The Vultures are Circling – Woodford, Carpetright et al

With the demise of the Neil Woodford’s empire and the winding up of the Woodford Equity Income Fund, investors are looking for whom to blame – other than themselves of course for investing in his funds. One target is Hargreaves Lansdown (HL.) and other fund platforms who had it on their recommended or “best buy” lists, including long after the fund’s problems were apparent. Now lawyers are only too glad to help in such circumstances and at least two firms have suggested they can assist.

One is Slater & Gordon. They say they are investigating possible claims against HL. and that “We’re concerned to establish if there was any actionable wrongdoing or conflict of interest by Hargreaves Lansdown in continuing to include Woodford funds on their ‘Best Buy’ Lists if it had concerns as to their underlying investments. We’ll also be looking at the price achieved when buying and selling instruments, such as ordinary shares, on the Hargraves Lansdown platform and whether or not this represents Best Execution”. You can register your interest here: https://tinyurl.com/yyrhbfb3

Another legal firm looking at such a claim is Leigh Day who say they already have 500 investors interested in pursuing a case. See https://tinyurl.com/y6r2buav for more information.

Having been involved in a number of similar legal cases in the past, my advice is that there is no harm in registering an interest but do not pay money up front and certainly not until the basis of any legal claim is clear. In addition bear in mind that it would be very expensive to pursue such a claim and lawyers may be willing to do so simply in anticipation of high fees when there is no certainty of winning a case. How is the case to be financed is one question to ask? Funding such cases by private investors alone (the majority of HL. clients) is likely to be difficult so “litigation funding” is likely to be required which can be expensive and erode likely returns. Insurance to cover the risk of losing the case is also needed and expensive.

Yesterday saw news announcements from three companies I have held in the past but all sold some time ago. The most significant was from Carpetright (CPR) which I last sold in 2010 at about 800p. It’s been downhill ever since. The Daily Telegraph ran an article today suggesting that this was a zombie company and that it was a good time of year for zombie slaying. After the announcement of a trading update and possible bid yesterday the share price is now 5p.

The Board of Directors “believes that Carpetright is performing well….” and “the prolonged sales decline appears to be bottoming out….”, but the company has too much debt and needs refinancing. One of its major lenders and shareholders is Meditor who have proposed to make a cash offer of 5p per share for the company. The share price promptly halved to that level because it is likely that the offer will be accepted by enough shareholders to be approved. So it looks like we will have a company with revenues of £380 million (but no profits), sold for £15 million. Founder Lord Harris, who is long departed, must be crying over this turn of events. But it demonstrates that when a company is in hock to its bankers and dominant shareholders, minority investors should steer clear.

Another announcement was from Proactis Holdings (PHD) which I sold fortuitously in mid-2018. They announced Final Results yesterday. Revenues increased by 4% but a large loss of £26 million was reported due to a large impairment charge against its US operations. The business has undertaken an operational review and restructuring is in progress. It has also been put up for sale but there is little news on potential “expressions of interest”. Just too many uncertainties and debt way too high (now equal to market cap) in my opinion.

The third announcement was from Smartspace Software (SMRT) which I sold earlier this year at more than the current share price as progress seemed to be slow and I wanted to tidy up my over-large portfolio. It reported interim results where revenue was up 57% but there was a large loss reported (more than revenue). There were some positive noises from the CEO so the share price only fell 0.7%. The company has some interesting products for managing office space but it’s a typical “story” stock where the potential seems high but it has yet to prove it can run a profitable business.

I have also noticed lately that the fizz has gone out of the share price of Fevertree (FEVR). It’s been falling for some time. I sold it in 2018 at a much higher level. It still looks quite expensive on a prospective p/e basis. Overall revenue is still growing rapidly but the USA is still the big potential market yet to be proven. I like the business model and the management even if I don’t personally like the main product. But perhaps one to keep an eye on. But generally buying back into past investments can be a mistake.

Given my track record on the above, perhaps my next investment book should not be on choosing new investments but on choosing when to sell existing ones?

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

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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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