Blue Prism, GB Group, Gooch & Housego, Greggs, IDOX, Pets at Home, Victoria, Brexit and Pre-Pack Administrations

Lots of results and trading statements this morning of interest. Here’s a few brief comments on some of them in alphabetic order (I hold some of these stocks), with the share price movement on the day at 14:00 hours (at the time of writing):

Blue Prism (PRSM) – down 12.3%. This was one of the ultimate go-go technology stocks until mid-September when it started a sharp decline like many other such stocks. It has some very interesting technology to automate business processes which is why everyone wanted to buy the shares. The trading statement had some positive comments about sales and cash flow (without giving any specifics which is annoying), but it also said “The EBITDA loss is expected to be larger than current expectations due to continued investments into the Group’s growth strategy and increased sales commissions arising from the strong fourth quarter”. With rising losses already forecast and no prospect of a profit in sight, the share price predictably fell. This company has a market cap of over £1 billion when revenue in the current year might be £55 million. I have seen technology companies before (e.g. in the dot.com boom era) that managed to grow sales at a terrific rate but with rising losses. Often they never did manage to show they had a profitable business as competition eroded their USP before they got there.

GB Group (GBG) – up 5.0%. Half year results much as expected taking into account the big one-off deal in the previous half year. Like Blue Prism the share price was down by 30% since early September in the technology stock rout. The valuation is now back down to a more sensible level and with revenue growth of 9%, cash up by £14.5 million and a positive outlook statement there seems to be little to be concerned about. The company provides on-line id verification and location services which is clearly a growth area at present and accounts for the consistently high valuation of the company.

Gooch & Housego (GHH) – down 1.8%. The share price fell sharply after the market opened but that seems to be a frequent occurrence after announcements by small technology stocks as a few insiders take the opportunity to sell. But the new chairman bought a few shares today. The shares in the company are also thinly traded which means they tend to be volatile. The preliminary results were slightly better than forecast on an “adjusted” basis although the reported accounts of this company are heavily distorted by the number of exceptional items including a large write-off of goodwill, restructuring costs (including a site closure) and transaction fees on acquisitions. The share price has been declining like other technology stocks and the announcement today about the departure of the CFO, but not until summer 2019, may not help the share price. The company has moved into a net debt position due to heavy investment in property, plant and equipment and an acquisition but it’s still quite lowly geared.

Greggs (GRG) – Up 11.6%. The share price jumped after the company reported sales up 9.0% in the last eight weeks – no particular reason was supplied. Also forecasting profits to be substantially ahead of forecasts. Greggs went through a share price dip in the middle of the year probably due to poor figures after bad weather hit this “food-on-the-go” seller. But it seems junk food is still a growth market if you adapt to sell it in new locations and less on the High Street, and the weather is good – not that Greggs are not into selling healthy options now of course.

IDOX (IDOX) – up 1.6%. A year-end trading update showed declining revenues even ignoring the disposal of the loss-making Digital business which will have a negative impact on the final results. The company is in cost-cutting mood so as to increase profitability and so as to “align the cost base more directly with its re-focused business model”. There was a new Chairman appointed recently with a very relevant industry background. The business should at least report a profit this year unlike last, and the valuation is lowly due to past problems. But investors may be getting impatient for better results.

Pets at Home (PETS) – down 0.1%. Interim results reported good like-for-like growth in both the retail business and the vet practices but a restructuring of the vet business is going to result in very substantial write-downs including cash costs of £27 million. The reason the share price did not fall is probably because of the positive trading figures and a commitment to hold the dividends both for the interim and future final ones. It’s on a prospective yield of 6.5% at present. With a new management team this may be a good share for those who like “value” plays but being in the general retail sector which is a bloodbath for many such stocks does not help.

Treatt (TET) – Up 5%. This manufacturer of flavourings issued very positive final results – revenue up 11% and adjusted earnings up 10%, with positive comments about likely future results in addition. This is one of John Lee’s favourite stocks and no doubt he will have been talking about it in the last couple of days at the Mello London conference. Unfortunately I could not attend that event, which is one reason for this long blog post today.

Victoria (VCP) – up 1.6%. Interim results were generally positive and they look to be on target to make the full year estimates. But Exec Chairman Geoff Wilding probably summed it up well with this comment: “Finally, I am acutely aware that Victoria’s share price is not where I believe it should be given our current trading and prospects. As one of the largest shareholders, you can be assured that I, and the other directors and management, are focused on building the confidence of investors and delivering the financial results expected of Victoria. It is important to remember, together we own a very robust, well-managed, and growing business with over 3,000 employees who manufacture and sell some of the finest flooring in the world. The events of the last couple of months have not distracted management from delivering and for that reason I am highly confident of Victoria’s continued long-term success”. The events he refers to were the growing concerns about the level of debt in the company and the aborted proposal to convert bank debt into a bond. Floor-covering businesses can be somewhat cyclical, as results from the Australian subsidiary in these figures indicate. Investors can get nervous about high debt and what will happen when it is due for repayment. You need a lot of confidence in Geoff Wilding for him to steer through this situation to buy the shares even at the current level.

It is remarkable looking back over these results and the share price performance of the companies over the last few months that share prices seem to have been driven by emotion and trend following even more than usual. Brexit also seems to be making investors nervous and overseas investors particularly so. That explains why the dividend yield on the market overall is at record levels. Current yield is not everything of course as future growth is also important to market valuations which depends on profit growth. But apart from Brexit there are few clouds on the horizon at present.

Brexit. Mrs May is apparently trying to sell her agreed Brexit deal directly to the general public, i.e. over the heads of politicians. But with no unanimity in the Conservative party nobody sees how she can get the Withdrawal Agreement through Parliament even if she manages to persuade the DUP to support it. It’s not easy to see how even a change of leader would help unless they can tweak the Agreement in some aspects to make it acceptable to the hardliners. That might just be possible whatever the EU bureaucrats currently say but otherwise we are headed for a “hard” and abrupt exit in March. Am I worried about such a prospect? Having run a business which exported considerably into Europe before we joined the Common Market, the concerns about the required customs formalities are exaggerated. The port facilities may suffer temporary congestion but it is always remarkable how quickly businesses can adapt to differing circumstances. For those who think we should simply go for a hard Brexit and stop debating what to do there is an on-line Parliamentary petition here: https://petition.parliament.uk/petitions/229963/signatures/new . With the Brexit Withdrawal date set for March 29th 2019, I confidently predict that the matter will be settled by March 28th or soon after, probably based on Theresa May’s Agreement which actually does have many positive aspects. It’s just the few glaring stumbling blocks in the deal that are annoying the Brexiteers.

Incidentally Donald Trump was incorrect in suggesting that the current Agreement would prevent the UK signing a trade deal with the USA. See https://brexitfacts.blog.gov.uk/2018/11/27/response-to-coverage-of-the-uks-ability-to-strike-a-trade-deal-with-the-us-when-we-leave-the-eu/ . There’s just as much fake news from politicians than there is from digital media platforms these days.

Pre-Pack Administrations. There was an interesting article on the subject of Pre-Pack Administrations in the Financial Times yesterday (26/11/2018). I have covered this topic, many times in the past, always negatively. For example on the recent case of Johnston Press – see https://roliscon.blog/2018/11/19/johnston-press-trakm8-and-brexit/ where creditors were dumped and a payment into the pension scheme due in just days time was not made with the result than the Pension Protection Fund is likely to pick up the tab. That not just means pensioners in the Johnston scheme will suffer to some extent, but the costs fall on all other defined benefit schemes so you could be contributing also.

They are not the only losers though. The FT article pointed out that one of the biggest losers are HMRC as it seems some pre-packs are done to simply avoid paying tax due to them. There is now an advisory group called the “Pre-Pack Pool” that was set up to try and stop the abusive use of pre-packs, but it is reported that even when they gave a pre-pack proposal a “red card” many were put through regardless. This looks another case where self-regulation does not work and abuses are likely to continue.

That’s not to say that all administrations could result in a better return to trade creditors and the taxman than zero, but a conventional administration with proper marketing and the sale of a business as a going concern is much more likely to do so. The insolvency regime needs reform to stop pre-packs and provide better alternatives.

Have I got a bee in my bonnet about pre-packs because of suffering from one or more? No, but I know people who have even though they are relatively rare in public companies. But I just hate the duplicity and underhand shenanigans that go along with them.

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

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Two AGMs (Accesso and Foresight VCT) in one day

Yesterday I attended the Annual General Meeting of Accesso (ACSO) in Twyford at the somewhat early time of 10.00 am with the result that I got bogged down in the usual rush hour traffic on the M25. What a horrendous road system we have in London! A symptom of long term under-investment in UK road infrastructure.

Accesso provides “innovative queuing, ticketing and POS solutions” to the entertainment sector (e.g. theme parks) although they have been spreading into other application areas. The business has been growing rapidly under the leadership of Tom Burnet who moved from being CEO to Executive Chairman a while back.

Tom opened the meeting by introducing the board, including new CEO Paul Noland who is based in the USA where they now have 5 offices apparently. He also covered that morning’s trading statement which was positive and mentioned deals with Henry Ford Health System and an extension to an existing agreement with Cedar Fair Entertainment. Expectations for the year remain unchanged. Questions were then invited – I have just covered a few below.

I raised a concern about the low return on capital in the company (now less than 5% irrespective of how one cares to measure it). I suggested the reasons were large increase in administrative expenses (up 43% last year) and the cost of acquisitions. Did the board have any concerns about this? Apparently not. The reason is partly the acquisitions and the costs might come down as they rationalise operations but they are in no rush to do so.

The Ford deal was mentioned and Tom said this is one deal where the acquisition of TE2 has provided the technology to assist closure. This is what the company said about TE2 when they bought it: The Directors of accesso believe that TE2’s cloud-based solution offers market-leading personalisation capabilities and data orchestration technologies which capture, model and anticipate guest behaviour and preferences not only pre- and post-visit online, but in the physical in-venue environment.  Personalisation is achieved via many heuristics, including machine-learning-based recommendations, in order both to enhance guest experiences and to provide actionable analytics and insights to the operations, retail and marketing organisations.”. I am sure all readers understand that. Hospital systems are clearly one target for this technology.

The vote was taken on a show of hands so far as I could tell, although the announcement the next day of the votes suggested it was done on a poll which is surely wrong. But there were significant numbers of votes (over 2 million) against several directors and against share allotment resolutions. I asked why and was told it was because of a proxy advisory service recommending voting against, allegedly because of some misunderstanding. The answer to my question seemed somewhat evasive though.

In summary, shareholders are clearly happy with the progress of the company but with a prospective p/e of 41 (and no dividends), a lot of future growth is clearly in the share price. Corporate governance seems rather hit and miss.

I then drove into London to the offices of Foresight in the Shard, again journey time a lot more than it should have been due to road closures, lane removal for cycle lanes, etc, etc. Interesting to note a large hoarding on the elevated section of the A4 inviting anyone who had a complaint against RBS and the GRG operation to contact them.

Also interesting to note when I stopped for fuel at a service station on the M4 that at the desk they were serving Greggs food and coffee as well as taking payment for fuel. I know that Greggs have kiosks in some motorway service areas but this is perhaps a new initiative to expand their market. It’s rather like the small Costa coffee outlets that are in all kinds of places. I am a shareholder in Greggs but this was news to me. Obviously I need to get out more to see what is happening in the real world.

The visit to Foresight was to attend the AGM of Foresight VCT (FTV) one of my oldest holdings. Effectively I have been locked in after originally claiming capital gains roll-over relief. It’s also one of the worst of my historic Venture Capital Trust holdings in terms of overall performance over the years.

I did not need to tell them again how dire the performance of the company had been over the last 20 years because another shareholder did exactly that. But I did query whether the claimed total return last year of 6.5% given by fund manager Russell Healey in his presentation was accurate. It was claimed to be so. Perhaps performance is improving but I am not sure I want to stick around to see the outcome.

One particularly issue in this company is the performance fee payable to the manager which I wrote about in my AGM report and on the Sharesoc blog last year. You can see why the manager has such plush offices as they have surely done very nicely out of this and their other VCTs over the years while shareholders have not, and will continue to do so.

Several shareholders raised questions about the reappointment of KPMG bearing in mind that in Foresight 4 VCT the accounts were possibly defective and a dividend might have been paid illegally. But the board seemed to know nothing about this matter. KMPG got about 6 hands voting against their reappointment and the board is going to look into the matter.

The above is just a brief report on the meeting as I understand Tim Grattan may produce a longer one for ShareSoc.

To conclude, both AGMs were worth attending as I learned a few things I did not already know. For example it seems my holding in Ixaris, an unlisted fintech company where Foresight have a holding, may be worth more than I thought. But I still think their valuation is a bit optimistic.

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

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