Bad News from Crawshaw and ULS, Ideagen AGM, Victoria Doubts and Other News

The real bad news today is that butchers Crawshaw (CRAW) is going into administration, “in order to protect both shareholders and creditors”. They hope the business will be sold as a going concern but it is unusual for shareholders to end up with anything in such circumstances. The shares have been suspended and the last share price was 2p. It actually achieved a share price of 3425p at its peak in 2005. Revenue have been rising of late but losses have been also.

I never invested in the company although I do recall seeing a presentation by the company when it was the hottest stock in the market but I considered it to be a business operating in a market with no barriers to entry and likely to suffer from competition once the supermarkets had woken up to what it was doing. That’s apart from the difficulties all high street retailers have been facing of late. Well that’s one disaster I avoided at least.

Another AIM stock I do hold is ULS Technology (ULS) who operate a conveyance service platform. A trading statement this morning for the first half year said the revenue is expected to be up 3% and underlying profit up 5%, despite a fall of 4% in the number of housing transactions across the UK market. But the sting in the tail was the mention of a slowdown in mortgage approvals which “may well be short lived but is likely to have some impact on the Group’s second half results”. The share price promptly dropped 20% this morning. It’s that kind of market at present – any negative comments promptly cause investors to dump the shares in a thin market.

One piece of good news for the housing market which I failed to mention in my comments on the budget was that the “Help to Buy” scheme is not being curtailed as some expected, but is extended for at least another two years to 2023.

Yesterday I attended the Annual General Meeting of Ideagen (IDEA), another company I hold. It was unexciting with only 4 ordinary shareholders in attendance so I won’t cover it in detail. But boring is certainly good these days.

It was the first AGM chaired by David Hornsby who is now Executive Chairman. One pertinent question from a shareholder was “what keeps the CEO awake at night?”. It transpired that the pound/dollar exchange rate was one of them simply because a lot of their revenue is in dollars (their US market seems to be a high growth area also). I suggested they might want a “hard Brexit” when the pound would collapse and improve their profits greatly. But the board somewhat ducked that issue. Note that this business is moving to a SAAS revenue model from up-front licence fees which may reduce organic growth slightly but increase revenue visibility. The point to bear in mind here is that even on a hard Brexit it is unlikely that trade tariffs would impact software income because there are no “goods” exported on a SAAS model.

Another question asked was about financing new acquisitions which the company does regularly. These are generally purchased for cash, and share placings are done to raise the funds required. Debt target revenue is only one times EBITDA so debt tends to be avoided.

It is worth comparing that with Victoria (VCP) a manufacturer of floor coverings who issued a trading statement on the 29th October which did not impress me or anyone else it seems. Paul Scott did a devasting critique on Stockopedia of the announcement. In summary he questioned the mention of a new debt being raised, although it was said that this would be used to repay existing debt, when there were few other details given. He also questioned the reference to reduction in margins to maintain revenue growth. The share price promptly headed south.

The company issued another RNS this morning in response to the negative speculation to reassure investors about the banking relationships, covenants and credit rating.

I have held a few shares in Victoria since the board bust-up a few years back and attended their last AGM in September when I wrote a report on it here: https://roliscon.blog/2018/09/11/brexit-abcam-victoria-and-the-beaufort-case/ . The share price was already falling due to shorters activities and my report mentioned the high level of debt. The companies target for debt was stated to be “no more than 2.5 to 3 times” at the AGM which is clearly very different to Ideagen’s!

I did have confidence in Geoff Wilding, Executive Chairman, to sort out the original mess in Victoria but the excessive use of debt and a very opaque announcement on the 29th has caused a lot of folks to lose confidence in the company and his leadership. Let us hope he gets through these difficulties. But in the current state of the stock market, the concerns raised are good enough to spook investors. It’s yet another previously high-flying company that has fallen back to earth.

One more company in which I have a miniscule number of shares is Restaurant Group (RTN) which I bought back in 2016 as a value/recovery play. That was a mistake as it’s really gone nowhere since with continuing declines in like-for-like sales. At least I never bought many. Yesterday the company announced the acquisition of the Wagamama restaurant chain, to be financed by a rights issue. The market reacted negatively and the share price fell.

I did sample some of the restaurants in the RTN portfolio but I don’t recall eating in Wagamama’s so it’s difficult to comment on the wisdom of this move. All “casual dining” chains are having difficulties of late as the market changes, although Wagamama is suggested to have more growth potential. The dividend will be rebased and more debt taken on though. With those reservations, the price does not look excessive. However, while they are still trying to get the original business back to strength does it really make much sense to make an acquisition of another chain operating in the same market? Will it not stretch management further? I will await more details but I suspect I may not take up the rights in this case.

One other item of news that slipped through in the budget announcements was the fact that in future Index-linked Saving Certificates from NS&I will be indexed by Consumer Price Index (CPI) rather than the Retail Price Index (RPI). This is likely to reduce the interest paid on them. But it will only affect certificates that come up for renewal as no new issues have been made of late. These certificates are becoming less and less attractive now that deposit interest rates are rising so investors in them should be careful when renewing to consider whether they are still a good buy. I suspect the Chancellor is relying too much on folks inertia.

At least even with the bad news, my portfolio is up significantly today. Is the market about to bounce back? I think it depends on consistent price rises in the USA before the UK market picks up, or a good Brexit deal being announced.

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

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Lloyds Case Impressions, Ideagen AGM and Return on Capital

Yesterday I attended the Annual General Meeting of Ideagen (IDEA) at 12.00 noon in the City of London – see below – and afterwards spent an hour in the High Court listening to one of the witnesses being cross-examined in the Lloyds Banking Group case. What follows is just an impression of the scene because the whole case is running for months so in no way can this be considered a comprehensive report. I have covered some more details of the case in previous articles, but to remind you the litigants are suing Lloyds and the former directors of the company over the takeover of HBOS which they declare was contrary to their interests as shareholders in Lloyds TSB. Lloyds deny liability.

The case is being heard in the Rolls Building in New Fetter Lane – a modern building very different to the ultra Victorian main Courts of Justice building in the Strand. See this link for a video tour of the building: https://www.judiciary.gov.uk/you-and-the-judiciary/going-to-court/high-court/the-rolls-building/virtual-tour/

The witness being cross-examined on the day was Tim Tookey, the former Finance Director of Lloyds TSB. Richard Hill QC was undertaking the task for the litigants under the eyes of a single judge, Mr Justice Norris (sans wig). It was a pretty impressive scene with at least 6 barristers in wigs and gowns plus about another 10 supporting legal staff. Why do barristers still wear wigs? To quote from the web: “The courts didn’t officially add wigs to the legal dress code until the 18th century when they became culturally chic. … They continue to wear them because nobody has ever told them to stop”.

It was a pretty impressive scene, somewhat lost on the few members of the public present – half a dozen litigants and members of the press. But the court was digitally up to date with every desk holding a screen on which the written evidence was displayed as it was invoked. However the witness being cross examined still referred to a paper copy, extracted from 150 large A4 binders stored in shelves on the left hand side of the court – filling almost the whole wall.

Mr Tookey gave his responses to questions firmly and without emotion. A confident witness giving clear answers. He was questioned about the events leading up to the announcement of the acquisition of HBOS and over how much capital Lloyds anticipated would be required to ensure the deal was “bullet-proof” (i.e. not creating unacceptable risks if the economic circumstances worsened). He was questioned about the extent the risks had been considered and whether enough due diligence on HBOS had been done before the decision was taken to proceed. Apparently it came down to a decision at 4.00 am on a Monday morning to proceed. They we being forced to decide to proceed or not by the Government before the markets opened on Monday. But he said that he thought all the risks had been considered and the board was supportive of the deal because of the strategic advantages of the HBOS takeover in the longer term. Recapitalisation involving the Government was necessary because there was no way it was possible to raise even £3 billion (underwritten) by the Monday, which was the minimum requirement. Government involvement “de-risked” the deal. The case continues….. for another dozen weeks.

One can see from the above exactly why the costs of such cases are so enormous.

Ideagen AGM

Ideagen (IDEA) is a software company in the Governance, Risk and Compliance sector. I have held the shares for some years when it has grown revenue and profits considerably, both from acquisitions and organic growth. They have a strong emphasis on the importance of recurring revenue. They are presenting at the ShareSoc Seminar on the 8th November, although that event is fully booked I understand.

There were fewer sharesholders at the Ideagen AGM than members of the public at the Lloyds hearing, but that’s not exceptional for small companies. But it was still a useful event – a brief report follows.

One question I raised was about return on capital. Now you might think this was prompted by an interesting article on that subject by Leon Boros in the latest ShareSoc Newsletter, but I did not get around to reading that until later in the day so it’s somewhat of a coincidence. Leon compared the return on capital at Bioventix (one of his favourite stocks which he likes to talk about regularly), and YouGov. He pointed out that not only are measures such as Return on Equity (ROE), Return on Capital Employed (ROCE) and Return on Assets (ROA) better at Bioventix calculated on the headline numbers, but that those for YouGov are somewhat doubtful because they capitalise and amortise the cost of recruitment of their survey panels. Plus they capitalise and amortise software development costs. But they then produce adjusted earnings figures that excluded the amortisation of both those costs, effectively pretending they are not real costs. He has a point.

Now I always look at returns on capital when I am investing in new companies because I consider it one of the most important measures of a company’s performance – as I told the directors of Ideagen. Hence at the Ideagen AGM I asked a question on that subject. On page 18 of their Annual Report they give the “Key Performance Indicators”, 9 of them, that the directors use to monitor the performance of the company. They all look good, but none of them measure return on capital. Should they not include a return on capital measure?

In reality the headline figures for ROE, ROCE and ROA reported by Stockopedia for Ideagen are all less than 2%, and that ignores even the large number of shares under option that the company has that would dilute the earnings. The reason for this is partly the fact that the profit measures used are “unadjusted” and as the company has very substantial amortisation of goodwill from past acquisations, and £1.2 million of share-based payment charges, these distort the numbers. The CEO David Hornsby, responded with “what measure would I like to use?” to which I responded that I did not mind so long as it was consistent from year-to-year. Companies often publish such figures, which are frequently based on “adjusted” profits. I also suggested cash return on assets might be a good measure, something I also look at.

The company actually generated Net Cash From Operating Activities of £8.3m last year which on Net Assets of £30m at the start of the year is very respectable, although technically one should probably write back the cost of past acquisitions that have been written off. In addition some of the cash generated was spent on contingent consideration on past acquistions and on “development costs” which they class as “investing activities”. This demonstrates that for some businesses, looking at headline return on capital figures or those reported by financial web sites can be misleading. One needs to look at the detail to get a real understanding on what is going on in such a business.

A short debate on the issue followed. Otherwise after a couple of other questions, the CEO mentioned the half year for the company ends today, and shareholders should be very pleased with the results.

In summary, a short AGM meeting, but a useful one. And the ShareSoc newsletter is well worth reading – it even includes some articles from me.

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

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