Intercede AGM and Tech Stock Valuations

Yesterday I attended the Annual General Meeting of Intercede Group Plc (IGP) at their offices in Lutterworth. I have held a very few shares in this company since 2010 in the hope that it would be able to turn its identity software solution into a profitable and growing business. Although they have some great major account customers, revenue has been static at around £10 million for the last 5 years and in 2017/18 they reported substantial losses. It always looked to me a typical example of a common failure in technology driven companies – great technology but inability to sell it. There was a revolution in the management in 2018 though with founder Richard Parris who was Executive Chairman departing in March 2018. Last year (year end March 2019), revenue was £10.1 million, a slight increase, and a small profit was reported after substantial reductions in costs.

New Chairman Chuck Pol introduced the board including the new CEO Klaas van der Leest and they have also appointed a new non-executive director, Rob Chandok. The other two non-executive directors have been there since 2002 and 2006 which is too long but they were not up for re-election.

There was no trading statement or other announcement on the day, so we went straight into questions. I asked about the “distractions” referred to on page 9 of the Annual Report and Klaas covered the management changes. It seems quite a number of staff left and new hires were made including sales staff, pre-sales and new developers, but the situation was now stable.

I asked about the status on development of channel partnerships which is what they are now clearly focusing on rather than direct sales. In response it was stated that 2 new channel managers had been appointed – one for the USA and one for the rest of the world. But it takes time to develop channel sales. The previous 4 offices have been cut to 2 in Lutterworth. Is it difficult to recruit staff bearing in mind the Lutterworth location? Not an issue it seems as remote working is now practical – Klaas lives in Surrey for example and visits the office a few days per week.

I also asked about the comment about development of a more standard variant of MyID (see page 6 of the Annual Report). Klaas said when he arrived the product had not been standardised – they were more selling a toolkit with “lots of arms and legs” so significant implementation expertise and effort was required. Comment: this explains why sales were not easy in the past because from my experience in the software industry this adds to costs substantially and slows sales.

I later asked whether the development effort put into before the management changes were made was of any use, but it seems that has been “mothballed” and they are concentrating on sales of MyID.

Another shareholder asked about the £1.45 million of receivables that are “past due” (see page 40) – have they been received? The answer from the CFO was in the main yes. The reason for the long payment times were because they are involved in large projects, often acting as sub-contractor. But he was somewhat evasive about whether they were now all collected and refused to disclose the current outstanding position. But he did say that with the type of clients they have, collection is not usually a problem.

I asked about the convertible loan note they have which is quite expensive – £4.7 million outstanding at 8% p.a. interest and repayable by December 2021. Could they be redeemed early? Answer was no but the board is considering that issue. As one shareholder commented, all they need to do is get the share price above the conversion price to remove the problem, although there would be some dilution as a result of course.

I chatted to Klaas after the formal meeting closed, and it’s good to have the company led by an experienced sales person. The changes he has been making look altogether positive but it seems to be taking some time to produce better results – but that might simply be the long lead times on major account sales and the time it takes to develop the partnerships. But it would have been preferable to have a trading statement of some kind at this meeting. I think we will have to wait and see on this company.

Technology Stock Valuations – Bango and Boku

Intercede is an example of a company which has minimal profits at present so valuing it is not easy. Based on broker’s forecasts of some increase in revenue this year it’s valued by the market at 1.4 times revenue approximately. That simply reflects the slow growth and the convertible debt issue. The large number of shares still held by Richard Parris may not help either. If the sales and profits can be ramped up, that may appear cheap in due course.

It’s interesting to compare this company with other technology stocks which have announced figures recently, which I also hold (none in a big way as they are all somewhat immature businesses to my mind with no proven profit or positive cash flow record).

Bango (BGO) issued interim results on the 17th September. It operates in the mobile phone payment and identity verification markets. It has forecast revenue for this year about the same as Intercede’s at £12 million and may break even after substantial historic losses. Its valuation is over £100 million, i.e. about 10 times revenue. The big difference from Intercede is that it is seen as a high growth business in terms of revenue! Another similar business is Boku (BOKU) which is also rapidly growing but historically loss making. They issued an interim statement on the 10th September. Revenue was up 39% and they appear to be on target to meet full year forecasts of revenue of $52 million. Their market cap valuation is £280 million at about 7 times revenue. Both companies have volatile share prices and tend to talk about EDITDA as profits are ephemeral.

You can see how important revenue growth is to technology stocks and why Intercede’s valuation is so low at present. If growth disappears as it did at Intercede then valuations quickly fall. You can see why it is necessary to look at the business dynamics, the management and the future prospects for the company to be able to understand the valuations.

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

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All Change at Superdry and Intercede – Perhaps

Readers are probably aware that founder Julian Dunkerton managed to win the votes yesterday at the EGM that he requisitioned at Superdry (SDRY). The votes to appoint him and Peter Williams were won by the narrowest of margins despite proxy advisors such as ISS recommending opposition. My previous comments on events at Superdry are here: https://roliscon.blog/2019/03/12/superdry-does-it-need-a-revolution/ . It did not seem clear cut to me how shareholders should vote, but I did suggest there was a need for change.

There will certainly be that because the incumbent directors (including the CEO and CFO although that does not necessarily mean they have quit their executive positions) have all resigned from the board although some of the non-executive directors are serving out their notice. Dunkerton has been appointed interim CEO.

Perhaps the most apposite comment on the outcome was by Paul Scott in his Stockopedia blog. He said “To my mind, the suits have made a mess of running this company, so bringing back the founder seems eminently sensible to me”. However, I suggest there is still some uncertainty as to whether the Superdry fashion brand can be revived – perhaps the world has moved on and it has gone out of fashion. But Dunkerton should be able to fix some of the operational problems at least. Retailing is still a difficult sector at present so I won’t personally be rushing in to buy the stock.

Another momentous change took place at Intercede (IGP) yesterday. This company provides secure digital identities and has some very interesting technology. But for many years it has failed to turn that into profits and revenue has been also remained flat. But yesterday the company announced a large US Government order and hence they expect a “return to profitability”. This certainly surprised the market as another loss was forecast. The share price jumped 60% yesterday after it had been in long decline for several years.

I have held a small holding in the stock since 2010 (very small prior to yesterday) but I was never convinced that the company knew how to sell its technology – a common failing in UK IT companies. The former CEO and founder Richard Parris who was there for 26 years was surely part of the problem but he departed in 2018. Has the company actually learned how to make money under the new management? Perhaps, but one deal does not totally convince. One swallow does not make a spring as the old saying goes.

Even after the jump yesterday, the market cap is still not much more than one times revenue which is a lowly valuation for such a company. But investors need to be aware that the company has £4.6 million of convertible loan notes which would substantially dilute shareholders if they were converted. A company to keep an eye on I suggest, to see if it has really changed its spots.

Another surprising change yesterday was the abrupt departure of Richard Kellett-Clarke from the boards of both DotDigital (DOTD) and IDOX (IDOX) “due to private matters in his other directorships” according to the announcement from DOTD. DOTD is looking for a new Chairman. I wonder what that is about? We may find out in due course.

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

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Beaufort Administration, Intercede and the Mello Conference

Yesterday I attended the first day of the 2-day Mello investor conference in Derby. There were lots of good presentations and some interesting companies to talk to. One hot topic of conversation was the collapse of Beaufort which was forced into administration (see two previous blog posts on the topic for details). There are apparently many people affected by it. There are a number of major issues that have arisen here:

  • The administrators (PWC) have suggested it might cost as much as £100 million to wind up the company and return assets to clients which seems an enormously large figure when the assets held are worth about £550 million. The costs will be taken out of the clients’ funds and as a result there will hundreds of larger clients who will suffer substantial loses (those with assets of less than £50,000 may be able to claim against the Financial Services Compensation Scheme – FSCS – but larger investors will take a hair-cut).
  • The assets (mainly shares) were apparently held in nominee accounts. Surely these were “segregated” accounts, i.e. not available to be treated as assets of the failed business? Most brokers who use nominee accounts will have wording in their contracts with their clients that cover this with often fine words that conceal the underlying reality that if there is any “shortfall” then the clients may be liable. But regardless, PWC are saying that because this is a “Special Administration” they have the right to take their fees out of the client assets/funds.
  • There will be a Creditors’ Meeting as required by all administrations but will the creditors be able to challenge the arrangements put in place by PWC and the costs being incurred? From past experience of such events I think they may find it very difficult. Administrators are a law unto themselves. It is alleged that there were offers from other brokers to take over the assets of Beaufort and their clients very quickly and at much lower cost, but that offer has been ignored. Investors need to ask why.
  • Note that the Special Administration regime was introduced during the financial crisis to enable the quick resolution of problems in financial institutions such as banks. This is where it is necessary to take prompt action to enable a company to continue trading and the clients not to be prejudiced. But in this case it seems we are back to the previous state where client assets are frozen for a lengthy period of time while the administrator runs up large bills at the clients expense.
  • I said only recently that the insolvency regime needs reform after the almost instant collapse of both Conviviality and Carillion. There may not have been a major shortfall in Beaufort and it might have been able to continue trading. But the current Administration rules just provide large, and typically unchallengeable, fees for the administrators who give the impression of having little interest in minimising costs. The result is the prejudice of investors in the case of a broker’s collapse, or of shareholders in the collapse of public companies.
  • Can I remind readers that part of the problem is the widespread use of nominee accounts by stockbrokers. I, ShareSoc and UKSA have long campaigned for reforms to reduce their use and give shareholders clear title and ownership after they purchase shares. In the meantime there are two things you can do: a) Avoid using nominee accounts if at all possible (i.e. use certificated trading or personal crest accounts so your name is on the share register); b) if you have to use a nominee account, make sure you are clear on the financial stability of the broker and that you trust the management. It would not have taken a genius to realise that some of the trading practices of Beaufort might raise some doubts about their stability and reputation.

I do suggest that investors who are affected by the collapse of Beaufort get together and develop a united front to resolve not just the problems raised by this particular case, but the wider legal issues. Forceful political representation is surely required.

See this web site for more information from PWC: https://www.pwc.co.uk/services/business-recovery/administrations/beaufort/beaufort-faqs.html

An amusing encounter at the Mello event was with Richard Parris, the former “Executive Chairman” of AIM listed Intercede (IGP). He was talking in a session entitled “The importance of the right board of directors” and he conceded that “separation of roles” is important, i.e. presumably he would do it differently given the chance. Richard, the founder of the company, has recently stepped down to a non-executive role, they have a new Chairman, and even Richard’s wife who was operations manager has departed. While I was in the session, there was even an RNS announcement saying the “Chief Sales Officer” had resigned (I am still monitoring the company despite having sold all but a nominal holding years back).

Richard pointed out to me that the pressure put on the company over his LTIP package back in 2012 meant that his share options are worthless as the performance targets put in place were not achieved. Well at least he is still talking to me and has joined ShareSoc as a Member apparently. Sometimes time can heal past disputes, and as I said, shareholder activism does work!

But it is regrettable that RBS are recommending voting against a resolution proposing a shareholder committee at their upcoming AGM. Perhaps not surprising, but a shareholder committee could avoid confrontation over such issues as remuneration and would be a better solution that confrontation.

I hope the Mello event becomes a regular feature of the investment calendar.

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

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All Change at Intercede, and Drug Development Costs

An interesting announcement this morning was the news that founder Richard Parris is losing his role as Executive Chairman at Intercede Group (IGP). He is stepping down to the role of Non-Executive Director and they are looking for a new CEO.

The company operates in the digital identity area. I once held quite a few shares in it but became disillusioned with the leadership some years ago and the company’s remuneration arrangements, so I now only have a nominal holding. For a company with interesting technology in a hot sector, it has a disappointing financial track record. Slow growth and lumpy sales, and consistent losses in recent years.

It is surely good news that Mr Parris is stepping down, although the share price has fallen today at the time of writing. He and his wife do hold quite a significant proportion of the shares. Let us hope the new management is able to make this company a world beater after all – it seems to have suffered the problem of many UK technology companies in failing to develop a sales and marketing strategy to turn good technology into market leadership.

I spent an interesting day on Wednesday meeting with Professor Jonathan Barratt at Leicester University. He is researching IgA Nephropathy, a disease that can lead to kidney damage and ultimately the need for a kidney transplant (as in my case). It included a tour of the labs and attending a lecture he gave on the subject which was most interesting. It’s a worthy cause if any investors have surplus cash after the recent stock market rout as Prof. Barratt and his team are making significant progress. Remember there are tax benefits from charitable donations.

One of the things Prof. Barratt mentioned was the enormous cost of drug development. According to the Tufts Centre, they suggested the cost was $2.6 billion in 2016 to get a drug to the FDA approved stage. One can see why relatively rare diseases do not get a lot of interest from drug companies, particularly those like IgA Nephropathy where the progression of the disease can be so slow that clinical trials take years to complete. I also now know exactly why I don’t invest in drug development companies, where the chance of success and obtaining a good financial return is so low.

But one aspect that Prof Barratt is working on is the possibility of improved diagnosis by using blood tests based on antibodies to identify the disease at an early stage which might assist with prevention. This is an area where I am invested though with holdings in Abcam (ABC) and Bioventix (BVCP). The latter produced some unexpectedly good interim results due to one of their customers identifying some royalties due that had not previously been reported. But even without that the figures were good.

One important future revenue stream for Bioventix is a troponin test which is a marker for heart attacks. This might speed up the diagnosis of chest pain. That is important if you arrive in A&E with severe chest pain as there can be many other causes although doctors often focus on that to the exclusion of problems such as gall stones or gall bladder infections which I was once told were more common. Delayed or misdiagnosis is obviously a major issue here that the new test might prevent.

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

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Johnston Press, Blancco Technology and Intercede

Companies in difficulties always make for interesting reading, and here’s a brace of them.

Firstly Johnston Press (JPR), a publisher of newspapers. That includes many local ones but also the Yorkshire Post and the Scotsman who cover national business news – the latter is particularly good on the travails of those big banks registered in Scotland such as RBS and Lloyds. The company had more operating losses than revenue last year, debt is way too high and dividends have been non-existant for years. Local newspapers have been shrinking as advertising revenue has moved elsewhere and traditional national newspapers have also been battered by the availability of free news on the internet. It is clearly operating in a sector in sharp decline.

Now it has become the subject of an attempted revolution by its largest shareholder, Norwegian Christen Ager-Hanssen who holds 20% of the equity. He wishes to replace some, if not all, the directors and called an EGM to do so. Removal of the Chairman of Johnston is proposed and the appointment of Alex Salmond, former First Minister in Scotland, and experienced newspaper executive Steve Auckland.

Apparently they feel confident of winning a vote, and would have been even more aggressive in removing directors if the company did not have a “poison pill”. One of their issued bonds includes a provision that if new directors form a majority of the board but were not appointed by the existing directors the debt could become immediately repayable. The company would have little hope of doing that. Mr Ager-Hansen says this mechanism is a “breach of fiduciary duties” and is consulting lawyers as to whether action could be taken against the directors. This writer certainly agrees that this arrangement was and is morally dubious and the sooner the Chairman of Johnston Press Camillia Rhodes, goes then the better. Shareholders should vote accordingly.

Whether a new management team can revive such an ailing business, even if editorial policy and management improves (which is one of the issues apparently) is surely doubtful.

Blancco Technology Group (BLTG) has been in turmoil for a couple of years. Results for the year to June were published today. They changed the nature of the business to focus on software for “erasure” and “mobile phone diagnostics” and new management was put in place a couple of years ago. But today’s announcement makes grim reading. The Chairman, Rob Woodward, spells it out to begin with by saying: “2017 has been a year of substantial challenges for the Group, with the business performing far below our expectations”, But he does say: “However, the underlying strengths of Blancco remain in place and I am confident that these, together with the significant number of remedial actions we are taking, will restore a sustainable growth trajectory and build long-term shareholder value”.

But the detail makes for horrific reading. For example: “During April the Group undertook a review of cash flow forecasts and identified anticipated pressure on the cash position of the Group.  This pressure was caused by the non-collection of £3.5 million of outstanding receivables relating to a sale booked in June 2016 and a sale booked in December 2016, and costs associated with past acquisition activity, including earn-outs and M&A advisory fees”; and “On 4 September 2017 the Group announced the reversal of two contracts totalling £2.9 million booked as revenue during June 2017, following a number of matters being brought to the Board’s attention”. As a result the 2016 accounts have been restated. In addition, the new interim CFO, Simon Herrick, was appointed interim CEO and the former CEO departed.

Last year’s accounts were full of adjustments and the complexity compounded by the number of disposals and acquisitions. This year is not much different, and they even report “adjusted cash flows”. I always thought cash was cash, but apparently not. But the share price perked up somewhat – up 30% at 72p at the time of writing after a long decline. The company does seem to have some interesting technology but whether all the problems have now been revealed we do not know. The Chairman is sticking around after previously announcing his departure but they are still looking for a new CEO.

I would not care to predict the future for this business. But one question worth asking is “what were the auditors doing last year?”. Revenue recognition is often a problem in this kind of company and it looks like a case of sales proving to be fictitious when some questions were asked about them. This is yet another example of the audit profession falling down on the job which we have seen so many times before. Shareholders in Blannco should consider asking for the Financial Conduct Authority (FCA) to undertake an investigation into the audits of this company. The auditors last year were KPMG.

Intercede (IGP) issued a profit warning yesterday in a Trading Update. A large order for its identity software solution that was expected will not now be received until the next financial year. Other orders are also apparently being delayed. As a result, revenue growth this year will be below market expectations. The share price fell yesterday and today and is 34p at the time of writing.

I first commented on Intercede back in 2011 when ShareSoc ran a campaign against the remuneration scheme in the company. The share price then was about 60p. It briefly went over 200p in 2014, on hopes of real growth in revenue and profits but then steadily declined before this latest announcement. In reality this company is a consistent under-performer. It operates in what should be a hot sector (personal id security) but never seems able to capitalise on its interesting technology in a growing market. Change is made difficult as Richard Parris runs it as “Executive Chairman”, assisted by his wife who is also employed in the business. An example of a “lifestyle” business, not uncommon on AIM, where the directors extract signficant sums while the business goes nowhere in particular.

This company would probably be worth a lot more than the current market cap to a trade buyer who could exploit the technology and improve the sales and marketing. What’s the chance of that happening? Not much I would guess.

Note: the writer has trivial holdings in Blancco and Intercede.

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

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