Royal Bank of Scotland – more losses and downsizing

Royal Bank of Scotland (RBS) announced yet another set of disappointing results yesterday (27/2/2014). The share price closed down 8% on the day and is now way below what the Government paid for its majority stake in the business. New chief executive Ross McEwan announced the results after the previous one, Stephen Hester, had departed to sort out another basket case – RSA (formerly Royal and  Sun Alliance). It was certainly an opportune moment to move on.

Last year RBS managed to lose £8.2 billion which is the six consecutive year of losses after the debacle in 2008. With the Government (i.e. you and me) owning over 80% of the company, that means a loss of £50 for every man, woman and child in the country last year alone – not a trivial figure. For the few private shareholders who remain as holders of the stock, the outlook continues to look bleak. The bank is clearly shrinking as losses force it to dispose of valuable assets so as to keep its capital ratios at an adequate level.

It is obvious from reading the detail of the results announcement that RBS simply got too big and complex. For example they now need to move from “50 core banking systems to around 10” and “from 80 payment systems….to approximately 10“, i.e. major simplifications of the business are required to reduce costs. This restructuring will cost £5 billion over 2014 to 2017 so there are still more costs to come. As the CEO says in the announcement: “RBS remains a complex bank. We can be hard to do business with, costly to operate, and complicated to work in.” He makes it appear that he does not like what he sees having now taken charge of this business. One would surely have expected the internal system problems to have been tackeled more vigorously while Mr Hester was at the helm – six years is surely an adequate time to re-engineer the business, even if they were fire-fighting for the first year or two.

But as this writer has said before (in March 2012) “the financial reports of banks and their profits or losses still seem to be at the whim of bankers” so it is possible the new CEO just wants to “take a bath” where you get all the bad stuff out of the way at the start of ones reign. But I would not particularly bet on it, and most analysts seem to be forecasting losses for several more years.

Law suit status

An update for those investors who believed what Fred Goodwin said in the rights prospectus in 2008. There are four groups of lawyers involved now representing different groups of shareholders – Bird & Bird, Stewarts Law, Leon Kaye, and Quinn Emanuel Urquhart & Sullivan. Smaller shareholders are mainly represented by Bird & Bird and Leon Kaye although the latter has yet to file a claim. Indeed Bird & Bird have suggested to the Court that Leon Kaye and Quinn Emanuel should be excluded unless they file a claim soon. There is no love among lawyers as usual, because there are significant financial stakes at issue.

Mr Justice Hildyard, who is hearing the case, has queried the size of the claims and asked for “a greater degree of case and accuracy in future“. The size of the respective claims is of course important in any subsequent allocation of costs. Bird & Bird originally gave their clients losses as £900m but have now downsized them to £392m based on actual claimants.

And what will the likely legal costs be? Bird & Bird have estimated £10m to £12m for their costs alone. Herbert Smith Freehills, who are defending against all the claims for RBS, have submitted an estimate of £42m. As you can see, this will potentially be one of the biggest commercial legal bunfights in UK history which explains why so many legal vultures are circling. But as with any legal case, the outcome may be uncertain.

Roger Lawson

ShareSoc Company Seminar Announcement

Our next seminar at which public companies will be presenting is scheduled for the 26th March in the City of London, with registration starting at 4.00pm. Three or four companies will be presenting in March and answering your questions, which are:

– Pressure Technologies (PRES): Engineering solutions for high pressure markets.  

– Cambria Automobiles (CAMB): Retail motor dealerships.

– MoPowered (MPOW): Mobile commerce applications for on-line retailers.

– We also hope to have a fourth company presenting – keep an eye on the link below for details.

Refreshments and a finger buffet will be provided of course and the event is free to Full ShareSoc Members with only a nominal charge for others. You will be able to talk directly to the senior executives of these companies after their presentations. In addition you can discuss them with fellow investors. It is also a good opportunity to socialise with other ShareSoc Members.

For more information and to register for the event, please go to this web page (click on to access):

http://www.sharesoc.org/seminarmarch2014.html

Numbers are strictly limited and attendance will be on a first-come first-served basis – so please register your attendance now to avoid disappointment!

Roger Lawson

RM Plc and a Questionable Share Consolidation

RM, a provider of educational products and services to schools, has been through some troubled times of late. Revenue has been falling and is forecast to fall further after they made the courageous, if long overdue, decision to stop producing PCs. In addition there have been a number of changes among the directors in the last couple of years.

But the company has been generating cash, and now has a healthy cash balance (£63m in the last accounts) so it has decided to return £15 million to shareholders via a special dividend. That’s equivalent to 16p per share and is also equal to 12.2% of the market capitalisation before the announcement according to the company’s calculation.  One cannot argue with the wisdom of doing so.

However, this special dividend is linked (and being voted on in a single resolution), to a share consolidation. The effect of the consolidation “will be to reduce the number of shares in issue by approximately the same percentage” according to the notice issued to shareholders for the AGM on this matter, which appears to be correct.

But share consolidations rarely make any sense because at best it fools only unsophisticated investors into believing the share price and its underlying value has remained unchanged. It’s also questionable because the value of the shares of a trading company is rarely dependent solely on the cash or assets on the balance sheet. Large cash holdings will certainly have some impact on the valuation, but more likely the future prospects in terms of earnings or dividends will have more impact

In addition there is the question of whether the share options that have been granted in the past should be adjusted to take account of the consolidation. Many people argue they should be in such circumstances so as to reflect the increased value of each share under option. But on a quick review of the AGM notice and Annual Report I can see no mention of any such adjustment.

Now if shareholders wish to go to the AGM and ask questions or complain about this matter, the company has at least moved the time of the AGM to 11.30 on the 19th March whereas it was set at 9.00 a.m. in the previous two years. Quite an unreasonable time to fix for AGMs in any location  but particularly so in the company’s offices west of London – as I complained at those meetings.

But if you wish to support the special dividend but oppose the share consolidation, you cannot because they are combined in one resolution. So bad corporate practice continues as combining resolutions in this matter is never a good idea. There should have been two separate resolutions with one dependent on the passing of the other.

Shareholders may therefore wish to vote against the combined resolution and encourage the company to do it correctly.

Roger Lawson

Pets at Home -one for pet lovers?

Pets at Home Group is one of the few upcoming IPOs that will be open to retail investors. A “pre-announcement” that gives some details of the float has already been issued.

Financial information so far supplied is not detailed but revenue was £598 last year from 369 retail stores and 246 small animal veterinary surgeries. The retail stores often include in-store grooming salons (for pets of course, not their owners). The business is currently owned by KKR and they seemed to have geared up the company with a high level of debt, but that will be reduced by using funds raised by the IPO to reduce net debt to £275m.

A raft of four new non-executive directors have been appointed including Dennis Millard as Deputy Chairman who is Chairman of Halfords and Chairman of Smiths News plus is a director of Debenhams and Premier Farnell. There is of course a connection in that the former CEO of Pets at Home, Matt Davies, became CEO of Halfords in late 2012. He was credited with doing a great job of developing Pets at Home at the time.

Mr Millard owns two dogs it is revealed, and the pet ownership of all the directors is given. Indeed their pet ownership is itemised if not to the extent of telling us their names, but it is all rather peculiar. However the Chairman, Tony DeNunzio, seems to be pet free. Indeed 93% of Pets at Home’s colleagues (i.e. staff) are pet owners and collectively they own 23,000 pets. All this detail on pets in the company might interest some investors but the pre-announcement is short of the kind of basic information most intelligent investors want.

One looks forward to reading the prospectus and about their VIP customer Club (Very Important Pet Club in case there is doubt). But retail investors will need to take care with this one.

Roger Lawson

ShareSoc Companies Seminar Report 2014-02-20

 

This a very brief note on the ShareSoc Companies Seminar last night. The companies presenting were NewRiver Retail, Ilika, DotDigital and IS Solutions. A full report on the meeting and the detailed presentations are available on the ShareSoc Members Network (see www.sharesoc.org/members_network.html). They were all interesting companies in different ways, and there is nothing better than hearing from the horse’s mouth what the management have to say about their own businesses.

 Note that ShareSoc is now running these seminars regularly so as to enable private investors to learn more about individual companies. The format enables you to hear directly from the senior management of small/medium sized companies and ask them questions. Our next seminar is scheduled for the 26th March and currently we have Pressure Technologies, Cambria Automobiles and Mopowered presenting (check nearer the date for the confirmed presenters as there may be another). You can register for this event on the following ShareSoc web page where more details are supplied: http://www.sharesoc.org/seminarmarch2014.html

Roger Lawson

Essar Energy and Camkids – spot the connection

Essar Energy (ESSR) is a FTSE-250 Indian oil company where minority shareholders are none too happy about a proposal from the majority owners (the Ruia family) to make a bid for the company at 70p. It floated at 420p in 2010 on the London Stock Exchange and joined the FTSE-100, but it has shown substantial losses in the last two years. Standard Life has described the move as “cynical opportunism” and seem to believe that the offer undervalues the future prospects of the business. The share price has been as low as 55p recently.

It was interesting to attend a presentation by Camkids (CAMK), a Chinese footwear and garment company, last night (17/2/2014) at a Mello event. Camkids is like many Chinese companies listed on overseas markets (in this case AIM) in that it now looks remarkably cheap on fundamentals, but buyers are still not in the market for the shares.

Here’s some of the key numbers: Forecast p/e of under 3 and forecast dividend yield of over 6%. The company has positive cashflow with RMB 294m in the bank (that’s £30m at the current rate of exchange equivalent to almost half the market cap). In addition it is growing quite rapidly and has a high return on capital. With a growing market for high quality children’s wear to the booming middle-classes in China (and a policy of only one child per family which might soon be relaxed), it looks well positioned. But since mid 2013 the share price has been heading downhill. Why?

The presentation by non-executive directors Jacques-Franck Dossin and Richard Sweet was competent, although it would have been good to have some samples of the companies products available. But it was when the questions came that doubts started to creep in. Here are some of the questions and answers (summarised and paraphrased for brevity) with some comments added:

Question: Has the Chairman or other directors bought shares in the company recently? Answer: No but having directors acquire shares may be seen as fine in some countries but we were advised it was not appropriate in the UK. Comment: I think this is referring to the grant of options or shares to non-executive directors as part of a remuneration package. But there is surely nothing to stop them buying shares in the market. It is generally a good idea for all directors to hold shares, but non-executives should not have such a large holding that it would prejudice their independence.

Question: Why were credit terms extended to 120 days? (this arose after it was pointed out that the debtors figure was very high (RMB 317m on annual revenue of about RMB 900m). Answer: This was necessary due to responses from competitors. Comment: this seems to be a common problem in Chinese companies. High debtors not just damage cash flow even if extending credit terms keeps the customers happy – it creates a very substantial risk of future write offs.

Question: What language is used in board meetings? Answer: both English and Chinese, but an interpreter is also available. As one of the directors said, “it’s a challenge”. It seems not all the non-execs speak any Chinese and the Executives are not all competent in English. Board meetings are generally held by telephone conference call, apart from the one held at the time of the AGM (which is in China). Comment: this must be an exceedingly tortuous process.

Question: Why did the company list (and a relatively small amount of shares placed)? Answer: It is important to be a listed company in China. Helps brand/company awareness.

Question: Why did the company list in the UK? Answer: There weren’t many options. Had looked at Hong Kong, but there was a long queue there.

Question: What is the dividend policy? Unable or unwilling to state.

Before summarising the reasons why investors may be wary of this company (as were many at the presentation), it’s worth looking at how this company stands up on the AIM Company Scorecard that ShareSoc issued in 2012 as an aid to investors (see  http://www.sharesoc.org/scorecard.htmlif you wish to do a full analysis of this company). Note: this has been done without even reading the AIM prospectus as it would clearly not score highly anyway.

This company fails on the following questions:

1. Do the directors control less than 35% of the shares? No, the Executive Chairman holds 66%.

2. Is there an independent Non-Executive Chairman? No, there is an Executive Chairman.

3. Is there a majority of non-executives on the board? No, it’s 50/50.

4. Is the company registered in England or Scotland? No it’s registered in Jersey.

5. Is the company not registered in a tax haven such as the Channel Islands….? No its registered in Jersey.

6. Does the company hold its General Meetings at a convenient time or location? No – they are in China.

7. The company has a USP or substantial barriers to entry from competitors in the markets in which it operates? No, there were certainly no obvious barriers given in the presentation.

So in summary the Executive Chairman, Mr Zhang Congming, holds 66% of the shares and is likely to have control of the board. As with Essar, this puts him in position to dominate any “corporate actions”, which may or may not be in the interests of minority shareholders. This writer from past negative experiences of such situations simply does not invest in companies of this structure. The fact that Camkids is based in a remote country with historically lax standards in the business arena does not help either and for the private investor who cannot easily meet the key player and converse with him in English, it’s surely one to avoid. That might help to explain why the share price is in the doldrums.

The organiser of this meeting, David Stredder, did have one suggestion to tackle the above issues. That a “roadshow” for investors to visit Camkids and other Chinese companies be organised, at the expense of those companies. That might give investors more confidence, and would make an interesting trip. But it would not tackle the other issues given above in respect of Camkids.

Reminder: these blog posts are the personal views of the author alone.

Roger Lawson

Financial repression to continue

Are you feeling subject to financial repression? You should be because it’s the phrase used to describe how the Government reduces it’s debts by lowering interest rates to a level that is negative in real terms. Anyone saving in a bank account or building society is having their savings eroded this way because they are not getting a real return. Bank base rate has been at the historically exceptional rate of 0.5% for some time and high street banks are as a result offering trivial rates of interest (certainly much less than the 2.7% and rising change in the Retail Price Index reported last month).

But the Governor of the Bank of England, Mark Carney, has indicated that interest rates are likely to remain low for some time. Indeed he is ditching the previous guidance that rates would rise once unemployment had fallen to a given level, because it has already fallen below the previously set target when it was not expected to do so until 2016. In the meantime, the Bank thinks the recovery is still too patchy to raise interest rates. There are still too many part-time workers who cannot find the full-time work they would prefer, i.e. there is spare capacity in the workforce, the Bank alleges. Although economic growth is improving, the expectation therefore is for a benign pressure on inflation.

Of course, this low interest rate environment does not just affect small savers in banks and building societies, it also affects stock market investors because the interest rates paid by stockbrokers on cash held with them is now minimal – indeed for many brokers it is now zero.

An example of low bank interest rates is that of Barclays. I commented yesterday on how the bank seems to be run in the interests of bankers rather than shareholders. It is certainly not run in the interest of depositors. So for example, it pays  0.7% gross on an “Everyday Saver” account, i.e. one with “instant access” and no penalties for withdrawal. That’s on a sum of £85,000 which is the maximum guaranteed for deposits under the Financial Services Compensation Scheme.

There is one tactic you can take if you don’t like that rate and wish to avoid the worse aspects of financial repression. Just move your savings to the Co-Operative Bank (formerly the Britannia Building Society part). They pay 1.5% gross on the same £85,000, with deposits guaranteed by the Government likewise in their Select Saver account. The only restriction is that you can’t make more than four withdrawals per year.

Now you may have read about the troubles of the Co-Operative Bank. But that should not worry depositors as the Government is standing behind deposits of up to £85,000 and the restructuring of their debt should see them through. But their troubles have put off other savers so the Co-Op probably needs to offer a higher interest rate. It’s rather like saving with Northern Rock after they ran into difficulties – a highly profitable exercise.

Unfortunately you will still be getting a negative real interest rate after tax. The only way to get a real return is probably to invest in real assets such as property, corporate bonds or shares in businesses. But as regards the latter punting on the stock market at this time might be risky whereas you need to be selective about bonds as when interest rates do rise then capital values will fall.

So it really depends on your time horizon, but cash is certainly no longer king in the pockets of investors. And it is surely regrettable though that the Government, with the support of the Bank of England, wishes to continue to run an economic policy that damages those who have few options for where to place their cash savings.

Roger Lawson