Two AGMs (Accesso and Foresight VCT) in one day

Yesterday I attended the Annual General Meeting of Accesso (ACSO) in Twyford at the somewhat early time of 10.00 am with the result that I got bogged down in the usual rush hour traffic on the M25. What a horrendous road system we have in London! A symptom of long term under-investment in UK road infrastructure.

Accesso provides “innovative queuing, ticketing and POS solutions” to the entertainment sector (e.g. theme parks) although they have been spreading into other application areas. The business has been growing rapidly under the leadership of Tom Burnet who moved from being CEO to Executive Chairman a while back.

Tom opened the meeting by introducing the board, including new CEO Paul Noland who is based in the USA where they now have 5 offices apparently. He also covered that morning’s trading statement which was positive and mentioned deals with Henry Ford Health System and an extension to an existing agreement with Cedar Fair Entertainment. Expectations for the year remain unchanged. Questions were then invited – I have just covered a few below.

I raised a concern about the low return on capital in the company (now less than 5% irrespective of how one cares to measure it). I suggested the reasons were large increase in administrative expenses (up 43% last year) and the cost of acquisitions. Did the board have any concerns about this? Apparently not. The reason is partly the acquisitions and the costs might come down as they rationalise operations but they are in no rush to do so.

The Ford deal was mentioned and Tom said this is one deal where the acquisition of TE2 has provided the technology to assist closure. This is what the company said about TE2 when they bought it: The Directors of accesso believe that TE2’s cloud-based solution offers market-leading personalisation capabilities and data orchestration technologies which capture, model and anticipate guest behaviour and preferences not only pre- and post-visit online, but in the physical in-venue environment.  Personalisation is achieved via many heuristics, including machine-learning-based recommendations, in order both to enhance guest experiences and to provide actionable analytics and insights to the operations, retail and marketing organisations.”. I am sure all readers understand that. Hospital systems are clearly one target for this technology.

The vote was taken on a show of hands so far as I could tell, although the announcement the next day of the votes suggested it was done on a poll which is surely wrong. But there were significant numbers of votes (over 2 million) against several directors and against share allotment resolutions. I asked why and was told it was because of a proxy advisory service recommending voting against, allegedly because of some misunderstanding. The answer to my question seemed somewhat evasive though.

In summary, shareholders are clearly happy with the progress of the company but with a prospective p/e of 41 (and no dividends), a lot of future growth is clearly in the share price. Corporate governance seems rather hit and miss.

I then drove into London to the offices of Foresight in the Shard, again journey time a lot more than it should have been due to road closures, lane removal for cycle lanes, etc, etc. Interesting to note a large hoarding on the elevated section of the A4 inviting anyone who had a complaint against RBS and the GRG operation to contact them.

Also interesting to note when I stopped for fuel at a service station on the M4 that at the desk they were serving Greggs food and coffee as well as taking payment for fuel. I know that Greggs have kiosks in some motorway service areas but this is perhaps a new initiative to expand their market. It’s rather like the small Costa coffee outlets that are in all kinds of places. I am a shareholder in Greggs but this was news to me. Obviously I need to get out more to see what is happening in the real world.

The visit to Foresight was to attend the AGM of Foresight VCT (FTV) one of my oldest holdings. Effectively I have been locked in after originally claiming capital gains roll-over relief. It’s also one of the worst of my historic Venture Capital Trust holdings in terms of overall performance over the years.

I did not need to tell them again how dire the performance of the company had been over the last 20 years because another shareholder did exactly that. But I did query whether the claimed total return last year of 6.5% given by fund manager Russell Healey in his presentation was accurate. It was claimed to be so. Perhaps performance is improving but I am not sure I want to stick around to see the outcome.

One particularly issue in this company is the performance fee payable to the manager which I wrote about in my AGM report and on the Sharesoc blog last year. You can see why the manager has such plush offices as they have surely done very nicely out of this and their other VCTs over the years while shareholders have not, and will continue to do so.

Several shareholders raised questions about the reappointment of KPMG bearing in mind that in Foresight 4 VCT the accounts were possibly defective and a dividend might have been paid illegally. But the board seemed to know nothing about this matter. KMPG got about 6 hands voting against their reappointment and the board is going to look into the matter.

The above is just a brief report on the meeting as I understand Tim Grattan may produce a longer one for ShareSoc.

To conclude, both AGMs were worth attending as I learned a few things I did not already know. For example it seems my holding in Ixaris, an unlisted fintech company where Foresight have a holding, may be worth more than I thought. But I still think their valuation is a bit optimistic.

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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RBS, Shareholder Committees, LTIPs and Weir

It is good news that the Royal Bank of Scotland (RBS) have accepted a requisition for a resolution on a Shareholder Committee at their forthcoming AGM. ShareSoc and UKSA, who jointly promoted this under the leadership of Cliff Weight have issued a press release confirming the resolution has finally been accepted after some legal evasions to try and avoid it.

Shareholder Committees are a way to improve corporate governance at companies and ensure that the views of shareholders (and potentially other stakeholders) are noticed by the directors. It might put a stop to such problems as wildly excessive pay in public companies which non-executive directors have been unable to do – mainly because they are part of the problem.

RBS has an appalling track record of mismanagement and dubious ethics in recent years, from the dominance of Fred Goodwin who pursued a disastrous acquisition and then a right issue (in 2008) that was promoted by a misleading prospectus, to the activities of its Global Restructuring Group (GRG) which is still the subject of regulatory action and law suits, through involvement in the sub-prime lending problems that caused the financial crash to PPI complaints.

A Shareholder Committee might have tackled some of these issues before it was too late. You can read more about the campaign to get one at RBS, and how shareholder committees operate here: https://www.sharesoc.org/blog/campaign-to-obtain-shareholder-committee-at-rbs/ . I wrote the original note on the subject published there by ShareSoc back in 2011 and I still consider that it would be a step forward in UK corporate governance to have one in all public companies. But there is still strong opposition from boards to the idea mainly apparently on the principle that it might interfere with their decisions. That may be so but only if they are unjustifiable and it would not undermine the “unitary” structure of UK boards.

Shareholders in RBS should make sure they vote for the resolution to appoint one at the AGM, but winning the vote will not be easy. RBS have made it a “Special Resolution” which requires 75% support.

Another aspect of RBS that has concerned investors is the delay in paying out the legal settlement that was agreed over the Rights Issue. This has received a lot of media coverage but the problems faced by the legal firm now handling the settlement, Signature Litigation, should not be underestimated. It appears that they face two problems: 1) confirming the eligible claimants and their shareholdings; and 2) confirming the contracts with “litigation funders” who helped to finance the legal action and their entitlements.

You might think that confirming the shareholders would be easy but it is not. A very substantial number of the claimants will have held shares in nominee accounts (i.e. the shares they subscribed for were not put on their names on the share register of the company). They are quite likely to have subsequently sold the shares due to the collapse in the share price. After 10 years the nominee operator may not be able to confirm their past holding, and if they ever received a contract note or other written confirmation of their holding they may not have printed it out or retained a copy in digital form. Many claimants may have died in the meantime or become senile, or moved house or changed their email address so that would create other problems.

There are two morals to this story: 1) Make sure you always keep accurate records of share transactions, including any contract notes or confirmation of subscriptions; 2) do push for reform of the share registration system so that everyone is on the share register and there is no doubt about who owns what and when the shares were acquired.

As regards the contracts with litigation funders, it is entirely appropriate that Signature Litigation seek to confirm the details of those contracts and that they were appropriate, i.e. that real services or funding was provided and the commission due was fair and reasonable. The fact that these arrangements seem to be difficult to confirm, or at least are taking time, certainly raises some doubts that the campaign and legal action was competently managed all through its duration.

However, as I recently said to a member of the fourth estate, the action group(s) and shareholders involved in this case should be complimented in continuing the fight for ten years against very difficult odds and a ridiculously expensive legal system. I know exactly how difficult these cases are – the Lloyds Bank one is similar and is still in court. To obtain a settlement at all in the RBS case was an achievement, when there was no certainty at all that it would be won.

As regards corporate governance, an interesting item of news today was that from Weir Group Plc (WEIR) who are changing their remuneration scheme to replace LTIPs. That was after losing a “binding” vote on pay two years ago. The new scheme means shares will be awarded (valued at up to 125% of base salary for the CEO per year) with no performance conditions attached, although the board may be able to withhold awards for underperformance. The base salary of the CEO was £650,000 in 2016 while Weir’s share price is still less than it was 5 years ago. The justification for scrapping the LTIPs was that they paid out “all or nothing”, often based on the prices of commodities that directly affect Weir’s profits and share price. They are also changing the annual bonus so that it focuses more on “strategic objectives” rather than “order intake and personal objectives”.

Comment: as readers may be aware, I regularly vote against LTIPs on the basis that I am not convinced they drive good performance and tend to pay out ludicrously large amounts. The new scheme might ensure that directors do hold significant numbers of shares, which is a good thing, but with minimal performance conditions this looks like a simple increase in base salary, in reality a more than doubling for the CEO. Looking at the history of remuneration at Weir this looks like a case of wishing to continue to pay out the same remuneration by changing the remuneration scheme when past targets were not achieved.

They really have not learned much from past mistakes have they? This would be another company where it would be good to have a Shareholder Committee to bring some reality into the minds of the directors.

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

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RBS, GRG and Borrowing From Banks

I just had a read of the Financial Conduct Authority’s report on the Global Restructuring Group of the Royal Bank of Scotland (RBS). This was published by the Treasury Select Committee despite the fact that the FCA wished to delay it further. At 361 pages in length, it’s not exactly a quick read.

The operations of GRG have been the subject of many complaints – hundreds in fact from mainly smaller businesses. This was a part of GRG where borrowers in default were placed so as to “help” them. In reality their fees were raised and many of the financially distressed companies that went through the process ended up being put into administration.

The FCA report certainly supports many of the complaints. It says one in six of the cases it examined RBS had caused “material financial distress”. They suggest there were major failings in GRG’s “governance and oversight arrangements” where narrow commercial objectives were paramount. The interests of their customers were ignored and the stated objectives of GRG to support the turnaround of potentially viable customers was not pursued. In summary they conclude there was “widespread inappropriate treatment of customers”.

In other words, the interests of RBS took precedence. Bearing in mind that this was the culture in RBS under the leadership of Fred Goodwin, it’s not that surprising. I saw this myself where RBS was involved with public companies in some difficulties. The other stakeholders seemed to be ignored by RBS who pursued their own interests regardless. But should borrowers have ever expected a bank like RBS to take account of their interests?

Regrettably small businesses often rely on bank lending to fund their working capital. This is a very dangerous practice when working capital can swing violently in response to market circumstances. Even larger companies often go bust when they take on too much debt unwisely and simply run out of cash – the latest example being Carillion of course.

Since the financial crisis of 2008, people have lowered their trust in bankers. They are now rated alongside estate agents and used car salesmen. But past trusts in bankers was always misplaced. Bankers are there to make money from you or your company. When you have lots of assets and cash, they are happy to lend on good terms. When you really need the funds, they will be reluctant to lend and if they do charge high fees and impose onerous terms. The moral is: businesses should be financed by risk capital, i.e. equity or preference shares.

Companies that gear up their balance sheets with debt rather than equity (and RBS itself was a great example of the problem of little equity to support its business back in 2008), might apparently be improving the “efficiency” of their financial structure and enable higher profits but in reality they are also increasing the riskiness of the business. Investors should be very wary of companies with high or increasing debts. It might look easy to repay the interest due out of cash flow now, but tomorrow it might look very different.

You can read the full FCA report on GRG here: http://www.parliament.uk/documents/commons-committees/treasury/s166-rbs-grg.pdf

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

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ADVFN Results and More on Lloyds

ADVFN Plc (AFN) published their results for the year to June yesterday. I have a very small holding in the company (acquired for reasons I won’t go into). ADVFN are information providers on the stock market, primarily to private investors. Many people monitor their bulletin boards although like many such boards frequented by private investors, they are somewhat of a curate’s egg so far as serious or sophisticated investors are concerned.

But they certainly have a large following – they say they have 4 million registered users. Does this enormously large mailing list ensure they have a profitable business? In reality no.

Indeed last year they barely managed to break even (£47k operating profit) on £8.2 million of turnover. That is however a massive improvement on the previous year when they lost £650k on similar revenues.

At least they showed postive cash flow but the net assets of the company are £1.7 million so they have a long way to go before they show a decent return on the capital employed. Current liabilities also exceed current assets. At least they have changed their strategy so as to stop further investing with a focus on “profits rather than growth”.

Regretably this kind of business model just shows that private investors are reluctant to pay money for good information provision. Folks can sign up a lot of “free subscribers”, which is no doubt ADVFN’s customer base, by spending money on marketing but monetising those eyeballs is another matter altogether. Relying on advertising to do so is also getting more difficult as Google and social media platforms are tending to dominate that market.

The other moral of this story is that one needs to be wary of investing in companies with unproven business models. It’s easy to spin a good story about the enormous demand for a given service, but the real proof of the pudding is when the model generates profits (and cash as well of course). Companies like Uber and Deliveroo appear to be chasing the same mirage. Lots of people like the services and are willing to pay their low prices, but whether they can compete profitably is another matter.

Lloyds TSB/HBOS case. My previous blog post was on the topic of the current legal case being heard in the High Court. One of the witnesses called in the case is Hector Sants, former head of the Financial Services Authority (FSA) at the time of the takeover of HBOS by Lloyds. His evidence is to be heard in secret, for reasons unknown. Indeed, even the fact that this was to be so, was kept secret until challenged by media organisations.

Why is this relevant? Because it was suggested at the time that without the takeover of HBOS, Lloyds would not have had to raise extra capital (and it was that which diluted shareholders interests). But the FSA told them they would still have to raise more capital even if they did not proceed with the takeover. Some shareholders allege that this was a forceful encouragement by the Government to go ahead, regardless of the interests of their shareholders. Perhaps that might have been in the public interest, as was similarly argued on the re-capitalisation of the Royal Bank of Scotland (RBS) and other banks, which was effectively a partial nationalisation. But many shareholders are more concerned with their own immediate interests rather than the public interest although it could possibly be argued that ensuring no melt-down of the UK financial sector took place was also in their interests. So Mr Sants evidence might be very revealing about the motives and actions of the Government, but the public may not learn much about it, even at this late date.

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

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