Coronavirus Impacts – Victoria, Auto Trader and Bowling Alleys

Stock market investors are clearly becoming nervous again following a rise in Covid-19 infections in the UKA – particularly in the Southern and Western states. This has affected the US stock markets and, as usual, it has affected UK markets in sympathy.

There were two announcements this morning that were interesting as regards the impact of the virus epidemic and the resulting “lockdown” of the population. Home working has become more normal or people have been “furloughed” or permanently laid off.

Victoria (VCP), a manufacturer of floor coverings, had to close their factories but they have all now reopened. Their customers are mostly retailers and many of them had to close but are now reopening or already have done. The company says group revenues for the last three weeks are now at 85% of pre-Covid-19 budgets.

Interestingly they say this in today’s trading update: “It is important to remember that 93% of Victoria’s revenues are derived from consumers redecorating their homes, not construction or commercial projects, and consumer demand for home decorating products appears to be strong across the world. This is not altogether surprising, given the extended period consumers have spent in their home over the last four months, which is likely to have encouraged the impulse to redecorate”. Clearly it’s time to do some DIY jobs.

Auto Trader Group (AUTO) announced their final results for the year ending March 2020, which contained an update on current trading. They provide a web portal for car dealers, who all had to close. Auto Trader provided free advertising in April and May plus a 25% discount in June. As a result they lost money in those months. The company has also chopped the dividend, cancelled further share buy-banks, did an equity placing and used the Government’s Job Retention Scheme. A vigorous response in essence, rather like that of property portal Rightmove.

Car dealers are reopening but for most you cannot just walk in to the dealer. You have to make an appointment. This encourages web shopping for a new car which is to the advantage of Auto Trader. The company announcement (and what was said in their web cast which was otherwise somewhat boring as it consisted mainly of reading a script), was generally positive but it leaves a question as to how soon car sales will recover. They don’t seem to be losing many dealers and dealer stock figures are what matter rather than sales. But dealers’ revenue and profits might come under pressure as many car purchases can be postponed. Cars do wear out of course, but with mileage reduced as there were, or are, few places open to go to and more home working is taking place, this could reduce car sales.

This is therefore a company where one needs to look to the future and how they can capitalise on the trend to shop for cars on the internet, like one might shop for groceries or clothes of late. One competitor mentioned in the conference call was Cazoo who sell (or lease) cars directly on the internet. No test drives or inspection first. You just get 7 days to trial it before acceptance. This is clearly a different business model that might affect traditional dealers although they also provide service of course and concentrate on new cars which is a more complex sales process. There may also be an issue of trust when using an on-line service. But the process of buying and selling cars certainly needs simplifying from my last experience of doing so.

At least bars and restaurants can reopen, albeit with severe restrictions on social distancing. That will certainly reduce their sales volumes and increase their costs, resulting in a big hit to profits. Still a sector to avoid I think.

Bowling alleys were expecting to be able to open from the 4th July based on what Ten Entertainment (TEG) and Hollywood Bowl (BOWL) said. But the recent Government announcement has put a stop to that along with the reopening of gyms and swimming pools. They now hope to reopen in August.

Is this ban rational? I can see why indoor gyms might need to remain closed. A lot of heavy breathing and sweating in close proximity. But bowlers don’t exert themselves much from my experience and if alternate lanes were used social separation would be good so long as they used their own shoes.

Note that I hold shares in some of the above companies. But thankfully not in Wirecard which I previously commented upon and which is now filing for bankruptcy proceedings.

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

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Learning Technologies and Ten Entertainment AGMs

I “attended” the on-line Annual General Meeting of Learning Technologies Group (LTG) today. This was run using the GoToWebinar software. There did not appear to be many people on the call as only one shareholder asked a question. Perhaps this was because you had to register for the event in advance using your Investor Code – which only those on the register would have, not those in nominee accounts. This is deeply unsatisfactory.

The meeting was initially chaired by Andrew Brode who spoke some platitudes before handing over to the CFO Neil Elton. Brode’s comments were the same as published in an RNS announcement this morning I believe but he did thank shareholders for their support of the recent share placing.

Mr Elton reviewed the financial results from last year and said that the company had achieved compound annual growth of 61% per annum since listing. Net debt at the end of May was £4.5 million, and there was strong operating cash flow. The return on capital employed increased to 16.4% last year. But the final dividend payment had been delayed.

CEO Jonathan Satchell then covered the progress on corporate governance. He mentioned the “measures taken to shore up the balance sheet” which is what I suggested the placing was really for in a previous blog post. He suggested that was because the economic crisis could get much worse later this year.

On governance he said they go further than the AIM regulation requirements. All directors are up for re-election and there is a vote on remuneration. [Comment: these are certainly good points]. He also discussed diversity in the workforce and new initiatives in this area will be announced.

The company has increased the number of products sold per client. They have only 10-11% exposure to Covid affected sectors. They are currently bidding for a “gargantuan” contract for the Royal Navy. They expect a result before the year end.

He then discussed the recent LMS acquisition – they have great hopes for the future of this business which they hope to make a market leader by adding other similar acquisitions.

He discussed the recent share placing. The reason for it was that they did not feel they could use surplus funds for acquisitions as there may be a liquidity crisis later this year.  He expected the core business to return to growth next year.

Questions were then invited but as none had been received at this point, we went to the formal business with votes on a poll. The poll counts were then read out, as all proxy votes has previously been received. All resolutions were passed but I noted that two directors received relatively low votes in favour. That include Andrew Brode with only 90.8% FOR.

Questions were then invited and one shareholder suggested that private shareholders could be included in placings by using such organisations as Primary Bid. Andrew Brode responded that the way it was done was based on advice from their joint brokers. Shareholders could buy shares in the market afterwards at a tiny premium, he suggested.

[Comment: Primary Bid is one solution but it is far from ideal with shareholders being given minimal time to take up any offer and possibly being downsized as well. It is also only fortuitous that the shares could be picked up for near the placing price in the market later. There did not appear to be any real urgency to get the placing done so an open offer alongside should have been done. Regrettably there are too many such placings of late].

This “virtual” AGM worked reasonably well, but you could not see who else was attending and there was no real interaction with shareholders present. Also Andrew Brode’s speech was difficult to hear at times. This was not a good alternative to a physical AGM.

Note: the above report may be inaccurate because it’s even more difficult to make notes of a virtual meeting than it is in a physical one. Sometimes it was not even clear which director was speaking for example.

Another recent AGM of an AIM company was that of bowling alley operator Ten Entertainment (TEG) for which I hold all of 50 shares. I sold almost all my holding before they had to close all their venues. This was another company that did a placing recently but it is hardly surprising in this case that it was required to keep the business afloat until they can get back into operation.

I don’t think this company even offered virtual attendance at their AGM so only the poll results were subsequently announced. They collected over 20% of votes against both the Remuneration Policy and Remuneration Report and two directors including the Chairman also collected substantial votes Against. The company is to review its remuneration policy which I certainly did not like when I looked at it.

Virtual and Hybrid AGMs, and a solution

I have been discussing with other ShareSoc members how virtual and hybrid AGMs should operate – indeed how AGMs should generally function in future as it is quite possible that virtual or hybrid options may become the norm even after the epidemic has passed. For instance companies such as TEG are changing their articles to permit them in the long term even after the temporary authorisation to permit them has lapsed.

But it is clear that there are good and bad practices while attendance at a physical AGM is still clearly advantageous so it would be a shame if that is excluded in future. For example it gives you the opportunity to have informal discussions with directors before and after the meeting as well as with other shareholders which you can never do at virtual AGMs. It also gives some of us the rare opportunity to get out of our home offices – we are all suffering from cabin fever at present!

One somewhat archaic practice that is likely to disappear is the “show of hands” vote. This was always useful and appreciated by shareholders because it firstly allowed AGMs to be concluded rapidly if there was no significant opposition to resolutions, and secondly it allowed you to easily see the overall opinion of shareholders at the meeting. If there was any doubt of shareholders views, a poll can be called by the Chairman, or by shareholders. A poll often means that the vote outcome is not declared until much later – too late to ask about any opposition. If that tactic is used I always ask the question in the meeting of “were there any significant proxy votes against any of the resolutions” as the proxy votes are known well before the meeting.

But with hybrid meetings (those where a physical meeting is combined with a virtual one), I can see a number of practical difficulties with allowing a show of hands vote (and checking who is voting), so I think that will go the way of the dinosaurs.

I suggest also that presentations to shareholders, and discussion thereon, should preferably be separated out into a previous virtual event – sometime after the Annual report is issued and Notice of the AGM has been issued but before the proxy vote deadline. This would enable shareholders (and others as such as non-shareholders and nominee holders) to become informed before they vote. The formal AGM with voting on a poll could then be held later (as a hybrid meeting).

Does this idea make any sense to readers?

But it is clear that it would help to standardise the actual process for virtual meetings and the software that might be used for them – or at least to those that can support the facilities that are needed.

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

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Recent Annual Reports and Trust Discounts

After the news over the weekend, it’s clearly going to be another very bad day on stock markets. One rare riser initially was Ten Entertainment Group (TEG) despite the fact that they announced this morning that all their bowling venues had been closed but they made some positive comments about their cash balances and Government support which might have helped.

As per guidance issued by the Financial Conduct Authority (FCA) it has delayed publication of its Preliminary Financial Results for two weeks as many other companies will be doing. This seems unfortunate to me as a company could just give only a limited outlook statement in there and issue separate trading statements as the crisis developments. But there is no reason to delay the historic figures for the last year.

The AIM Regulator (the LSE) has also announced that in response to the epidemic it is making the rules around suspension of listings more flexible. It is also permitting Nomads not to do site visits to new clients. See https://www.londonstockexchange.com/companies-and-advisors/aim/advisers/inside-aim-newsletter/inside-aim-coronavirus.pdf for details.

Clearly all companies affected by the closure of all public entertainment venues such as pubs, bowling alleys and cinemas are going to suffer greatly. Although they might get some financial relief from the Government, a close examination of their balance sheets and debt will be essential. Some might request suspension of their shares until their financial position becomes clearer. Property companies seem to have been badly hit simply because independent valuers are having difficulty valuing commercial properties as the market is frozen. Retailers with physical stores are also closing them, apart from supermarkets who are doing well due to panic buying and the shift from eating out to eating in as restaurants close. But they seem to be having difficulties adapting their supply chains and coping with the new demands for on-line ordering.

With preliminary announcements being delayed, the AGM season might be delayed also. Companies might have difficulty holding physical meetings and venues might become unavailable, particularly in London. We might see companies holding small meetings in their own offices instead as they won’t expect many people to turn up – I certainly won’t be attending as I am one of those people being told to stay at home for 12 weeks. Some larger companies may try and provide a live on-line stream of the meeting such as Alliance Trust (ATST) who just issued their Annual Report which I would certainly encourage them to do, preferably with some way to submit questions.

It is interesting to look at the discounts to NAV of the share price of that trust and other similar large trusts. According to the AIC, their discount was 17.5% at the weekend, and others were Brunner on 17.5%, F&C on 19.3%, Monks on 12.6% and Witan on 15.6%. These are much higher discounts than such trusts have traded on of late. When private investors have lost faith in the stock market, the discounts tend to rise, although some of the discount can be accounted for by the delay in reporting.  There may be some bargains in investment trusts in due course as private investor sentiment tends to lag financial news.

One company that just distributed their Annual Report and which I hold is property company Segro (SGRO). They had a good year last year although the share price is down 28% from its peak in February due to the general malaise in the property sector as open-end funds close to redemptions and run out of cash. I won’t  be attending their AGM but I will certainly be submitting a proxy vote which all shareholders should do anyway. I will be voting against their remuneration report simply because the total pay of executive directors is too high. The remuneration report consists of 27 pages of justification and explanation, which is way too long and is a good example of how both pay and pay reporting has got out of hand of late.

With bonuses, LTIPs and pension benefits, the total pay of the 4 executive directors (“single figure” report) was £20.4 million. They also wish to change the Articles of the company to raise the limit on the total pay of non-executive directors to £1 million so I will be voting against that also. I would encourage shareholders to do the same.

Lastly for a bit of light relief as it looks like we might have a major recession this year, I mentioned the book “Caught Short!” by comedian Eddie Cantor on the 1929 Wall Street crash in a previous blog post. Now Private Eye have repeated one of his comments in October 1929 after John D. Rockefeller (probably the richest person in the world at the time) said “during the past week, my son and I have for some days been purchasing sound common stocks”. This was seen as an attempt to calm the market in a world where a few very wealthy investors could influence financial markets. Eddie Cantor’s response was “Sure, who else has any money left”. I hope readers do not feel the same.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.