ShareSoc Company Seminar Announcement

The initial line-up for our next seminar at which public companies will be presenting on the 15th July is now available and registrations are now open. This event is in the City of London (in the usual FinnCap offices venue), with registration starting at 4.00 pm. Four companies will be presenting this month and answering your questions, which are:

– IDOX (IDOX): Public sector software solutions, and for highly regulated asset intensive industries.

– ABZENA (ABZA): Services and technologies to support the development of better biopharmaceuticals.

Plus two other companies to be advised (keep an eye on the web page below for the details).

Refreshments and a 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.

To register for the event, please go to this web page (click on to access):

http://www.sharesoc.org/seminarjul2015.html

Roger Lawson

Greek Financial Crisis and Globo – it’s a Big Day

What better day to go to the Annual General Meeting of a Greek company (Globo Plc – GBO) than the day that Greece closed its banks and stock exchange for as long as a week? At least it used to be a Greek company and although it still has a lot of software development staff in Greece most of its operations are now in the rest of the world. Indeed it has ambitions to be a major global business based on a strategy of more acquisitions and taking on debt to finance them.

Before the meeting commenced I asked the CEO (Costis Papadimitrakopoulos) whether his staff could survive on 60 Euros per day which is all apparently they will be allowed to take out of a bank but did not get an answer – perhaps he was not aware of the latest announcements. He did say that the Greek Government needed to resolve the situation but any exit from the Eurozone might actually reduce their costs because there would presumably be some implied devaluation on the adoption of a new currency. They only have 87,000 Euros in Greek banks.

Costis decided to give us a specific pep talk on the Greek situation later which he introduced by saying “today is a big day”. He explained that the group has minimal exposure to Greece. People are still working, coding, and generating sales. Contingency plans have been made [as well they might have been as this crisis has been a very long running story]. Power and telecoms have back-ups and they are using cloud services in many areas but some 45% of employees still reside in Greece.  Last year only 12% of revenues came from Greece and it will be below 10% this year. Most of that is to large enterprises. Receivables will be devalued on Euro exit but so will payables.

He emphasised that the Greek people wish to stay in Europe. The referendum on Sunday might drive a new cycle of negotiation. [Comment: it is clear that there is considerable brinkmanship going on and forcing some resolution is surely the way to go. It might not be positive for Greece to exit the Euro in the short term, but there seems to be a lack of facing up to reality on both sides. Levels of Greek debt are unsustainable and surely some needs to be written off, but nobody wants to permit that when there is lack of acceptance of the need for fundamental change in the Greek economy].

Globo is a company that has generated some debate on bulletin boards because of its high debtor levels, high and increasing debt (while holding cash), and large software development capitalisation. I will be writing a more extensive report on the AGM and covering some of those issues as soon as possible – the report will be available on the ShareSoc Members Network.

But the Greek crisis has certainly not helped the share price today – down 6% at the time of writing, which seems somewhat irrational based on the information above. That’s a lot more than the general market falls.  If Greece does devalue, doing software development there may prove even more economical than it is now.

Roger Lawson

Vacation and Thorntons Takeover Bid

Back from a week’s holiday during which one of my holdings (Elementis) issued a profit warning while another was the subject of a possible bid (Netcall). Neither prompted me to take action as I was on holiday even though I spotted the news. The Greek crisis is not yet over and one gets the impression the deadlines keep moving out and most knowledgeable commentators expect some last minute fudge to allow Greece to stay in the Eurozone. At least my total portfolio value was up at the end of the week for those who might worry that taking time out over the summer and ignoring the day to day market gyrations for some time will damage their investments.

One interesting item of news was the agreed bid for Thorntons, the chocolate company, by Ferrero at 145p per share. The share price before the announcement was 101p and the offer looks a very fair one.

I have not held Thorntons for a long time but it reminded me to look back at a review I wrote on the company  in 2003 which won a competition run by Investors Chronicle. The share price then was 133p.  It was entitled “A Low Risk Bet on Financial Structure” and it explained why profits might improve substantially simply by paying down the debt and reducing interest payments over the next few years. The business was still very cash generative and had some positive aspects, but had suffered from a patchy trading history and recent over-expansion funded via debt. Here are a couple of paragraphs from the original article:

Even with past poor trading results, the business has always been massively cash generative. In the last two years cash inflow from operations has been over £21m per year, and capital expenditure was reduced to less than £3m last year. Even if trading remains much the same, this business will throw off enormous sums of cash in the next few years.

What will that cash be used for? Will it be wasted on acquisitions, foreign ventures, tarting up the stores, or unprofitable expansion? Well so far it has been primarily used to repay debt. If that process continues then profits after interest payments will rise by 35% for that reason alone over the next few years.”

Investors who acted on my report might have made money because the share price did increase in the next few years as the profits improved, reaching almost 200p in 2007. What happened subsequently?  Revenue certainly increased but profits did not. In a good year they were flat, and in a bad year (typically when another “restructuring” was undertaken) they were zero. They also got through several CEOs in this period. So investors who held on would have been disappointed.

The chocolate market seemed to be changing with consumers moving to the extremes of high quality and strongly branded products (such as those sold by Ferrero) with supermarkets taking the lion’s share of the traditional boxed chocolate market with sales to middle-aged mums. Tinkering with the shop format at Thornton’s and moving into sales via supermarkets and on-line did not seem to help much. And having a low-cost vertically integrated structure did not help either.

So the underlying business problems of the company were never resolved. The moral is that investing simply on the basis of financial numbers such as future cash flows can be a tricky exercise. Retailers that rely on consumer tastes can be vulnerable to market changes just like any business. It will be interesting to see how Ferrero change this business – presumably they see some potential in it that others have not managed to realise of late.

Roger Lawson

FCA Investigation into Quindell

Shares in Quindell have today been suspended from the AIM market and an investigation into “public statements made regarding the financial accounts of the Company” has been initiated by the Financial Conduct Authority, according to this announcement.

ShareSoc applauds the launch of this investigation, with the FCA acting too rarely on the many cases of questionable statements made by AIM quoted companies in particular.

Comments have previously been made questioning the veracity and motivations of statements made by those short of certain companies’ shares. I’m sure we all agree that statements designed to mislead and affect share prices should be prosecuted with the full force of the law, according to the Market Abuse regime, irrespective of whether they come from the short or the long side. Nevertheless, it is my own personal experience that it is (sadly) more frequent for misleading statements to emanate from companies themselves, than from attackers. Quite frequently it is only from investigations conducted by parties with a short interest in a stock that management misdemeanours are uncovered. What is the point in shorting a stock, unless there are reasons to doubt the valuation being ascribed to it by the market?

ShareSoc will continue to press the FCA to investigate and prosecute cases of Market Abuse. Shareholders have lost large sums of money through believing that statements made in RNSs can be relied on and are not designed to mislead.. It is time that the FCA ensured that investors can rely on such  official statements, by prosecuting offenders vigorously and publicly. Moreover, it is essential that such prosecutions should focus on offending directors, and not on the companies. When companies suffer a financial penalty as a result of misleading statements made by directors, it adds insult to shareholders’ injury by penalising the innocent shareholders, as opposed to those responsible. Justice must be seen to be done.

The views expressed in this article are those of the author and not necessarily those of ShareSoc.

Mark Bentley

Charles Stanley and Alliance Trust

Stockbroker Charles Stanley (CAY) today announced their Preliminary Results for the year ending in March, and also announced they had exchanged contracts for the disposal of the CSS Division. The results were somewhat better than expected, but there was a loss before tax of £6.1 million, albeit with positive underlying earnings per share. Charles Stanley have a considerable retail investor client base and it is always worthwhile for investors to keep an eye on the financial position of their stockbroker. The last thing any investor wants, particularly those in nominee accounts, is for their broker to get into financial difficulties and risk administration or action by regulators.

The balance sheet of the company does not look that strong (current ratio only 1.13). Although they had £28m of cash on the balance sheet at the year end, this is swamped by the large amount for trade receivables of £267m offset by £265m of trade payables. However they did raise £15.8 million from investors after the year end which puts them in a stronger position and they should receive more cash from the disposal of the CSS division over the next year.

It is particularly interesting to look at the Charles Stanley Direct (“CS Direct”) division’s performance which provides what they call a “full service digital investment platform” for investors. Although the number of accounts went up substantially by 37%, it continued to lose money. This is surely ominous for Alliance Trust who are competing in the same area with the Alliance Trust Savings (ATS) platform and who are trying to expand it by adding clients – for example by the recent acquisition of Stocktrade.

What is more Charles Stanley invested £2.6m in “internally generated software” during the year which they capitalised (see Note 14) a lot of which surely went on CS Direct. This shows the size of investment that is now required in technology to maintain competitiveness in the stockbroking market.  In addition they wrote off £8.3m in asset impairments of which £3.0m was in CS Direct. It does not look a particularly healthy part of their business surely? Some questions for the AGM no doubt there.

Why is stockbroking such a competitive and unprofitable business for many operators? Because there are few barriers to entry is one reason, with some platforms offering the technology as a “white label” solution to new entrants and not a lot of apparent service differentiation. In addition because of the high capital costs to develop new platform technology, and on-going maintenance costs, there is always a tendency to try to increase volume to better cover the overheads. This leads to aggressive competition on price to grab market share and over excitement about acquisitions with large client bases. As in the airline business, it can result in lots of players losing money. Alliance Trust beware.

Roger Lawson

Rensburg AIM VCT About Face on Wind-Up

Rensburg AIM VCT Plc have today (18/6/2015) announced that the circular giving details of the previously proposed wind-up of the company has been put on hold. They state that the previous announcements have “……acted as a catalyst to generate interest in the Company and several of the parties with whom the Board had held previous discussions have approached the Board with proposals which might prove to be more attractive than before”. Maven Capital Partners, who had written to shareholders, is not one of the parties though.

ShareSoc had made representations on the wind-up to the board as we considered it very prejudicial to certain shareholders and we were in the process of sending a letter to all shareholders on the register when the latest announcement was made. Our comments on this matter in the past and the letter to shareholders can be read on this page of our web site: http://www.sharesoc.org/campaigns.html .

In summary we believed that other alternatives should be pursued. It is good that the board has changed its mind on this matter and is now considering other options. But it surely demonstrates that active engagement by ShareSoc and by shareholders with companies is important.

The AGM will still take place on the 22nd July and shareholders present should ask these questions: 1) what have been the costs of this abortive development of proposals for a wind-up (legal and other costs) and 2) why did the board not actively pursue alternative proposals before rather than waiting for the previous announcements to “act as a catalyst to generate interest” as their announcement puts it?

Roger Lawson

Rensburg AIM VCT Wind-up covered in the FT

There was an interesting article in the FTMoney edition yesterday (6/6/2015) on the proposed wind up of Rensburg AIM VCT Plc. The board of directors are pushing ahead with this proposal and a General Meeting to approve it is scheduled with the AGM on the 22nd July.

The FT article by Adam Palin points out that anyone who claimed capital gains roll-over relief on their original investment in the VCT may not wish to support the wind-up. It quotes me (as a shareholder in that position) as saying “The cash I would receive would barely be enough to cover my tax bill” and “My shares are worth practically nothing if they wind it up“. Indeed the position is potentially actually worse than those off the cuff remarks indicated because, as I have pointed out to Mr Battersby the Chairman of the company, even with capital gains tax at a lower rate than applied when I bought the shares, the tax bill would still be higher that the current net asset value of the shares. So unless you can use up the tax claim within your annual allowance, or soak it up in some other tax advantaged investment, then it makes no sense to vote for a wind-up.

Avoiding the tax is problematic as is the cost of the wind-up and realisation of the assets of the trust at near their market value. Bill Nixon of Maven who has previously written to shareholders is also quoted in the article. He said “There’s no precedent for old money VCTs to wind up and cystallise capital gains …… It’s inexplicable“. Mr Nixon said he has offered to manage the VCT for free for two years but Barry Anysz, one of the directors of Rensburg VCT is reported as saying that Maven have not engaged “formally” with the Rensburg board. What does that mean?  However it seems likely that no serious engagement has taken place between the board and Maven or any other VCT or VCT manager to consider alternatives to a wind-up.

It’s worth considering how the board got into this invidious position where the company is in a strategic hole. It has become too small in size with few options now available. Back in June 2012 ShareSoc issued a note recommending votes against all the directors partly on the grounds that the policy of consistently returning cash to shareholders via dividends while making few new investments would lead to difficulties. Cash dividends were not covered by profits earned so effectively assets were being returned to shareholders. Indeed the note said “In the long term, if this policy is continued it will surely prejudice the viability of the company  unless more funds are raised” and so it has turned out to be.

So in essence the company and its shareholders are now facing some difficult decisions due to past policies adopted by the directors. Are they being any wiser about what is now being proposed? Investors in the company will have to judge that for themselves. But make sure you look at your tax position closely and take expert advice on it if required.

In the meantime, ShareSoc has requested a copy of the share register for the company and may be writing to shareholders before the AGM and Wind-up Meeting. Anyone who is not on the register may record their interest on our web site here: http://www.sharesoc.org/campaigns.html  (use the form on the right hand side of the page), which also gives a lot more background information on past events at this company.

Roger Lawson