It’s Definitely the Silly Season

It’s that time in Summer when the sun has come out and media staff take their holidays. The stock market is just bouncing around with no clear direction of travel although large tech stocks are going up while small cap stocks remain in the doldrums.

Politics are just getting to be ridiculous while media stories have nothing better to talk about than what will Boris Johnson do next? Write for the Daily Mail is one new job apparently.

The hot weather encourages quick decisions but I think Boris would do best to ponder his future at some length. One commentator suggested Boris was trying to emulate Winston Churchill by becoming a famous writer until called back into politics when the country needed him but being in the wilderness for a while may be a good sabbatical for Boris I suggest.

As an example of how impulsive the current market is yesterday GB Group (GBG), in which I have a holding, fell about 10% but rose by 7% this morning. The fall was due to a large write down of goodwill apparently as a result of over-paying for a recent acquisition. This will be a non-cash charge in the accounts of course but it does not inspire confidence in the management while there are the usual several explanations for the poor results. Is this a temporary blip which is bound to happen when a company chooses to make a big acquisition for strategic reasons? Or is it a management failing?

Is this company faced with slower growth in what must be becoming a crowded sector for identity verification? Revenue still grew last year by 8.6% but free cash flow was down. I am beginning not to like the financial profile of this company and the share price chart over the last 5 years looks horrible but I will give them time to fix things. In the meantime, I suspect this is a sector where consolidation may soon be taking place.

Instead of spending money on holidays or putting it into the stock market I have bought a second-hand car and some other “mobility” aids. I got a surprisingly good trade-in value for my ten-year old Jaguar XF so I bought a newish Jaguar XE. Should last me as long as my life expectancy according to an optimistic doctor I saw recently.

But the vehicle is so complex you need to read a 130-page manual to figure out all the controls. As a former IT professional, I am not in the habit of reading the manual first for any new product but just like to dive in.

Roger Lawson (Twitter:  )

You can “follow” this blog by entering your email address in the box below.  You will then receive an email alerting you to new posts as they are added.

GB Group Webinar plus Spirent and Paypoint Trading

I watched the Capital Markets Event webinar yesterday of GB Group (GBG), a company whose shares I have held for a number of years. As one of the speakers said, identity verification is the key for trusted e-commerce and GB has exploited the growing demand for that.

The event lasted over 2 hours and was full of marketing hype including four presentations from customers saying how wonderful the company was. But I learned very little that was new about the company’s activities.

Future guidance was reiterated. According to Stockopedia that puts the company on a prospective p/e of 19.2 for the current financial year (year end of March) and 17.1 for next year which does not seem expensive. The half-year results recently announced showed positive growth in revenue but earnings per share down and debt risen no doubt due to the recent large Acuant acquisition.

I would have liked much more information on their competitive position, market share, integration progress etc.

This morning there was a trading statement from Spirent (SPT). This said 2022 results were in line with expectations but also included the comment “the Group’s performance is now likely to have a heavier than usual weighting to the second half of 2023”. That was enough to scare the market and the share price is down 16% at the time of writing. Investors have learned to be very wary of such comments – it usually simply means sales targets are not being met.

Yesterday did produce some better news at another of my holdings – Paypoint (PAY). They said “Group net revenue from continuing operations increased by 9.8% in the quarter to £32.5 million”. The share price perked up yesterday and it looks fundamentally not expensive but a large holder (Sanford DeLand Buffettology Fund) has been selling recently and still holds a big stake so the share price may remain under pressure.

The other good news yesterday was that inflation fell slightly to 10.5%. Will it continue to fall? Probably but at that level it’s still rapidly eroding the value of the pound in our pockets. Food price inflation is a particular problem. Killing off inflation is not going to be easy as labour shortages and strikes means there will be pressure to increase wages and hence prices for some time.

Roger Lawson (Twitter: )

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Lifting the Gloom, But Not at Halfords

I think I have been suffering from Seasonal Affective Disorder (SAD). It seems to have been raining and cloudy since before xmas and the stock market did not perk up until the last few days.

Even today one of my holdings, Halfords (HFD) issued a profit warning which caused the share price to drop by 20%. But the losses on that were offset by significant rises in a number of my other holdings including some technology stocks and property REITs.

Is this the end of the bear market? I don’t know but I doubt it. The economic prospects are still poor. However I have cautiously purchased a few small AIM company shares including GB Group (GBG), Eckoh (ECK) and RWS (RWS). These are not share tips but more a strategic move to increase my holdings in smaller companies which now seem good value when I have a large cash balance at present.

What was the problem at Halfords? Softer than expected cycling and tyre markets was one aspect but enthusiasm for cycling is bound to fall in very cold and wet weather. Another problem was difficulty in recruiting skilled labour in Autocentres.

These might both be temporary problems so I am not planning to reduce my holding which was mainly purchased before the recent ramp up in the share price after it was enthusiastically tipped in several publications. That shows the danger of following the crowd.

Roger Lawson (Twitter: )

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Strix Shares Crash, GB Group Results and Segro Bond Issue

Shares in kettle control supplier Strix Group (KETL) fell by 40% this morning after they published a trading update. It reported that the Covid lockdowns in China had adversely affected their major OEM customers. Along with negative comments about the future impacts and “continued macroeconomic and political uncertainty” you can see why investors are nervous.

I used to hold this stock but sold the shares in May and August last year – at a small loss I hasten to add – as growth prospects seemed to be weakening and the valuation seemed too high. So I am currently suffering from schadenfreude – pleasure in escaping from that disaster.

Yesterday GB Group (GBG) issued an interim statement which received some negative comments. This is what Graham Neary said on Stockopedia about it: “…. the outlook statement tells us that H2 has started in line with expectations, and there is no change to forecasts. Net debt currently sits at around £118m. This is a large and reputable business providing advanced digital intelligence services to some of the world’s biggest businesses. However, there are many different moving parts to understand, and I perceive it as a black box type of investment. It is in my “too difficult” tray at this time”.

My response to some of the other posts was “Re all the comments on GB (LON:GBG) the accounts are complex but it helps to watch the company’s presentation here: . There have clearly been negative impacts from declines in cryptocurrency and internet companies generally but I am not as negative as others about prospects.  A lot of the issues are one-offs and judging a company on one half-year’s results is not wise in my view. I am a long-term holder and am likely to remain so”.

This is clearly one company affected by all the negative reports on cryptocurrency trading and the collapse of several companies operating in that sector (FTX etc). It appears there are many fewer people opening crypto trading accounts and needing to have their identity verified – surely a good thing.  

Another company announcement of interest today was from property company Segro (SGRO). It said it is issuing a 19-year bond with an annual coupon of 5.125%. It was six times oversubscribed apparently. This shows that property companies can still raise debt easily which was one concern affecting their share prices recently but it seems they now have to pay a lot more in interest on such debt than they have been doing of late. If they need to refinance existing debt it is clearly going to be at much higher rates. Can they still make a profit if debt is that much more expensive? They surely can if inflation is running at 10% and rents they can charge are up to match.

Roger Lawson (Twitter:  )

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Abrdn UK Smaller Companies Trust and Property Companies

red apples on tree
Photo by Tom Swinnen on

I took the time to read the Annual Report of Abrdn UK Smaller Companies Trust (AUSC) today. It makes for interesting reading for those of us who invest in small companies. The performance last year (to the end of June 2022) was dire. NAV Total Return down 27% and the share price even worse. This wiped out all the gains in the previous year.

This is the main explanation given by the Manager: “The period was a challenging one for performance for the Company, particularly during the second half of the financial year, with our style being out of favour in the market as “top down” global macro factors have taken the lead over “bottom up” stock picking. Smaller companies markets have been difficult, seeing dramatic falls during 2022 after having been relatively stable in the second half of 2021”.

Their best performing holdings were Telecom Plus (TEP), Safestore (SAFE) and Alpha Financial Markets (AFM) and I hold the first two directly also. But they have both fallen back sharply recently.

This is what they say about those two which is a good exposition of their merits:

· Telecom Plus 118bps* (shares +72%): supportive end market conditions given the exit of low-priced competitors from the industry, and the strong position the nPower contract has in Utility Warehouse’s pricing offering. Sales force fully engaged again post Covid-19. Strong cash generation and dividends. An investment case study for Telecom Plus is included on page 42.

· Safestore 90bps* (+12%): solid demand in the selfstorage industry with the constant of the 3Ds (divorce, death, dislocation). Rate increases and strong utilisation have ensured consistent earnings and dividend growth”.

One of the biggest fallers in the year was GB Group – down 52% which has been the subject of a takeover bid subsequent to the year end. They exited a number of holdings and it’s worth reading the Annual Report for details of the portfolio changes.

The company has no plans to change its investment style and processes and I agree with that although the company is surely going to come under pressure if underperformance continues (the discount to NAV is currently 15.6%).

Safestore is of course a property company although it does not just rent out space so should ideally be valued in a somewhat different way. But it has participated in the rout of property company prices which continued today. Safestore is also held in some property trusts which has compounded the problem.

There is an interesting article in this weeks Investor’s Chronicle headline “The Sorry State of the London Office Market”. It explains how landlords are concealing a surplus of space and declining rents by offering rent-free periods and other incentives. However average lease lengths have been falling and are now less than 7 years which is far cry from when I was looking for office space 20 years ago. The additional flexibility is surely to be welcomed.

This perceived poor market for offices in London seems to be affecting all property companies when they frequently have a very different customer bases. It’s a typical bear market in essence – the good is sold off with the bad.

But the market seems to be reaching a point in my view when it will be worth picking up the big fallers in property and small cap companies soon. Those sectors are irrationally out of favour. For example some small cap companies have a large proportion of US$ earnings so will benefit from the falling pound in due course.

A falling pound should stop the lunacy of importing apples from New Zealand which Sainsburys just delivered to our house in the peak of the English apple season. Making imports more expensive does have some benefits!

Roger Lawson (Twitter:  )

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Comments on Possible Offer for GB Group

Announcements late yesterday and this morning indicate that GB Group (GBG) may receive a cash offer for the business from private equity firm GTCR. I have held these shares since 2011 – first purchased at 42p, closed last night at 522p. It’s one of my larger holdings and needless to say I have been very happy with my investment as it has been one of the few AIM companies that has shown consistent growth in revenue and profits.

The share price touched over 900p in 2020 when I realised some profits but I bought back some more recently at near 400p. The current share price seemed fair to me – Stockopedia reports a prospective p/e of 25 – so I am in no rush to sell unless a significant premium is paid. As it is this would be another of my bigger holdings after Ideagen and EMIS that I might lose so I would end up with a big capital gains tax bill which I can do without.

There is a shortage of quality small cap stocks in which to invest and with cash paying so little in interest I would prefer the company was not taken over at this time. Let us hope the directors of GB hold out for a good offer and reject one that does not recognise the growth prospects for the company.

Roger Lawson (Twitter:  )

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

GB Group AGM

Today (28/07/2022) I attended the Annual General Meeting of GB Group (GBG) via the Lumi online platform. This worked well as one could both submit questions and vote via the platform. It appeared there were few attendees either physically or on-line as I was the only person who submitted any questions.

I asked why not all directors were up for re-election which is now considered best practice. The answer from the Company Secretary was that this was not a requirement for AIM companies. But that’s a very poor answer.

Secondly I asked about the performance targets for the new Performance Share Plan (PSP) that replaces the previous Annual Bonus and Share Matching Plan. The answer given by Natalie Gammon was they had worked with remuneration consultants to devise the PSP scheme and that it was based 75% on EPS and 25% on TSR. I still don’t like it and consider the change a retrograde move. It awards nil-cost options if performance targets are met. I would have liked to be able to vote against the reappointment of Natalie but all I could do was vote against the PSP and Remuneration resolutions and against the Chairman.

One problem with the Lumi platform is that you can submit questions in writing but there is no easy way to follow up the answers, i.e. there is no interaction as in a physical meeting.

Other than dealing with my questions in a perfunctory manner, the meeting only consisted in the Chairman reading out the statement issued in the morning on an RNS – I will not repeat it here. The meeting was therefore over in 10 minutes. Not a very useful meeting in essence.

GB Group is focussed on digital identity checking and fraud prevention. Coincidentally today I received an email (delayed as it ended up in a spam folder) that advised me that all my personal information provided as part of a VCT subscription application had potentially been accessed illegally via a company providing a service to Albion Capital. Is it not really annoying when one takes great care not to have such information available publicly to find that it has been leaked? I hope that I do not have to change my email address yet again. But it certainly emphasises how important an identity verification service now is.

Roger Lawson (Twitter:  )

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Comments on GB Group and Voting Suggestions

GB Group (GBG) is a provider of digital location, identity verification and fraud prevention systems. Because of the need to identify people quickly and at low cost in the digital world, it has been a great success in the last few years and has become one of the largest AIM companies. Revenue has grown from £87m to £242m in the last 5 years although profits have been less consistent. The share price peaked at about 950p last September but is now down to 390p at the time of writing, i.e. a 59% fall.

Having purchased the shares in 2011-13 I am still showing a profit but it’s rapidly disappearing although I did sell some at higher levels. This is a typical example of a small cap technology stock at present. Nobody is buying while there are some sellers even though the prospective normalised p/e is only 18 which for a profitable growth stock seems very low.

Here’s a comment from Techinvest newsletter last week on GB Group: “Good cash generation and a strong balance sheet were factors that enabled GB Group to significantly strengthen its position in the key US market through the acquisition of Acuant last November”. They tipped it as a “buy”. Perhaps there is some risk associated with the deal and there were a large number of shares issued as part of the transaction, possibly to weak holders. Readers will need to judge for themselves whether this is now cheap enough to consider buying but I think it’s worth making some comments on the voting for the Annual General Meeting on the 28th July.

This will be a hybrid Meeting using the LUMI platform for those who don’t wish to travel to Chester. That usually works well.

But not all directors are up for re-election which is best practice for all companies although not legally required. I wished to vote against the reappointment of the Remuneration Committee Chair but cannot do so. The Chairman lost my vote instead although he is being replaced in September anyway.

My main concern is the replacement of the bonus arrangements for executive directors with a new Performance Share Plan (PSP) that replaces an Annual Bonus and Share Matching Plan. The new PSP is claimed to be more aligned with majority market practice. But in essence it will permit the award of nil-cost options with performance conditions. What are the performance conditions? They do not say. But there will be a fourth KPI added to maintain a focus on ESG improvements and communication.

Without going into details this looks like another complex remuneration scheme likely to increase total director pay (the CEO earned £1.3 million last year which I consider quite enough for a middling size business (profit last year was only £15 million so the directors total pay of £3.4 million was a significant chunk of the profits).

When remuneration schemes are changed it’s usually because the directors do not think they are paid enough or the existing scheme does not produce the desired results.

I am therefore voting against resolutions 7, 8 and 9 on the agenda as well as 3, 10 and 15 (share buy-backs for this company would be very unlikely to be appropriate). I am voting against Ernst & Young as auditors after the laughable $100mn US settlement over ethics exam cheating. See FT report here: . It seems auditors cannot even be trusted not to cheat in exams.

I suggest other shareholders vote the same way.

Roger Lawson (Twitter:  )

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Two High Fliers Back Down to Earth

This week saw a couple of high-flying digital automation suppliers move back into more realistic pricing levels. On Tuesday DotDigital (DOTD) announced their preliminary results for the year to June. The share price fell sharply on the day and is now down over 25%, possibly prompted by negative comments on Stockopedia.

I won’t go into detail on the issues because this blog post would otherwise be a very long one. But I did attend the results presentation on the Investor Meet Company platform this morning when some of my questions, and others, were covered.

One question raised was about the reporting of “discontinued” revenue from the Comapi business. It was stated that this was definitely closed down completely by June this year so won’t appear in future. There was also concern that SMS business was impacting revenue and profits but it was stated that it was not cannibalising email revenue. But SMS business is at lower margins and there was clearly a spike last year in SMS business (if you are signed up for NHS services you will have realised that they are now tending to use that communication channel which I find quite annoying).

There was a good review of the competitive landscape and it seems there is good growth coming via partners with “connectors” such as Magento, Shopify, Big Commerce and MS Dynamics.

In summary my comment would be that I think this is still a fundamentally sound business which can grow some more, but I would prefer to see the accounts presented in a simpler way. However the share price had grown very rapidly in the last year and in my view was overvaluing the business. It’s now at a more realistic level.

The other company whose share price has taken a big knock is GB Group (GBG). Yesterday they announced a share placing at a price of 725p to raise money to enable them to acquire a similar US business. It looks to be a sensible acquisition. But the share price was at a discount of 17% on the market price and involves substantial dilution of existing shareholders.

Again I would suggest that this has reset the share price to a more realistic level. Retail investors may be able to participate via the Primary Bid platform.  

As I hold shares in both DotDigital and GB Group, these events have not done wonders for my portfolio valuations but I had been reducing my holding in these companies (top slicing) in recent months as the valuations did seem to be departing from reality. They are now back down to earth.

The Covid epidemic has certainly driven more digitisation of processes which both companies have benefited from but the valuations of such businesses have become strained in my view. Can the growth continue at the same rate in the next couple of years? Perhaps so but that is not certain.

Readers should of course form their own view on the valuations of these businesses and not rely on my comments. But they are both key players in the automation of marketing and financial services so are well placed for the future.

Roger Lawson (Twitter:  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

Market Musings

The stock market seems to be positively benign at present, if not almost somnambulant. While certain sections of the economy have gone to hell in a handcart, the enthusiasm for technology stocks has not abated. My very diversified portfolio is up today at the time of writing by 0.4% helped by good news from Dotdigital (DOTD) today and a sudden enthusiasm for GB Group (GBG). Optimism about a more general recovery in the economy seems to be still prevalent.

It’s probably a good time to consider overall market trends with a view to adjusting portfolios for the future. It is very clear for example that the UK at least, if not the world, is heading for a “net zero” world, i.e. a world where we are not emitting any carbon which implies a very high reliance on electricity generated from wind, solar and hydroelectric sources.

Whether that can be achieved in reality, and in my lifetime, remains to be seen. Whether it is even rational, or economically justified, is also questionable. But now that the religion of zero carbon has caught on, I do not think it is wise for any individual investor to buck the trend. As with any investment fashion it’s best to jump on the bandwagon and as early as possible. So I hold no oil companies and few interests in coal miners, except where they are part of diversified mining companies who are also mining copper (essential for the new electrification) and steel (not easily replaced). But I have recently invested in “renewable infrastructure” investment companies of which there are several, and in funds that provide battery support and load smoothing systems. Wind farms and solar panels tend to generate intermittent electricity so there is a big demand for emergency sources of power.

There was a very good article by Bearbull in last weeks Investors Chronicle headlined “The Net Zero Perversion” on this subject. He commences by saying “It is surely the new paradigm – that economic recovery from the damage caused by the response to Covid-19 can only be achieved by a fundamental shift towards a zero-emissions future. This is stated as fact – that reducing greenhouse gas emissions to ‘net zero’ by 2035 will be the powerhouse of economic growth – when, of course, it’s just a contention; much like the complementary one that investing in companies that are wonderfully compliant in meeting their economic, social and governance (ESG) commitments will bring excess investment returns”.

He goes on to say, after some other comments that must have enraged the uneducated environmental enthusiasts: “Yet there is plenty of evidence that the pursuit of net zero is brimming with unintended consequences, which is what you might expect from a movement driven by a weird mixture of idealism and greed”. He points out that rewiring our homes and expanding the grid to cope with the new electricity demand might cost £450 billion, i.e. £17,000 per household. Similarly the banning of the sale of new internal combustion powered vehicles from 2035 just causes the pollution generated from the manufacture of electric vehicle power systems and associated mining activities to happen elsewhere in the world. But overall emissions might not fall.

This fog of irrationality and attacks on personal mobility via vehicles using the Covid-19 epidemic as an excuse is now happening in several London boroughs, encouraged by central Government “guidance” and funding. Roads are being closed. In the Borough of Lewisham, adjacent to where I live, road closures have caused increased traffic congestion, more air pollution and gridlock on a regular basis. There is enormous opposition as the elderly and disabled rely on vehicles to a great degree while in the last 75 years we have become totally dependent on vehicles for the provision of services (latterly for our internet deliveries). Councillors in Lewisham think they are saving the world from global warming and air pollution that is dangerous to health when they won’t have any impact on overall CO2 emissions and there is scant evidence of any danger to health – people are living longer and there is no correlation between local borough air pollution and longevity in London. Air pollution from transport has been rapidly falling while other sources (many natural ones) are ignored. Lewisham and other boroughs have partially backed down after a popular revolt but local councillors still believe in their dogma. There is a Parliamentary E-Petition on this subject which is worth signing for those who think that the policy is misguided:

The Bearbull article concludes with this comment which matches my opinion: “All of which means investors should preserve their scepticism. But they should also recall their purpose in investing – to make money, not to go to war with the climate change movement, however ridiculous they may see some of its follies. Sure, as consumers they should see much of the pursuit of net zero for what it is – another charge on their net income. But as investors they should see it as an opportunity to join the momentum and, at the very least, to park some of their capital in a fashionable part of the market”.

When it comes to investment, markets can be irrational for a very long time. That is surely the situation we are currently seeing with stock markets kept buoyant by a flood of cheap money and there being nowhere else to stash it. With traditional industries and businesses in decline, most of the money is going into technology growth stocks or internet shopping driven businesses such as warehousing. That trend surely cannot continue forever. But in the meantime, following market trends is my approach as ever.

Roger Lawson (Twitter:  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.