Tag: Ideagen

After IDEAGEN and EMIS, What to Buy? VIP Perhaps?

With bids for Ideagen (IDEA) and EMIS (EMIS), two of my larger and longer-standing holdings, I need to look for new small/mid cap technology stocks in which to invest. I may be willing to hold the realised cash for a short while but with inflation at 10% it’s going to be costly to hold much cash for very long.

I note AB Dynamics (ABDP) has been tipped in both Techinvest and Small Company ShareWatch last week but I already hold that and it does not look particularly cheap to me as yet.

Techinvest reported on their New Year Tips last week. With 12 stocks recommended the average fall is 17.7% to date which just shows how out of favour small tech stocks have been of late. Only one of the 12, Ingenta, rose with all the rest falling. I won’t mention the rest because none look greatly attractive to me.

What I am looking for is companies with good intellectual property, which can provide barriers to competition, in growing market sectors, with good returns on capital, high levels of recurring revenue, positive cash flow and with rising revenue (Ingenta has a poor track record in that regard and has low return on capital).

Readers should add your suggestions for companies to look at by leaving a comment (see left hand column of this blog).

One alternative to investing in tech stocks is property companies and I read the Annual Report of Value and Indexed Property Income Trust (VIP) over the weekend. Property companies are a good hedge against inflation, particularly as VIP has a focus on holdings with index linked rent reviews. Their comments on future prospects make for interesting reading.  To quote:

“Total returns will be lower but still satisfactory over 2022 as a whole. They may be around 12% overall with returns for industrials, retail and the alternative sectors all in the early teens but offices only around 5% with capital values flat, rents under pressure and voids through the roof. Property’s real returns will be far lower, with the RPI already up 9% year on year. It will stay higher for far longer than the Bank or England or the market expects. Stagflation is here to stay for at least as long as the war in Ukraine drags on”.

That’s a good summary of my own view and investors might be happy with a 3% real return this year as world economies go into recession.

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

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Possible Offer for Ideagen

Yesterday, after the market closed, there was an announcement that Cinven are considering an offer for Ideagen (IDEA). They note the recent speculation but say there is no certainty an offer will be made and no approach has been made to the directors.

I first purchased shares in this company in 2012 and they are still a significant proportion of my portfolios so this potential offer is worthy of some comment. The share price at closing on Thursday was 253p which according to Stockopedia means that the prospective normalised p/e is 35. The market cap is 11 times sales revenue.

Even if the share price has fallen from a peak of 325p in the last year as with many technology stocks, this does not make it outstandingly cheap in my view that would warrant a very high bid premium.

But there are many good qualities in this company such as high recurring revenue although the financial picture is clouded by numerous acquisitions and disposals resulting in a lot of adjustments in the accounts. A bidder might find it attractive though simply because it operates in the high growth market sector of audit, risk and compliance software so anyone wanting to move into that sector might be willing to pay a high premium for a well managed company.

I will await the outcome but if there is a sharp jump in the share price next week I might hedge my bets and sell a few shares.

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

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Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

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

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Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

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

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Ideagen Results, Stock Speculation and Verici DX

Ideagen (IDEA), which is one of my long-standing holdings, announced their interim results this morning. There were no surprises in them but it included a note that David Hornsby, Executive Chairman, would be retiring this year. I think I first met David at a Mello event in 2012 and I purchased some shares soon after because I was impressed by how much he knew about selling software. That turned out to be a wise investment as he has grown the business many times subsequently. My shares were originally purchased at about 15p and are now 285p.

A recent conversation with David did give me the impression that it might be time for him to retire. I submitted a written question to the AGM in October, but it was not answered so I took it up later. The question related to the write off of past sales transactions as being uncollectable which were treated as an exceptional item in the accounts. David then calls me and tells me he did not consider the question reasonable (or “somewhat crass” as he later called it). He also suggested if I was not happy, I should sell my shares. This is not the kind of aggressive response I expect from a Chairman to questions that might have been “pointed” but not unreasonable. I also tried to attend the on-line results presentation this morning but for some technical reason it did not allow me to register. Not at all satisfactory. Anyway thanks for the ride David.

Stock Speculation

There is a very good article in the Financial Times today under the headline “Retail investors rush to find the next stock market unicorn” by James Bianco. It reported how investors have piled into technology stocks in recent months. A Goldman Sachs index of non-profitable tech stocks has risen by 400% since March.

It notes three things have dramatically changed retail investor perceptions of investment in small cap stocks: 1) the cutting of broker commissions to zero; 2) the adoption of fractional purchases; and 3) the increase in savings helped by Government assistance payments (which Biden promises to increase further). In effect money is being spent “chasing unicorns”.

If you read my recent review of the book “Boom and Bust” you will realise that these changes (a rise in liquidity from lower trading costs and money being pumped in) are common drivers of speculative bubbles. It is surely time to be wary.

Verici Dx

I am still on the look-out though for interesting small cap stocks. One company I thought I might understand is Verici Dx (VRCI). The company is focused on producing better control of immunosuppression in kidney transplant patients who often suffer from damaging graft rejection. That may not be obvious from current blood tests used to monitor transplants.  As a transplant patient of 20+ years standing I thought I might understand the business.

So I read the prospectus for their IPO on AIM last November. Market cap is now over £100 million but with no revenue or profits. The company is a spin-off from Renalytix AI (RENX) with a similar financial profile and market cap of £640 million but they do expect some sales in 2021.

Both companies have some interesting technology which might certainly be beneficial to kidney disease patients, but the technology is not just unproven but adoption by clinicians might be slow and there are potential competitors.

I consider the valuations way too high for such early-stage businesses even if the potential markets for the technology might be large. A frothy market for such companies puts me off investing until they actually show some revenue. Perhaps these are companies to keep an eye on rather than jump in now.

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

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Ideagen Placing

Ideagen (IDEA) announced a placing of shares yesterday at 4.50 pm, i.e. after the stock market had closed. I predicted the placing in my previous blog post on the 3rd December and it was obviously common knowledge that one was about to take place.

They also announced an offer via the Primary Bid platform at 4.53 pm yesterday which did potentially make it accessible to private shareholders. But you would have had to move very quickly because this morning at 7.00 am the results of the placing and Primary Bid offer were announced and the offer was closed.

Note that I do not consider this arrangement to be an acceptable alternative to an Open Offer for individual shareholders. It simply does not provide enough time for shareholders to consider the offer and locate the required cash.

It is also not a good idea to have knowledge of the placing becoming widespread before it is announced. I suggest that when placings are being hawked around the market, that the shares are suspended to avoid market abuse.

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

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Invinity Open Offer, Ideagen, and AJ Bell Results

I have recently taken a strong interest in those shares that are involved in electrification of the world. It’s not just the UK Prime Minister who wants to save the world from global warming and air pollution with Joe Biden likely to be much more environmentally conscious than Donald Trump. Those companies or trusts that are involved in alternative energy sources such as wind and solar, and systems to manage the fluctuations they impose on the grid, are of particular interest.

One such company is Invinity Energy Systems (IES) who announced a placing and open offer this morning. This was a company that was mentioned at a recent investor discussion group I attended and I did some research into it and bought a very few shares.

It produces vanadium flow batteries which are typically large batteries used in large energy storage projects. They are alternatives to lithium-ion batteries which have limitations and lithium is a relatively rare element that we might run out of or it might become very expensive. Vanadium is the 20th most abundant element in the earth’s crust and is mainly used in steel making at present. Vanadium flow batteries have advantages in that they can be cycled many times, have a 25-year lifetime, with no risk of thermal runaway and are cost competitive. They have been around for many years but not in high volume production mainly because they are bulky and hence only suitable for certain applications – Invinity plan to change that. It’s still a relatively early stage business but it seemed worthy of a punt as their sales prospects, of which details are provided, look promising.

Their placing is at a discount of 8% to the pre-placing market price and dilution is only 16% so I consider that acceptable and the other good aspect is that they are including an “open offer” so existing private shareholders can participate.

For those interested in the environmental sector the following shares may be of interest (Note: I hold some of these): Gore Street Energy Storage Fund (GSF), Greencoat UK Wind (UKW, Gresham House Energy Storage Fund (GRID), Impax Environmental Markets, (IEM), Octopus Renewables Infrastructure Trust (ORIT) and The Renewables Infrastructure Group (TRIG). Some of these are effectively private equity trusts that invest in storage systems, windfarms and solar power installations. Much of their revenue comes from guaranteed prices for power supply and their assets are valued on a discounted cash flow basis. This enables them to pay high dividends with some capital growth but they are currently typically trading at a high premium to net asset value as they have grown in popularity as good reliable dividend payers have disappeared from the market. Whether the assets are fairly valued is anyone’s guess and clearly it depends on what discount rate is used – never an easy thing to determine in DCF calculations.

There is a lot of enthusiasm for these companies in the market at present so readers need to decide whether it is a bandwagon that will fade or grow stronger.

Last night I attended a webinar on Ideagen (IDEA) run by ShareSoc. I have held this company since 2012 and it has been highly profitable but one aspect I am unhappy with is that they regularly do placings, typically to fund acquisitions, but never include open offers, so I have been diluted. As Chairman David Hornsby said last night, they do at least only do placings at near the market price, but I am not convinced that is a good excuse. Market cap of Ideagen is £500 million while that of Invinity is £138 million so if Invinity can include an open offer why cannot Ideagen?

From David’s other comments it seems they are planning a placing to enable them to do more acquisitions to meet their growth plans. That might be why the share price has been drifting down of late as expectations of this have become known.

AJ Bell (AJB) announced their final results this morning (they run the YouInvest platform). Revenue was up 21% and pre-tax profit was up 29% but on a forecast p/e of 48 according to Stockopedia for next year the price is clearly discounting more growth but there must be limits on how much market share they can grab.

One interesting item mentioned in the AJ Bell announcement was that the FCA has delayed implementation of the “Making Transfers Simpler” rules due to the Covid-19 epidemic. The new rules were designed to make transfers between platforms easier so as to encourage a more price-competitive platform market. Let us hope these changes are not abandoned although AJ Bell mention they feel the new rules could be improved and have made alternative suggestions.

As anyone who has moved an ISA or SIPP between platform operators knows, it takes way too long and is too expensive. The FCA’s new rules may have helped in some regards but are not a total solution.

At least AJ Bell have substantially reduced their exit charges in their new price list effective from January. They have made a number of other changes to their prices which overall do not seem unreasonable and they will remain competitive.

Platform operators have generally been edging up their prices as the interest they receive on client cash has disappeared as interest rates have shrunk while regulatory costs have increased. This has also undermined the few “free dealing” platforms that wanted to conquer the UK market like Robinhood have done in the USA with commission free trading. Operators such as Freetrade were potentially a threat to AJ Bell but with the former offering only a limited service that threat seems to be receding.

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

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ShareSoc Seminar – Ideagen, Zegona, LoopUp and Anexo

Some brief notes on the ShareSoc Seminar I attended yesterday (10/7/2019). There were four companies presenting:

Ideagen (IDEA): This company has presented many times before to ShareSoc members and those who invested after the first such event will have done very well indeed (I hold the stock). This time we had CEO Ben Dorks presenting rather than Exec Chairman David Hornsby and Ben did a good job explaining their buy and build strategy for this software company. They now have 4,700 customers including many big names and 7 out of 10 UK audit firms – not that this seems to have solved most of the poor audit quality I commented on in a previous blog post probably because box ticking does not help when “judgmental” issues and failing to challenge management seem to be the big problems there.

Organic growth might be slightly reduced this year due to transition to an SAAS model but they plan to add £30 million in revenue from acquisitions. There were some interesting comments on how they integrate acquisitions – they “ideagenise” the companies, the people and the products!

A question arose concerning the apparent low return on capital of this company (as reported by Stockopedia et al). I have looked at this in the past and the key is to look at the cash flows and return on cash invested, as David Hornsby suggested.

Zegona (ZEG). This is an investment company that is investing in European telecoms operators where they think there are opportunities for consolidation. In essence a “buy, fix and sell” strategy. Their main investment at present is in Spanish company Euskaltel.

The financial ratios may look attractive but I doubt I can keep track of European telecoms operators and their regulatory environment so this looks like a “special situation” to me that is for the experts in this area only.

LoopUp (LOOP). This company provides teleconferencing services. I hold a very few shares in this company whose value has halved after a recent profit warning related to forecast sales revenue falling. It was therefore particularly disappointing that the Co-CEO who was due to present did not appear due to sickness. Instead we have Gareth Evans from Progressive Digital Media who provide research reports on the company. He covered the business well and he mentioned they use LoopUp themselves.

Recent problems allegedly relate to the slow build-up of new “pods” (sales teams), diversion of experienced sales staff into training and “general economic factors”. But I thought the general economy was doing well so I doubt that the latter is a good explanation.

One thing not mentioned in this presentation was the announcement on the same day that SFM UK Management (a subsidiary of Soros Fund Management) had acquired over 8% of the company so someone still has faith in it.

Progressive did supply their latest analysis of the company that shows forecast adjusted eps of 6.2p for this year and 8.5p next year which makes them not expensive on a p/e basis. I think this is one to monitor to see if there is no more bad news in which case it may be an opportunity to acquire a business with many positive characteristics.

But the share price fell again this morning. But that’s just following the trend in small cap technology stocks over the last few days – Ideagen included. That’s after a good positive run in such companies in the last few weeks. Small cap stocks are suddenly out of favour it seems and that’s nothing to do with Brexit as companies such as LoopUp and Ideagen will not be affected in any way and actually might benefit from the falling pound that has resulted from nervousness over Brexit.

Anexo (ANX). This is an interesting company that I had not come across before. It provides litigation and courtesy cars to impecunious drivers who have no-fault accidents. The company maintains a stock of vehicles to provide as courtesy cars but that includes a large number of Mercedes cars so not all their customers can be impecunious.

They mainly get their business from introductions from small vehicle repair shops, and claim a success rate of 98.5% in recovering from insurers. The latter consistently ignore claims until they are taken to court and just before a court hearing.

The management spoke well in their presentation and clearly have ambitions to grow the business substantially – they claim only 2% market share at present. But they do have to fund the cost of vehicle provision and legal costs before a claim is settled.

The business may be at risk of changes to the law on what can be recouped from third parties but it certainly deserves closer examination.

Just one general comment on the event. It is disappointing that several of the powerpoint presentations were poor. Too many words on them in too small a font and with not enough graphics to make the points they are trying to get across. This seems to be a common failing in small cap company presentations. The slides should support what the speaker is saying with a few key messages, not distract from the spoken words.

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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