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Posted by ShareSoc at 15:25, February 12 2013.
Lynn Ruddick steps down from City of London Investment Group
It was good to see the announcement today that Lynn Ruddick is stepping down as a director of City of London Investment (LON:CLIG) “in order that she can devote more time to her other business commitments”.
Indeed the number of her other commitments was a subject I raised at their last AGM after her appointment in January 2012. In response to a question, she conceded that she was a director of 4 other investment trusts and was also a trustee of 3 pension funds. This seemed to me to a contradiction to the guidelines that City of London has for the companies in which it invests (readily available on their web site and well worth reading). It is also contrary to the guidelines ShareSoc set in its own recently published guidelines for non-executive directors which suggests a limit of 4 or 5 roles (available here: www.sharesoc.org/Non_Execs_Code.pdf).
One can only welcome the wisdom of this change therefore.
Posted by ShareSoc at 09:34, February 15 2013.
PIRC Opposes All LTIPs
PIRC have issued a Press Release saying that they intend to oppose all new Long Term Incentive Plans (LTIPs) this year. PIRC (Pensions and Investment Research Consultants) provide voting recommendations to institutional investors so this is a very significant step.
PIRC is taking a much tougher stance on remuneration issues and they argue that LTIPs neither provide incentives nor are “long term”. They also allege that they are ineffective due to amendment and manipulation by remuneration committees.
In addition they suggest shareholders need to scrutinise the role of remuneration consultants who have a vested interest in “creating complex and accommodating outcomes”. They specifically will oppose cases where a company’s auditors also act as remuneration consultants and will recommend voting against the auditors and the head of the audit and remuneration committees.
ShareSoc has in the past also argued against large LTIP awards. For example we said this in our response to the Kay Review:
In our response to Vince Cable’s consultation on Executive Pay we said this:
Whether all LTIPs are bad may be debatable, but they are certainly generally incapable of being designed in a manner that aligns executives’ interests with those of shareholders and are usually excessively generous with easy to achieve performance targets. Good incentive schemes are both simple and pay out quickly which is of course the exact opposite of most LTIPs. Introducing more complexity (such as “claw-backs”) simply makes them even worse. Opaque and complex LTIPs have been a major contributor to the inexorable rise of total executive pay and ShareSoc agrees that one step forward in dismantling this one-way escalator would be to halt their use.
Posted by ShareSoc at 09:07, February 18 2013.
Cosalt goes into Administration – shareholders to lose all
On Friday Cosalt (LON:CSLT) announced that it was going into administration. This is the final act in the long-running campaign by minority shareholders to keep the company alive and listed, and out of the hands of majority shareholder David Ross. But the announcement makes it clear that shareholders should not expect any value to remain in their shares, which is not unusual when a company goes into administration.
The Cosalt Offshore division is to be immediately sold (apparently via a Pre-Pack Administration) to a new company backed by NBGI Private Equity who are associated with ATR Group. You can tell it’s a Pre-Pack because the announcement says “the administrators will sell Cosalt Offshore to Dunwilco (1793) Ltd on the basis of the terms negotiated immediately following their appointment” but it also says “an agreement for the sale of the shares in Cosalt Offshore has been negotiated with Dunwilco (1793) Ltd” so it is clear that this is a typical pre-pack where the deal is agreed well before the formal appointment of the administrator and then immediately completed. See our previous blog posts for our negative comments on pre-packs in general. The other major division, Cosalt Workwear, is likely to be sold in due course, effectively winding up the holding company. It will be interesting to see who that is sold to and at what price.
Who are the major beneficiaries of this arrangement? Undoubtedly the lenders to the company who of course include David Ross but also Royal Bank of Scotland (RBS) and HSBC who presumably stand some chance of getting some or all of their money back. RBS frequently feature in pre-packs and have lobbied the Government against any reform of pre-pack arrangements. As the Government has a major stake in RBS, there is some conflict of interest here. It was clear from the announcement by the company on the 7th February that the banks were bringing pressure to bear to ignore the interests of shareholders and expedite the repayment of their loans rather than await an asset sale process so an administration was not unexpected.
One complaint shareholders have had for some time was the lack of provision of up-to-date financial information about the company to shareholders. Failure to publish accounts was one reason for the suspension of the company’s listing back in May 2012, and it has remained suspended since. So although shareholders defeated a delisting in Feb 2012, this made it a fait-accompli in practice.
An allegation from minority shareholders was that the financial position of the company was being concealed from them so that Mr Ross could pick up the company on the cheap. Will shareholders now ever get to see any accounts? Probably not is the answer. Administrators have no obligation to publish past accounts of any kind and will generally ignore requests to see them, although there will be a report on the administration issued in due course – perhaps in some years time.
Altogether a disappointing outcome of a long and complex saga, where communication to minority shareholders certainly seems to have been deficient.
Shareholders might ask the following questions: Have Mr Ross or the other lenders obtained any equity of other interest in Dunwilco (1793) Ltd and exactly who are the other shareholders in that company other than NBGI? Also was the Offshore business sold at a fair valuation via an open and competitive marketing process as required by Insolvency practice rule SIP16?
Posted by ShareSoc at 12:04, February 21 2013.
RM results and the welcome departure of Martyn Ratcliffe
RM (LON:RM.) announced their preliminary results this morning. The financial results were much as forecast by analysts following the major restructuring undertaken by Martyn Ratcliffe who was appointed as Executive Chairman after the company got into some difficulties.
There is an extensive report on the affairs of this company and the last Annual General Meeting on the ShareSoc Members Network. In conclusion it said “an example of not only poor corporate governance and bad remuneration policies, but also of how not to run a General Meeting”.
Mr Ratcliffe may have brought a breath of fresh air to this company, and undertaken the necessary management restructuring, but his general attitude to smaller shareholders who bothered to attend the AGM left a lot to be desired.
At least the results announcement included a comment that David Brooks is being appointed Chief Executive Officer and that Mr Ratcliffe will be stepping down as a director in the summer. So they are now looking for a new Non-Executive Chairman. For his rather short tenure, Mr Ratcliffe will be handsomely paid assuming that the share price exceeds 100p prior to 30th November 2015 (currently 78p at the time of writing) when he will be able to cash in his share options.
Shareholders might ask what lies in the future for this company. The steps taken to refocus the business and dispose of non-core businesses surely make sense but the company warns that it anticipates difficult market conditions will continue for the foreseeable future. With the focus on the UK education market, which is mainly dependent on Government funding, it’s clearly not going to be easy for some time as the Government looks to reign back public spending. So both the company and analysts’ forecasts predict some continuing decline in revenues. Most of this is from the hardware/infrastructure side which is low margin anyway (actually declined to 3.3% margin last year), which the company should surely have moved away from sooner.
Profits may not be similarly impacted but might also decline slightly in terms of earnings per share. But the interesting aspect of this company is that it is generating substantial cash. At the end of the last financial year it had cash on the balance sheet of £38m when the market cap of the company is only £66m.
It’s worth pointing out that the company does have a substantial pension fund deficit which will cost it about £4m per year in cash over the next few years (they actually paid £5m last year) which might put off any potential buyers of the company. But there may well be room to return cash to shareholders or make some suitable acquisitions as the company has little debt (credit facilities in place were unused at the year end).
In summary, this company is still a work in progress but looks not expensive on the fundamentals, which is probably why the share price rose this morning when most other stocks fell. Let us hope the new Chairman has a more sympathetic approach to smaller shareholders and a better stance on corporate governance matters.
Posted by ShareSoc at 16:12, February 21 2013.
BAE results impress the market, but it’s not all roses
BAE Systems (LON:BA.) issued their preliminary results this morning and basic earnings per share fell by 11% which you would normally expect to be rather a dampener on shareholders’ enthusiasm for the stock. But instead the share price rose during the day by over 4% when most of the market was falling. This contrary response probably arose because an increase in the dividend was announced – up 4% to 19.5p giving a yield of 5.6% on the share price at the time of writing of 346p. In addition there was an announcement of an aggressive share buy-back programme of up to £1bn over three years. These aspects may have pleased many shareholders who often hold the stock for income.
Underlying earnings per share only fell slightly but sales fell by 7% to £17.8bn and it’s no secret that BAE has been operating in tough markets for some time. However, the order backlog increased by 8% to 42.5bn so there looks to be a reliable income stream in the future. Indeed the company stated that it anticipates modest growth in underlying earnings per share growth in 2013. But the underlying figure ignores some exceptional items which are a recurring feature of BAE’s accounts as with many large FTSE-100 companies. The difference between basic and underlying earnings might better be viewed as being “out of sight, and hence and out of mind”.
Uncertainties about the US defence budget cloud the picture and the pricing negotiations on the Salam contract are still continuing. In essence UK and US defence expenditure is flat or declining and although there is some growth in international markets for defence equipment and in specific areas, this is not enough the offset the negative areas. For example, the US contributed 40% of group sales in 2012 so it is difficult to overturn that impact. The only positive aspect is that many of the contracts are long term in nature so that has a smoothing effect.
This picture was reinforced by a recent report in the Daily Telegraph that BAE’s share of global arms sales had slipped to third place from second according to a report from SIPRI (that data excludes China due to shortage of information). Lockheed Martin is now the leader with Boeing in second place. This data is based on US$ figures though so might have been affected by exchange rates.
So in summary, the company may be making positive hints about future prospects by raising the dividend, but it might also be simply trying to keep its shareholders happy by doing that and undertaking share buy-backs. Which applies might become clearer at the AGM on the 8th May.
No clarity on when Dick Olver might step down as Chairman was supplied in the announcement and that might no doubt be another question shareholders will ask at the meeting.
Posted by ShareSoc at 12:35, February 23 2013.
Audit market not serving shareholders says Competition Commission
Shareholders have many concerns about the provision of audit services to public companies. The same audit firms stay in place for very many years, and are only beholden to the company that hires them – and not to shareholders following the Caparo judgement, which may surprise you.
So in the banking crisis there were many questions how audit firms had managed to pass Northern Rock, Bradford & Bingley and the Royal Bank of Scotland as being “going concerns” when they subsequently collapsed within a few months. In addition there are frequent allegations that auditors should have identified major problems in companies but did not – Cattle’s is one of the more recent cases.
To quote Alistair Blair: “Auditors are supposed to take a sceptical look at management. Instead, they are in their pockets, condemned to bite their lips and sit on their hands, because auditors are selected by management and paid by management”. Auditors have managed to persuade Governments and judges over the years that they should not be held responsible for inaccurate information reported to investors, and have lately transformed themselves into Limited Liability Partnerships to avoid personal financial responsibility.
Although auditors are nominally elected by shareholders, in reality no resolution to reappoint them has been lost in living memory so it’s rather like an election in communist state – the outcome is preordained.
Yesterday the Competition Commission published its initial report into the audit market and they simply say that the “Audit market is not serving shareholders”. They complain about the lack of competition in a market dominated by the “big four” audit practices, and the reluctance of companies to switch auditors. In particular they say “although auditors are appointed to protect the interests of shareholders, who are therefore the primary customers, too often auditors’ focus is on meeting the needs of senior management who are key decision takers on whether to retain their services. This means that competition focuses on factors that are not aligned with shareholder demand”.
The Commission says investors are unhappy and that changes are needed “so that external audit becomes a more genuinely independent and challenging exercise where auditors are less like corporate advisors and more like examining inspectors”. That would indeed be a welcome change.
The Commission is suggesting a number of possible remedies including:
ShareSoc has said in the past that we would like to see the auditors selected and nominated for election by a committee of shareholders, not by company management. We would also like to see the Caparo judgement overturned and auditors be legally accountable to shareholders, not just to the company. We will therefore probably be submitting a response to the Commission’s Report, but if you have any comments please let us know.
More details of the Commission Report are here: www.competition-commission.org.uk/media-centre/latest-news/2013/Feb/audit-market-not-serving-shareholders
Posted by ShareSoc at 10:37, March 1 2013.
Bankers’ bonuses – is Boris missing the point?
The EU is going to mandate a cap on banker’s bonuses. It will be limited to 100% of basic pay (unless shareholders specifically approve a higher ratio, which can be up to 200%). Boris Johnson, who is always quick to spring to the defence of City of London practices, compared this with other attempts at price controls such as those of the Roman Emperor Diocletian.
ShareSoc has of course consistently opposed pay packages which contain a very large bonus element, and criticised high levels of remuneration for the top executives of banks. The former generate risky behaviour and are not necessarily motivational, which is the common argument for their use. The latter seems to arise from the fact that normal market forces do not apply when directors determine their own pay and there is little concerted discipline imposed by shareholders.
But we have never supported legislation to directly control pay. Those with long memories will remember such attempts as a means to tackle rampant inflation back in the 1960s, and of course they did not work. Neither would any attempt to do so in Europe alone be successful when we all live in global financial world.
But the EU is not trying to dictate overall levels of pay. It’s simply saying bonuses should not be too high a proportion of overall remuneration. And that is in banks alone, not other businesses. This is seen as a way to control risky behaviour in banks which was one generally acknowledged source of the global financial crisis in 2008. So if bankers can still justify high pay levels, they will simply need to get their base salary raised instead of being remunerated via bonuses. This will have one advantage for shareholders though – it will highlight the general level of pay they are getting instead of hiding bonuses in complex pay packages.
In addition, is 100% (or 200%) so unreasonable a limit? ShareSoc actually suggested a limit of 50% in its submission to Vince Cable’s review of executive pay. That provides the incentive element without making executives so dependent on bonuses that short-term risky behaviour is promoted.
We will now no doubt see David Cameron, George Osborne, Boris Johnson, et al, fighting the bankers’ corner and trying to water down these EU proposals but they would surely be mistaken to do so.
Posted by ShareSoc at 15:10, March 2 2013.
Avoiding Libel on Bulletin Boards and Blogs
February was a month for companies commencing libel suits against commentators on their activities. Firstly it was Red Rock Resources versus Gary Carp. Now it’s Sefton Resources who announced last week they had filed an action against well known blogger Tom Winnifrith and Daniel Levi. Tom claims his past reports are supported by facts and his comments were justifiable. Indeed he says he welcomes the proceedings and is looking forward to the court hearing.
As in the Red Rock Resources case, the allegation seems to be one of misleading RNS announcements issued by the company. But it would be premature to say more. Undoubtedly if the case does result in a court hearing (and most legal actions never do of course), then all the dirty linen will be aired in public, and can be reported by anyone. In other words, the publicity generated can be enormously damaging whoever wins the case. That is why it is rare for commercial companies to sue individuals for libel.
But it’s worth making a few comments on the use of bulletin boards and blogs because it’s undoubtedly the case that many of the items posted are defamatory. Hence they may be at risk of being considered libellous. Here are a few simple pointers to help you avoid any threats of legal action:
Now those who frequent bulletin boards will know that a lot of people post casual, off-the-cuff remarks without much thought. These might be simple abuse in the extreme, or unsubstantiated and factually incorrect analyses of recent events. There is a lower standard applied to the courts to such material and any claim for financial loss by a company might be difficult to demonstrate, but you ought to be wary of relying on that discretion.
One final point: if you get a letter from a company’s lawyers alleging a libel, then take advice before responding. Don’t concede anything or offer to apologise or make a correction, partial or otherwise, without great care. Do not call the company directors and try to discuss the matter, or call their lawyers and do likewise (as I have seen happen). Do not treat lawyers as fair and reasonable people who can be persuaded by your pleas of poverty or temporary ineptitude to withdraw the case – it won’t happen. It’s rather like when you have a road traffic accident – never concede it was your fault or apologise on the spot because it may undermine your case whatever the merits, or otherwise, of your actions.
For further information you could try reading McNae’s “Essential Law for Journalists”.
Good and timely advice. Many posters (especially elsewhere!) would do well to take careful note.
If I may briefly comment on these points:
I think that point 2 is by far and away the most important point. No sensible company objects to fair and reasoned criticism or comment - but they sure as hell can get irritated by personal attacks on mangement, especially when they are doing their absolute level best for shareholders (whether or not that happens to be reflected in the share price!) and when those attacks are completely unjustifiable based on the facts. Such attacks blacken the image of private investors as a whole and make it more difficult for shareholders to have a sensible dialogue - and ultimately are IMO the main reason that companies are provoked into issuance of writs.
Re point 3, though, I'm not sure that it is in any way essential to avoid being one-sided (though it may be unwise from an investor standpoint). I don't think there is any problem with posters being only critical of a company - providing that their criticisms are based on verifiable facts and not on things like imputed motivations (which are very frequently woefully wrong, IMO).
I would also add that posters should be very wary of lazy consensuses that have been formed on bulletin boards based on an incomplete picture held by shareholders. It may well be that, from time to time, some things do not appear to be in the company's interests (ie appear not to be in shareholders' interests) - but that is a million miles away from being able to assert it as a categorical fact. And shareholders should also remember that it may frequently be in their own economic interests that the full facts are not in the public domain (eg commercially-sensitive matters). It is frequently much tougher to run public companies than posters may assume from the comfort of their armchairs.
Posted by ShareSoc at 11:16, March 3 2013.
Dematerialisation – why you should be concerned, as it’s back on the agenda
What is dematerialisation? It’s the replacement of paper share certificates by an electronic system of registering share ownership. In reality such systems don’t actually necessarily get rid of paper for those who are not computer literate but simply change the legal basis of holdings and the underlying systems (and of course, as almost all shares are now traded in the Crest computer system, even if you have a paper share certificate this is more a change of form than substance). Investors would still be able to get a paper “Statement of holding” and “Contract Note” if they wish, although these might more likely be sent via secure email systems in future.
Many other countries have enacted dematerialisation and have no paper share certificates for publicly traded company shares. But in the UK there are still estimated to be about 7 million holders of share certificates. Even sophisticated investors often have some – for example VCT shares are issued in paper form and as there is usually no reason to trade those actively, they tend to remain in paper form. Likewise many people have share certificates from past demutualisations and privatisations.
There is one advantage of a paper share certificate in that your name is on the register of the company, and hence you receive all communications directly from the company and can vote directly (i.e. you have “information rights” and “voting rights”). In addition you can turn up at any AGM and ask questions, speak and vote because you are recognised as a shareholder by the company. Those rights do not apply to those holdings shares in a nominee account where you are effectively disenfranchised and have to rely on your stockbroker if you want to have a say in the running of the company you own. Some stockbrokers are a lot better than others in extending those rights to you but in essence their systems are often complex, difficult to use, unreliable and ultimately a mess. See www.sharesoc.org/nominee_accounts.html for more background information.
However there are a lot of disadvantages with paper share certificates. They are in reality very insecure, create problems with clearing quickly, are expensive for brokers to process and often get lost (when it becomes expensive for the holder). So a few years ago there was an initiative to create a new electronic share registration system that would replace paper share certificates and enable dematerialisation. After some years of work by a working party representing all affected bodies, this was ultimately not proceeded with. The Government decided it was not a priority and there was lobbying against the proposals by some stockbrokers who apparently would prefer to see everyone stuffed into nominee accounts.
But now the phoenix will arise from the ashes of that debacle because the EU is mandating dematerialisation and probably from the 1st January 2015. This is part of the Central Securities Depository Regulations (CSDR). So the UK Government will now have to tackle this issue afresh.
ShareSoc has a very clear policy on this matter which can be summarised as follows:
1. We support the principle of dematerialisation because of the advantages it provides to shareholders.
2. It is essential that UK legislation enacting the CSDR guarantees dematerialised holders identical rights to those of current certificated holders. Without such guarantees, current certificated holders would have cause for concern and we could not support the proposal. Those rights (which must be granted without charge by the issuer or depository) include:
3. That shareholders have the choice as to how to hold their shares and are not forced into nominee accounts.
Before anyone points out that there is already an electronic share dealing system called Personal Crest Membership which is certainly recommended for sophisticated investors, this is not a full solution and is not likely to be viable for many paper certificate holders (it forces the use of a stockbroker with associated costs for example).
ShareSoc has already made representations to the Government on this matter and had meetings with other parties. We will be keeping a close eye on developments on this issue, but ShareSoc Members may wish to raise the matter with their M.P.s if they get the opportunity. It is a complex issue but it might have very wide ramifications. It is very important that whatever system is devised, it meets the needs of investors and of issuers (the companies who issue the shares), and not be focussed on the preferences or commercial interests of the intermediaries such as stockbrokers.
Posted by ShareSoc at 15:44, March 4 2013.
New High Growth Segment of the LSE – or should it be “High Risk”?
The London Stock Exchange (LSE) recently announced a proposed new “High Growth Segment” of the exchange. This will be a market for companies that meet the following criteria:
- Compound revenue growth of 20% per annum over the last three years.
- Incorporated in Europe
- A minimum free float of 10%
The LSE claim that it has been designed to meet the needs of companies aspiring to a listing on the main market, but this writer certainly has many reservations about this idea. It is worth making it clear to begin with that these companies will not be “Listed” (i.e. will not be bound by the Listing Rules that apply to main market companies). They will therefore simply be “quoted” as are AIM companies and will have a separate Rule Book similar to that of AIM. Indeed they will have the equivalent of AIM Nomads but in this case they will be called “Key Advisers”. Why the change of name? Have Nomads got such a bad name that a change was required? Or was it perhaps that as there will be a separate list of Key Advisers to Nomads, to be determined by the LSE, this was simply to avoid confusion?
A quick review of the proposed Rule Book does not inspire confidence either. It looks if anything very similar to the AIM equivalent. So for example no limitations on share placings which are the bane of private investors in AIM companies.
In addition the requirement of a free float of only 10% could make the liquidity in these stocks very poor (albeit that on AIM there is no specific requirement). Incidentally ShareSoc sent a letter today to various parties about how the poor regulation of AIM undermines confidence in that market and deters fund raising via a public quotation among UK SMEs. It’s available on our Members Network web site and spells out all the defects in the AIM system.
There may be a revenue growth requirement, but there is no profit requirement so the kind of companies it might attract could be those like Monitise, i.e. technology companies that are spending money like it’s going out of fashion to be the first mover in a market.
In summary, it is not altogether clear why the LSE needs a separate category for such companies when surely they would have qualified for an AIM listing anyway? Perhaps the LSE have faced up to reality and realised that the reputation of AIM might now be putting off companies from listing thereon. But it will certainly be confusing for investors to have yet another “market” category.
Posted by ShareSoc at 15:21, March 5 2013.
How much for executive access?
How much would you pay as an investor to have access to the senior executives of a public company? $20,000 for an hour, or $10,000 for a brief chat, or perhaps nothing? In fact ShareSoc offers such access for nothing to investors at such events as the upcoming Technology Company Seminar on March the 20th (see www.sharesoc.org/techseminar.html).
But the reason for asking this question is because the Financial Times has recently reported that asset managers are frequently paying a company’s broker to gain access to senior executives and sometimes they pay $20,000 for an hour with the CEO.
It seems company brokers have fallen on hard times and claim to need such payments to enable them to cover their costs. But where does the money come from? Out of the pockets of the investors in the funds managed by the asset managers who may not be aware it is going on. Neither presumably may the executives of the company whose time is being sold in this way realise that the broker is collecting additional fees via this means.
As usual the murky principles underlying City practices may surprise you when revealed.
Posted by ShareSoc at 13:17, March 7 2013.
Facing up to reality – Aviva and RBS
£AV. announced a major cut in its dividend this morning – the final dividend being reduced by 44%. But if you look at the financial figures in the same announcement, they look quite dire. An overall loss of over £3 billion mainly as a result of write-offs on business disposals in the last year.
Does that indicate a rosy future now that the duff businesses have been disposed of? Not exactly. They have apparently divided their operating businesses into “cells” and report there are 9 “red” cells remaining (i.e. inadequate performers where disposals is likely), 20 “amber” cells who presumably need some work and only 22 green cells. This hardly indicates a healthy business. In addition it transpires that after the disposals, even though these have strengthened the balance sheet, one consequence has been an “increase in tangible leverage from 41% to 50% which is high relative to the sector”.
There is talk of focus on the improvement of cash flow, and the justification for the dividend cut is to ensure that the dividend can be covered by cash next year and support the other structural improvements necessary.
So even if the dividend cut had not shocked investors (and some reduction was forecast by several analysts), the commentary must have depressed them. As a result the share price took an immediate dive of about 15%. As often is the case, the dividend cut tells you more about the real confidence of the management about future profits, than all the past glowing comments on improvements being made to the business.
In summary it seems that even though the company has a new chief executive, they are a long way from turning this company into a growth story that offers shareholders a good return on their capital. And for investors looking for income, they tend to retain a long memory of abrupt dividend cuts. It might be a long time before this business is back in favour with investors.
More facing up to reality on RBS
Sir Mervyn King has delivered one of his parting shots as Governor of the Bank of England in comments to a Parliamentary Commission. It seems he is disillusioned with the time it is taking to sort out £RBS and dispose of the Government’s 82% stake – never likely while the bad news continues and the share price stays stubbornly below the cost paid by the Government for their shares.
He said “the longer this goes on, the more difficult it becomes” and he indicated that as RBS is so key to the UK economy, it is “nonsense” to suggest the Government can run it at arm’s length. He pointedly said “The lesson of history is that we should face up to it – it’s worth less than we thought and we should accept that……”. Sir Mervyn’s solution: simply split it into a “good” and “bad” bank like Northern Rock and sell off the former.
Comment: one cannot agree more with his sentiments, but why bother splitting it into two which would undoubtedly take some time? That just saddles the Government, and us taxpayers, with the rubbish part of the business while enabling others to profit from the upside on the good part. Better to really face up to reality and sell it for what we can get for it, sooner rather than later.
Posted by ShareSoc at 09:01, March 9 2013.
Should you invest in Esure?
Should you invest in Esure? Or more to the point perhaps – should you bother reading the 328 pages of the prospectus?
One thing to count against this company is that they don’t seem to know the basics of English grammar. Proper names should commence with a capital letter so it should be “Esure”, not “esure”. I have corrected it in this note.
But back to the Prospectus, and the prospects, for Esure. There are three important pages to read in the prospectus and you may want to read those before the rest. These are pages 11, 25 and 107. Page 107 gives the “Offer Statistics” and tells you that the price range of the shares may be anywhere from 240p to 310p, but on the mid-point would value the whole company at £1,148m.
Page 107 gives the consolidated income statement for the last three years which shows post-tax profits rising from nothing two years ago to £88m last year, i.e. implying a historic p/e of 13 on the mid-point of the price range.
Page 11 gives you the other “key financial” information which shows they are heavily dependent on motor insurance business and that the combined ratio was 115% two years ago (i.e. they lost money on their insurance activities) but improved to 93% last year.
So the company has been improving profits substantially in recent years on fairly low revenue growth, which is not dissimilar to other car insurers. Note what it says on Page 71: “The Directors believe that the Group’s motor underwriting business has further growth potential. Although the UK motor insurance industry is at a stage of the cycle where there is and will likely continue to be significant competition in pricing and underwriting terms and conditions over the short to medium term, the Directors believe the Group is well placed to mitigate the impact of this and achieve growth”.
We will leave other gurus to divine exactly what the future may hold for this company, and their prognostications will no doubt be on view in the next few days, but it certainly appears that they have chosen an opportune moment to do an IPO with good recent numbers and prospects looking moderately favourable due to regulatory changes in this market. But one big problem is that retail investors are apparently expected to buy a “pig in a poke” in that they do not know at what price they will obtain shares or how many shares. All they can do is submit a cash figure of how much they want to spend and the price, and hence quantity, will be determined by what the institutions agree to pay.
So only investors who are willing to follow the herd should consider this proposal.
Further comment from personal experience: I switched to using Esure for my car insurance a few years ago because they were substantially cheaper than other quotations. They were using a low-cost business model since imitated by others but their policy terms were not ideal. Recently I switched to another insurer because Esure were no longer substantially cheaper. So did they grab market share by undercutting their competition on price and have now improved their rates, and hence profits? Clearly there is a “drag” in the market for car insurance in that not everyone will get a new quote every time their car insurance comes up for renewal so it is my guess that profits might be improved in the short term (for say a year or two) followed by a decline in market share. But trying to understand the underlying dynamics of this business may not be easy even if you read the whole 328 pages of the prospectus.
Posted by ShareSoc at 13:29, March 12 2013.
Is the Stock Market dying?
Is the UK stock market dying? This was a thought that came to mind after attending a seminar at which Professor John Kay spoke last night, organised by the High Pay Centre. As in the Kay Review which he authored, he covered a wide ranging analysis of the problems in the UK financial world. He pointed out that the UK stock market has not raised any net new money in the last few years, i.e. it is no longer a significant way of raising equity finance for new businesses. Neither of course has it generated the returns desired by savers in the last ten years, with much of the profits generated by businesses actually being dissipated into the hands of financial intermediaries, of which there are numerous kinds.
He posed the question “are equity markets moving to a close?” as they have in essence lost their main function. He even went so far as to suggest that we don’t need a stock market, simply a group of asset managers who are entrusted with funds by retail investors. The asset managers could simply invest directly in companies along the model of private equity firms. This would give them more direct control and more influence on companies (and of course how much they pay their directors).
Comment: The AIM market is of course an extreme example of how dysfunctional stock markets currently are. Created by a commercial body (the LSE), and structured in such a way as to favour the interests of financial market operators, it has raised very little capital for UK SMEs. Indeed it tends to be a mix of foreign companies and IPOs via placings of current shareholders, with little new capital raised.
Another problem Prof Kay highlighted was the low level of investment in companies in the UK in comparison with other OECD countries. This may be because directors of public companies now seem to see themselves as “portfolio managers” rather than business developers, and are focused on short term decision making. But he suggested it is the structure of the financial industry that is the key problem rather than regulation (which he would prefer to see less of rather than more as it mainly seems to be designed for the benefit of the financial intermediaries).
Prof. Kay was arguing for a cultural change in the financial world, but he did not really spell out how we get to his nirvana. Can such change be achieved without some system changes or direct Government intervention is one question readers might want to think about. Otherwise send in your suggestions to ShareSoc or the Government. But whether politicians will both understand the issues, and be willing to tackle them with substantial reforms may be the real problem to face up to.
In reply to ShareSoc, post #262
I haven't read the Kay report but the idea that 'equity markets are moving to a close' is typical bear market thinking. Equity is a fundamental asset and public ownership is a huge leveller - it significantly reduces the cost of capital for those that can access it successfully.
I believe the biggest problem is not equity markets, but equity market players. The public are disillusioned with equity as they have seen practically no returns - most of the profit has been syphoned off by the managers in the last decade. The idea that we should entrust everything to managers and close the market is an absolute disaster of an idea!
Public markets have been failing as they are too easily gamed and most participants are extremely unsophisticated. I know many extremely rich people who have learnt how to game the system in their favour. It's not really that hard if you know how and if can buy the info required. The hard thing is teaching more people how to defend themselves from all the cons & fads out there (which may well include index funds and ETFs - there's no free lunch in the markets when something that seems sensible becomes massively overpopular ).
It's not impossible though - you can still win in these markets with a sound investment philosophy.
In reply to Edward Croft, post #263
Hi Ed,
What you say is very much reflected in the Kay Review (which ShareSoc contributed to). You should take a gander: http://www.bis.gov.uk/assets/biscore/business-law/docs/k/12-917-kay-review-of-equity-markets-final-report.pdf
Increasing intermediation is a root cause of many of the problems. It doesn't help, however, that inadequate regulation/enforcement (e.g. over honesty of RNSs) disfavours "ordinary Joes". The fact that you can't rely on what's being said/implied by an RNS (esp. from AIM companies) does make for a minefield.
I do agree that "death of equities" is invariably a bullish signal! However, not sure that the recent strong run and "dash for trash" that you so eloquently highlighted recently are sustainable in the short run. Neverthless, I'm convinced that there are still quite a few bargains out there, if you hunt them down and are prepared to be patient.
Best not to try to compete with the "City boys" on short-term trades, where you are invariably outgunned, so I mainly stick to longer term propositions that I consider offer valueand/or quality, sustainable growth at a reasonable price.
Cheers,
Mark
PS I suspect Kay's proposition last night was provocative, to stimulate debate, rather than a real recommendation.
In reply to marben100, post #264
I've been asked to clarify this comment:
I'll give one example. A friend I know buys the flow of funds data before it's really hit the wires. He uses it to analyse whether the majority has gone into Growth or Value funds and in what regions. Once he knows that it's not that hard to effectively front run the trades - it's fairly straightforward to know which liquid stocks are going to be bought by which funds if you know the fund flows, and the sheer scale of fund flows means that its only deployed to the market after a delay. The hedge fund in question returned 38% and 30% in first 2 years of running.
Easy when you know how eh!
Not only was John Kay more provocative than in his published report, but my headline was also provocative to stimulate debate. But he has a good point in that there are many things wrong in essence in financial markets that could be rectified by a few simple steps and an associated change of culture. His report was not particularly revolutionary, and yes there is surely still a need for a good place to trade shares. Moving to a private equity model would of course sooner or later result in a market being formed where private equity players could exchange stakes or portfolios (as they do at present to some extent). At worst it might solely prevent smaller players such as current individual shareholders from participating which obviously I wouldn't be too keen on.
Posted by ShareSoc at 09:18, March 13 2013.
Government to Review Pre-Packs
The Government has announced an independent review into pre-pack administrations in a debate in the House of Lords on the subject. It is well worth reading the comments (and criticisms) of Lord Mitchell in that debate which you can see here:
http://www.theyworkforyou.com/lords/?id=2013-03-11a.29.7&s=pre-pack+administrations#g84.0
ShareSoc has of course strongly opposed pre-pack administrations, and we reported on two recent ones at publicly listed companies only recently in our blogs and newsletter – those of Cosalt and of United Carpets. Pre-packs are not just the province of small businesses trying to escape their creditors and start again – all manner of companies are using it to evade their responsibilities and preserve the jobs of the directors and managers who got the companies into difficulty in the first place. In summary, pre-packs encourage unethical and disreputable behaviour, and the process is in essence “unprincipled and unfair” as Lord Mitchell said.
But the Insolvency Service does not seem to have changed their mind as yet. So when they announced the news they had this to say: “The Government has listened carefully to the concerns of creditors about pre-packs and that is why we already have measures in place to increase transparency and prevent abuse. Strengthened measures are being introduced to improve the quality of information insolvency practitioners are required to provide on pre-pack deals and we are using targeted monitoring of outcomes to assess whether there is evidence of abuse.
Used appropriately, pre-packs can be a highly effective process to ensure the best deal for creditors by better enabling the rescue of businesses, preserving value and safeguarding jobs. The independent review announced by the Minister will enable further evidence to be assembled on how pre-packs are working in practice and whether further steps are needed”. There is more in the same vein, defending the indefensible.
It does not exactly give the impression they concede that there are major problems, does it! So let us hope the review will be a truly independent review, and not another whitewash by the Insolvency Service.