Johnston Press, TrakM8 and Brexit

Over the weekend, Johnston Press (JPR) was put into administration and immediately sold to a new group of companies controlled by the company’s bondholders. In other words this looks like a typical “pre-pack” administration where a company does not go through a proper administration process with an open sales process but is flogged off to in a fire sale to those who already know the business and see an opportunity to collect a bargain.

Trade creditors will lose their money, shareholders will lose everything and the pension scheme is being dumped – and is likely to need bailing out by the Pension Protection Fund.

One investor in the company who wished to revive the business was Norwegian Mr Ager-Hanssen who on Saturday accused the board of thwarting efforts to turn the group around and a “sham” sales process. He is probably right from my experience of what happens in pre-pack administrations. Pre-pack administrations are an anathema as I have said many times before as they undermine a proper process when a company is in difficulties.

Johnston Press does have some very valuable media titles such as the Scotsman and Yorkshire Post but had managed to accumulate an enormous amount of debt by going on an acquisition spree. It also had a big pension deficit. The company put itself up for sale recently but now states that the offers were insufficient to repay the bonds so the company has concluded the equity is worthless. Or perhaps it was simply an example of where the prospective buyers could see it was cheaper to do it via a pre-pack.

I have never held shares in Johnston Press although I looked at it a few times as a possible “value” play. But high debt is a killer when the market in which a company operates is facing strategic problems. With newspaper circulations dropping, and advertising revenue being impacted by changes to media usage – particularly a move to internet advertising – the company failed to cut its debt rapidly enough while revenue was falling and profits disappeared.

Another disaster area on Friday was AIM-listed Trakm8 (TRAK) whose shares fell by 66% on the day to a new low of 22p. This was after publication of their half-year results and a trading statement. Group revenue fell by 38% and a very large loss was the result. The company provided numerous excuses for this and a very negative short-term outlook. But it suggests the market for the company’s solutions “will be robust in the longer term”. Anyone who believes the latter statement must be an eternal optimist.

I did hold this company’s shares briefly in early 2016 when it was the darling of many private investors and the share price peaked at over 360p but I rapidly became disillusioned with the management. Peculiar acquisitions made subsequently, poor cash flow (rather suggesting profits were a mirage of fancy accounting) and generally over-optimistic statements being issued. Warren Buffett has always emphasised the importance of trust in the management of companies in which he invests, and when I lose trust I sell in short order.

Brexit is a topic one can hardly avoid talking about at present. I gave my personal analysis of the draft withdrawal agreement here (yes I have read it): https://roliscon.blog/2018/11/16/brexit-agreement-is-it-a-fair-deal/ . On reflection it seems to me that Mrs May is attempting to meet the demands of both brexiteers and remainers with a compromise deal that keeps us partly in the EU in many regards. The result is that she has pleased few people – the right wing of her own party, the Labour Party and Jeremy Corbyn who is stirring the pot like mad to gain political advantage, the DUP who May relies on for votes, and many others. Even her cabinet seems split counting only those who remain. The concept of the “chequers” plan might have made some sense, but the detail of the proposed agreement is simply not acceptable to many people. I suggest she needs to reconsider, sooner rather than later.

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

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National Grid, Johnston Press, Crown Place VCT, Lloyds Bank, LoopUp and Brexit

I had a busy day yesterday, but let me first comment on the news today. National Grid (NG.) published their half year results this morning. They reported “Adjusted operating profit, excluding timing up 4%….” but statutory earnings per share were down by 12%. What exactly does “adjusted for timing” mean? I have no idea because the announcement does not explain it in any sensible way. For example, it says under “UK Timing”: “Revenues will be impacted by timing of recoveries including impacts from prior years”. Why are these revenues not being booked in the relevant period? Why are they not being recognised as revenues in the period concerned? Looks like a simple “fudge” to me as “adjustments” to reported figures in accounts often are. Many analysts seem to have a negative view of the stock, and I am coming to the same conclusion. I sold some of my holding in the company this morning.

I have previously mentioned the requisition of an EGM at Johnston Press (JPR), but the company has rejected this on the basis that it is “not valid”. It seems this is because the shareholder who requested it holds their shares in a nominee account (i.e. are not on the register). Yet another example of the obstruction caused by the use of nominee accounts. Changes to the law in this area are required to fully enfranchise all shareholders. See the ShareSoc Shareholder Rights campaign for more information: https://www.sharesoc.org/campaigns/shareholder-rights-campaign/

Yesterday morning I attended the AGM of Crown Place VCT, managed by Albion Capital. No excitement there. Just a competently managed VCT and a well run AGM with a presentation from one of their investee companies (PayAsUGym) who have developed an innovative business selling gym sessions. Crown Place made a total return of !4% last year and currently provide a tax free dividend yield of 6.9% which is covered twice by earnings. The expense ratio is 2.4% which is certainly better than many of the VCTs I hold. Previously this company had a strong focus on “asset-based” investments but they are now restricted by the new rules for VCTs so they are moving into more “exciting” fields. There are also concerns about further rule changes or removal of tax reliefs in the budget next Wednesday. Investors in tax incentivised vehicles seem to be getting nervous.

After lunch with representatives of AGMInfo, I filled an hour or so before the ShareSoc AGM by dropping into the Lloyds Bank legal action nearby which I have mentioned in previous blog posts. On the witness stand was former CEO of Lloyds TSB Eric Daniels being cross examined by the littigants QC. He gave a confident performance and was clearly well prepared. He said he was “bitterly disappointed” over the need to raise £7 billion in capital and was also disappointed that they would end up more highly capitalised than other banks. It was clear from his other comments that there was a certain momentum to go through with the deal (the acquisition of HBOS) and that they did not revisit the benefits of the transaction at every turn (e.g. as more information came out of the due diligence work for example).

He disclosed that in a conversation with the FSA there were real concerns that they could lose the vote of shareholders. This could be because there were views that HBOS could remain independent, although the Government had already indicated that it was promptly going to be nationalised if no rescue deal could be done; and because Lloyds TSB shareholders might vote against it.

The case continues. Lloyds Bank and the former directors continue to say that the claims have no merit of course.

It was then onto the ShareSoc AGM. Again no great excitement there. Mention was made of a possible merger with UKSA and as a former director of both I spoke in favour of that. Spreading the fixed costs over two organisations of a similar size makes a lot of sense. It should never have been necessary to set up a rival organisation to UKSA, but interesting to note that ShareSoc has more members now so my efforts in recent years were not in vain.

The ShareSoc AGM was followed by one of their company presentation seminars. Of interest to me (being current holders) were the two by LoopUp (LOOP) and Ideagen. I reported on Ideagen recently on coverage of their AGM so will only cover LoopUp herein. The presentation by their joint CEO Steve Flavell was slick but it was more a sales pitch for the product/service to customers than one to investors. The issue of them having two joint CEOs was raised in a question later.

The emphasis was on the simplicity of the service, so anyone could take it up easily and quickly. This is the major USP as there are lots of other conferencing products around. Most interesting was his explanation that they leapfrogged the “chasm” by ignoring the early adopters (who often like techy products) by aiming straight for the “mainstream majority”. His reference to “Crossing the Chasm” is from a book of that name by Geoffrey Moore which is essential reading for all sales/marketing executives in the software field, or investors in early stage technology companies likewise. Just had a chat with an Uber driver about this book – he has a degree in marketing – that’s the modern world for you. It will be a great shame if Sadiq Khan manages to put Uber out of business – might miss out on intelligent conversations with cab drivers. I read the book when it first came out back in the 1990s and Mr Flavell had read it also. I highly recommend the book. LoopUp is clearly a sales/marketing driven organisation but the technology is sophisticated enough to make it all look simple.

On the current valuation, the company has obviously a long way to go to grow into that valuation. Questions were raised about whether growth could be accelerated (revenue only up 39% in 2016m and 44% in the interims this year). But I expressed scepiticsm on attempts at a faster growth rate to Flavell after the meeting.

The Financial Times continue to publish anti-Brexit stories and editorial every day. My letter to the editor on the dubious bias, which they published, has obviously had no impact whatsoever. Tim Martin, CEO of JD Wetherspoon, had a lot to say about the subject of the impact of Brexit on food costs in his latest trading statement. He accused the media, and the Chairman of Sainsburys and that of Whitbread, and the head of the CBI, for completely distorting the facts. Rather than food prices rising after Brexit, he suggests they will fall. For his arguments see:

https://www.investegate.co.uk/wetherspoon–jd–plc–jdw-/rns/fy18-q1-trading-update/201711080700068513V/

My conclusion is quite simply that some foods might become more expensive, others might become cheaper, and home-produced products might also be cheaper; plus the Government might be able to save a lot of money on contributions to subsidising inefficient farmers. But that of course means that food buying habits might change as consumers react to price changes. Is that a bad thing? Readers can ponder that question.

Whether the Chairmen or CEOs of public companies should be making comments on essentially political issues, one way or the other, is also a question to consider. I suggest that might best be left to bloggers like me. Sainsburys and Whitbread (Costa, Premier Inns) might find they disaffect half their customers while having minimal impact on public opinion.

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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