Tag: Persimmon

Persimmon, the Cost of Houses, and Why I Don’t Invest in Banks

As I mentioned in a previous blog post, I made the mistake of buying some shares in housebuilder Persimmon (PSN) last October. I am pondering what to with them after reading the Annual Report which I received over the weekend. It’s full of glowing references to future prospects but the share price is way down on my purchase price meaning the shares are now on a prospective p/e of 8.2 and a yield of 11.4%.

Clearly the price of shares in housebuilders have been falling due to worries about higher interest rates, which could make mortgages much less affordable, while the Government threatens them about the rectification costs of high-rise buildings. The latter may be less of an issue than the former, particularly for Persimmon, but will some increase in the cost of mortgages really put off people from buying houses? I doubt it. There is such an unsatisfied demand for more houses to get people off high rental prices and for bigger houses to cope with Working from Home that price will be a relatively small factor in my view. In any case so long as house price inflation is greater than mortgage interest rates, it is a simple argument that you should buy a house if mortgages are available.  

We bought our first house in 1976 for about £10,000 with a cheap mortgage from the local council when the interest rate was way below inflation. A bit of a no-brainer at the time. Inflation can be good if you are borrowing money rather than lending it! Our sons have managed to buy houses with small contributions from us but we now have grandsons who will no doubt need some assistance soon. Clearly we are moving back into the era of the 1970s in terms of financial planning.

I voted my shareholding in Persimmon electronically as Computershare provide an easy voting system for registered shares, but I voted against the Remuneration Report. Pay is still too generous at this company – the CEO earned in total £2.6 million last year. For 2022, fixed salary will be £746,000 plus 9% for a pension, plus up to 200% of salary for the annual bonus plus up to 200% for the LTIP. Real world economics have not yet sunk in so far as the Remuneration Committee is concerned it seems.  

The fact that Persimmon performed well last year and prospects are claimed to be good does not excuse this generosity.

Why I Don’t Invest in Banks

Reading the FT today reminds me why I don’t invest in banks. Barclays (BARC) have apparently managed to lose £450 million due to a technical error in their structured products unit. It will have to compensate customers after issuing $15.2 billion more Exchange Traded Notes than were registered for sale. The loss will affect Barclays share buy-backs and the share price was down 4% at the time of writing.

Another FT article reported on how National Westminster (formerly the Royal Bank of Scotland) has reduced the Government stake to less than 50%. The Government has of course lost many billions of pounds on its investment in RBS after it thought it could turn a profit by forcing RBS to give it an equity stake in the 2008/9 financial crisis. They were following the Swedish model which was successful in that country’s previous banking crisis. But HM Treasury was no better at understanding the accounts of banks and their risk profile than any other investors.

Paying for Share Tips

I see one of my former sparring partners is complaining about share tipsters who are paid to puff companies – apparently by being issued shares in the companies they talk about. It’s certainly a disreputable practice. Let it be stated now that I am not paid by anyone to talk about the companies I mention. I am not paid and never have been since I started commenting on financial matters!

This blog is not just free to readers, it also does not pay contributors.                                                                                                                                         

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

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Cladding Rectification – Persimmon et al.

My first big investment mistake of the year came to light yesterday. In October last year I started to buy a holding in Persimmon (PSN). The outlook for the housing market seemed bright and the company was trading on a prospective p/e of 11 with a yield of 8.6%. Revenue and earnings growth were forecast for the next couple of years.

But Michael Gove yesterday put a spanner in the works of my decision process by announcing that the Government is going to force developers to fix the cladding crisis – initially by persuasion but if they don’t come up with the money by early March there is threat of legislation to force them to act. The share price of Persimmon dropped sharply as a result along with all the major public housebuilders.

In April last year the company said that they were “Committed to undertake fire remedial works on buildings constructed using cladding materials that may no longer comply with current Government guidance and building regulations; £75m fund created to cover developments identified”. In addition the Annual Report said this: “As announced on 10 February 2021, we have therefore decided that for any multi-storey developments we have built, we will ensure that the necessary work to protect residents is undertaken. Where we own the building, we will act to do what is necessary to keep the residents safe. Where we do not own the building, we will work with the owner and offer our support. Ultimately, if the owners do not step up and meet their obligations, we will ensure the work is done to make the buildings safe. To meet this commitment, we have recognised a £75m provision”.

This seems reasonable but the Government is now asking them to do more. In a letter the Secretary of State has asked companies to agree to:

  1. make financial contributions to a dedicated fund to cover the full outstanding cost to remediate unsafe cladding on 11-18 metre buildings, currently estimated to be £4 billion.
  2. fund and undertake all necessary remediation of buildings over 11 metres that they have played a role in developing.
  3. provide comprehensive information on all buildings over 11 meters which have historic safety defects and which they have played a part in constructing in the last 30 years.

See https://www.gov.uk/government/news/government-forces-developers-to-fix-cladding-crisis for the full Government announcement.

How did this devasting situation arise that has left hundreds of thousands of people with unaffordable bills to rectify defects and unsaleable homes? It all stems from the Grenfell Tower fire disaster after which it was discovered that cladding used was inflammable despite it being sold as meeting fire safety regulations. In addition it was found that many buildings had other defects such as inflammable insulation, inflammable balconies, missing fire gaps, or other fire safety defects so the total bill to rectify all affected buildings might reach many billions of pounds.

The Government has already committed £5 billion to rectification work but more is needed to cover buildings up to 18 metres high and big builders are being asked to stump up much of the cost irrespective of whether they were to blame or not. Clearly much of the blame should be assigned to those who manufactured and sold the defective cladding, or even the Government for not imposing and enforcing adequate regulations. Housebuilders are complaining they should not have to foot all the bill.

Will the actions of the Government even fix the problem? The devil is in the detail as it is unclear that the leaseholders will not still be left with bills beyond their means to pay and years of uncertainty while their properties remain unsaleable. One has to have sympathy with their predicament but I also feel that the big housebuilders are being unreasonably targeted. Those who were at fault should certainly pay the cost of rectification but the Government seems to be wanting to bully those with money to pay up by using the court of public opinion, and threats. This is wrong.

The Government should identify who was at fault and assign responsibility in a clear legal and regulatory framework. Otherwise there may be years of legal battles which will not help those who are suffering.

Perhaps the moral of this story is that it is always a mistake to invest in companies that might be affected by Government interference or political whims.

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

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Pay at HSBC and Santander, Net Worth, Duplicate Dividends and Persimmon

Apparently bankers still live in an unreal world so far as most of us are concerned, even after the financial crisis of ten years ago when their remuneration was attacked. The Financial Times covered two stories on the pay of bankers in today’s edition (16/7/2019). The first was on the opposition to pay at Standard Chartered and comments from the CEO, Bill Winters, on it after a vote of almost 40% against their pay policy in May. The concern is mainly about his pension arrangements which will mean he gets a pension allowance of £474,000 this year which is about 20% of his overall pay. But that includes bonuses when usually pensions are related to base salary only.

Mr Winters comments on his pay were quoted as “I think it’s quite appropriate for the board not to ask me to take a pay cut. And they didn’t – I don’t think it ever occurred to them to ask”. Is that not most amusing. Perhaps the FT coverage might remind them to consider the matter.

The other article was on the pay offered by Santander to Andrea Orcel as an incentive to join the company as CEO. It included a €52 million figure as a “joining bonus” including partly cash and partly in shares to offset the loss of deferred pay from him leaving UBS. In fact the offer was subsequently withdrawn and Mr Orcel is now suing but it just shows how bankers’ pay is still in fantasy land.

As it’s a quiet time of year I thought I would take a look at my and my wife’s “net worth” (we jointly manage our financial affairs). Over 20 years ago one of my US business associates talked to me about his net worth which was something new to me and ever since then I have reviewed it occasionally. It’s something everyone should do to tell whether you are getting richer or poorer, separately from your stock market speculations. How do you work it out? You simply list and add up all your assets and debts – like this:

Assets:

  • Cash in your bank accounts
  • Value of your investment accounts
  • Your cars – market value
  • Market value of your home
  • Value of Business interests
  • Personal property, such as jewelry, art, and furniture
  • Cash value of any insurance policies and pensions

Liabilities (outstanding balances):

  • House Mortgages
  • Car loan and other loans secured against assets (e.g. H/P agreements).
  • Credit card balances
  • Student loans
  • Any other debts

The Net Worth is simply the Assets less liabilities. If it is growing from year to year you must be doing something right. If you are getting poorer every year, then you need to do some hard thinking. It gives you a “reality check” on your overall financial position. However there are clearly periods in your life when you are likely to be building up wealth (such as the CEOs of banks mentioned above) but in later life you might be consuming it or giving it away. At least that’s the conventional assumption.

How did we do in the last year? Net worth was up 7% which rather surprised me as UK stock markets have been down over the last year in capital terms and our house (in London outer suburbs) was not revalued as the market is static. We must donate some more to charity.

Dividends do help of course, particularly when a company pays them out twice! This morning I received duplicate cheques from Pets at Home (PETS). I contacted the company and have spoken to their registrar. They will let me know whether to present the cheques or not. I suspect they may want to cancel all the dividend cheques they have issued. This is the first time this has happened to me, and it simply looks like the same cheques have been printed twice. I suggest other holders of shares in this company await advice, not that many people receive their dividends in cheque form these days.

Persimmon (PSN) shares were down slightly today which is not surprising after the documentary about the defects in their newly built houses on a Channel 4 Despatches programme last night. It highlighted the poor quality of the houses while Persimmon was raking in money from the Government “Help to Buy” scheme which encourages house buying and has probably contributed to rising house prices. Persimmon has been making a profit of £66,000 on each home sold on average, and it was suggested that they paid more attention to the profits of the company than to their customers. Such profits also enabled enormous bonuses to be paid to their management.

I used to hold Persimmon shares but no longer. I have been concerned for some time about the future of the Help-to-Buy scheme and the general unaffordability of houses which may get a lot worse if interest rates rise. House builders are certainly looking cheap on fundamentals at present but can the bonanza continue much longer is the question investors need to ask themselves. A few more programmes like that on Channel 4 and the Government may decide there are better ways to help those without houses.

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

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Taxation of Trusts, LTIPs and Technology Stocks

The Government has announced a review of the Taxation of Trusts. You can read the consultation document and respond thereafter here: https://www.gov.uk/government/consultations/the-of-taxation-of-trusts-a-review

It’s not about investment trusts, but all kinds of traditional trusts whose origin goes back hundreds of years and enables “settlors” to move assets into a trust and out of their personal wealth. There are a number of different reasons why trusts are created as the above document explains. The Government does not dispute that they have genuine uses but wishes to ensure that they are not used for tax avoidance. They also wish to try and simplify the taxation of trusts if possible.

One particular concern they have is about foreign resident trusts controlled by UK residents where they cannot necessarily see what is going on, i.e. they lack “transparency”.

I do have an interest as a settlor in a simple UK based family trust. These are not straightforward things to set up but as for many people it was created to try and move some assets out of the scope of inheritance tax. However, apart from the fact that you can retain some control of where the money goes as a trustee, you may almost as well just give your money to the beneficiaries directly. But you can include minors and unborn offspring as beneficiaries so there are some advantages in the trust form.

Taxation is paid on trust income and capital gains but in a somewhat different form to personal tax. I won’t even attempt to explain the differences here as it would take too long. You can be worse or better off than having it in a personal name, but it won’t be as tax free as ISAs or SIPPs. The major income tax benefits of trusts have long ago disappeared. But certainly one problem with trusts at present is that calculating tax and making tax returns is no simple task so trusts tend to be used by those who can afford professional assistance or have a trustee who can do the necessary work.

But the expense of preparing trust accounts and tax returns are deductible which does not apply to personal tax returns. They suggest this is unfair in that trusts are being favoured which I certainly would not agree with! Of course if the taxation of trusts was simplified so that any amateur could do the work, I might take a different view. But certainly dealing with trust accounts at present is not simple.

Indeed the whole area of trust creation and management is too complex but no doubt there are lots of professionals who make a good living out of advising on them so their consultation responses might be somewhat biased.

I have not yet gone through the document in detail and I’ll probably even need to take some advice on it before responding, but this consultation will be very important to some people.

Postscript: My submission to the HMRC Consultation is present here: https://www.roliscon.com/Taxation-of-Trusts-Roliscon-Response%20.pdf

LTIPs

The case of Persimmon and the value that departing CEO Jeff Fairburn obtained from their LTIP scheme continues to get a lot of media coverage. Best guess seems to be about £75 million, but there are similar every large sums of money to other executives and there could be millions also to each of more than 100 staff under the same scheme.

This comment in the FT’s LEX column this morning is very much apposite: “There are two lessons. First, UK boards should ditch LTIPs in favour of vanilla stock awards. LTIPs are too complicated, sometimes delivering fat payouts when investor returns are thin. Second, chief executives should avoid saying they have no responsibility for their own pay. No one believes them”.

Why did shareholders vote for the original LTIP at Persimmon? Probably because nobody anticipated what the scheme might pay out after the housing market became buoyant and the Government introduced the “Help-to-Buy” scheme. There was of course no cap imposed on the payout which should have been done. But LTIP schemes are so complex many shareholders can’t be bothered to read the details (as I found out talking to one investor at the recent Abcam AGM).

I very much agree that LTIPs would be best replaced by conventional share options.

I have never liked LTIPs for a number of reasons: 1) typically too complex with confusing targets rather than simple numeric ones; 2) they are too long term – incentive schemes need to pay out quickly if you want behaviour to be incentivised by them. Short term cash bonuses are simple to administer and have some merits but there was a demand a few years back to make remuneration relate to long-term performance as short-term schemes can create perverse incentives. Share options do at least align employee interests with that of shareholders.

One change that is also required to avoid executives determining their own pay is to take remuneration setting out of the control of directors and into the hands of shareholders, e.g. via a Shareholder Committee for which ShareSoc has been campaigning.

Technology Stocks Due a Revival?

Sophos (SOPH) shares tumbled yesterday. The cyber security group closed down 28% after a disappointing report about future revenues in a half-year statement. This was one of those UK stocks that reached very expensive valuations until about July since which it’s been heading south. Indeed that’s a common story among small cap technology stocks with many having fallen back sharply in the last few months. That’s despite the fact that many are still growing revenues and profits well above inflation, i.e. they are still growth stocks. Sophos did have a particular problem of comparability with previous year’s figures which were very buoyant after numerous cyber attack scares. The valuation of Sophos now appears more sensible and it would seem other folks also feel it is time to dip their toes back in the water because the share price rose. Or was that a “dead-cat” bounce today? But there do appear to be some buying opportunities appearing in this area, although nobody would say it’s not a high-risk field for investors. At least the valuations are not so daft as they were only a few weeks ago.

Note: I do hold both Persimmon and Sophos shares.

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

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Persimmon Departure, Abcam AGM and Over-boarding

Persimmon (PSN) issued an announcement this morning saying that CEO Jeff Fairburn was stepping down at the request of the company because “the Board believes that the distraction around his remuneration from the 2012 LTIP scheme continues to have a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role”. They are undoubtedly right there.

To remind readers, their misconceived and uncapped LTIP potentially would have meant bonus shares being awarded to Mr Fairburn worth well over £100 million, and similar large sums to other managers. Part of the potential award was later given up but even so it was the most disgraceful example of how pay has been ramped up by LTIPs in recent years. Another example at Abcam (ABC) is covered below.

Persimmon also issued a third quarter trading statement today which was generally positive. They clearly have a good forward committed sales pipeline and the extension of the help-to-buy scheme was positive news in the budget. But I am still somewhat nervous that the housebuilding market may suffer as interest rates rise. New houses are becoming unaffordable for many people despite the demand for accommodation and growing population.

Yesterday I attended the Annual General Meeting (AGM) of Abcam. This is a company that sells antibodies and other life science products/services. It is operating in a high growth sector. I first invested in the shares of the company in 2006 and it has delivered a compound total return of over 32% per annum to me since based on Sharescope figures. I am therefore happy with the financial performance of the business as I said to the board at the AGM. That’s even allowing for recent declines in the share price as analyst forecasts were reduced and general market malaise affected high-flying technology stocks. But I am very unhappy about two aspects: 1) failure to answer simple questions at the AGM, which is the second time in a week where this problem has arisen (the previous being Patisserie); and 2) the remuneration scheme and revised LTIP.

What follows is a report on the meeting, summarised and paraphrased for brevity. The meeting was held at the company’s Cambridge offices at 2.00 pm, but not even a cup of tea was offered.

The recently appointed new Chairman, Peter Allen, introduced the board and there was then a very brief presentation from CEO Alan Hirzel. He said there were between £5 billion and £8 billion of opportunities for the company to grow which they were focused on. They had doubled revenue in the last 5 years, at 11.5% CAGR. There were lots of opportunities to continue to grow the business. They are now focused on 4 areas: 1) RUO Antibodies which are still growing; 2) Immunoassays where growth was 25% last year; 3) China for RUO tools (China could be as big a market as the USA in a few years and they now have 300 people there and are putting more investment in); and 4) CP&L (Abcam Inside). He said the company needs to invest in technology and IT to achieve their growth goals.

Questions were then invited. I commented on the absolutely massive expenditure on new IT systems. They have spent at least £33 million on the Oracle implementation with another £16 million to go and the project is clearly way behind schedule. This level of costs has even caused analysts to downgrade future profit forecasts. As the former IT manager of a large public company, this seemed disproportionate to me in relation to the size of the business. However much one recognises that IT is the key to the business, this looks like a typical project that is way out of control. Who is responsible for this, are they still with the company, who are the outside contractors and what is the current state of this project?

The Chairman first responded that any answers to shareholder questions could only relate to information already in the public domain. This is simply legally wrong and I will be writing to him on this subject and the other issues below.

However Alan Hirzel did respond and accepted the IT project was over budget and covered the history of the project. It was essential to replace some of the legacy systems which were unmaintainable. Many had been built in-house (even an email system apparently) and they had multiple different HR systems in different countries. HR was the first project completed (partner Hitachi as systems integrator) followed by a communication system (part CRM perhaps – it was not clear) but finance and supply chain (manufacturing) projects were yet to be done. He said the CIO had been replaced and a new system integration partner appointed. He assured me that the project was under control now.

I asked who the new IT contractor was, at which point the Chairman refused to answer as that was not in the public domain. I complained that this was a breach of company law as questions must be answered unless there are good reasons to do otherwise. For example, answers can be refused if it is confidential information, not in the company’s interests to do so or may affect the good order of the meeting. The relevant Regulation is here: http://www.legislation.gov.uk/uksi/2009/1632/pdfs/uksi_20091632_en.pdf (see Section 12).

I can see no reason why my question could not be answered as I said to the Chairman and to their lawyer, neither of whom seemed to be aware of the Regulations or the common law principle about answering questions at general meetings. The Chairman also suggested that they could not disclose some information because they would have to issue an RNS announcement to cover it. This of course only applies to “price sensitive” information and I don’t see how knowing who their IT contractor is would be price sensitive. Very annoying and feeble excuses were being given in essence from someone who is supposed to be a very experienced company Chairman. This is the second time in a week (the other was at Patisserie) where the law on answering questions was ignored which is exceedingly annoying.

After that debate, which I will be following up including with a complaint to the FCA as it is not acceptable for companies to ignore the law, we moved on to the Remuneration Resolutions.

I said the following: “Remuneration also seems to be out of control. Although the CEO seems to be generally doing a good job, his pay last year was £1.8 million. This is also out of proportion to the revenue and profitability of the business. Not only that but his basic pay has been increased by 22%, and the maximum award under the LTIP increased from 150% to 400% of base salary. This is obscene and totally unnecessary. Such highly geared schemes promote risky behaviour as we saw with bankers in the financial crash of 2008. I always vote against remuneration policies where the maximum award under LTIPs is more than 100% of base salary and I will be doing the same here. I encourage my fellow shareholders to do likewise”.

There was a response from Louise Patten, chair of the Remuneration Committee to the effect that they could be “traduced” for underpaying rather than overpaying (“criticised” I think she meant). A review had shown that the CEO was underpaid in comparison with market rates in the sector. The LTIP was only a temporary measure as a new policy would be adopted in 3 years’ time.

I also asked whether they had received representations on the subject of remuneration from proxy advisory services and fund managers. She indicated there had been but mainly focused on other issues than the LTIP (in fact they got only 67.1% FOR the Remuneration Report, and 86.7% for the Remuneration Policy which are very low numbers). I said I had no objection to an increase in base pay if justified, but the LTIP was an example of how pay is ratcheting up and it sets a very bad precedent that other companies will follow to have a 400% bonus maximum. I have of course argued with Ms Patten before on the remuneration schemes at this company to no effect, so I chose to vote against her and her two colleagues on the Remuneration Committee but she still collected most of the proxy votes. No other shareholders in the meeting, other than my son Alex who holds the shares also, voted against the remuneration resolutions or the directors which rather demonstrates that when shareholders are happy with a company’s financial performance, they will vote for anything.

There were few other questions from shareholders at the meeting, but after the formal part had finished I asked the Chairman why he only managed to achieve 79.6% of votes in support of his appointment. He said this was because of complaints of “over-boarding”, i.e. that he had too many roles. In fact he has 4 other Chairman roles and one other non-executive directorship which I certainly think is too many and is contrary to ShareSoc’s guidelines. He argued that it was no problem and he did not agree with the current attitude of some proxy advisory services. I disagreed. The duties of directors are more onerous than ever, particularly if the job is to be done properly. Even small difficulties at a company can create a lot of extra work. One of course only has to look at Patisserie Holdings and their recent difficulties where Luke Johnson had lots of other commitments and failed to pick up what appears to be a massive fraud executed by the finance director. Peter Allen seems to think that all he has to do is turn up for a few board meetings each year, let the executive directors get on with business and do not much else. But Abcam is becoming a large company where the Chairman’s role is much more significant than that.

I voted against the Chairman anyway because I think Chairman should be familiar with company law and how to handle questions at meetings. Good ones do of course know how to answer questions without giving out sensitive information or avoiding direct answers but it is certainly not good for the Chairmen to start an argument with a shareholder in a meeting on any subject. Some Chairmen need to take a lesson in how to handle awkward folks like me who are not easily ignored.

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

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Shareholder Democracy, RBS, Rightmove AGM and Stockopedia

There is a very good article by City Slicker in this weeks’ edition of Private Eye (No.1469) on the subject of “Apathy in the City”. The article comments on the “disengaged” share owners in Persimmon who failed to vote against the remuneration report, or simply abstained. See my previous blog post on that subject here: https://roliscon.blog/2018/04/25/persimmon-remuneration-institutions-duck-responsibility/

The article highlights the issue that the many private shareholders in the company probably also did not vote (they could have swung the result), because they have effectively been disenfranchised by the nominee system that is now dominant. The writer says “This democratic deficit has been richly rewarding for companies, share registrars and those representing retail investors”, and the result “has been a real diminution in shareholder democracy”. A few more articles of that ilk may sooner or later impress on politicians and the Government that substantial reform is necessary.

The article also points out how the EU Shareholder Rights Directive, one of the few good things to come out of the EU bureaucracy in my opinion, is being misinterpreted by the UK Government to suggest beneficial owners are not shareholders.

To get the message across I have written to my M.P. on the subject of Beaufort and the substantial financial losses that thousands of investors will suffer there as a result of the use of nominee accounts compounded by the current insolvency rules. If anyone would like a copy of my letter to crib and send to their own M.P., just let me know.

In the meantime the AGM at the Royal Bank of Scotland (RBS) is due on the 30th May. The RBS board has opposed the resolution put forward by ShareSoc and UKSA to establish a “shareholder committee”. That would be a step forward in corporate governance in my view and shareholders would be wise to vote in favour of that resolution (no.27). I do hold a few shares in the company but will be unable to attend the AGM in Edinburgh so if anyone would like a proxy appointment from me so that you can attend and voice your own views on the subject, please let me know. You would at least have the pleasure of seeing the buildings created in Gogarburn by empire builder Fred Goodwin for RBS.

The RBS Annual Report is a 420 page document which must make it one of the heaviest UK Plc Annual Reports. The motto on the cover is quite amusing. It reads “Simple, safe and customer focussed” – perhaps it means they intend to get back to that because RBS was none of these things during the financial crisis that almost bankrupted the business.

One aspect that City Slicker criticizes in the aforementioned article is the low “turn-out” of voters at AGMs, i.e. the low percentage of shareholder votes cast even including “votes withheld”. A third were not voted at Persimmon. That is not untypical at AGMs in my experience although institutional voting has improved in recent years. It’s often the private investors now who don’t vote due to the difficulty, or downright impossibility of voting shares held in nominee accounts.

But there was no such problem at Rightmove Plc on the 4th May. About 85% of votes were cast. As a holder I could not attend in person, but Alex Lawson has written a report which is on the ShareSoc Members Network. One surprising result though was that long-standing Chairman Scott Forbes got 39% of votes against his re-election and Remuneration Committee Chairman Peter Williams got 37% against. I voted against the latter, against the Remuneration Report and did not support the re-election of Scott Forbes either. With 12 plus years of service, it is surely time to look to board succession planning and a new Chairman. The board is to look into why they got so many votes against the two resolutions which is certainly unusual.

To conclude I see that blogger/journalist Tom Winnifrith is having yet another go at mild-mannered Ed Croft of Stockopedia after a spat at the UK Investor Show over a trivial matter. Since then Tom has been attacking Ed over “recommendations” given by Stockopedia in his usual rottweiler manner. As a user of Stockopedia and other stock screening services, I don’t expect absolutely all the positively rated stocks to be great investments. I know that some will be dogs because either the accounts are fraudulent, the management incompetent or unexpected and damaging events will appear out of the blue. So for example, Globo’s accounts fooled many people including me until late in the day so any system that relied just on analysis of the financial numbers would be likely to mislead. But stock screens rely on the laws of averages. The fact that there will be one or two rotten apples in the barrel does not mean that stock screens cannot be a useful tool to quickly scan and dispose of a lot of “also-rans” in the investment world. They can quickly highlight the stocks that are worthy of more analysis, or prompt dismissal.

Winnifrith seems unable to differentiate between meritorious causes that deserve the full power of his literary talents and those where his imitation of a sufferer from Tourette’s syndrome where he heaps abuse on innocent victims goes beyond the bounds of reason. Stockopedia provides a useful service to investors. Let us hope that the saying there is “no such thing as bad publicity” applies in this case.

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

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Persimmon Remuneration – Institutions Duck Responsibility

Most folks are aware of the absolutely outrageous pay levels at Persimmon Plc (PSN) and the perverse LTIP scheme that permitted them. Today was the day of their Annual General Meeting when shareholders had the opportunity to express their displeasure. Some did but a lot of investors (no doubt institutional ones) did not. The results of the vote on the Remuneration Report were:

VOTES FOR: 74.5 million, AGAINST: 70.2 million, ABSTAINED: 64.8 million.

Because of the very large number of abstentions (votes withheld), the resolution was passed by 51.5% to 48.5% of votes cast.

Is this not a sorry reflection on the corporate governance standards in the UK when such a blatantly perverse remuneration scheme is not censored by a vote against? The excuse that last year’s pay was simply a reflection of a previously approved remuneration policy is a very poor one. When the outcome was so appalling, it should have been consigned to the garbage heap by a vote against.

This is the kind of behaviour by UK company directors and institutional investors that might well lead to a socialist Government in due course who will have a mandate to deal with this problem in a more vigorous manner than the current Government.

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

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Persimmon Pay and Rightmove Results

This morning the directors of Persimmon (PSN) gave in to demands to revise the benefits they would get from their LTIP scheme. This has drawn lots of criticism from investors, even institutional ones who voted for the scheme a few years back. They clearly either did not understand the workings of the scheme or did not understand the possible implications. I voted against it at the time as a holder of shares in this company, but then I do against most LTIPs. The LTIP concerned potentially entitles three directors and other staff to hundreds of millions of pounds in shares.

Three of the directors have agreed to cut their entitlement to shares on the “second vesting” by 50%. They have also agreed to extend the required holding period and put a cap on the value of any future exercise.

However, they have not conceded anything on the first tranche of vesting which vested on the 31st December 2017. Director Jeff Fairburn, has said he will devote a substantial proportion of his award to charity, but surely that is simply a way to minimise his tax bill.

One particularly annoying aspect of the announcement this morning is this statement therein: “The Board believes that the LTIP put in place in 2012 has been a significant factor in the Company’s outstanding performance.  In particular, it has contributed to industry-leading levels of margin, return on assets and cash generation”. This is plain hogwash. The main factors were a buoyant housing market, supported by the Government’s “Help to Buy” scheme. House prices rose sharply driven by a shortage of housing while record low interest rates encouraged buy-to-let investors. It was the most benign housing market for decades.

So although the three directors have made some concessions, and the company Chairman has resigned, I suggest this has not really been as satisfactory an outcome as many folks would have liked to see.

Rightmove Results

Another company I hold who also operate in the property sector is Rightmove (RMV). This business mainly provides an advertising platform for estate agents. Results were much as forecast with revenue up 11% and adjusted earnings per share up 14%. These are good figures bearing in mind that there were some concerns about increased competition from two other listed companies, Zoopla and OnTheMarket, plus concerns that the business was maturing. In addition the number of house moves has been falling, thus impacting one would have assumed on estate agent transactions, but they seem to be spending more to obtain what business is available to them.

There are very few estate agents, traditional or on-line ones, that are not signed up with Rightmove plus one or other of the competitors. Although growth in revenue to Rightmove has been slowing, it’s still improving mainly because of price increases and new options available to advertisers. It is clear that Rightmove has considerable “pricing power” over its customers.

The really interesting aspect of this business is their return on capital that they achieve. On my calculations the return on equity (ROE) based on the latest numbers is 1,034% (that’s not a typo, it is over one thousand per cent).

This is the kind of business I like. A dominant market position due to the “network” effect of being the largest property portal, plus superb return on capital.

But their remuneration scheme is not much better than Persimmon’s. Retiring CEO Nick McKittrick received £159,200 in base salary last year, but the benefit from LTIPs is given as £1,063,657, i.e. seven times as much. Other senior directors had similar ratios if other bonuses are included (cash bonuses and deferred share bonuses). Such aggressive bonus arrangements distort behaviour. In the case of Rightmove I believe it might have resulted in an excessive emphasis on short-term profits which has enabled their two listed competitors to grab significant market shares.

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

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Persimmon Directors, IDOX Profit Warning and Transplants

This morning house building company Persimmon announced that Chairman Nicholas Wrigley and Non-Exec Director Jonathan Davie were departing. The company says that both of them recognise that the 2012 LTIP “could have included a cap” and “in recognition of this omission” they have tendered their resignations.

Holders of Persimmon shares like me, or indeed anyone who has followed the debate on excessive executive pay, will be aware of the outrageous pay that has resulted at this and other companies because of the adoption of complex and aggressive LTIPs. Often these schemes have paid out unanticipated amounts, because the directors seemed not to understand their complexities or the possible outcomes. In the case of Persimmon it has meant that as much as 10 per cent of the value of the company has been paid out to the beneficiaries, allowing the CEO to pocket more than £100 million.

Neither of course did the shareholders understand these schemes and hence voted in favour of them regularly. So long as the company financial performance was good, some shareholders considered the payouts were justified. So the Board of Persimmon “believes that the introduction of the 2012 LTIP has been a significant factor in the Company’s outstanding performance over this period, led by a strong and talented executive team”. No mention of the main factors that have driven performance – high house prices supported by interest rates lower than they have been for thousands of years, the rapid growth in households from immigration and other factors, the Governments “help to buy scheme”, and other contributors. When companies are making hay, few shareholders will pay much attention to remuneration schemes or vote against them which is surely an argument for Government intervention in this area.

The company has appointed a new Chairman of the Remuneration Committee, who is Marion Sears. Will policies and practices change as a result? I doubt it because back in 2015 I argued with her at the AGM of Dunelm where she chaired the Remuneration Committee and subsequently exchanged emails on the complexities of the bonus scheme at that company. I also said to her that it was “difficult to understand the implications of the new policy on the overall remuneration of the senior executives and its sensitivity to different scenarios” and argued that the performance targets were not stretching.

I have come to the conclusion that all traditional LTIP schemes are dysfunctional and I therefore vote against them. There are better ways of recognising superior management performance.

IDOX

Another company I have held for a long time is AIM listed software company IDOX. This company was very successful under the leadership of former CEO Richard Kellett-Clarke. Two days ago the company issued a profit warning (not the first) saying that results for the year ending October 2017 will be delayed until next February. The announcement indicated some concerns about revenue recognition, complicated by the “sudden absence” of the CEO, Andrew Riley, on sick leave.

This is the kind of announcement that investors hate. No real details, and no information on when or if Andrew Riley might return. All we know is that the EBITDA forecast is reduced again to approximately £20 million. But at least we know that Kellett-Clarke is back as interim CEO.

There were concerns expressed by me at the last IDOX AGM about revenue recognition, high debtors and the apparent offering of long payment terms to customers (effectively providing them credit). I opined at the time that this was no way to run a software company because even if the customers are credit worthy, projects can run into unforeseen difficulties causing the customers to argue about the bills. I reduced my holding in the company substantially at the time as a result although it’s still one of my bigger holdings. Leon Boros also made negative comments about cash flows at the company and some investors were shorting the stock at the time – they are probably doing so again.

Comments on bulletin boards also raise the issue about the restating of accounts at 6PM, an acquisition that IDOX made in December 2016. But this is old news. Reference to accounting restatements at 6PM were made in the offer document (page 15, where it says for example that “the Directors expect that the value of the net assets of 6PM under IDOX accounting policies will be reduced materially”). Indeed 6PM subsequently filed accounts in Malta where they are registered showing substantial losses in 2016 and restating the 2015 and 2014 numbers. I thought the acquisition was a dubious one at the time for various reasons and voted against it. But these adjustments were surely known about earlier in the year so the latest announcement suggests some other problems.

Needless to say, with all these uncertainties and lack of clarification from the company (which we may not get until February it seems), all the likely share buyers have disappeared because it becomes very difficult to value the business. Simply too many unknowns. I will be encouraging the company to clarify the position a.s.a.p., but the “transplant” of the CEO, even on a temporary basis, might provide some reassurance that the problems will be sorted.

On the subject of transplants, one public consultation that is of personal interest to me is the Government’s consideration to change the default on organ donation to be an “opt-out” system as opposed to the current “opt-in” arrangement. In other words, unless you had specifically opted out, then it would be assumed that you had no objection to your organs being used for transplantation. Relatives may still be consulted though.

It is hoped that this will increase the number of transplants that are performed. There are a large number of kidney transplants performed each year, with lesser numbers of liver, pancreas, lung and heart transplants. The NHS says that 50,000 people are alive today who would not otherwise be so as a result (including me of course). But there are still long queues of people awaiting transplants. In the case of kidney patients, the alternative of dialysis reduces quality of life substantially and also reduces life expectancy significantly so it is a very poor alternative. Dialysis just keeps you alive, but a transplant gives you a new and better future.

For my financially informed readers, you also need to bear in mind that transplants save the NHS money because maintaining a kidney transplant patient costs a lot less than looking after dialysis patients.

Scotland, Wales and other countries have introduced opt-out systems already. Go here to respond to the public consultation on the matter: https://www.gov.uk/government/consultations/introducing-opt-out-consent-for-organ-and-tissue-donation-in-england

I hope readers will support this change to the law.

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

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