Discussion board poster AliceInWonder is a regular attendee of AGMs. He's keen to encourage other private investors to follow suit and become more actively involved in the companies they own.
I recently attended the AGM of Mears Group (LSE: MER). Although these Alice's AGM reports are mainly for private investors, if any directors are reading this post, some advice: please don't serve red wine to private investors. It only encourages the lonely and the bored to turn up. It is amazing how many miles someone will travel for a free glass of red wine.
Eleco (LSE: ELCO) is a classic example of the red wine factor. AGM attendance numbers for this small cap (and getting smaller after its latest profit warning) are 40+, with the vast majority of attendees looking forward to their annual free lunch and a glass of red wine. Mears seems to be going down the same slippery slope, as a result, the grey hairs were in the ascendant. Nothing wrong with grey hairs, I have a few, but do directors want the majority of those attending to be only turning up for a free lunch?
The second big mistake made by Mears was to keep the grey hairs waiting until they could enter the room in which the AGM was held. The venue was at Investec's office close by St Pauls in central London. Many were in a rebellious mood by the time the doors were opened at five minutes before kickoff. As a result, the directors received no congratulations for their latest results, a year in which:
- turnover was up 38%;
- adjusted operating profits were up 23%;
- EPS rose by 19%; and
- its order book hit £1.6b.
Also there were no congratulations for Mears taking their corporate social responsibilities very very seriously. The excellent annual report provides lots of examples of how Mears contributes to the wider community.
What does Mears do?
I should at this stage say, for those who are not familiar with Mears, that it is the leading social housing repairs and maintenance provider in the UK (who has not seen a Mears van?), and it also has a growing presence in the domiciliary care market. These two divisions make up 80% of turnover, which was £420m last year. Market expectations are for a 10% increase in turnover this year.
Mears is currently trading on a forward adjusted P/E ratio of 10. Although dividends have doubled over the last five years, the dividend yield is low. The most recent annual dividend was 4.75p, but the current share price is 240p. Its market capitalisation is £175m.
Getting back to the AGM, there were 11 resolutions, all standard: they included approval of the accounts, approval of the directors' remuneration, appointment of the auditors and their remuneration, increasing the nominal share capital and purchasing shares in the market.
The meeting was held in a smallish room and all the directors attended (three executive and five non-executive). Chaired by the executive chairman, Bob Holt, the meeting did not start on time as the registrar was walking around the room asking for signatories, this being one of the consequences of the late access to meeting room.
Attending is easy
My first general point on AGMs -- access to AGMs is very very easy. You just need to turn up at the right time and at the right location. You can even turn up late, as a number did in this instance. Well, it was very hot in central London and some of the attendees are not getting any younger.
An elderly lady turned up 15 minutes late, and then blamed the directors for not having the foresight to have someone outside Investec's offices looking out for confused ladies of a certain age who were seeking to attend the AGM. She then berated everyone for mumbling. I was all for a whip round to buy her a hearing aid.
But she did not ask the most bizarre question, a gentlemen on my right gets my vote. He told the audience that he runs his own business and he suggested that Mears should increase its profit margins from 5% to 6%. He did not explain how.
Do your homework
My second general point on AGMs, don't be surprised if directors assume that those who attend AGMs are idiots. Hence it is recommended that one does a bit of homework before the AGM, and then ask some sensible questions. If you do, this often results in the management talking passionately about their company. And this was the case today, but only after the formal meeting had finished -- more on this later.
Although Mears has an excellent track record, and six out of eight recommendations from analysts who cover the stock are buys, the share price is languishing. It has been well over 300p, and for Bob Holt's mother of all option packages (7.9m options) to have any value, the share price has to be well over 320p by the end of 2012.
My take on why Mears is out of favour is threefold:
- The share price has, in the past, been chased too high. A few years ago, everyone loved the defensive characteristics of Mears, selling essential services to local authorities and developing a nationwide reputation for quality. The P/E ratio touched 20. But the days of heady P/E ratios have long gone.
- Buying Careforce, a player in the domiciliary care market, has resulted in a fall in margins. It also contributed to Mears being perceived as struggling to maintain its double digit growth rate.
- The key problem for me is that MER does not generate cash. Cash conversion was 93% in 2007 but only 43% in 2008, and it is not likely to increase substantially in 2009 as Bob Holt continues to grow the company and working capital requirements continue to increase.
I asked questions about Careforce and cash during the formal part of the meeting. But because the atmosphere was fractious, and a few people had got their teeth into directors pay (MPs and bankers have a lot to answer for), the more constructive discussions took place after the AGM had been formally closed.
Be flexible
My third general point in this article is always be flexible at AGMs, one can never predict what will happen. Usually directors stay around after the formal part of the meeting has been completed. If your fellow investors are beginning to make comments like 'Mine's a double' or 'I prefer white' it is better to forgo asking question after question during the formal part of the meeting. Instead grab hold of directors afterwards and spend time on a 'one-to-one' basis. This is what I did.
I came away cursing red wine but also confident that Mears, with the passionate Bob Holt in charge, will continue to grow. I also think that it should build as a good reputation in domiciliary care as Mears has in social housing. But the nagging thought remains, Mears does not generate cash, so I see it as a yo-yo stock in the medium term.
Some investors will get excited by the headline interim and final figures, pushing the share price up higher for a while, at which stage canny investors will take their profits. I suspect the share price will then drift down until the next set of results.
