Shareholders: Read Annual Reports Properly, says Hobson

THE WEEK: Morningstar columnist Rodney Hobson diagnoses problems at Hornby, gives easyJet a ticking off and says that Britain's Budget is no laughing matter

Rodney Hobson 24 November, 2017 | 11:21AM

It is very frustrating when you have products but no customers, but at least there are measures you can take to alleviate the situation: cut production, reduce prices or find new customers. How much more frustrating it is to have customers and no products. Your disappointed customers will look elsewhere for alternatives and will be reluctant to return because they consider you to be unreliable.

That was the position that Hornby (HRN) got into when it outsourced production to China and lost control of the supply chain. The model trains maker never recovered from being caught short, the shares collapsed, profit warnings were issued, losses mounted, and now last year’s rights issue has been followed by a placing and open offer. The shares, relegated from the main market to AIM to save money, are at a new low.

I hope history does not repeat itself at digital inkjet specialist Xaar (XAR). Shareholders tolerated a flat first half on the assurance in July, repeated in September, that revenue from new products this year would be weighted towards the second half.

Alas due to “supply constraints” Xaar has not been able to fulfil all of the demand this year, so the second half will be no better than the first.  It is rather worrying when a company knows well in advance that demand will increase yet it fails to ensure that there are adequate products available.

The company expects supplies to improve with new capacity coming on stream next year, leading to significant growth in 2018, but then that’s the same promise that was broken this year. As Xaar admits, competition for installing new printers continues to intensify, so what is to stop rivals from pinching the frustrated customers?

The shares fell from 500p to 370p in less than a fortnight. You are braver than I am if you take a chance that they have hit the bottom yet.

Shame on You, easyJet

It used to be Ryanair (RYA) that thrived on outrageous statements but easyJet (EZJ) takes the biscuit for its disgraceful full year results announcement.

No fewer than 20 boastful bullet points made it look as if profits were up and, far worse, that the dividend had been increased. In fact, both were down, as anyone wading as far down as the results table would discover.

The shares jumped more than 5% at the opening. I wonder if some investors were fooled by this shameful misrepresentation. It is a warning that investors should read all the way through a results statement before rushing in. If that means you miss the best buying opportunity, too bad.

Oh, and by the way, isn’t it time to end this silly business about starting a company’s name with a lower-case letter and putting a capital in the middle? This gimmick rightly went out of fashion 15 years ago.

Unfortunately, Easyjet – there, I’ve spelt it properly – isn’t the only offender. Did you wonder why Severn Trent was so determined to hide its pre-tax profit figures, preferring to repeatedly use the profit before interest and tax figure?

In case you didn’t guess, that’s because PBIT was broadly flat, while the true profit figure showed a sharp decrease. By raising the dividend, an act which looks quite unjustified in the circumstances, the directors hoped you wouldn’t notice the profit fall.

Whenever companies use PBIT, or any other measure that excludes interest payments, you should assume they are hiding something. The real profit figure will always be worse.

Britain’s Budget is No Laughing Matter

When a Budget is more memorable for the jokes than the financial content, you know it isn’t much of a Budget. Philip Hammond looks increasingly grey to me and such measures as there were merely highlighted the lack of options he has.

Rather like Severn Trent, he chose not to draw attention to the fact that the UK growth figures have been revised downwards. He simply stated the new figures without comparison. I remain optimistic that we are still heading in roughly the right direction, but it does seem wise to include in any investment portfolio a strong presence of companies with international operations.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
easyJet PLC1,610.00 GBX-1.95-
Hornby PLC35.50 GBX0.00-
Ryanair Holdings PLC15.66 EUR-1.54-
Xaar PLC260.00 GBX0.19-
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.