I fear that these directors are not improving in the way I set out in my Autumn justification for investing: indecision on New York space, indecision on Finance Director layoff, not selling stuff effectively, apparently the Internet is this revolutionary new tool for selling antiques..umm
These are the questions I intend to ask at the AGM meeting.
First. When the special dividend has been paid shareholders will be holding net assets of around £12m to £13m. It is reasonable for equity providers of capital to a business to expect to receive a minimum return of 8%. That would mean Mallett should be, consistently, year-after year, producing at least £1m profit after tax. If there is no reasonable prospect of this then the logical course of action is to return shareholders' money to them. Imagine if 5 years ago that you (addressed to directors) were persuaded by a friend to invest £15m in the equity of his business. The friend has run the business in such a way that losses were made each year. Now there is £12m of your money left in the firm. Your friend wants to carry on the business that he loves (surrounded by beautiful things, nice salary, trips abroad, etc) When you first invested you said you needed at least an 8% p.a. return. It seems that your friend is incapable of generating even £1m per year on the money you have entrusted to him. So what will you say to your friend? Carry on? or, I want my money back so that I can invest it in other businesses that do produce a decent return? I did consider using Jesus' parable of the talents, but even the worse character there returned the talent.
So my questions:
1. Why should we not liquidate the assets of the company to release shareholders money?
2. Why do you not examine each section of the business in terms of (a) how much of shareholders money is devoted to this activity, and (b) are we generating a large enough ROCE? and (c) should we cut value-destroying activities?
3. Do you agree with this idea: By all means pay the current remuneration to directors if they achieve the £1m profit after tax target. But until they do this Board remuneration should be no more than £40,000 per person?
Second: Can I direct your attention to Note 18 in the accounts 'Receivables'. I'm afraid I do not understand - can you help me please?
First, why do wealthy customers buying antiques need to be offered credit?
Also, why, when gross margins are so small, do you even contemplate giving credit? Why is it that such a high proportion of customers do not pay on the due date? £637,000 is outstanding 6 months after 'sale'. What is going on?
Do the shareholders as a body need to get the fraud police involved? Are shareholders assets being misused in any way?
Can we hold the directors to account if the receivables figure at next year-end is not close to zero?
A report on the AGM: The first interesting fact is that the CEO had better things to do – he was busy selling antiques in Hong Kong. Only three directors attended – the two NED and the FD. At first I was shocked at this contempt for shareholders then I looked around the room. I was the only shareholder present (I think this is the case: there was a young lady, but I think she was with the company and did not ask any questions). My eldest son accompanied me, and there was a young gentleman who was a ‘representative’ from the Weinstock Trust (he did not ask questions either). So, how can you expect directors to take their shareholders seriously if shareholders do not show an interest in their company by turning up once a year to the AGM – a self-reinforcing cycle of depressing misunderstanding and suspicion?
Directors’ answers to my questions: To liquidate the assets in a ‘fire-sale’ (who said anything about a fire-sale) would result in NAV being below the current share price. They are optimistic (but not so that they will part with their money to buy shares) that the company is on the mend: new sale opportunities in Middle East, Asia and South America; economic recovery; the website and Masterpiece. ‘Analysts’ are now forecasting profit for 2014 of £400,000 and for 2015 £1m. Therefore we are getting close to my target profit numbers - supposedly.
Are they willing to put their money where their mouths are? Well, you see, if you reduce the remuneration of the senior team they will walk – already a New York expert has crossed over to Sothebys. I understand that argument, if it was imposed. I was looking more for the actions of a decent man to stand up and say that ‘I’m so confident in the turnaround of the company and I feel a sense of moral obligation to shareholders that I will only take a high salary when the shareholders are getting a good return’ I was looking for volunteers with integrity. Blank stares of incomprehension all round.
Apparently, many long hours have been spent in looking at individual parts of the business to see where profits can be generated, but I’m not sure that they fully understood the value-based management concept of value generation above the equity cost of capital. My son (a first class business graduate and an entrepreneur) tried in vain to contrast the £11m tied up in fully owned antiques producing very little profit with the near zero company capital tied up in the £20m of consignment stock producing, as a percentage of capital allocated, a nice contribution. They came half way by acknowledging the importance of consignment, and we came half way in accepting that 100% consignment would be a mistake because you must have the freedom to correct the mixture displayed in the show room. Charles, however, could not see why they could not reduce ownedinventory to say £5m (increasing consignment to £30 or £40m) releasing a large sum of money to be paid in a special dividend. One point of optimism: the consignment business will sit nicely with the internet strategy.
Charles also thought that the business model of the antiques game was “c**p”. The way it works is that rich bods come along and say I’d like to buy that item at £50,000, put it on my account please. They might pay you 30 days later or 150 days later. You, as the seller, do not know when you will get the money. We were told that the Mallett staff know all these rich bods and that they have only had one bad debt. But, in normal business terms, it is appalling to combine these three things: (1) Gross margins barely in double figures (2) Stock turn of once per year, and (3) Giving generous credit terms. The directors say that they are very frustrated by the credit terms convention enduring in the industry, but that they cannot do anything about it. If they tried to get tough (what I would call normal) then customers will say ‘I’ll go to Sothebys then, who will give me credit’. I wonder, I wonder – I know some very bright 20-somethings who might look at that afresh and find a way of persuading rich bods to pay up. They would probably also shift the business to being very capital-light (special dividends) with Mallett trading on its name as a market-place, as an endorser of quality and as an exhibitor. It would be fun to try (but you would need to retain the goodwill of the antique ‘experts’).
I was suspicious of Gurr Johns (Note 29 in accounts) but was reassured that antiques flow through this agent with client contacts – lots of buying and selling, helping both firms. I’ll take that on trust.
The voting was interesting. On many issues (including the re-election of the Chairman) around 40% of the votes were against (apparently, Peter G opposed). They looked nervous and I was under the impression that they had received many messages that they are in the last chance saloon. Time will tell whether they really do understand the concept of value creation from the capital you have under your command. It speak volumes to me that the Board members do not buy shares in this company.
For now I will hold onto my shares. It’ll be interesting to see how the story unfolds. What larks, eh Pip.