Brexit and Other News

It’s been a busy few days even if stock market news is thinning out now we are into summer. The white paper outlining how Theresa May’s cabinet (at least those who are left) would like to do a deal with the EU has been published. I advised my followers via Twitter to read it rather than simply read the media commentary on it which tends to be slanted based on the writer’s emotions to “leave” or “remain”. You can find the white paper here: https://www.gov.uk/government/publications/the-future-relationship-between-the-united-kingdom-and-the-european-union

Needless to say I have taken my own advice, and read it all. As a supporter of Brexit primarily because I think it is necessary to regain democratic control of our laws, I think it gives me most of what I was looking for.

On goods and agri-products it does mean that we will be adhering to EU standards but is that a major problem? It will ease trade if we do so, just as we adhere to internationally agreed standards in some areas. I do not see that it will necessarily thwart any free-trade agreements with the USA or any other country, regardless of what Trump says. A free trade agreement is primarily about having no tariff barriers but there are bound to be issues about technical standards. For example, does Mr Trump expect the UK to accept US cars built to US technical standards for us to get a free trade deal with the USA? If he does then we would risk becoming a poodle of the USA rather than the EU. That makes no sense when we are much closer to the EU, already conform to their standards in many areas, and do more trade with them. Some Brexiteers argue that we should not be a poodle of either of course, but for us to start setting our own standards and enforcing them would be a massive task in the short term. Likewise continuing to adhere to EU standards on employment rights and competition law, at least for some time, does not seem totally unreasonable even if the European Court of Justice might give rulings on issues that relate to them.

Whether the EU will accept Mrs May’s proposals is far from certain. The proposed customs arrangements where we collect EU tariffs on goods coming into the UK that are destined for EU countries seems particularly problematic. Is that workable in practice and at reasonable cost? And the refund arrangements for goods that do not get forwarded might be a recipe for large scale fraud I suspect.

So on the whole, I am supportive of the white paper’s proposals if in any negotiation with the EU no more is conceded. I hope Donald Trump gives Mrs May some advice on hard bargaining while he is here.

But as I said before, read the white paper and make up your own mind. Your comments are welcomed.

How Not to Run an AGM

On Wednesday I attended an AGM of an EIS company named British Smaller Country Inns 2 Plc (one of four similar companies). The directors have managed to turn my investment of £2,400 into £670 over 12 years (based on the latest estimate of net assets). I think the directors are fools for not trying to exit the pubs market years ago and this AGM gave other examples of their incompetence. Firstly the Chairman, Martin Sherwood, does not know how to run the voting at an AGM according to the Companies Act. He announced a “show of hands” vote but then proceeded to add the submitted proxy votes to the count of raised hands before declaring the result. In essence you can only take into account the proxy votes if a poll is involved in which case the show of hands vote is ignored. Mr Sherwood did not understand this point when I raised it.

I also raised the fact that the company had sent out from it’s email address an “invite” that was clearly “phishing” of some kind. When I raised this at the time he said the company had been “hacked”. Bearing in mind the email had been sent to a number of shareholders, and probably everyone in their email contact list when that could be thousands of people, I asked whether they had reported it to the Information Commissioners Office (ICO)? Who are they, never heard of them, was the response at the AGM. Well for Mr Sherwood’s information and everyone else, if there is a significant leakage of personal information, then it should be reported to the ICO (see https://ico.org.uk/for-organisations/report-a-breach/ ). This is a legal requirement since the 25th May. It simply astonishes me that a director of a Plc is not familiar with the ICO and their responsibilities under the GDPR regulations.

As there is only one pub remaining to be sold in British Country Inns 2, after which the company is likely to be wound up, I may get an exit within a year or so and will then be able to claim “loss relief”. Shareholders in the other linked companies are not so fortunate as they may take longer to reach wind-up. Originally I did not invest directly in this EIS company but via a fund. I am now very wary about EIS fund offerings. How many really show a profit rather than just provide a vehicle for tax refunds?

Proven Growth & Income VCT

After the above AGM I moved on to the Proven Growth & Income VCT (PGOO), another tax relief focused vehicle but with a much better track record. In this case I am at least showing a profit even ignoring the generous tax reliefs. Total return last year was 4.35% according to my calculations, but only 2.7% according to the company. I queried the difference and it’s probably accounted for the fact they are calculating it on the mid-year average asset value when I do it on the year start figure. Total return (change in net asset value per share plus dividends paid out) is the only measure to focus on for VCTs and other investment trusts.

Not much to note at this AGM with only 4 ordinary shareholders present. I queried the length of service of the directors, with 2 having served more than 9 years. They are not apparently in any hurry to refresh the board however.

The manager said it was difficult to find new deals – a “wall of money” going onto companies that would qualify for VCT investment. But they are doing more marketing to raise awareness of their company.

Oxford Technology VCTs

Yesterday I attended the AGMs of the Oxford Technology VCTs in Oxford (all four of them) who are a very different beast altogether with a very disappointing track record since formation. Figures for total return (after tax relief) were given as 107.4, 52.9 122.2 and 82.9 respectively since foundation. As manager Lucius Cary said in his presentation, “not a great result – not brilliant but not a disaster either”. They have had some disappointments and a lack of really big hits which one needs when investing in early stage technology companies. But clearly many investors attending were unhappy with several suggestions for winding-up the companies. That was particularly vociferous for OT4 where there is no problem with investors having claimed capital gains roll-over relief.

The directors, who were all changed not so long ago, suggested wind-up would be difficult. They also think there is value to be realised that would be lost in any “fire sale”. They recognize these VCTs are too small and with no major new investments being made and no fund raising likely, they are aware of the strategic issues. But they are apparently looking at possibly doing a similar deal to that done by the Hygea VCT who appointed a new, experienced manager to raise a “C” share fund. That company has been renamed the Seneca VCT accordingly.

We had presentations from three of their investee companies: Ixaris (electronic payments business), Scancell (a listed pharma company) and Select (printer management software). The last one was somewhat interesting as I am familiar with the sector from my past career. But Select used to be a company that had its own products and IP but seemed to have turned into a distributor of other people’s products. Distributors are not valued highly and in the presentation the typical problems of being distributor became apparent – they lost money last year due to a change in the relationship with their major supplier to their disadvantage.

Scancell and Ixaris are both major proportions of the portfolios so a lot depends on their future results. Scancell result is very dependent on the outcome of clinical trials which won’t be available until 2019. But it was mentioned that one analyst values then at 55p when the current market price is 12p.

The presentation from Ixaris was by David Sear via Skype who was appointed Chairman a year ago. They also changed CEO a week ago. Note: for those who saw a presentation by LoopUp recently at the Amati AIM VCT agm where one member of the audience suggested that everyone should use Skype as it works fine, this latest event was a good demonstration of why Skype is not fit for business use – audio out of synch with video, download delays, etc.

I have to admit to knowing a lot about Ixaris as I was a founder investor 14 years ago and still hold a few shares directly. It has been slow progress, although revenue has been increasing and they are near EBITDA profitability. The new management team does seem to be improving the business but it was suggested that a “possible liquidity event” was 2 years away and it might be via a public flotation. But the bad news was Sear’s mention of a contractual issue with Visa for their Entropay pre-paid card service. Incidentally if you want a pre-paid card for security reasons then the Entropay service is a good one. Ixaris do have a second major division though that seems to be doing well.

Some of the other investee companies were covered in brief, and they do appear to have prospects in some cases. But Plasma Antennas for which there were high hopes at one time has been written off.

When it came to the votes, all the resolutions were passed on a show of hands, including re-election of all the directors, and perhaps even more importantly on the votes to continue with the companies, including even on OT4!

It was an educational AGM and my conclusion is that the directors are actually doing the right things with these problem companies. These VCTs are trading a high discounts to NAV, partly because there are no company share buy-backs unlike in many VCTs. But it would be a brave investor to buy the shares in the market. I only have a small holding in one of them.

K3 Business Technology (KBT), MaxCyte (MXCT), Eservglobal (ESG) and FairFX (FFX)

On Wednesday I attended presentations on the above four companies at the ShareSoc Growth Company Seminar in London. The last of those four I hold some shares in, and at least they made a small profit last year whereas all the others reported losses. With AIM companies, as the private equity world often says, you have to kiss a lot of frogs before you find a prince.

K3 showed the same problems historically as in Select mentioned above. Being a distributor is not an easy life and it’s difficult to make money doing that. But new management is changing the focus which may improve matters. Maxcyte is a typical pharma company and I never understand the technology in these businesses. I think you need a degree in biochemistry to even get to grips with developments in the sector. I have no idea whether it will come good in the end. Eservglobal seem to be moving from a mobile payment offering to focus on “Homesend” – sending money internationally more quickly and at lower cost than traditional banks can do. Earthport is a similar business I believe and that has not yet been reporting profits.

FairFX has a number of electronic money/payment offerings with the latest being a “business” account for SMEs. That might be very attractive to the large numbers of such companies. I have seen this company present before and the message is always clear and the questions answered well whereas the other companies presenting failed to convince me.

An eventful week, compounded by stock market volatility. Summer is the time to pick up bargains and sell the over-hyped stocks when buyers depart for their holidays.

Curtis Banks

One final item; I seem to be having some payment problems with Curtis Banks (an AIM listed company) who manage one of my SIPPs that is in drawdown. They took over a business called Pointon York and since then there have been delays in payments, or in one case two payments made in error. Reviews of the service, including comments from employees on the web seem somewhat poor. If anyone else is having problems with them, please contact me.

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

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Brexit – Good or Bad?

Prime Minister Theresa May convinced her ministerial colleagues to back her Brexit vision, but now our Brexit negotiators David Davis and Steve Baker have resigned and there are grumblings from the “hard” Brexit wing of the Conservative Party. Like no doubt many Brexit supporters I am somewhat puzzled by this outcome mainly because it is not at all clear what the plan is in detail, nor what the ramifications are. But it’s worth reading the letter sent by Mrs May in response to David Davis’s resignation letter. It included these words:

“At Chequers on Friday, we as the Cabinet agreed a comprehensive and detailed proposal which provides a precise, responsible, and credible basis for progressing our negotiations towards a new relationship between the UK and the EU after we leave in March. We set out how we will deliver on the result of the referendum and the commitments we made in our manifesto for the 2017 general election:

  1. Leaving the EU on 29 March 2019.
  2. Ending free movement and taking back control of our borders.
  3. No more sending vast sums of money each year to the EU.
  4. A new business-friendly customs model with freedom to strike new trade deals around the world.
  5. A UK-EU free trade area with a common rulebook for industrial goods and agricultural products which will be good for jobs.
  6. A commitment to maintain high standards on consumer and employment rights and the environment.
  7. A Parliamentary lock on all new rules and regulations.
  8. Leaving the Common Agricultural Policy and the Common Fisheries Policy.
  9. Restoring the supremacy of British courts by ending the jurisdiction of the European Court of Justice in the UK.
  10. No hard border between Northern Ireland and Ireland, or between Northern Ireland and Great Britain.
  11. Continued, close co-operation on security to keep our people safe.
  12. An independent foreign and defence policy, working closely with the EU and other allies.

This is consistent with the mandate of the referendum and with the commitments we laid out in our general election manifesto: leaving the single market and the customs union but seeking a deep and special partnership including a comprehensive free trade and customs agreement; ending the vast annual contributions to the EU; and pursuing fair, orderly negotiations, minimising disruption and giving as much certainty as possible so both sides benefit.

What exactly are the moaners complaining about if that deal can be achieved? Their concerns seem to be focused on points 5 and 6 above. Will adopting common product standards (or whatever EU standards they might determine subject to UK Parliamentary consent) really hobble the UK and make it difficult for us to negotiate trade deals with other countries? I do not see why – it just means that exporters to the UK will need to comply with UK/EU regulations just as UK exporters to the USA now have to comply with US products rules and regulations. What is so difficult or damaging about that?

Note that only industrial and agricultural products are covered by these proposals. Services are not so such matters as financial regulations where the EU has been particularly inept will presumably fall into abeyance unless we decide to conform. But such phrases as “A commitment to maintain high standards on consumer and employment rights and the environment” do need explaining more – does this mean we have to accept EU regulations or what in those areas?

With those reservations otherwise my view is that if Mrs May can achieve her objectives this would look to me to be a reasonable outcome as it will meet the main objectives desired by Brexiteers. Sovereignty and the ability to lay down our own laws and regulations in most areas and in a democratic way will be returned to us. Would anyone care to explain to me why it is otherwise?

But whether these proposals can be agreed with the EU is another matter of course. Perhaps David Davis has resigned because he sees the impossibility of getting their agreement to this “fudge”. The borderless objective in Ireland looks particularly problematic. We need a clearer explanation of how that might work in practice.

My conclusion therefore is that this might be a way forward, but the game of Brexit negotiations is a long way from being concluded.

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

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Learning Technologies AGM and Brexit

I went to the Learning Technologies (LTG) Annual General Meeting yesterday, only to find my son Alex was there also (we both hold the shares). So we did a joint report which can be found on the ShareSoc Members Network. What follows are a few particularly interesting points from it.

LTG was a workplace digital learning solutions provider up to the beginning of last month when it announced it was to buy PeopleFluent – a cloud based talent management platform. Chief executive Jonathan Satchell described the deal as “transformative” for LTG’s US presence and that is surely the case. He also noted that “learning and talent are closely aligned” with cross-selling opportunities adding possibilities for further growth.

When the formal business was considered the first resolution was to accept the annual accounts and directors report. This had a surprise vote of 56 million proxies against (12%). I asked why the large vote against a resolution that normally gets a high percentage “yes” vote. Chief exec Jonathan Satchell replied that ISS (a proxy advisory firm) had recommended shareholders vote against the resolution on the grounds that there was insufficient disclosure in the Directors remuneration report, and shareholders had not been given a chance to vote on directors’ remuneration. Jon felt the complaint by ISS was overblown, but that LTG had discussed the issue with ISS and will look to improve disclosure next year. Jon noted it was not necessary to hold a vote on remuneration although I pointed out it was preferable to do so and many AIM companies did have remuneration votes. ISS had also noted that the Chairman Andrew Brode was on the remuneration committee, which they didn’t like. Jon did say that Andrew would be more than willing to give this role up and so in the coming year Jon said to expect a change on this committee.

A shareholder asked if the £13.3m Civil Service contract was a one off. Jon replied that there is scope for a one year extension to the contract but at the moment the accounts are based on the contract ending with no extension.

I asked about the PeopleFluent acquisition and questioned the use of a “cash box” transaction as this ignores shareholder votes in prior resolutions. A cash box placing allows a company to issue new shares by bypassing pre-emption requirements – meaning without shareholder approval. It works by a company forming a new subsidiary into which it puts cash via a placing and then buys that shell, paying with shares priced at whatever level it deems suitable. In effect it sidesteps the legal requirements of Company Law, and the resolutions previously passed by shareholders re share issuance.

Jon replied that LTG was up against US private equity and it was felt this was the best way to get the right amount of funds needed in a timely fashion to give the highest quality offer LTG could make. Comment: with the Chairman and CEO holding over 45% of the shares any vote would have surely gone through so it may not be so prejudicial to shareholders interests. But it sets a bad legal precedent as I think such transactions should be made illegal. Apparently Numis, their Nomad/Broker, suggested they do this. Otherwise it was a placing with no open offer which prejudices private shareholders although the discount to the previous share price was minor.]

Jon talked about the recent Pluralsight IPO, a similar US business. The company lost $90m on $160m revenue. Valuation $2Billion. Comment: this is obviously a “hot” sector for investors.

Summary: The enthusiasm of the CEO for the future prospects of the business were very evident and this seems to have been communicated to shareholders in recent weeks. The share price has been motoring upwards so it’s now on a prospective p/e of 44 according to Stockopedia. Certainly the high recurring revenue feature of the PeopleFluent business is positive as I always like companies with high recurring revenues and I said that in the meeting. However there are significant risks in such a major acquisition of a US business where there may be cultural and management style differences. The business also seems to have some difficulties and they have already be making some management changes.

In addition to that the large civil service contract in the UK will probably not be extended – or at most by a year – so historic revenue may not be representative of future revenue, and in addition the change to adopt IFRS 15 (see page 12 of the Annual Report) will impact 2018 financial figures. The corporate governance and the way the placing was done are also negatives. In summary there are a number of negative aspects in this business and potential high risks from the acquisitions that have been made (not just the latest one). The enthusiasm of investors for this business might be ignoring the substantial risks now associated with it so investors should keep a close eye on the progress of the acquisitions and their associated restructuring.

But as always, I learned a lot about this business and the individuals involved from attending the AGM. There were less than a dozen ordinary shareholders at the meeting which is disappointing given the opportunity it provides to quiz the management.

Brexit: I have not said much on the hot topic of Brexit of late although it’s no secret that I am generally in favour of it. The regulations that have come out of Europe such as MIFID II, the Shareholder Rights Directive and GDPR might have had good intentions behind them but in practice the detail regulations that result have been horribly complex and bureaucratic. The result has been very high costs imposed on many businesses and often with ineffective results. The key problem has been bureaucrats in Brussels with little knowledge of the real world and the business environment in the UK designing regulations without adequate consultation (or ignoring feedback submitted) and producing gobbledygook which few people understand. GDPR had positive objectives but the law of unintended consequences has resulted in people receiving hundreds of pointless emails.

The latest example of ridiculous claims of the cost of Brexit was the statement by Jon Thompson the head of HMRC that the “maximum facilitation” (Max Fac) option could cost UK businesses as much as £20 billion per year. This is apparently based on the cost of filling out customs declarations (200 million per annum at a cost of £32.50 each, plus other form filling according to the FT). This seems to assume that forms are filled out manually when in reality that can be done by computer software surely. Business might also look to reduce the costs by bulking up orders, or simply choosing not to export or import, i.e. to do business in different ways or with different people.

Whether Max Fac is a sensible option it’s difficult to say without a lot more evidence but staying in the Customs Union simply to avoid a hard border in Ireland does not seem to make sense because it means our trading policies and practices will be dictated by the EU. That’s not what people voted for in Brexit. People voted for political and governmental independence. Many people accept there may be some extra cost involved as a result but scare stories about the costs are not helpful.

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

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Quindell, Carillion and Brexit

The Financial Reporting Council (FRC) have announced that they have fined audit firm Arrandco (formerly RSM Tenon) £750,000 and the Audit Partner Jeremy Filley £56,000 in relation to the audit of the financial statements of Quindell for the 2011 accounts. They also “reprimanded” both parties and Tenon had to pay £90,000 in costs. Both parties admitted liability. Two of their errors were a “failure to obtain sufficient appropriate audit evidence and failure to exercise sufficient professional scepticism”. In other words, quite basic failings. The FRC is still looking into other issues that do not affect those parties.

So after seven years shareholders in Quindell have finally seen some action. But the penalties are hardly sharp enough to cause the targets any great suffering. Quindell which was primarily a claims management company, and a favourite of many private investors, had accounts that were in essence grossly misleading. For example, the FRC reported in 2015 that the restatement of its accounts in 2013 turned a post-tax profit of £83 million into a loss of £68 million. Revenue recognition of future contracted profits was one issue.

Now I never held Quindell despite having looked at it more than once. One thing that put me off was talking to someone about the previous involvement of Rob Terry, CEO of Quindell, in Innovation Group. The FT have a good article on his previous career here: https://www.ft.com/content/62565424-6da3-11e4-bf80-00144feabdc0 . I also did not like the look of the accounts at all and the recognition of revenues. Paul Scott, that well-known commentator on small companies, said yesterday: “…its accounts were fairly obviously highly suspect. Excessive debtors, excessive capitalisation into intangible assets, and a flurry of acquisitions to muddy the waters, are the usual give-aways of fake profits, so these dodgy companies are really terribly easy to spot.”

In essence, just a little background research combined with some understanding of accounting, would have put off most investors. But both private and professional investors (even institutions were fooled by Quindell) do not put in the work, or get carried away by the management and company promoters. Rob Terry has yet to be brought to account for the events at Quindell.

There was an interesting letter in the Financial Times yesterday signed by a number of people including Martin White of UKSA. It said the blame for Carillion’s demise was causing fingers to be pointed in all directions, but most are missing the real culprit – namely that faulty accounts appear to have allowed Carllion to overstate profits and capital. This enabled them to load up on debt while paying cash dividends and big bonuses to the management.

One problem again was recognition of future revenue from signed contracts, but the letter says “anticipated revenues from long-term contracts cannot count as distributable capital, and foreseeable losses and liabilities need to be taken into account”. Carillion effectively reported profit that was “anticipated”. They suggest KMPG’s audit should be investigated as I also said in a previous blog post.

The letter writers suggest that faulty standards mean that today accounts cannot be relied upon and the results for all stakeholders can be devastating. Indeed the fall-out from Carillion is going to be really horrendous with potentially thousands of small to medium size businesses that relied on sub-contract or supply work from Carillion likely to go bust. The letter writers suggest that Carillion is yet another “canary in the coal mine”. Perhaps when MPs get deluged with letters from disgruntled business owners and their out of work employees, they will actually get down and demand some reform of the accountancy and insolvency professions.

Incidentally I never held Carillion either probably because it was mainly in the “construction” sector which I avoid because of low margins, unpredictable and “lumpy” revenue and high risks of projects or contracts going wrong. It also had the Government as a major customer which can be tricky. So from a “business perspective”, such companies are bound to be risky investments.

Another good letter in yesterday’s FT was on the subject of Brexit from Dr Ian Greatorex. It said “For too long, some FT contributors have peddled the line that Brexit is the result of a “populist” backlash that might be reversed”. He restated the “remainers” causes for why they think they lost the vote, but then said “The main reason I voted to leave, often based on FT reports over the years of reported EU mess-ups, was that I believed EU institutions lacked proper democratic control and were complacently trying to create an ever-deeper political union against the instincts of the average voter………”. It’s worth reading and good of the FT to publish a more sober letter on the subject than they have been doing for some months. Perhaps the FT have finally realised that not all their readers are so opposed to Brexit and that the reason a number of educated and intelligent people supported it was for factors other than the possible trade difficulties that will need to be overcome.

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

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Brexit, HBOS, Globo and the FRC

Is it not heartening that the Brexit divorce bill, and other terms, have been settled? The exact cost is unclear but it could be up to £40 billion – a lot of money you may say! However, the fact that the key negotiators, Mrs May, Barnier et al, all looked somewhat glum about the deal when announced perhaps tells us that it was a compromise in which both sides had to concede ground. Or perhaps they were just tired. The terms of any future arrangements including trade deals still need to be worked out so it’s a long way from being concluded.

Now that £40 billion figure, sounds a lot, even if it is spread over some years. Hard line brexiteers will be unhappy. But it’s all relative. For example the annual UK Defence Budget is over £35 billion and rising. In addition, I have just read the Financial Reporting Council’s report on the HBOS audit and you can see there on page 7 that HBOS had to write off £63.3 billion in loan losses. That was only one smaller sized UK bank. According to the Bank of England, the financial crisis that affected HBOS caused £7.3 trillion of losses in total in the UK.

The report from the Financial Reporting Council (FRC) on the audit of HBOS is a quite tedious and turgid document. To remind you, HBOS was a bank that almost went bust after making imprudent commercial property loans financed by short term debt. When Lehman’s collapsed and debt became difficult to raise, HBOS had to be supported by the Government and then bailed out by a merger with Lloyds TSB. The latter’s shareholders are currently pursuing a claim against the company and its directors over that event.

The reason the audit of HBOS was examined by the FRC was because the company obtained an unqualified audit report suggesting that it was a “going concern” when it soon turned out to be otherwise. These events date back to 2008 – that’s 9 years ago which shows the speed with which the FRC typically operates.

One interesting comment made in the FRC report is that it suggests on page 11 that liquidity support from central banks may be considered “a normal funding source…..and therefore reliance on such support does not mean that the bank is not a going concern…..”. As banks with a positive balance sheet are usually assumed to be eligible for “lending of last resort” from the Bank of England that might mean that HBOS would be considered to be a going concern even if it ran out of cash (which is the reason most banks go bust, not because of defective balance sheets – Northern Rock is a good example).

The report also refers on page 29 to “market expectations” at the time. Market participants did not expect the financial crisis to get worse which affected the auditor’s views. So now we know why the FRC let the auditors of HBOS (KPMG) off the hook!

As I mentioned in a blog post a couple of weeks ago (see https://roliscon.blog/2017/11/22/standard-life-uk-smaller-companies-and-frc-meetings/ ), I attended a meeting with the FRC organised by ShareSoc/UKSA. One of the issues raised was the lack of feedback from the FRC on the progress of investigations. I followed up with one of the speakers after the meeting, specifically about the case of Globo. I asked what was the status on the investigation of the audit of their accounts by Grant Thornton. As readers may know, Globo was a company that went into administration in 2015 after it was revealed that the revenue of the company was probably fictitious (see https://www.sharesoc.org/campaigns/globo/ for details). The report of the administrators made it clear that the cash on the balance sheet of Globo plc seemed to have disappeared, bringing into doubt the preceding audit report on that ground alone let alone the revenue recognition issue.

The FRC announced an investigation in December 2015, i.e. two years ago. What have the FRC been doing, when will the investigation likely conclude, are there any preliminary conclusions, etc, etc? All of these questions are very relevant as the answers might provide the basis for legal action by shareholders against the auditors and others. After several email exchanges with FRC staff, the only answer I managed to elicit is that the investigation is on-going. It has not even been turned into a “Formal Complaint”.

The reason more information could not be supplied is that it might prejudice “the overarching requirement for fairness”. My response was “I really do suggest that the FRC needs to reconsider its policies in this area. You have too much emphasis on treating those who have been complained about (i.e. auditors) fairly, while those who have complained are treated unfairly. This rather suggests, as we already knew, that the FRC is dominated by auditors who are the people it is supposed to be regulating”.

You will be amused to read in the FRC’s Publication Policy document (para. 3) that “Transparency contributes to public confidence in independent disciplinary arrangements….” but then proceeds to spell out all the restrictions it imposes that thwart it.

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

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Preparing for Brexit

Apparently MPs on the Public Accounts Committee are very concerned that a new Customs Declaration Service will not be ready in time for Brexit – at least this was in a report in the Financial Times, assuming it is not another of their scare stories. The timescale is indeed somewhat tight to get the new system in place before the likely Brexit date, particularly if one bears in mind that many Government IT projects overrun.

Inability to process export declarations quickly could result in massive queues of traffic awaiting clearance. I recall a previous suggestion that lorries might be backed up along the M20 as far as the M25 which would certainly personally inconvenience me.

But I have some experience of implementing major IT systems for HMRC (or Customs and Excise as it then was) as I was involved in the implementation of the VAT system back in 1973 (when we joined the EEC at the same time). This was a project commenced two years earlier. It had to go operational on time, and it did so without a hiccup. One of the more successful events in my IT career although I only played a minor part in it. The key point I wish to make is that fixing a date when it had to go live concentrated everyone’s minds on the project, and it ensured the best expertise was available to deliver it. The VAT implementation project, which affected not just tax collection work by the Government but also almost all UK businesses was one of the biggest and most important Government IT projects ever completed.

Now when Mrs May decided to fix a specific date for when we will be leaving the EU, to my mind this was a wise thing to do. It will focus those responsible for the supporting systems to enable this to happen smoothly (whatever the nature of the deal, if any, finally agreed with the EU for post-Brexit trade arrangements) if a date is fixed now.

But yesterday the Daily Telegraph ran a front-page story on the “Brexit Mutineers” who were planning to revolt against a fixed date, and as a way to undermine Brexit it was suggested. Lots of other news channels covered the story and one of the mutineers, Bob Neill my local MP and one of the “mutineers”, appeared on television to suggest it was simply the normal democratic scrutiny process. The revolters also signed a letter printed in today’s Telegraph saying a fixed date was too inflexible. There may need to be last minute extensions to conclude a transitional deal. I beg to differ. A fixed date will concentrate the minds of both British and EU Brexit negotiators, which could be of course the reason for Mrs May’s decision.

On both political grounds, and to help those implementing the required systems, fixing a date is the right thing to do in my opinion.

Meanwhile the FT has an editorial supporting the “no fixed date” revolt, and they also published several letters today opposing Brexit. All I can do is yawn at their persistence in ignoring the realities of the situation.

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

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A Quick Guide to New Issues, SMRs, Car Market and Brexit

In today’s Financial Times (11/11/2017) Neil Collins gave a quick guide to new issues which is worth repeating. This is what he said: “Do not buy into an initial public offering if most of the capital raised is going out of the business, or if it replaces existing debt (because the capital has already left). Do not buy if private equity is selling. Do not believe any forward-looking statements, because if the prospects really were that good, the vendors would wait and get a higher price. Do not buy any share that has been listed for less than a year. You will miss some bargains but you will avoid many more disappointments. Leave it to the professionals to lose other people’s money.”

Those are wise words indeed. He also made some ascerbic comments on small nuclear power stations which he says have been rebranded as “small modular reactors” (SMRs) to make them less scary. Rolls-Royce, who have produced such reactors for submarines, have touted them as a potential future business growth area for several years, but the FT’s in-depth review of the subject last week suggested that they are not likely to be put into production any time soon. Meanwhile the share price of Rolls-Royce is still below where it was in 2014.

Neil Collins also commented on the car market. You probably don’t need to be told that new car sales have slumped. The share prices of car dealers are cheap as chips and even my shares in Auto Trader are down substantially this year. Indeed one could apply Neil’s comments about IPOs to the company although it has taken a couple of years to reveal that the debt when listed is handicapping the company now. The car market is inherently cyclical which is one reason why car dealers are normally not valued highly, and they also show low barriers to entry with the car manufacturers controlling the market to a large extent and limiting the profits that dealers make. But Auto Trader is similar to Rightmove in the property market. High margins, dominant market position and a business with great network effects with the result that competitors find it difficult to muscle in on their market. I think I’ll stick with it for a while yet.

I am not convinced that we have reached “peak car” as some have suggested. There seem to be more cars on the road than ever although traffic volumes have slowed in London where most such commentators live. But that is as much about political policies that have limited road space and caused congestion, mostly irrational, than car buyers desires. Another good analysis in the FT recently was about how “green” various car types actually are. On total life emissions, some smaller petrol/diesel vehicles can beat “all-electric” cars. How is that? Because the manufacture and decommissioning of electric vehicles generate large emissions, and producing the electricity for them often does also.

With all these plugs I just gave for the FT, it is unfortunate that it coninues to publish such tosh about Brexit. Most of their writers predict the financial outcome will be calamitous. Whether that will be the outcome or not, I don’t have the space to provide a full analysis here, but most people who voted for Brexit did not consider the financial issue as conclusive. Consider an American colonialist in the year 1775, before their declaration of independance. No doubt with an economy very reliant on trade with Great Britain many people would have counselled against leaving the protection of their parent country. Did that deter them? No because they valued freedom more highly. They wanted control over their own affairs including that over taxes, and not to be ruled by a remote and undemocratic regime where they had minimal representation. That is the analogy that all the remainers should think about.

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

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