for 2019. However it also said “earnings, margin and cash are not expected to be impacted”. There were also some negative comments about growth in 2020 which is probably what really spooked the market. Regardless the share price has been falling for most of the day and is now down 7% at the time of writing which is a pretty major shift.

I recently purchased some shares in Unilever so this is another case where I misjudged a big company probably due to relying on analysts’ forecasts. However, I did not buy many shares as it was a new holding and had already sold some of them as the share price drifted down of late. Clearly the bad news had been leaking out! I’ll wait to see where it settles and for revised analyst forecasts before deciding whether to sell the remainder or buy more.

This morning I attended the DotDigital (DOTD) Annual General Meeting. I have held shares in the company for some years and it has made steady progress. Sales last year were up 15% (including discontinued operations) at £42 million and adjusted earnings up 33% with positive cash flow. The company originally focused on an email service for use in marketing, newsletter distribution, etc, but is now a multi-channel communication service. They acquired a company called Comapi to add functionality in that area last year but decided to close down part of that business which was non-core, and a large write down of goodwill was the result.

I’ll cover some the questions from attending shareholders, which were generally good ones.

One question was about how the company plans to expand, e.g geographically. The answer is that this is generally done by dipping a toe into the water before developing the market and making significant investment. Some 30% of revenue now comes from international markets and they have appointed a General Manager in North America who starts in January.

I questioned the high losses of non-exec directors in the last year and were they looking for new ones? The answer was yes they are, and hope to appoint someone soon. Founder Tink Taylor who has been acting as interim Chairman will be stepping down although he will continue to do some consultancy work for the business.

There was a question on the use of cash on the balance sheet which is now substantial, but only 10% of market cap according to the CEO, Milan Patel. They do not intend to use it for market share purchases, other than to satisfy share options. They would prefer to invest in the business or use on acquisitions, but it does not sound like there are any short-term prospects of the latter.

A question on competition was asked and Emarsys was mentioned as a competitor in the mid-range market which is a name new to me I must admit. But there is probably a very diverse competitive landscape. I use a competitor product but only because it used to be a lot cheaper and it is always a hassle to change software as one has to learn a new user interface. These kind of products are remarkably “sticky” with customers and it was mentioned that 50% of their end-users are now “integrated” in some way which would make it even more difficult for them to change supplier.

Another question was on the large amount of capitalised development cost (£5.5 million last year, with £2.5 million of previous cost amortised which is done over 5 years). You can understand why the figure is so large if you know that they have 78 development staff which was the answer to one of my questions! Some of these are ex rocket scientists based in Byelorussia and there are some in South Africa also.

There were a couple of Brexit related questions but the answers were of no great concern. I did not pick up any issues that worried me about this business and it was generally a useful AGM.

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

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City of London Investment Group AGM

I attended the City of London Investment Group (CLIG) Annual General Meeting this morning – not of course to be confused with other City of London companies. CLIG is primarily an investment company that invests in Closed End funds/trusts via a very specific process. It encourages such trusts to close any discount to NAV. Historically it has had a strong focus on emerging markets funds but has been diversifying into other markets and into REITS more recently.

Barry Oliff was the founder and has acted as investment manager until recently but he is retiring in December. He plans to dispose of some shares but he has pre-announced the number he would sell and at what price. He has set an example of open disclosure at the company and they provide voluminous information on Funds Under Management (FUM) and likely future profits. They also make the investment process used absolutely clear which is of some importance if you wish to be able to trust a fund manager.

The company also publishes a Statement on Corporate Governance and Proxy Voting Policy for closed end funds which is very well worth reading by all investors in funds and trusts. I could not immediately find it on their web site but no doubt they would supply if you ask for a copy.

The company traditionally pays a high dividend, currently over 6% yield, which attracts some investors.

There were about a dozen investors at the AGM which is typical at this company, and there were a number of intelligent questions. All resolutions were passed on a show of hands votes and unusually I supported all of them. However, as is common at this company there were substantial proxy votes against one resolution from proxy advisors. It seems they were unhappy with the last resolution on revised Articles which removed the reference to a cap on director fees. The directors are to engage with shareholders with a view to reintroducing that.

In the past they often got substantial votes against remuneration resolutions as the scheme is somewhat unusual, but not this time. Indeed Mark Bentley of ShareSoc complimented the board on an “excellent scheme”.

One question was why pay a special dividend rather than diversify and create new funds? The answer was they have done so but there are limits to how much can be raised and invested by new funds – it takes time to do so.

On grounds of brevity and time, I won’t cover the other questions as they were not of great significance. In essence there seem to be no great concerns at present and the business has a clear development path, although there are perhaps slight concerns about downwards trends in fund management fees that can be charged. This is a general trend it seems but the Chairman indicated that there is potential to treble the funds under management which would offset that trend of course.

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

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ProVen VCT AGM Report

I commented on the results of ProVen VCT before their AGM on my blog. I said: “Total return to shareholders was 10.3% last year, but the fund manager did even better. Of the overall profits of the company of £18.6 million, they received £7.7 million in management fees (i.e. they received 41% of the profits this year). That includes £5.6 million in performance fees. Studying the management fee (base 2.0%) and the performance fee, I find the latter particularly incomprehensible. I will therefore be attending the AGM on the 3rd July to ask some pointed questions and I would encourage other shareholders to do the same. I am likely to vote against all the directors at this company”.

I did attend the AGM on the 3rd July in London, but so far as I could tell there were only two other ordinary shareholders present. No presentations and it was a hot day in London that might have deterred some from attending. In essence picking a summer day for an AGM and not providing any special reason for them to attend is a good way to put off shareholders from doing so.

But I did meet with the Chairman, Neal Ransome, and two representatives of the fund manager before the AGM commenced to go through the performance fee figures. The performance incentive fees are based on a very complex calculation which is essentially based on the growth in net assets of the fund plus dividends paid out, i.e. on Total Return. The manager gets 20% of any excess over a hurdle rate. The hurdle rate is the higher of a 25% uplift on initial net asset value or the initial net asset value compounded by base rate plus 1% per annum. That is on top of a “base” fee of 2.0% of net assets per annum payable to fund manager Beringea.

If one is going to have a performance incentive fee, that is not an unreasonable system. But I had already told Neal that I considered all performance incentive fees should be scrapped and a simple base fee used instead (as for example Amati AIM VCT use and other VCTs used before performance fees became common). Performance fees do not improve performance because managers have a good incentive to perform to the best of their ability anyway – if they do and the fund grows they get higher fees.

One complication in the calculation of the performance fees is that they are actually calculated separately on each of seven tranches of the funds that have been raised on previous years. There is also an additional PIF performance fee related to two specific investments. In essence, the calculation is so complex that no investor in the shares of this company could ever work it out or check that it is reasonable. I hope the auditors can do so.

The reason for the exceptionally high performance fee last year was explained as being due to the very high dividends paid out, which primarily were driven by the exceptional realisations during the year. Plus some “catch-up” from previous years having passed the hurdles. VCTs cannot generally hold on to cash because the VCT rules require them to reinvest the cash quickly which can be very difficult to do so and shareholders like the tax-free dividends anyway.

Investors have done reasonably well from this VCT (comparing them with generalist VCTs reported by the AIC), but over the last 10 years the average percentage of the year end net asset value represented by overall management and administration fees is 5.5% so the manager has done very well indeed.

The AGM was a fairly trivial event with only I and one other shareholder asking any questions. I voted against the reappointment of Malcolm Moss as I don’t like fund manager representatives on boards of trusts and told the board so – he was not present in person. All the directors should be independent in trusts which he is clearly not.

I asked whether there was any difficulty with the new VCT rules which requires a focus on earlier stage companies. Response was no but there was lots of money in the market so there was lots of competition for new deals and so pricing tends to be high.

I also asked about two of the holdings that suffered large write downs. Due to reduced market multiples on retail and ecommerce companies and underperformance respectively was given as the explanation.

Another shareholders asked about a possible merger of the two ProVen VCTs but it was said there are advantages in keeping them separate – for example it enables shareholders to sell from one trust and immediately reinvest in the other when if they did that in the same trust they would lose tax reliefs.

All resolutions were passed on a show of hands vote, with no significant proxy votes against any of the resolutions except for the remuneration report (4.9% against).

Are shareholders likely to revolt over the high levels of fund management fees at this company? I doubt it, but I think the directors should tackle this issue because the fees are unreasonable. The relatively good performance of the fund manager, which may be partly from chance, tends to end up in the hands of the manager rather than the shareholders. But if the fund underperforms it’s only the shareholders that will suffer.

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

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Royal Bank of Scotland AGM – How to Vote

Shareholders in the Royal Bank of Scotland (RBS) will have received their Annual Report and Notice of the AGM in the post today. The meeting is on the 25th April for those in a nominee account, and its being held at the RBS headquarters in Scotland of course.

There are 28 resolutions on the Agenda. Please ensure that you vote your shares. Resolution Number 28 directs the board to appoint a Shareholder Committee and was put forward jointly by ShareSoc and UKSA. The board has again opposed that resolution on spurious grounds. A Shareholder Committee would provide a say on such matters as director nominations, remuneration and strategy and that resolution should be supported by all thinking shareholders. See this document for more explanation and a list of the resolutions: https://www.investors.rbs.com/~/media/Files/R/RBS-IR/results-center/letter-to-shareholders-2019.pdf

Corporate governance at RBS is still poor and a Shareholder Committee would cure that. The Financial Times today highlighted one remuneration issue which is that the CEO, Ross McEwan will receive a pension contribution this year of 35% of salary, i.e. £350,000. This seems to be the latest wheeze to avoid scrutiny of high pay with other major UK banks paying similar amounts. So another recommendation is to vote against the Remuneration Report (Resolution No. 2).

Personally I will also be voting against the authorisation of share buy-backs (Resolutions 26 and 27), and against the resolution that permits General Meetings at 14 days notice (No. 24), as I always do.

I will also be voting against the Chairman Howard Davies (Resolution 5) for opposing Resolution 28.

For more information see the ShareSoc blog item here: https://www.sharesoc.org/sharesoc-news/vote-for-rbs-agm-special-resolution-28-shareholder-committee/

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

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Impressions of the British Land AGM

I attended the Annual General Meeting of British Land Plc (BLND) today. This is a large FTSE-100 property company of course, focused on London offices (39% of portfolio) and Retail stores (most of the balance).

The trading statement issued in the morning was a mixed bag. Loan-to-value (LTV) further reduced to 26% (they have been selling off developments and repaying debt plus buying back shares with the resulting cash). There were positive comments about the office sector – the Chairman indicated in the meeting that the Brexit threat had put new developments on hold so there was a growing shortage of good quality office space in London. But retail comments were less positive – long term structural change driven by the internet and short-term trading headwinds, so the market “remains challenging”. The share price fell this morning as it has been doing since mid-June.

The Chairman, John Gildersleeve, mentioned NAV was up 6% last year but profits were down because of disposals (which reduce the rental income). He gave the impression that he thought British Land have been doing a good job of managing their property holdings and “reshaping” their retail portfolio. He also talked about their new ventures in flexible office space (“Storey” – now 80% let) and in homes to rent (e.g. on Canada Water). Whether these new ventures will be sufficient to offset the negative trends in retail property in general is not yet clear.

Shareholder questions focused on whether the portfolio valuations were accurate – the Chairman defended them; should they be developing offices in Dublin – answer No; or warehouses – no clear answer but general impression is to focus on what they know and stick to the UK; and the risk of rent controls on housing – risks are uncertain and it’s only a small element in their portfolio. There were some other questions of little consequence.

More than one shareholder questioned the large buy-backs undertaken by the company – they could have doubled the dividend instead (dividend yield will be about 4.0% this year, but they are doing more buy-backs). The Chairman said as they can buy their own shares (i.e. their assets) at 30% discount why should they not do it? Can’t say I am convinced by such arguments. The company is clearly reducing its size by selling assets and hence generating surplus cash but if they cannot find a good use for it they should return it to shareholders via dividends or a tender offer, not market share buy-backs.

I asked whether they could use the new “hybrid” AGM capability (part physical, part on-line) capability in the new Articles but the Chairman seemed to think that investors were not yet ready for that, which is a disappointment. It would have saved us all traipsing into the West End of London on a hot day.

The questions only lasted about an hour before we moved to a poll vote. No questions on remuneration which is excessive (4.5% voted against), or on why they need 13 directors a number of whom seemed to have no relevant backgrounds. Thirteen directors must surely make for dysfunctional board meetings. Perhaps more questions were deterred by the witty put-downs given by the Chairman to some shareholders which is a style I do not like even if it makes such events somewhat less boring.

There were also 14% of shareholders voted against the change to 14 days notice for General Meetings – good for them. But we did not see the voting figures until later so no opportunity to comment on them.

In summary, an unexciting AGM at an unexciting company. A typical PR event for geriatric shareholders on the whole so only useful to a limited extent.

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

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Property Companies and TR Property AGM

Yesterday I attended the Annual General Meeting of TR Property Investment Trust (TRY). I have held shares in this company for a long time, and it’s always useful to attend their AGM as you get a useful update on trends in the property market from the fund manager (Marcus Phayre-Mudge of late). As he mentioned, the fact that they hold property directly, as well as holding shares in property companies gives them a unique insight into the state of the market.

Apart from holding TR Property, I also hold some direct property company shares which are British Land, NewRiver, Segro and Tritax Big Box. Not claiming to be a property expert, have I made the right choices there? Answers will be obvious later.

Segro announced their interim results yesterday also. Segro, like Tritax, are focused on large warehouses. They reported adjusted eps up 6.5%, and NAV up 2.6% with the dividend increased by 4%. The share price rose 2.8% on the day and has been in a strong positive trend in the last few months. Marcus was particularly positive about the Segro results and said there was tremendous rental growth in that sector with a 94% retention rate which is remarkably high. So no problems there.

As Marcus made clear, the property market is at present only doing well in certain sectors and certain geographies. TR Property is very well diversified though as it covers the whole of Europe (one might consider it as another of those Brexit hedging stocks with only 36% of holdings in the UK and they have been reducing that). The commercial property market is somewhat cyclical and was expected to decline in the UK, particularly after the Brexit vote. London offices were perceived as being vulnerable. There is also the impact of the internet on large retail stores. They are reducing exposure to retail but not to convenience stores. Shopping habits in the UK are clearly changing substantially, but less quickly in the rest of Europe. Marcus said they have been trying to focus on buying more physical property but the market has been surprisingly strong.

Switzerland, Benelux and Sweden were the worse geographic areas, and one shareholder commented very negatively on the political and social problems of late in Sweden. Rental growth in Paris and Stockholm is taking place and we might even get some in Spain as properties are filling up.

He made it plain that two sectors are performing well in the UK – “big box” warehouses, and convenience stores. So my holdings of Segro, Tritax and NewRiver are in the right place. But TR Property also hold those two big companies of British Land (pedestrian performance of late with asset value declines) and Land Securities (now renamed Landsec – Marcus said he hoped it did not cost them much to change). He has a bigger holding in the latter, but apparently he may not be totally happy as he mentioned he held a meeting with them recently, and it was not just to have a cup of tea.

He was positive about the share buy-back announced by British Land but suggested it was not big enough to make much difference. British Land is currently on a big discount to NAV so it probably makes sense when I am generally opposed to market share buy-backs. The discount discourages me from selling the shares at present.

TR Property managed to achieve a Total NAV Return of 8.0% last year which was very similar to the previous year and ahead of their benchmark. The depreciation of sterling helped the valuation of their European holdings. The share price discount is currently 7.8% which is slightly below their average. The dividend grew by 26% last year due to strong revenue growth, and currently yields 3.0%.

Marcus was positive about the future because capital markets are still good for property with very cheap debt. There has been record bond issuance by property companies – fixed for longer and lower, which they are encouraging.

He is slightly worried about Brexit and our politicians – “not sure they could negotiate themselves out of a paper bag”.

There were about 70 shareholders present at the AGM at a new venue (Marriott Grosvenor on Park Lane) with defective air conditioning. Shareholder votes were overwhelming in support of all resolutions, except that Chairman Hugh Seaborn got 5.9% against on the proxy votes. Not clear why and did not get the opportunity to ask him about that.

In summary, a useful AGM for those interested in the property sector (which I hold to offset my go-go growth stocks as property tends to be relatively defensive in nature, with share prices more driven by asset values and rental yields).

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

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