JD Wetherspoon Results and Directors Reappointed at Edge Performance VCT

JD Wetherspoon (JDW) published their results for the year on Friday (13/9/2019). The revenue figures were very positive with like-for-like sales up 6.8%, overall revenue up 7.4% and earnings up 9.2% (after exceptional items).

There was an extensive diatribe from Executive Chairman and founder Tim Martin on two issues: 1) Brexit and 2) Corporate Governance standards.

Mr Martin’s stance on Brexit is well known. He is a Brexit party supporter and sees no problem with a “hard” Brexit. He says “Elite remainers are ignoring the big picture regarding lower input costs and more democracy, and are mistakenly concentrating on assumed short-term problems, such as delays at Channel ports”.

On corporate governance he dislikes the requirement for non-executive directors to step down after nine years. He says his company’s stance “is that experience is extremely important and the so-called nine-year rule is perverse and counterproductive”. He has a number of other complaints about the UK Corporate Governance standards. It looks like there may be a battle on some of these issues at the forthcoming AGM.

I agree with Tim Martin on Brexit but not altogether on corporate governance. I don’t like directors serving for more than 9 years simply from past experience of directors becoming stale and sycophantic over time. But he is right to criticise the “excessive focus on achieving financial or other targets”.

It’s well worth reading the announcement, but this is clearly one of those companies where shareholders have to have faith in the leadership of Tim Martin.

I do not hold the shares, but not for any prejudice against Mr Martin.

At the Edge Performance VCT (EDGH and EDGI) the sole remaining director Terry Back has reappointed two of the directors removed by votes at the recent AGM. This I consider most atrocious behaviour. The last time I saw this happen was at the bun fight over the future of Victoria (VCP) and that was soon overturned and a new board put in place.

It is of course essential to have more than one director in a public company because of the listing rules and for other reasons. It can of course be difficult to recruit new directors at short notice, particularly when a company is in difficulties. Potential directors fear they are at reputational risk. But reappointing directors removed by a vote of shareholders is simply not acceptable. Shareholders have a strong interest in improving matters so it should not be impossible to find some volunteers. I have suggested that ShareSoc line up some nominees to put the board on the spot. Investors need some new independent directors, not the same old guard.

As I said in this previous blog post: https://roliscon.blog/2019/09/02/edge-performance-vct-sorted/, I have long considered this VCT to be a basket case of the first order. The situation should not be allowed to continue.

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

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Brexit Investment Strategies

Investors may have noticed that the pound is in free fall and heading towards US$1.20. That’s near the low after the initial Brexit vote. Pundits, not that they can be relied on for forex forecasts, suggest it could go lower now that we seem to be heading for a “no-deal” Brexit.

With the pound falling, and potential damage to the UK economy from a hard Brexit, investors should surely have been avoiding companies reliant on UK sales, or UK consumers, or those such as engineers and manufacturers that rely on just-in-time deliveries from Europe. The key has been to invest in those UK listed companies that make most of their sales overseas in areas other than the EU.

One such company that announced interim results today is 4Imprint (FOUR), a supplier of promotional merchandise. Most of its sales are in the USA and its accounts are in dollars. Revenue in dollar terms was up 16% at the half year and pre-tax profit up 22%. The share price rose 6.5% yesterday and more this morning but the former suggests the good news leaked out surely. With the added boost from currency movements, this is the kind of company in which to invest but there are many other companies with similar profiles. For example, many software companies have a very international spread of business, or specialist manufacturers such as Judges Scientific (JDG). Those are the kind of companies that have done well and are likely to continue to do so in my view if the US economy remains buoyant and the dollar exchange rate remains favourable.

The other alternative to investing in specific UK listed companies with large export revenues and profits is of course to invest directly in companies listed in the USA or other markets. But that can be tricky so the other option is to invest in funds such as investment trusts that have a global spread of investments with a big emphasis on the USA. Companies such as Alliance Trust (ATST), Scottish Mortgage (SMT) or Polar Capital Technology Trust (PCT) come to mind. Alliance Trust has a one-year share price total return of 11% according to the AIC and the share price discount is still about 5%. I received the Annual Report of PCT yesterday and it makes for interesting reading. Net asset total return up 24.7% last year and it again beat its benchmark index. The investment team there has been led by Ben Rogoff for many years and what he has to say about the technology sector is always worth reading. Apparently the new technology to watch is “software containerisation” which is compared to the containerisation of cargo shipments in its revolutionary impact.

Another interesting comment is from the Chairman complimenting Ben on having the skill of buying shares and holding those which go on to outperform, but also knowing when to sell at the right time which the Chairman suggests is not common in fund managers.

Another hedge against a hard Brexit is to invest in companies that own warehouses because a lot more stockpiling is already taking place as a protection around the Brexit date by importers, but also more will be required to hold buffer stocks for manufacturers in the future. Companies such as Segro (SGRO), Tritax Big Box (BBOX), and Urban Logistics (SHED) have been doing well for that reason. They have also been helped by the trend to internet shopping which requires more warehousing space and less retail space. These trends are likely to continue in my view and the retail sector is likely to remain difficult for those retailers reliant on physical shops. You can see that from the results from Next (NXT) this morning. Shop sales down while internet sales up with the overall outcome better than expected as on-line sales grew rapidly. Anyone who expects the high street or shopping malls to revive is surely to going to be disappointed in my view.

There are bound to be some problems for particular sectors if we have a hard Brexit. The plight of Welsh sheep farmers was well covered by the BBC as Boris Johnson visited Wales yesterday. Most of their production currently goes to Europe but they may face 40% tariffs in future. The Prime Minister has promised assistance to help them but they have been heavily reliant on subsidies in the past in any case. There will need to be some difficult decisions made about the viability of farming on marginal land in future.

The falling pound has other implications of course. It will help exporters but importers will face higher prices with the result that inflation may rise. However, there are few products from Europe that cannot be substituted by home grown or produced equivalents, or by lower cost products from the rest of the world. With import tariffs lowered on many imports the net effect may be very low in the long term. But it will take time for producers and consumers to adjust. Tim Martin of JD Wetherspoon is well advanced in that process so you can see just how easy it will be to adapt.

In summary, investors should be looking at their current portfolios and how they might be impacted by Brexit now, if they have not already done so. There will clearly be winners and losers from the break with Europe and investors should not rely on any last-minute deal with the EU even if Boris is expecting one. Any solution may only be a temporary fix and the policies suggested above of international diversification are surely wise regardless of the political outcome.

Note: the author holds some of the stocks mentioned.

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

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