Victoria and Downing One VCT Annual Reports, and Rio Tinto Mea Culpa

With it being all quiet on the financial front, with a lot of people on holiday, I had the time to read a couple of Annual Reports over the weekend. First came Victoria (VCP), a producer of flooring products (carpets and tiles) in which I have a relatively small holding. Chairman Geoff Wilding always has some interesting things to say and their Annual Report is an exemplary model of shareholder enlightenment.

He commences with this statement: “There is an old Yiddish adage which, loosely translated, says “If you want to make God laugh, tell him your plans”. It is safe to say that when Victoria developed its business plan for 2020/21 at the start of this year, we did not factor in the complete economic shutdown in most of the various countries in which we operate”. He does briefly cover the latest business position but the Annual Report covers the year to the end of March so it is mainly historic data.

It was interesting to read this section: “A core element of our UK growth strategy, made possible due to the scale of our business, is our logistics operation, Alliance Flooring Distribution. 18 months ago, we made the decision to invest heavily in logistics, accepting the consequential temporary loss of some margin, in the belief that our customers – flooring retailers – would highly value reliable on-time delivery of carpet, cut precisely to size for a specific consumer order. This has meant that they can hold less inventory, freeing up cash from their working capital, and devote more space in their stores to point of sale rather than using it to warehouse product, and reduce waste, improving their margins. (Carpet is produced in rolls 25m long. However, houses rarely need exactly a full roll and retailers would invariably be left with a typical leftover 2-3m “short end”, which would be thrown away. In contrast, given our high volume of orders and sophisticated cutting planning software, our wastage is much lower). And this is exactly how it has turned out”.

Going back into history, in 1980 I developed a similar system for Harris Carpets to establish a computer system to optimise their central carpet cutting operations and minimise “remnants” or “short-ends”. This proved to be one of their key competitive advantages. Similar systems have been used by other big carpet retailers and distributors since, but the carpet market is still dominated by smallish local operations so you can see the advantages that Victoria might gain.

The second annual report I read was that of Downing One VCT (DDV1). Apart from a very poor financial performance for the second year running, the report fails to cover several important items.

Firstly there is no information on the length of service of the directors, nor their ages. It is now convention not to report the ages of directors which I consider unfortunate but they should at least state when they joined the board so we can see their length of service. Ages can of course be easily looked up at Companies House – they are 60, 71 and 75 years for the three directors.  Are ages and length of service important? I think they are simply from my experience of boards and their performance.

But the really big omission is that the substantial loss reported of £23.8 million partly included a “Provision for doubtful income” under Other Expenses of £2.1 million in Note 5 to the Accounts. What is that? I cannot spot any explanation in the report. I have sent a request for more information to the company.

Rio Tinto (RIO) published an abject apology this morning for their destruction of a cultural heritage site in Juukan Gorge in Australia. They say “The board review concluded that while Rio Tinto had obtained legal authority to impact the Juukan rockshelters, it fell short of the Standards and internal guidance that Rio Tinto sets for itself, over and above its legal obligations. The review found no single root cause or error that directly resulted in the destruction of the rockshelters. It was the result of a series of decisions, actions and omissions over an extended period of time, underpinned by flaws in systems, data sharing, engagement within the company and with the PKKP, and poor decision-making”. They propose a number of improvements to avoid the problems in future. In the meantime they are knocking off £2.7 million from the possible bonuses under the STIP and LTIP schemes available to CEO J-S Jacques and large amounts from two other senior executives. That should hurt enough I think. 

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

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Big Miners, Moneysupermarket and Winning Against the Odds

Looks like we are back to a normal English summer – rain every other day and cool. But there are a few things to talk about.

Yesterday BHP Group (BHP) published their results to the end of June yesterday. Revenue and earnings were slightly below forecasts and the dividend was reduced by 10% as profits were down. But hey, when so many companies are cutting out their dividends altogether this is surely not going to worry many people. They still managed to achieve a return on capital of 17% and underlying eps was up. The shares fell only slightly as a result.

Today Rio Tinto (RIO) reported that production of refined copper in 2020 is now forecast to be lower by about 30% due to delays in restarting a smelter after planned maintenance. The share price is actually up today slightly at the time of writing, perhaps because copper is a relatively small part of their portfolio.

Both companies are very reliant on consumption of commodities such as iron ore in China, and China is still forecast to have economic growth this year despite the Covid-19 epidemic, unlike many other countries. Both companies are working hard to improve their ESG credentials after some recent mis-steps. Ignoring that, these companies still look good value to me (I hold both).

I used to be a holder of Moneysupermarket (MONY) shares but sold most of them in March when I was cutting my exposure to the stock market and weeding out the underperformers in the epidemic rout. Recently my house insurance came up for renewal and the broker I had used for many years gave a renewal quotation that was up 12% on last year. So I thought I would look for a cheaper quote on Moneysupermarket. They produced three quotations only one of which was cheaper and they insisted we replaced our newly installed alarm system for reasons I could not understand. So I then looked at other alternatives and got a quote from LV (Liverpool Victoria as was) that was less than 50% of all the other quotations. The moral is that it can be cheaper to go to direct providers. Is this why Moneysupermarket has not been growing earnings of late? Perhaps they are not producing competitive quotations?

Another good book for summer holiday reading is “Winning Against the Odds”, the recently published autobiography of Stuart Wheeler. He died in July and had a very interesting career.  He was a big gambler and founded IG Index which developed into a major spread-betting company from which he made many millions of pounds eventually.

One section of the book talks about his visits to Las Vegas where he made money by using a card counting technique on Blackjack. But he clearly liked to bet on almost anything.

I visited Las Vegas several times for computer software conferences. But I avoided the gaming tables and slot machines.  I did have some interest when a teenager in betting but not after the age of 18. To win at card games, betting on horses or sports results requires a great deal of hard work to be successful. I think there are easier ways to make money such as betting on stock market shares.

One of Stuart Wheeler’s friends was the late Jim Slater, financier and author of books on stock market investment. One of his sons is Mark Slater who runs a fund called the Slater Growth Fund, and others. I don’t hold them because I prefer investment trusts to open-ended funds but he is certainly a good “active” manager. They sent me the latest update on the Growth Fund today and it’s good to see that their fund asset chart over the last few months appears to match my portfolio. At least I am keeping up with the professionals.

The latter part of Wheeler’s book covers his involvement with politics although he seemed to have no great adherence to any political stance, apart from his belief in capitalism and his desire to depart from the EU. He did donate £5 million to the Conservative Party which was the biggest donation at the time to them. But they later expelled him from the party after he started to support UKIP.

Politically the last few years have been some of the most exciting in my lifetime. Politics used to be a very boring subject but now it has captured the imagination of the public with everyone forming opinions on the parties, their leaders and their policies. Rational analysis often gets lost in the fierce debates. Brexit alone was and is a very divisive subject. 

The leaders have been a very mixed bunch indeed and Wheeler sticks the knife into both Jeremy Corbyn and Theresa May. But he was careful not to say a lot about Boris Johnson. I think he might have preferred Michael Gove as Conservative Party leader but I do not see him as being very electable.

In summary, it’s an interesting book and an easy read.

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

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Market Trends, Big Miners and Will the Music Stop?

Stock markets continue to rise. They seem to be ignoring the bad company results that are going to come out in the next few months. Although there are signs that the Covid-19 epidemic is weakening, some sectors such as hospitality are going to be in lock-down for some time. The economy is clearly going into recession with many employees being laid off. The lack of consumer spending, not just because some people have less money to spend, but because others are growing more nervous of spending money or finding fewer things to spend it on, is going to have a wide impact on the economy.

Cash is being put back into the stock market, simply because with very low interest rates there seem to be few good alternatives. The measures taken by central governments to refloat the economy will promote asset inflation so these trends may continue.

Investment trusts I hold which are popular with private investors seem to be some gainers from this market enthusiasm with their discounts narrowing again. Small cap stocks are also recovering and with very low liquidity just a few trades can raise their prices dramatically for no good reason. Or sharply reverse when a few sellers think the prices have risen too far. Rational judgement on share prices flies out the window when share prices are being driven primarily by momentum.

My portfolio continues to follow the market trend as it is very diversified even though I don’t hold shares in the sectors worse hit by the epidemic. I may have to put cash back into my ISAs which I withdrew only in March after making some sales. I have been buying a few large cap stocks which is not usual for me. I tend to avoid FTSE-100 companies as their share prices are driven by professional analysts’ comments, by geo-political concerns, by general economic trends and by commodity prices. You can buy a FTSE-100 company and soon find it’s going downhill because one influential analyst has decided its prospects are not as they previously thought.

But I did start buying a couple of big miners, BHP and Rio Tinto, in March which has worked out well. I considered the fundamentals sound and China, which is their major market, was clearly recovering and getting back to work rapidly. There was an interesting article in the Financial Times a couple of days ago highlighting other reasons why they are doing well. It was headlined “Australia’s iron ore miners exploit supply gap as Covid-19 hobbles rivals”. It explained how BHP, Rio Tinto and Fortescue Metals Group were capitalising on the production problems of their competitors in Brazil and South Africa who have been badly hit by the epidemic, while demand has remained buoyant. In Australia, where most of the mining is in Western Australia, they took vigorous action to halt the virus early on and most of the workers fly in and out so are easy to monitor. It seems that this unexpected turn of events has helped rather than hindered my investment performance for a change.

Although I am confident that the economy will recover in due course, and stock markets will follow that trend as they always must do, in the short term I find it difficult to be positive. It is hard to identify companies where one is both confident that they won’t be badly affected by the epidemic in the short term and where one can reasonably accurately forecast their future earnings. It’s the opposite of shooting fish in a barrel to use a bad metaphor. Together with the uncertainty of whether we will get a second virus wave, whether a working vaccine will be found, the impact of Brexit and the prospect of higher taxes, mine and the confidence of other investors must surely be low. In the short term, growth in company profits is going to be hard to come by, which is often the major driver for improving share prices.

But the market is ignoring that. It reminds me of the infamous saying of Citigroup CEO Chuck Prince during the last big financial crisis – “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”

Unfortunately judging when to move in and out of markets is not a skill that most investors have and so I will stick to trend following while keeping a sharp eye on events.

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

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Rio Tinto Production and BHP, plus Hollywood Bowl Placing

Mining company Rio Tinto (RIO) issued a statement on its first quarter production this morning. This was a very positive report and the share price has risen over 5% at the time of writing. The share price of BHP Group (BHP), another big miner in the FTSE-100, rose in tandem.

I am not generally a fan of mining companies as their profits are very dependent on the prices of the commodities they produce, but with a p/e of under 10 and a very high dividend yield I did consider those two companies worth a small punt recently. They are both heavily dependent on industrial consumption in China but that seems to be recovering, particularly for iron ore. That may of course simply be because it is difficult to halt blast furnaces temporarily. Their production guidance for 2020 remains basically unchanged apart from in copper where demand and prices have fallen and production and development of a new mine in Mongolia has been disrupted by the coronavirus epidemic.

Hollywood Bowl (BOWL) announced a share placing this morning at 145p – a slight premium to last nights price. The share price has risen by 10% today. This company is in the “hospitality” sector as it runs bowling alleys primarily, all of which have been closed.

The company has taken aggressive steps to cut expenditure such as halting all new developments, delaying all discretionary expenditure, furloughing staff using Government schemes and deferring a proportion of salaries for management. It is also negotiating with its landlords to defer rent payments for 9 to 12 months. In addition it has agreed relaxed covenants with its lenders, and it previously announced that the interim dividend will be cancelled.

All of this means that monthly cash burn will reduce to £1.6 million while its sites remain closed so it suggests it won’t run out of cash until the end of October. But I am still glad I sold most of the shares I held in this company in February. Financial results for this year are clearly going to be very poor and it may take a long time before customers return in volume.

As with all companies in this sector, buying the shares at present is pretty much a bet on when the restrictions might be listed and business return to normal. I have no better view on that than most readers of this article I suspect. But the share price probably rose today on the view that the company may avoid going bust if life returns to normal within a few months’ time.

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

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Rio Tinto Requisitioned Resolutions – Paranoia Exemplified

Yesterday (7/2/2020), Rio Tinto (RIO) issued an announcement which said that resolutions had been requisitioned by shareholders for the Annual General Meeting in May of Rio Tinto Ltd. Note that Rio Tinto has a rather peculiar corporate structure.  Rio Tinto plc and Rio Tinto Limited established a dual listed companies (DLC) structure in 1995. As a result, the two companies are managed as a single economic unit, even though both companies continue to be separate legal entities with separate share listings and share registers. We may see similar resolutions for the UK Plc company in due course as the resolutions might require a “Joint Decision”.

The first resolution is a Special one that seeks to amend the Constitution to give shareholders the right to pass ordinary resolutions that give the directors an opinion on how they should exercise their powers. But it is only an “advisory” resolution and appears to be more aimed at supporting or enabling the second resolution.

The second resolution is an Ordinary one and is worded as follows: “Shareholders request that the company, in subsequent annual reporting, disclose short, medium and long-term targets for its scope 3 greenhouse gas emissions (Targets) and performance against the Targets, consistent with the guidance of the Task Force on Climate-related Financial Disclosures. Targets should reflect decarbonisation pathways for the company’s products in line with the climate goals of the Paris Agreement”.

Readers might not know what Scope 3 emissions are, but as this issue recently came up at a local council meeting which I attended, I do know something about them. Scope 3 emissions are all indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream. That’s as opposed to Scope 1 emissions which are direct emissions from owned or controlled sources and Scope 2 emissions which are indirect emissions from the generation of purchased energy.

Reporting of Scope 3 emissions would require a company to identify all the emissions made by suppliers and customers and even include such emissions as from staff travel to work. A company will in practice have no control over most of those emissions and obtaining the required information might be very difficult.

It’s basically a pointless and expensive exercise to impose such an obligation on any organisation whether it’s a major international company such as Rio Tinto or my local council, but there are many people who would like it done.

This is surely a demonstration of the extreme paranoia that is gripping the world at present over CO2 emissions with the concern that such emissions are contributing to global warming. Even it that is the case, and that argument is far from proven beyond doubt as there are other credible explanations, there is no financial justification for imposing such reporting obligations on companies. It will simply have no impact on CO2 emissions. It’s bad enough that companies such as Rio now have to report Scope 1 and 2 emissions, which incidentally are falling but not very rapidly. Note: please don’t start an argument with this writer about the reality of global warming and its threat to destroy the world. I do not have the time to explain the science of the matter to you. There are plenty of good internet resources on the subject.

As a shareholder in Rio I advise other shareholders to vote against these proposed resolutions at the company.

It seems likely though that the coronavirus outbreak in China might have a significant impact on CO2 emissions. Businesses are shutting down there and imports of oil/gas and other commodities are falling. China consumes half the world’s metals and prices have been falling as a result. It’s hardly surprising that the share price of Rio has been falling of late also.

The coronavirus threat and other similar plagues are probably more a threat to humanity on a global scale than any slight rise in the temperature.

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

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Exchange Market Size in Stockopedia and BHP plus RIO

I noticed that the share prices of BHP Group (BHP) and Rio Tinto (RIO) jumped this morning – at least for these behemoths of the FTSE-100 they moved substantially at 2.8% and 3.4% respectively. I only noticed because I recently purchased some of the shares in each company.

These are of course very large mining companies so they are dependent on the price of metals and metal ore, particularly iron ore. The last time I looked at these companies was two or three years ago when they were laden down with debt and had poor returns on capital. But they have certainly had a change of heart since then and seem to be more focused on generating real profits and cash flow rather than building ever bigger holes in the ground. Debt has been cut substantially in both companies.

With the profits mainly coming from overseas, they are a good hedge against any form of Brexit, and yields are high for those who like dividends. I am not a great fan of commodity-based businesses where predicting future prices of the products is not easy and they typically go through boom and bust cycles as such companies all invest in new production capacity at the same time as prices go up. Soon after when all the new capacity comes on stream there is a bust of course. But I made a small exception in this case.

But why the share price jump this morning? Are investors moving from growth to value as other commentators have suggested? Have value shares such as BHP and RIO suddenly started to look attractive, as they did to me? Or has Nigel Farage’s impossible demands for a deal with the Conservatives to ensure Brexit over the weekend suddenly encouraged investors to look for Brexit hedges?

Stockopedia have released an updated version of their “New” software. It now includes the Exchange Market Size (EMS) which is a useful parameter to look at when trading in company shares, particularly smaller ones. Note that Exchange Market Size was previously called Normal Market Size.  It is the maximum size in terms of share trade volume at which a market maker is obligated to adhere to their quoted share prices. It is a very good indicator of the liquidity in the shares and how easy they will be to trade. When trading electronically on most retail platforms, this is a useful number to know as it will affect whether you can trade automatically, have to set a limit order or get a dealer to trade for you. In addition, any trade bigger than the EMS might be done at prices higher or lower than you expect.

This number can be very small for some AIM stocks. For example on Bango (BGO) which I hold it is currently only 3,000 shares (less than £4,000 in value) when the EMS for BHP and RIO is more equivalent to £20,000 in value.

The new Stockopedia software version has other improvements although I still seem to be having problems with the Stock Alerts feature that I use every day. Perhaps there are still some issues that have yet to be fixed but you can still revert to the old version.

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

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