Tungsten, RedstoneConnect, Proactis, LoopUp, Mello and productivity

ITesterday there was an announcement by Tungsten Corporation (TUNG) that there was press speculation about a possible requisition of a general meeting to remove some of the directors, including the Chairman and CEO, and appoint others. This is likely to come from Odey Asset Management supported by other large investors the company understands. Their combined holdings could give them a good chance of winning any vote, or at least it would be a hard-fought proxy battle.

It would seem that the former CEO Edi Truell is involved in this initiative. It would be most unfortunate in my view if he returns to this business (and I did purchase a very few shares in the company after he departed which I still hold). Richard Hurwitz has done a good job in my view of turning this company from a financial basket case with very substantial annual losses into a sounder one. Revenue has been rising and costs have been cut although profits have been longer to appear than hoped. However the company does report that EBITDA was at breakeven for the first four months of the calendar year. It’s at least heading in the right direction now so I am unlikely to be voting for any such requisition.

I attended the Mello event at Hever yesterday and was hoping to get an update from Mark Braund on RedstoneConnect (REDS) where he was due to present. But his presentation was cancelled. Now we know why because an announcement this morning from the company said he was leaving. Perhaps he wants a new challenge. This was another basket case of a company where Mark turned it around in the two years he has been there. So some investors may not be pleased with his departure and the share price predictably dropped on the news. The new CEO will be Frank Beechinor who is currently the Chairman. He is also Chairman of DotDigital and clearly has experience of running IT companies so it’s probably a good choice. A new non-executive Chairman has been appointed (Guy van Zwanenberg).

The Mello event, organised by David Stredder of course, was held near Hever Castle in deepest Kent. I know some of the roads in the area as I live nearby but even so managed to get lost. Not the ideal location. But it was a useful event otherwise. I did an interview for Peter of Conkers Corner and sat on the panel covering the Beaufort case. Videos of both are likely to be available soon, and I will tweet links to them when they appear.

A company that did present at Mello was Proactis (PHD) with CEO Hamp Wall doing the talking. I was unsure of the potential future growth for the company as I thought the market for procurement software might be quite mature (i.e. most likely users had such a product/service). But not so it seems, particularly in the USA and their target vertical segments. Hamp spoke clearly and answered questions well. He is clearly an experienced IT sales/marketing manager. He said he was surprised though that the share price fell over 40% recently when they announced the loss of two of their largest customers. He thought it might fall 15%. I agreed with him that it seemed excessive. But the market does not like surprises.

Today I attended the AGM of LoopUp Group (LOOP) who sell conferencing software. They recently merged with a competitor named MeetingZone and it looks likely to double revenue and more than double profits if things go according to plan. The joint CEOs made positive noises about progress. The company is chaired by heavyweight Chairperson Lady Barbara Judge CBE which is somewhat unusual for this kind of company – at least heavyweight in terms of past appointments if not lightweight in person.

Tim Grattan was the only other ordinary shareholder present and may do a fuller report for ShareSoc. A disappointing turnout for a very informative meeting as both I and Tim asked lots of questions.

Tim advised me after I mentioned the Foresight 4 VCT fund raising that it was odd that no mention was made in the prospectus of the alleged illegal payment of a dividend. Is this not a “risk factor” that should have been declared he asked? That company and its manager seem to be turning a blind eye to that problem.

There was an interesting letter from Peter Ferguson in the Financial Times today. It covered the issue of a declining productivity growth in the UK and other countries aired in a previous article by Martin Wolf. This is certainly of concern to the Government and should be to all investors because only by increasing productivity can we get richer. Mr Ferguson suggested one cause was the negative impact of increasing regulation. He suggested it has three impacts: 1) more unproductive people appointed to monitor and enforce the regulations, 2) more compliance officers, and 3) less productivity as a result in companies due to sub-optimal practices. Perhaps fortuitously I am invested in a company that sells risk and compliance solutions. It’s certainly a growth area and there may be some truth in this argument. Has MIFID II reduced productivity in the financial sector with few benefits to show for it? I think it has.

But Rolls-Royce are going to improve the productivity in their business at a stroke. They just announced they are going to fire 4,600 staff. But are any of them risk and compliance staff?

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

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LoopUp, Audioboom, Social Media Abuse and a VCT AGM

LoopUp (LOOP), a small AIM listed company that provides audio conferencing and in which I have a small holding, have announced a proposed acquisition of a company in the same business – MeetingZone Group. This will more than double the size of LoopUp so it constitutes a reverse takeover. As they are paying cash for MeetingZone it will be financed by a term loan and a large placing. The placing will be at 400p per share, when the share price last night was 435p so it’s only a small discount. The share price normally falls to the placing price in such circumstances but it actually rose today which suggests investors like the deal.

MeetingZone is profitable and is being acquired at 12 times EBITDA. The plan is to deliver a “timely transition of the MeetingZone Groups audio conferencing business to the LoopUp platform” as the announcement says. This is clearly potentially a significant step up in the size and profitability of the merged entity, but my slight concern is the risks involved in this transition as it means the customers will need to learn a new system. Such transitions are never easy.

Another small AIM company is Audioboom Group (BOOM) whose shares have been suspended for some time after they announced a proposed acquisition, with a fund raising to finance it. Yesterday they announced it had been impossible to complete the placing to fund the deal and the company now needs to raise some money just to cover its working capital needs. Audioboom is primarily a podcast hosting platform and revenue has been increasing but for the year to November 2017 it was still less than £5 million and the loss was expected to be a similar figure! Accounts have yet to be published though. Needless to say perhaps, I have never held shares in this company because I considered it to have an unproven business model. Such early stage companies are surely best financed via private equity who can accept the risks rather than public market investors. I wish them the best of luck in raising more funds.

But I did have some contact with the company after a certain person posted a podcast which contained abusive comments about me. So my lawyer asked politely that it be removed which the company did simply because it did not comply with their policies. The result was a torrent of abuse about Audioboom by the same aforementioned person which was totally uncalled for. But now the same person has been on the receiving end of an attack from someone else where he has even had to call in the police for assistance.

Postscript: Let me make it clear that I do not condone racist or other illegal communications of any kind. They can never be justified. I have only recently been informed of the content and likely reasons for it which has resulted in the aforementioned communication being referred to the police.

This is a typical example of the problems of social media and blogging sites which have been getting a lot of media coverage in the last few days. Facebook have reported that 2.5 million posts alone that included “hate speech” were removed in the last 3 months of 2017, and there were many more violent, terrorist or pornographic posts they also removed. However, they cannot easily identify lies, fake news, fraudulent advertisements and common abuse. In other words, the social norms about what should be “published” in a public forum are completely breaking down. Nobody can, nor does, police the internet.

This is now proving to be a major problem for anyone in public life such as politicians. Free speech is a good concept in essence, but when it degenerates to allowing irrational and unconsidered abuse and false allegations to be propagated then surely something needs to be done about it. The laws against “hate speech” and libel law hardly provide effective remedies to stop the kind of behaviour that is now becoming so prevalent. I suggest that the Government needs to undertake a full blown public inquiry into this problem.

It is particularly serious in the financial world where bad behaviour can affect the business of a company and its share price, effectively leading to “market abuse”.

Yesterday I attended the Annual General Meeting of Maven Income and Growth VCT 4 Plc (MAV4). There were only about half a dozen shareholders in attendance in the City of London.

I raised a number of issues and posed questions. Subjects covered were:

  1. The poor performance of the company last year, which I calculated to be a total return of 1.72% (i.e. less than inflation). Total return includes asset growth and dividends of course, and although the company paid out dividends of 12.45p last year representing a yield of 16.5% on the share price at the end of the year (tax free of course), it’s the total return that really matters. Otherwise shareholders are just getting their assets returned to them.
  2. Inadequate explanation for the poor performance in the Annual Report. It does mention that “one of the larger portfolio companies suffered a write down in value which diluted the overall performance in the financial year, but more explanation would have been preferable.
  3. The length of service of the board directors. Apart from director Bill Nixon, who represents the fund manager and which I do not accept should be a director simply for that reason, the other three directors including the Chairman have all served since 2004. So this is one of the few companies where I voted against the reappointment of all of them. I made it clear that the board should look at succession and they indicated they may do so.
  4. The high overhead costs in this VCT – total administration and management expenses I calculated to be 4.0% of net assets at year end, although Bill Nixon disputed this figure.
  5. There was a suggestion made that with high returns of cash to shareholders last year, and a new fund raising, there might have been some “cash drag” in the performance data.
  6. I questioned the impact of the new VCT regulations, and Bill Nixon said the market was getting “frothy” with valuations difficult to sustain. The inability to write debentures on investments limits the amount of control they will have in future. The manager has reshaped the investment team to adjust to the new focus – they now have 4 PHDs. They rarely back start-ups and prefer to back teams with successful track records – they don’t “want them to be learning on our money”.
  7. Advanced approval from HMRC on new investments is getting better (this has been a major concern for many VCTs of late as it delays closing deals). Now closer to 30 to 40 days. There is also a proposal for a “self-certification” scheme where a qualified independent person gives a positive opinion. This might be of assistance but there are still potential problems if a business is subsequently found not to qualify.
  8. The company is looking at using the funds raised to make 10 to 12 investments in the current year, so the new rules about what kinds of businesses can be invested in are apparently not proving to be a major problem. But Bill said the result is they are moving from investing in “old” economy companies to “new” economy runs. This is likely to mean that portfolio volatility will increase so overall returns (and hence dividends) may fluctuate more from year to year.
  9. Bill thought VCTs will raise less money this year so new offerings may be in high demand.

Votes were taken on a show of hands and the proxy counts circulated after the meeting. Only about 10% of shareholders voted which is the typical pathetic turnout these days from private shareholders in such companies. There were substantial votes against one resolution on share buy-backs but apparently this was mainly from one family who may not understand the issues.

In summary this was a useful meeting and worth attending. I am only holding this VCT for historic reasons after Maven took over management of previously problematic VCTs I invested in years ago. Performance has improved as a result but is still not great and high overhead costs would put me off investing more money in it. I am always surprised that such VCTs are able to raise more funds with such apparent ease.

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

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