It’s safe to say that Barclays has not been the most rewarding investment of the new millennium. Once upon a time, the shares cost over £7. They can be picked up today for 190p each. With the Serious Fraud Office now seeking to reinstate criminal charges over the bank’s infamous Qatar fund-raising, and fresh action from local councils over Libor-rigging, only a brave investor would go knife-catching with this stock.

In his brutally frank chairman’s statement with the 2017 accounts, John McFarlane spelled out just where the last six years’ profit had gone: £15.1bn in litigation and conduct charges, £2.4bn in bank levies, £10.1bn in losses from “non-core”, a £2.5bn write-off from the sell down of Barclays Africa. Add in £7.1bn of taxes, and the profits from running the business are just about wiped out.

Mr McFarlane reckons it adds up to £35.6bn. Philip Augar, the City’s premier historian, has entitled his Barclays opus The Bank that Lived a Little. On his arithmetic, the cost of living adds up to £37.2bn over the six years. As Mr McFarlane concludes: “Clearly, shareholders would prefer we declared higher dividends, but it should be remembered over the same period, we paid £5bn in dividends” which the bank failed to earn, as he did not add.

Built to resist a siege

What would it take to shift the two Daves from the top at Hammerson? Their last strategy fell apart in ridicule at the sight of them turning from “irrevocable” support to “withdrawal of recommendation” for the absurd deal to buy Intu Properties. Well, if you don’t like our principles, we have others, and here they are.

They have caught a bad dose of McKinseyitis, in 63 pages of “enhanced strategy”. This Brave New Hammerson wants to flog off the sort of shopping centres that Intu owns. Well, best of luck with that after Intu this week wrote £650m off the value of its portfolio. The Daves also plan a token buyback of shares, to cut capital investment, promise to be more efficient, and to boldly go overseas.

This string of exciting initiatives left the share price almost unmoved, still £1 short of the 635p proposal from Klépierre, and miles away from the company’s Pollyanna 790p estimate of net asset value – apparently unchanged, despite taking a 10 per cent haircut on a couple of small property sales.

The market’s ennui is hardly surprising. The desire for foreign adventures looks like the time-honoured distraction from problems at home. The only idea that betrays some serious thought is the proposal to turn those worn-out shopping centres into flats. With a little imagination, clever architects could make something quite agreeable, relieving a little of the pressure for new homes on greenfield land.

Otherwise, the justification for the rewards to chairman David Tyler (£334,000 last year) and CEO David Atkins (£1,996,000) is hard to discern. And the central puzzle remains: what is Hammerson for, exactly?

A little summer reading

In her deckchair before she takes her seat on the executive committee of troubled accountants KPMG, Mary O’Connor might treat herself some light reading in the form of Bean Counters, a forensic analysis of the business by Private Eye journalist Richard Brooks.

If Ms O’Connor had any delusions about the task facing her, Mr Brooks will surely dispel them. As the number of world-scale accounting firms has shrunk to just four, so their power has grown as they moved seamlessly from dull old auditing into the endlessly profitable world of consulting.

Their particular genius has been to claim the ethical high ground to ward off suggestions about conflicts of interest as consultants. As auditors they have managed to slough off responsibility for financial disasters even when, as in KPMG’s case most recently with Carillion, the disaster has followed within weeks of signing off a clean set of accounts. The inevitable response to failure has been to call in accountants from another big four firm.

KPMG’s woes suggest that the accounting industry’s days of making out like bandits while staying in the shadows may be over. The appointment of Ms O’Connor, lawyer, former regulator at the Financial Services Authority and with a recent background in global risk management suggests that the accountants, at KPMG at least, may have noticed.

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Last year’s annual report from Greene King portrayed a business in rude health: record results, further outperformance in view, and a proud boast of a dividend that had grown at 8.6 per cent compound over half a century.

Yet despite this cheer from Britain’s biggest pub company, the shares had drooped to a four-year low. As this column pointed out then, the £774m acquisition of Spirit Pub Co in 2014 had soured the beer, despite the landlord’s protestations.

It has taken another year for the real cost to emerge. Greene King’s management had failed to see that the private equity vendors had (surprise) skimped investment in the pubs. The shares are down a further fifth, and the analysts at Berenberg are calling them a value trap.

In other words, they look very cheap, but Greene King is not generating enough cash to pay down its debt. The brokers conclude: “We struggle to see sense in the business continuing to pay £103m of dividends per annum when it will only generate free cash flow of £50m-60m.”

A cut in the dividend after so long would be a bad blow, but a payout that is not earned is not really a dividend at all. The episode is a sad reminder of how much damage one poorly-judged acquisition can do.

A lesson in how to cook the books

When it comes to accounting sleight-of-hand, no fraudster can hold a candle to the UK government. It’s unlikely that even Enron, high practitioners of the art, could have got away with the financial framework HMG has invented for student loans.

The Office for Budget Responsibility is brutally frank in its latest analysis of this mechanism for turning debt write-offs into positive sums in the national accounts, entitling it “Student loans and fiscal illusions.” The numbers are pretty big: around £100bn, or 4.9 per cent of GNP, yet the real cost is invisible. The House of Lords Economic Affairs Committee last month described the loans as “the pyramid of fiscal illusions in the treatment of student finance.”

Here’s how it works. The loan accrues interest (at RPI plus 3 per cent) which the government counts as income, even though none is received. The inevitable loss of capital (and accrued income) is not accounted for until the loan is written off, decades hence. The 2017/18 cohort, for example, produce an “income” of around £1bn a year until 2050. When the remaining loans are written off, there’s a whacking £25bn charge over the next three years.

This is just for one year’s loans. As the OBR says: “This pyramid of fiscal illusions means that the deficit will always be flattered despite the system…costing significant amounts after the interest cost of financing the loans is included.”

That’s not all. The government has started selling off the loan book, at less than 50 per cent of face value. Conveniently, this is called a “holding loss” which does not affect the deficit. The OBR concludes: “This means that the deficit will be flattered by the build-up of never-to-repaid interest on the loans that are sold, but will never be hit by the write-offs that follow…creating a perverse incentive for the government to sell loans.”

It’s brilliant, really. The more the state lends, the better the books look, with a kicker from the loan sales. The OBR, the Lords and everyone else can complain, but HM Treasury isn’t listening. Why should they?

 

 

Put out more flags

Michael Donnelly, an analyst at brokers Panmure Gordon, is concerned about the financial health of Equiniti, the business best known for looking after share registers. He’s found 15 (count ’em) “red flags” ranging from “recurring ‘exceptional charges'” and “collapsing cash generation” to share sales by directors.

His analysis knocked a further 10 per cent off the shares, to 210p, after a terrible year’s performance. He reckons they are worth 163p, about the price the company floated at three years ago.

Sell recommendations are rare, because they are of little interest to non-shareholders, while the company will scour the work for errors. Panmure has pre-empted this by publishing Equiniti’s responses, which are at least more constructive than reaching for the lawyers. Mr Donnelly can hardly expect a Christmas card, but if he concentrates management minds, they should be grateful to him.

This is my FT column from Saturday 

 

 

The National Infrastructure Commission produced its first assessment last week. No, nobody else noticed it either, what with all the other excitements, so bad luck to the great and good commissioners. Infrastructure is frightfully fashionable and horribly expensive. The assessment was a fine chance to shine a light on why Britain is so useless at it and why, after years of dithering, we make such terrible decisions for major projects.

Why, for example, are we persisting with HS2, when for the same price the whole of the rail network could be brought up to modern standards, for the many not the few? Why, despite the finding of every outside expert that it is risky and too expensive, are we building another nuclear power station at Hinkley Point? How did we commit to so-called smart meters which are as smart as the average budgerigar and where true savings are a fraction of the cost?

Alas, these questions are far too short term for the commissioners. Lifting their eyes to the hills, they focus on “a long term vision for high quality, good value, sustainable economic infrastructure for the UK, and a clear plan to achieve it.” Well, we’d all vote for that, except that with our record, it would bankrupt us. The nearest the report comes to criticism is to suggest that nuclear power may not be the whole answer to energy provision. Yet far from acknowledging the financial disaster of Hinkley, the assessment timidly suggests that the next nuclear project might be the last, for a while anyway.

In its fantasy world, the commission sees half the country’s power coming from renewables, three-quarters of plastic waste recycled and 100 per cent electric car sales. All by 2030, and all at a cost of 1.2 per cent a year of national output, conveniently inside the maximum the government has allowed for its projections. The numbers at the back of the report look like those familiar far-out years in every Budget Red Book, where somehow the deficit melts away. We are supposed to take them seriously, even though we know they are fantasy.

For good measure, the commission suggests that we give up using gas to heat our homes, and spend much more money on insulation. The future, eh? Doncha just love it? No wonder nobody noticed the report.

 

A game of two halves

Forget the Southgate waistcoat (so last week for the fashionistas), it’s the absence of quarterly reporting from Marks & Spencer at the annual meeting that got the analysts worked up at the annual meeting. Without those quarterly numbers, what’s left for us to analyse? Shares will trade on out-of-date information, and surely someone, somewhere will have price-sensitive information that would otherwise have been disclosed?

Well, perhaps, but quarterly reporting is the bane of executives’ lives, since the treadmill forces them to worry constantly about presenting the next three months’ figures, rather than trying to create proper long-term value. M&S is hardly a market darling nowadays, so it takes courage from chairman Archie Norman and CEO Steve Rowe to upset their professional financial followers still further after their bleak “burning platform” assessment of the task ahead. Have patience, boys and girls, and hope the dynamic duo can prevent M&S becoming the Woolworth of the 2020s.

This adVenture is over

Venture Capital Trusts have been a big success, even if not quite in the way the original designers imagined. Rather than producing failed investments and the occasional lottery-sized win, the typical VCT has become something more like a high-risk annuity, with tax-free dividends being paid at the expense of capital preservation.

As other tax breaks have reduced, the tax relief on subscription has drawn more capital in, just as the rules on what VCTs can buy were tightened, resulting in more money chasing fewer qualifying investment prospects. So one small VCT, Chrysalis, has warned that it now plans to shrink the business, perhaps to the point where it is no longer viable. Few others take such a gloomy view, but they should. Investors, meanwhile, should think twice before rushing in for the tax breaks. It does look as though the best days for VCT returns are over.

This is my FT column from Saturday

In matters of commerce the fault of the Dutch

Is offering too little and asking too much*

It ought to be a long, hot summer for the directors of Unilever, that essential ingredient in every sensible UK investor’s portfolio. They are trying to unify the group’s unusual Anglo-Dutch share structure, but the way they are going about it is causing resentment and risks doing material harm to holders of Unilever plc.

In principle, merging the two classes of share makes sense. It overcomes any conflict between them, helps the use of new shares for purchasing businesses and reduces costs. The other Anglo-Dutch giant, Royal Dutch Shell, recently managed to merge without fuss. By contrast, Unilever’s proposal guarantees trouble.

If the plc shareholders approve, Unilever would cease to be a British company as generally defined, since it would be registered and listed in Holland, with headquarters in Rotterdam. The original press release in March rather gave the game away. After some boiler-plate guff about “building the Unilever of the future” and soothing noises about the importance of UK manufacturing businesses, the intended move was presented as almost a routine tidying up operation, replete with the usual adjectives about being more agile, more focused, more strategic flexibility, etc.

For plc shareholders, it is nothing of the kind. While the move may make sense corporately, we are being forcibly switched from the UK share into a Dutch one. Despite pressure from the company, the compilers of the FTSE100 index have resisted waiving the rules to keep the share in the index. Sensibly, they have concluded that Newnilever NV would be no more a British company than, say, IBM or Ford.

As a result, some funds would be obliged to sell their plc shares to stay within their mandates. For the others, shunted onto the new register, there remains an awkward question about the 15 per cent with-holding tax on dividends from Dutch shares. The Dutch government has pledged to scrap this from 2020, but its position is not secure, and already there are rumblings about giving tax cuts to foreign investors. The cost of a tax-inefficient dividend would dilute the gains from unification, while a pledge in a company press release to deal with the problem is hardly a long-term commitment.

There is much at stake here beyond losing a major constituent of the FTSE100. However international the investment professionals consider themselves, the majority of UK shareholders tend to buy domestic shares for their portfolios. We may be a dwindling band, but the plan requires a 75 per cent majority of votes cast to proceed.

Together the individuals who own shares through Hargreaves Lansdown, Rathbones or Alliance Trust (for example) speak for several per cent of the plc votes. Two of the top 10 shareholders have signalled serious doubts about it, while other institutions are unconvinced. If individuals can harness their votes, they can defeat this proposal.

It does look suspiciously like a coup, organised by a CEO who is about to retire, to deliver the business into Dutch hands, safe from the possibility of takeover, and less visible to the critical British financial press. So here’s the question for the plc shareholders: is this proposal really in my interests, or just those of the board?

*George Canning 1826

McCarthyism

Another profit warning from McCarthy & Stone. The CEO is retiring, although probably not to one of the company’s retirement homes. The stagnant housing market is blamed, since the last-time buyers that are McCarthy’s market are finding it harder to sell their old home.

Yet there is a deeper crack in the business model. Waving goodbye, the CEO now expects profits between £65 and £80m. In December, he estimated that sales of ground rents would  generate £33m this year, as he lobbied to be exempted from the proposal to ban them.

Long leaseholds make sense for flats, but there is no convincing case for them on sales of new houses, least of all to the elderly and vulnerable. Ground rents skim off value and complicate secondary sales, giving the (often shadowy) holders unreasonable power. Banning them removes one way that buyers of retirement homes can be confused,  and helps keep McCarthy and Stone honest. Bad news for the share price, though.

This is my FT column from Saturday.

If you know anyone who might like to see this every Monday, please pass on the details. Go to neilcollinsxxx and follow the links.

 

Petrol is getting dearer, but cheaper computer games are now a big enough factor (see below) to balance the impact. The result of this pushme-pullyou was that consumer prices rose less than expected last month, and an annual rate of 2.4 per cent spared the blushes of the UK’s Monetary Policy Committee for spending another month dithering over interest rates.

Perhaps this dithering is because the current members of the MPC have no experience of raising them. Aside from the reversal of the panic post-referendum cut, UK Bank Rate has now been stuck at 0.5 per cent for more than nine years. What started as a desperate measure to head off a financial crisis has somehow morphed into the new normal.

It’s quite a contrast to the US Federal Reserve. Although the rates of inflation in both countries are similar and they share a target of 2 per cent, the Fed raised rates this week for the seventh time. For good measure, it signalled two more rises this year, with a further three in 2019, which would take its bank rate to the dizzy heights of 3 per cent.

There are no such detailed projections from the Bank of England, which is just as well considering its woeful record on forecasting. Governor Mark Carney’s reputation as the unreliable boyfriend has been well earned. He might consider a comment from Paul Tucker, the pre-crisis front runner for governor, that doing nothing is doing something.

The effect of all this almost doing something is to give the impression that the MPC is pushed about by the previous week’s weather and economic statistics. There is no sign of a strategy for getting Bank Rate to a level which balances the interests of lenders and borrowers, only an assertion that inflation will somehow stay quiescent.

In the old days, a central bank that found itself chasing rising inflation had to raise interest rates much further to overtake it. At the Fed, they are taking pre-emptive action. At the BoE, they still think a rate nearly 2 per cent below inflation is just fine.

High Speed spending

Britain’s white elephant game reserve of wealth-destroying capital projects is filling up nicely. Here are Gordon Brown’s planeless aircraft carriers. There is Hinkley Point nuclear power station. And look, that dear little calf is HS2, the railway line whose justification changes more often than passengers at Crewe.

It is now showing a fine appetite, and consuming cash at an increasing rate. Needless to say, the forecast diet of dosh is proving inadequate for the growing pachyderm, as New Civil Engineer reports. The target for the construction works is £6.6bn, but contractors’ cost submissions are £1.2bn higher. They have been asked to review their sums, but following the collapse of Carillion they know how to respond to requests for cuts in their estimates.

When the government gave the green light to the line, the estimate for the project was £32bn. That seemed pretty pricey at the time, but it has already almost doubled, to a jumbo £56bn, before any real work has started, so even £1,000 for every man, woman and child in the land may not be the final answer. In that context, £1.2bn may seem like a rounding error, rather like the £1.6bn already paid in compensation to those affected by the line.

It is still not too late to set the financial big game hunters onto Nellie. And even with Notwork Rail’s hopeless budgetting, £56bn would go quite a way to modernising the entire existing rail network. For the benefit of the many, not the few, as the current argot has it.

It’s only a game

You may not understand the lure of computer games any more than the next grown-up, but the scale of this industry is pretty scary, with one estimate suggesting a market worth $145bn worldwide by 2020. Codemasters, which came to Aim this month, is a market leader in racing games, and has raced to 253p from its placing price of 200p. At £354m the business is valued at 5.5 times last year’s sales. There are no (post R&D) profits, but no debt either. High risk, of course, but if you want to be up with the zeitgeist…

This is my FT column from Saturday

Every government makes mistakes, but it takes a really special administration to make a massive blunder and then go on to make the same fundemental error again, just months later. The blunder is the £20bn Hinkley Point nuclear power station, which Theresa May bottled out of scrapping, and which will force UK customers to buy some of the most expensive electricity on the planet – an inflation-linked £105 per MWh in today’s money.

Despite this fabulous, guaranteed price, the project is so financially toxic that it threatened to break EDF, its contractor. It seems that Hitachi, which fancies building a £16bn nuclear power station at Wyfla in north Wales, has noticed, and wants us to share the risk. Ominously, it seems we are going to.

The Hitachi design is said to be better than EDF’s, in that there is an actual working example, and the guaranteed price is rumoured to be around £15 per MWh less than Hinkley’s (though still wildly expensive). Yet if even this is not attractive enough for Hitachi to go ahead unaided, is any big nuclear plant worth building? While wind and solar costs are falling, ever-stricter safety rules continue to drive up those for nuclear. Changing patterns of use and advancing storage technology also undermine the “base load” case on which nuclear is built.

Elsewhere in the land of white elephants, here’s the Swansea barrage, optimistically priced at £1.3bn and recently described by business secretary Greg Clark as “an untried technology with high capital costs and significant uncertainties”. Pulling the plug on that would at least avoid a hat-trick of terrible energy policy decisions.

 

He reads the small print

If you have tears to shed for the traders of credit default swaps, prepare to shed them now. Oh, you haven’t? These nifty little financial instruments nearly brought down the world’s financial system a decade ago, but CDSs are so profitable that the banks can’t resist creating them.

Their basic purpose is simple enough: to allow holders of bonds to hedge against not being paid. In practice, there is even more small print in bond prospectuses than in, say, your home insurance policy. That’s the one you haven’t read, and that four-fifths of us wouldn’t understand even if we did so.

It seems that buyers of bonds also bought in blissful ignorance, except that at Blackstone, Akshay Shah read the documents. Blackstone bought CDS contracts for debt issued by a struggling company. Since default looked likely, the debt holders were keen to offset the risk. Blackstone then approached the company to offer finance on condition that it triggered the default conditions on the existing debt.

This default could be as trivial as a slightly late interest payment, if that’s what the documents dictated. The CDSs would then pay out regardless of what happened at the struggling company. This “manufactured default” is being branded insider trading, mostly by those banks who have had to pay out on the CDS contract.

It looks more like fair game between consenting adults. After all, the banks create these dangerous instruments, not the company, and if Blackrock’s financing (and the associated default) is the difference between survival and failure, you could say the company has a duty to take the money. If Mr Shah has irreparably damaged the CDS market, then we’ll all pretend to be frightfully upset.

They’re fleeing from the black stuff

Once the boffins established beyond reasonable doubt that smoking was a bad idea, there would be no new tobacco companies. As a result, the industry has consolidated into a fireproof world oligopoly, and the stocks have ranked among the best performers of the last 20 years.

Something similar may be happening down the coal mine. The mantra is familiar: coal is killing the planet unless the industry is killed first, green-backed litigation is never far away, and investors are sloughing off anti-social assets. Yet as brokers Jefferies point out, rumours of coal’s death are much exaggerated.

Global demand is increasing, while US stocks of coal are falling faster than domestic demand, spurring a “greatly under-appreciated” bull market. The brokers pick Glencore in London and Peabody in the US. Just don’t expect anyone to like you for investing in these particular smokes.

This is my FT column from Saturday

Philip Hammond, we’re told, is so unhappy with Britain’s modern version of capitalism that he is working up a major speech on improving it. He has no shortage of targets, from runaway boardroom pay and the gig economy, to extracting significant tax revenue from the internet giants.

Above all is the growth and influence of large corporations, seen by many as “malignant rather than benign” as James Odgers, a farmer, wrote to the FT last week. Nowhere is this power more apparent than in the decision by Walmart to sell Asda to j Sainsbury.

Skilfully presented as some magic formula for cheaper food, the proposal would create a company with over 30 per cent of the UK grocery market. Yet it was not the prospect of millions of happy shoppers that caused the Sainsbury price to leap by 15 per cent when news of the deal broke last month, but the prospect of oligopolies behaving the way they always do.

We now know how Tesco behaved when it considered itself so powerful that no supplier dared argue. Alongside Tesco, Sainsbury/Asda would mean two companies controlling almost two-thirds of Britain’s food sales. Small suppliers would face an intensified squeeze. No amount of store sale “remedies” would make a significant impact on this dominance.

Above all, this is another test of whether the UK authorities are serious about competition. It took a brave stand from the EU’s competition commissioner, Margrethe Vestager, to prevent the takeover of O2 by Three. The UK’s Competition and Markets Authority recently waived through Tesco’s takeover of Booker, presumably because wholesale food is nothing like what you get in the supermarket.

The CMA now has a chairman in Andrew Tyrie who can face the consequences of being awkward, one of which was to deny him high office in the government. He now has the chance strike a blow for competition, and stop this anti-competitive stitch-up in its tracks.

Very few signs of life

Standard Life Aberdeen has been transformed, chairman Gerry Grimstone told shareholders this week, into a “capital light investment company.” All that fuddy-duddy 200-year-old life assurance stuff has gone, with the final disposal to Phoenix for £3.2bn, a deal which he described as “excellent value”. The new company is so capital light that half the proceeds are not needed.

The shareholders do not seem impressed. Despite the prospect of getting £1.75bn back, the shares sagged. They are cheaper now than before the ‘orrible merger that created Staberdeen in March last year. The yield is over 6 per cent, and if there are any benefits, they look a long way away, rather like the hundreds of jobs which are lost in Scotland as a result.

The double act at the top, with an unmatching pair of CEOs, has lasted longer than many observers expected, but still looks like unstable equilibrium. Sir Gerry is off next year, by which time the troops may want results. His successor will doubtless note that there is no such thing as a successful merger.

As for Phoenix, this “transformational” (dread word) purchase will be paid for with a £950m rights issue and the £500m of Fixed Rate Reset Perpetual Restricted Tier 1 Write Down Notes (you knew) it has already raised. The banking vultures are skimming a mere £13m from the rights issue. It is not known how many shareholders will be merely recycling their Standard capital handout into Phoenix. It’s how the City works, after all.

Not perpetually enhanced

When the board of Invesco Perpetual Enhanced Income demanded a cut in fees, Invesco managers refused and gave notice, as they are entitled to do. Now instead they are biting back. With their allies, they want to remove two directors and (presumably) keep the mandate for this £153m trust. Given the wide dispersion of shareholdings through platforms and nominees, their 23 per cent might well win the vote.

This looks like blatant self-interest. The fees, for managing a bond portfolio, are high even before a complex performance kicker. The interests of the outside majority are being sacrificed for the managers. Unless Investec backs off, or produces a convincing explanation, its actions will do long-term damage to itself and the industry.

This is my FT column from  last Saturday