Stock Market Rally and Improving Market Regulation

The free trade deal with the EU has finally been settled. It just needs passing in the UK Parliament and ratification by the EU which is expected to occur without difficulty. Boris Johnson has good reason to celebrate because he has achieved almost all his objectives and got a deal that many thought would be impossible. From the 1st January, when the EU exit “transition period” ends, we will no longer be subject to EU laws.

This is a very satisfactory outcome so far as I am concerned as we will escape the horrible bureaucracy of the EU and once again be a truly independent nation. EU laws will not automatically be translated into UK law. We will maintain alignment on some matters such as labour rights, but we will have the ability to diverge to some extent. And there is an agreement on a new framework for the joint management of fish stocks which was being argued about until the last minute apparently.

For the UK, it gives us potential opportunities such as trade deals with other countries that we could not do as part of the EU. This is truly a historic moment in history and should reinvigorate UK politics. 

All we need now is to get the Covid-19 pandemic under control. To quote Judy Garland from the film “Meet Me in St. Louis” which I watched yet again over Xmas: “Have yourself a merry little Christmas, next year all our troubles will be out of sight…”. Let us hope so.

The AstraZeneca vaccine has been approved by the UK regulator so a massive expansion of vaccinations is now expected to commence. It is hoped this will control the epidemic by the spring. The stock market continues to rise based on the positive Brexit free trade deal, the vaccine news and a massive stimulus to the US economy by the Government sending cheques to everyone. My portfolio is now ahead of where it was at the start of the year which is somewhat surprising after such a turbulent year – more analysis may follow when I have done my full end of year analysis which takes me some time. Some shares were so buoyant of late, particularly investment trusts where discounts have narrowed, that I sold a few shares this morning. (P.S. – only from ISAs where no tax on the gains will be payable. Trading investment trust shares on short term horizons is rarely a good idea).

On the issue of stock market regulation, there was an article in this week’s Investors Chronicle by James Deal, the COO or Primary Bid. That company aims to enable private shareholders to take part in share placings from which they are normally excluded. As such placings are often at substantial discounts to the market share price, private investors miss out. They also get diluted.

The article mentions the £8 million cap on “undocumented” deals (i.e. ones without a prospectus) imposed by the EU’s Prospectus rules. The writer says “Brexit affords policy makers an opportunity to revisit this cap”. That’s one of many EU Directives that have been translated into UK law in the last few years. The Shareholder Rights Directive is another one that has been poorly thought through in terms of applicability to UK investors.

EU Directives are frequently excessively complicated as a result of trying to meet the needs of 27 EU countries all with different financial traditions. Let us hope that Brexit enables the UK to look again at many aspects of stock market regulation and the rights of individual shareholders.

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

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Profit Warnings at XP Power and Ted Baker, plus Mercia Placing

A number of profit warnings this morning. The most interesting to me was at XP Power (XPP) although I do not hold it. It was interesting because as a former IT Manager it is a good example of how to screw up a business by poor IT management.

In this case their problem is an implementation of a new SAP Enterprise Resource Planning (ERP) system. The announcement this morning says that some short-term disruption to shipments “will result in revenues and adjusted profits before tax for 2019 being below current market consensus”. However they say the outlook for 2020 is unchanged. The fact that this may be only a temporary situation and that investors look ahead is no doubt why the share price has not fallen but has actually risen slightly at the time of writing.

As I said in my recently published book: “Many businesses fail, or perform badly, because their internal systems and operations are defective. Reliable and effective IT systems are enormously important in the modern world….”. It is something that investors do need to look at and when a company says it is implementing a new ERP system you need to be wary. Just look at the costs of a failure of new IT systems at Abcam for example.

Ted Baker (TED) issued another profit warning (I do not hold it). The share price has dropped another 15%. They report that “trading over November and the Black Friday period was below expectations, with lower than anticipated margins and sell through”. They anticipate that difficult trading conditions will continue. This looks like another casualty of the problems on the High Street, but even their e-commerce sales fell slightly. That result is even after more promotional activity which has cut margins. The dividend has been suspended and costs are being cut.

It’s worth commenting on the placing by Mercia Asset Management (MERC) to partly fund the acquisition of NVM Private Equity and for other purposes. Mercia invests in smaller unlisted companies, in other words it’s a private equity investor. I do not hold the shares although I did invest alongside them in an EIS company back in 2013. It was a start-up fintech business which is now moribund so both they and I have written it off, but I don’t hold that against them. It just proves how risky such investments can be and hence the difficulty of valuing the investments they hold. This kind of investment company deserves to trade at a substantial discount to their claimed NAV in my view (as do most VCTs which are similar companies).

NVM manage the Northern VCTs (NVT and NTV) which I do hold so I have an interest thereby in the acquisition. I have no objection to that acquisition and it certainly looks a sensible strategic move for Mercia as it will grow their assets under management very considerably and provide a much more stable source of income. However, the placing to fund this acquisition, which as usual private investors were not able to participate in, was done at a 23% discount to the pre-announcement share price. This kind of large discount does not give me confidence in the management that minority shareholders will not get screwed again in the future.

This placing also received severe criticism from Simon Thompson in Investors Chronicle. He has previously tipped the shares partly on the basis that there was value here because of the high discount to NAV. Well he is now disillusioned because the placing was at a discount of 40% to NAV, with a large dilution of existing shareholders! He recommends voting against the placing at a General Meeting on the 20th December and I cannot disagree with him.

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

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Placings at Gordon Dadds and Blue Prism

There were two placings announced yesterday. The first was by legal firm Gordon Dadds (GOR). I held a very few shares in the company. This company had already annoyed me by suspending the listing of the shares for several months while they finalised an acquisition deal. Totally unnecessary. If Northern Rock could remain listed while in their death throws, the propensity to suspend shares simply because there is more uncertainty about the business is not justified. This annoyance also arose at Patisserie (CAKE) recently. Investors can decide for themselves whether they want to hold the shares, and possibly take more risk, or not.

The placing by Gordon Dadds was also annoying. Apart from the dilution of 25%, it was a placing at a price of about 25% below the market price. Needless to say, this was taken up by institutional investors very promptly indeed while, as usual, private investors had no opportunity to do so. There did not seem to be any great urgency in this fund raising as it was simply to provide “financial flexibility” for their acquisition strategy. So why no full rights issue or open offer?

I simply do not wish to hold shares in companies that treat their investors this way. Those that do tend to be repeat offenders. So I sold the shares I held.

Another interesting placing was in Blue Prism (PRSM) a fast-growing supplier of office automation software, which I do not hold. The company also announced their full year results for the year to October. Revenue more than doubled to £55 million, but losses went up in a similar proportion to £26 million. The market cap is now an incredible £939 million (i.e. 17 times sales revenue).

Their placing was aimed at raising £100 million and was got away at 1100p (no significant discount to recent price but way down on a few months back). The purpose of the placing was given as this: “The Group is seeking to capitalise on the market opportunity available by accelerating its investments in distribution, its product and platform whilst maintaining its thought leadership in the RPA market.”

So it’s interesting to compare this approach with the position of Cloudcall (CALL) previously discussed who might expand faster if they raised more funds but are also loss making. Clearly Blue Prism intend to take the US approach and try to grab market leadership in a relatively new and potentially large market, i.e. it’s a land grab. This can work but the risk is that competitors who are more cost efficient can erode market share and often they all end up losing money until reality sinks in. Is what Blue Prism is doing that difficult to replicate by competitors? I do not know enough about their product to judge that but the share price and risk are too high for me.

It’s worth bearing in mind that in the software world you can sell almost anything with a good story if you spend enough. Whether such sales are really profitable can be very difficult to judge when money is also being spent at the same time to expand the business.

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

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