High pound also impacts Renishaw and GlaxoSmithKline

Following on from my blog post a couple of days ago about the high pound impacting the profits of technology companies, yesterday saw final results from Renishaw (RSW) and interims from GlaxoSmithKline (GSK) which reflected the same issue. However, the currency impact in both companies was not the main impact on the subsequent share price move.

At Renishaw, profits would have been £6.8m higher on top of an “adjusted” figure of £70.1m for the year, but for the currency impact. Last years corresponding figure was £79.2m, so underlying profits fell sharply and more than accounted for by the currency impact.  Did the share price fall on these dismal results? No the share price actually rose 23% on the day of the announcement. Allegedly this was because of a very good fourth quarter which resulted in the adjusted e.p.s. being ahead of forecast. The company also reported an exceptional profit of £26.3m on its holding of Delcam shares which was the subject of a takeover bid during the year. This made the overall, statutory, results look good of course.

At GSK, turnover declined on a “constant exchange rate”  (CER) basis by 4%, but declined 13% at real exchange rates. Core (i.e. “adjusted”) earnings per share was down 12% at CER but 25% at actual rates. This appears to be mainly down to below budget sales of Advair – not yet replaced by new drug Breo.

The company put the usual positive spin on the numbers – a good pipeline of new products, expect to maintain leadership in respiratory products, etc, but the negative exchange rate move has put a stop to more share buy backs as cash flow is not as high as expected. In addition the company plans to dispose of some older products – which suggests more downsizing to follow on from disposal of some of their OTC products. The share price declined 5% on the day of the announcement, but had also been in decline for the last few weeks. The looming threat of legal action over bribery in China does not help of course, plus general pricing pressure in markets such as the USA. Earnings seem likely to be flat as against the previous year at best.

Comment on GSK: It’s a case of two steps forward, one step back in the long term recovery of GSK. If they continue to underperform despite claiming to have a great drug pipeline, they may end up with a bid if they are not careful, like AstraZeneca. Getting a clear picture of the financials and prospects is of course difficult because of the numerous “adjustments” to the accounts. This half year included £101m of restructuring costs and £47m of legal costs which were treated as “exceptionals”.  Like SSE I have commented on recently, GSK are serial offenders in presenting their figures in the best light possible, but with repeated exceptionals, the story becomes both repetitive and unjustified.

Roger Lawson

High pound impacts Croda, Abcam and others

Today Croda issued their interim results for the six months to the end of June. Croda is a speciality chemicals company and less than 10% of its revenue arises in the UK. A very substantial proportion comes from the USA and from other dollar denominated sales elsewhere. The high pound (currently over $1.70 to the pound) is having a big impact on companies such as Croda. In the six month figures revenue in constant currency terms is up 2.5% and operating profit is up 0.4%. But in sterling revenue fell 4.5% and profit is down 5.0%.

A lot of smaller and specialist technology companies export a large proportion of their sales so we are likely to see more such reports. This is one reason why share prices of these companies have been drifting down in anticipation in recent weeks, and Croda fell another 2% after the aforementioned announcement.

Another company reporting today with a “Pre-close Trading Update” was Abcam, another very international business (they sell antibodies primarily). Although they said that adjusted profit before tax will be slightly ahead of consensus expectations for the year, they did spend a lot of time talking about “constant currency” revenue growth and in sterling terms it looks like revenue will be somewhat below forecast. Abcam do have some of their costs in dollars which may have protected the profit figure. The Abcam share price rose on these figures, possibly in relief that they had not been more impacted by the high dollar rate.

Of course it’s not just smaller companies that are likely to see the impact of a high pound though. Major oil and pharmaceutical companies may also be affected – the dollar is of course the currency in which oil is usually traded.

Investors should perhaps look at their portfolios to see if they have companies likely to be affected by the exchange rate, but it may be a bit late to react unless you think the pound will rise further. Unfortunately forecasting the direction of exchange rate movements is a mugs game so far as this writer is concerned so whether it will move further up or reverse direction I would not like to say. But it is a good time to take a vacation in the USA for UK residents.

Roger Lawson

Tesco admits it needs a new leader

Today Tesco announced that CEO Philip Clarke is departing. The statement included a further profit warning which mentioned that the overall market is weaker and trading profit in the first half of the year is below expectations. It’s surely an acceptance that Mr Clarke had been given long enough to turn around the business, but had ultimately failed (he has been in the CEO role since March 2011).

The new CEO is to be Dave Lewis who joins from Unilever where he has worked for 28 years, mainly in personal care products markets. So the new CEO does not have a strong retail background? Yes that’s right – he does not! Flogging personal care products to supermarket buyers is surely a very different background to convincing retail consumers to buy food (and a few other products) in your shops, however strong his general management skills might be.

Mr Clarke is getting 12 months pay in lieu of notice, but apparently payable from when he ends a transitional period in six months time from the 1st October – so effectively he is getting 20 months notice. Plus he will remain Chairman of the Tesco joint venture in China (pay for that is not disclosed).

He also received some no doubt heartfelt plaudits such as “done a huge amount…”, “achieved a great deal”, “the board are deeply grateful” and “an outstanding achievement” to quote from the RNS announcement. But apparently not quite enough to justify his retention. Shareholders in Tesco might not agree with the praise as the share price of Tesco has moved from 400p to 282p during Mr Clarke’s reign. But it perked up 2% on the news of the change.

Alkane Placing – What a Wheeze!

Today (17/7/2014) Alkane Energy announced a placing to raise £8m to fund the acquisition of three power response companies. The placing was at 36p, when the closing price the previous day was 39.5p indicating a discount of 9%. But as with all such placings, the news had got around the market beforehand, so it’s more like a 15% discount to the share price before the news spread.

So what you may ask? It’s just another placing that prejudices private shareholders who were unable to participate (there is no “open offer” in this case). But there is one aspect of this placing that is unusual. It is being done using a “Cash Box” arrangement because the number of shares to be issued (15.2% of the enlarged share capital) would normally require shareholder approval, i.e. the calling of a General Meeting.  The “Cash Box” process involves the creation of a new subsidiary company into which cash is injected and the company then buys the shell at an artificial price. Shares in the company are issued to the placees in exchange for shares in the new subsidiary thus technically enabling the company to claim it has not received cash from the issue of shares in the company.

What a wheeze one might say! But other companies have used it such as Ocado, Great Portland Estates and Drax. It tends to be used when companies are in a hurry (i.e. cannot accept the time required to call an EGM) and it also saves them the cost of doing so.

In the case of Alkane, the CEO has justified it on the basis that the company was competing to acquire the relevant businesses against a private bidder and any delay would have prejudiced the deal.

Shareholders in Alkane will have to decide for themselves whether  the circumstances justified these actions, but there surely seems little point in having rules about share issuance and consent by shareholders if ways around them are allowed.  Does the end justify the means is the question?

That and the general problem of placings in AIM companies, which prevents many shareholders from participating, should surely be reviewed. Unfortunately one of the difficulties is the Prospectus Directive as mandated by the EU which is totally inappropriate for small cap companies.

Roger Lawson

Blinkx AGM Report – Was it a black swan event?

At the Blinkx AGM today the events of the last year were various described by the management as a “black swan event”, “one in a 1000 years”, and “a perfect storm”. That probably echoed the emotions of shareholders after the Edelman blog, the attack by shorters, the resulting collapse in the share price, and the subsequent profits warning that caused it to fall by a further 60%. The share price peaked at 230p in November 2013 and is now 35p, so needless to say there were a number of grumbles from shareholders at the meeting.

I will not go into details of past events at the company because they have been well reported on our blogs and in our Members Newsletter.

There is a detailed four page report on this meeting on the ShareSoc Members Network (in the AGM Report Forum). The meeting no doubt helped to explain some aspects of past events to shareholders present, and apparently the company is considering share buy-backs.

Is this a temporary hiccup or are there major trends in the industry that are moving in the wrong direction for the company? Are buyers of advertising being put off by the general reputational damage of the Edelman blog, and will this recover as the story fades into history? We will have to wait and see for answers to those questions it seems, as it is not clear that the board knows them.

I do think the board and major shareholders have to ask whether they have the right Chairman and CEO to put things right though (that’s a personal opinion of course).

Roger Lawson

Shareholder Class Actions

The topic of shareholder class actions is a controversial one. Before ShareSoc participates in any such actions, on behalf of its members, we therefore wish to obtain the views of our membership on this subject. We will shortly poll all our members, including associates, to ask your views. If you would like to cast a vote, and receive the other benefits that ShareSoc offers, but are not already a member, you can join us here: http://www.sharesoc.org/membership.html The poll will be e-mailed to our members on 18th July, so please ensure you are signed up before then if you wish to have your say. We also welcome your comments on this blog post.

If the result of this poll is supportive of participation, ShareSoc’s board will decide on any particular actions that we feel it is in the interests of our members and good corporate governance to pursue, usually together with international partners and/or institutional shareholders.

What is a class action?

A shareholder class action is a legal suit where a number of shareholders join together to seek compensation for losses incurred as a result of actions or inaction by a company they are or have been invested in. Most often the legal action is taken in the USA, where a) legislation protecting shareholders is more rigorous; b) more lawyers are prepared and able to pursue such cases on a “no win, no fee” basis, meaning plaintiffs take no financial risk themselves; c) defendants costs are not recoverable from plaintiffs, so plaintiffs do not run the risks of being liable for those costs. Hence such cases most usually concern multinational companies. NB: there is no such thing as a “class action” in English law, but there is a rarely used concept of “Group Litigation Orders”.

Arguments in favour of pursuing class actions

The primary argument in favour of pursuing such actions is that they are one of the few ways of holding errant managements to account and improving corporate governance. Clearly they can also result in current and previous shareholders that participate gaining some restitution. ShareSoc itself may benefit financially too, by taking any small share of any awards that are made. Any such financial gains would improve our ability to support and broaden our membership – remember that ShareSoc is a not-for-profit organisation. Details of any such financial participation by ShareSoc would be provided to participating members in each such case.

Another argument in favour is that if we do not participate our members might lose out if other shareholders do pursue such an action and succeed.

Arguments against shareholder class actions

There are two principal ethical & practical arguments against pursing such actions:

1. Effectively, such suits could be considered as shareholders suing themselves, as any restitution must come mainly from company funds! It is possible that some recompense can be obtained directly from management, but in most cases settlement of such claims is likely to be covered by insurance against such an eventuality that their employer provides. Nevertheless, simply the fact of having to account for their behaviour in court, and the reputational impact thereof can act as a deterrent against bad behaviour.

What actually makes matters worse for current shareholders is that previous shareholders may participate to recoup historic losses, meaning that funds can be transferred from the company which existing shareholders own, to past shareholders.

2. Inevitably legal fees in such cases will be high, and some proportion of any settlement obtained will end up in lawyers’ pockets. Of course, this means that US legal firms in particular are keen to encourage such actions. Hence, rather than shareholders solely benefiting from any company funds they succeed in extracting, some proportion of those funds end up with the lawyers, whilst the value of the company assets that shareholders own may be reduced by the full amount of the settlement.

Long standing directors and investment trusts

The UK Corporate Governance Code has a clear rule about non-executive directors who have served for more than nine years (Code B.1.1.) which states “The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director: has served on the board for more than nine years from the date of their first election“. This rule was not introduced to ensure that the “jobs for the boys” get regularly rotated, but to ensure that such directors do not get stale and that the board is regularly refreshed with new views and fresh blood. The wording clearly suggests that the board should provide justification for directors who have been serving for more than 9 years to be re-elected (i.e. on the usual “comply or explain” basis), and it is generally considered good practice if directors are replaced before then.

In investment trusts there is a particular problem though that all the directors are usually non-executive and often very long-standing (and also often aged). For example this issue arose at the AGM of Baronsmead VCT 3 where Andrew Karney and Gillian Nott had been on the board since 2001. But the explanations given for retaining such directors are often trivial and simply say that the board considers them independent.

In addition, it is often the case that the Chairman claims, or it is stated in the Annual Report, that the company complies with the AIC Code  (which has a somewhat different wording) and hence they don’t need to comply with the UK Corporate Governance Code. Indeed the Chairman of Baronsmead VCT 3 made such a claim at their AGM.

This is what the relevant part of the AIC Code says:

“4. The Principle – The board should have a policy on tenure, which is disclosed in the annual report.  


As mentioned in principle 2, some market participants believe directors should not be considered independent after nine years service, whereas others consider a longer tenure enhances the ability to be independent. Many boards function best when working together for years; others find regular changes to be desirable but awkward to achieve. 

Provision B.1.1 of the UK Code contains a provision that boards should state their reasons if they consider a director to be independent notwithstanding the fact that the director has served for more than nine years from the date of their first election.  

Whilst the boards of investment companies, in common with the boards of other companies, are likely to benefit from a regular infusion of new blood, they are perhaps more likely than most to benefit from having at least one director with considerably longer than nine years’ experience. Continuity, self-examination and ability to do the job should be the relevant criteria.”

This of course drives a coach and horses through the UK Corporate Governance Code principles.

Investment companies have also relied on a letter from the former Chairman of the FRC, Baroness Hogg, to the AIC that suggested that compliance with the AIC Code would satisfy the requirements of the UK Corporate Governance Code.

But ShareSoc recently took up this issue, and it has been confirmed by the current Chairman, Sir Winfried Bischoff, that the AIC Code does not “absolve AIC members from their obligations under LR 9.8.6, including the obligation to provide an explanation when choosing not to follow the Code” to quote from his letter.

So when you see a moribund board of directors, challenge why they are still there after 9 years and make it clear they do need to comply with the UK Corporate Governance Code or provide adequate explanations. The explanations should not be trivial, i.e. they should be specific and explain why the people concerned could not be easily replaced. And you might also tell them that as a shareholder you don’t accept they can rely on the AIC Code, which is a body that represents the interests of investment companies (primarily the managers in practice), and not investors.

Here’s a couple of investment trust AGMs where you may want to consider how to vote for the directors at forthcoming AGMs: Monks Investment Trust on the 5th August where CC Ferguson and EM Harley have served since 2003, DCP McDougall has served since 1999, and the Chairman James Ferguson has served since 2002; and Rensburg AIM VCT on the 23rd July where the Chairman R.G. Battersby was first appointed to the board in 1999, and the two other directors B.A.Anysz and P.C. Smart have served for more than 9 years.

Yes it’s a common problem that the directors of such companies think they should go on and on and on. They need dissuading.

Lastly of course the principle of regular refreshment of the board is supported in ShareSoc’s Non-Executive Guidelines document where it says: “All Non-Executives should be subject to an annual election by shareholders at the AGM and should not remain on the Board for more than nine years as per the Corporate Governance Code but we recommend that each NED should be subject to a thorough review of their performance and contribution after three years and the company should then choose whether or not to extend their appointment” – see www.sharesoc.org/Non_Execs_Code.pdf  for the full Guidelines.

Roger Lawson