Here's a company that could benefit from a boardroom shake up.
The OpSec Security Group (LSE: OSG) AGM had a whiff of the Edwardian era about it, notwithstanding the meeting being held in a trendy office close to Chancery Lane tube station. Prior to kick-off, talk amongst the three private investors already in attendance was about the Royal Mid-Surrey Golf Course (something about the greens being dug up) then it was onto gossip about Barings and de Zoete.
I straightened my tie, stood up straight and stroked my side whiskers. The chairman commenced the AGM saying that his fellow non executive had a bad back so was not allowed out of barracks.
We struggled through the 11 resolutions. A tip for company secretary/registrars -- a lot of time can be saved if hard copies of the proxy votes are distributed thereby allowing the chairman to avoid having to give the detailed votes for each resolution.
History Man
Once the formal part of the meeting was completed, one of the Surrey men read a speech, consisting of a four-page handwritten note which covered much of the life story of OpSec. Apparently he has held OpSec shares for 20 years, enjoying the happy days when the share price touched 500p in 2000. Disappointment followed shortly afterwards. The share price struggled above 100p in February 2007, but has since fallen below 10p and is currently 17p.
The speech, although overlong, was useful. It did provide a guide to the last couple of decades for OpSec/Applied Optical Technologies. The phrase of 'jam tomorrow' was used a couple of times.
Speaking to an executive director afterwards, we agreed that we could not understand how anyone could hold a share for so long if they're unhappy about the performance of the company. Why not sell and move on or contact other shareholders with the aim of seeking change?
No musical chairs
Although shareholders have suffered heartache, this has not been meant musical chairs at board level. In fact, it has a touch of the Miss Havisham's about it. The non-exec chairman has been in place for an amazing 24 years, while the other non executive has been in place for 10 years. The CEO, who has a distinctive accent, possibly mid-west, joined the board in 2000. The finance director joined in 1997.
Much time was spent on directors' remuneration. Last year, the non executive received a total of £55,000 while the executives took home over £800,000.
This looks high to me. Per Incomes Data Services, the average basic salaries for CEOs on AIM was just under £200,000 last year. The Chairman said that, in the case of OpSec, one had to take into account the fact that the directors are based in the US for most of the year. He also said that outside advisers are also used to ensure that salaries are 'fair', dismissing the link between outsider advisers and the upper quartile (as in advisers usually suggest that directors are top notch and deserve to be paid salaries in the upper quartile).
I guess that the advisers have billed OpSec regularly over the last few years. I have never seen a group with so many share-based payment schemes -- the descriptions cover two pages of the latest accounts and explanatory notes cover another two and a half pages.
Putting all the chips on the table
Perhaps at this stage, for investors who don't know anything about OpSec, I should say that the group is involved in anti-counterfeiting technologies and services.
Turnover last year was £39m. The CEO said that there are about 50 companies selling similar services to OpSec, some with turnovers of less than £1m, and then there is De La Rue (LSE: DLAR) with turnover of over £500m. The directors believe that OpSec needs to grow to get away from the lumpy earnings pattern that has blighted the group in the past.
In 2008 OpSec bought Light Impressions for £4.9m and P4M for £8.3m. Note the market cap of OpSec is currently about £8m, debt is about £14m, so the enterprise value of the group is about £22m. The acquisitions were funded by debt because of the weak share price.
Although the directors are saying positive things about the acquisitions, it is a shame that the value of Light Impressions has already had to be written down by nearly £1m because a major customer was lost soon afterwards. I queried why the chairman describes the lost contract as low margin when the non-cash adjustment approximates to a 15% write down.
Careless
OpSec has also been careless with regard to cash. Although no bank covenant has been breached, the facility was recently renegotiated with Royal Bank of Scotland (LSE: RBS), resulting in an increase in margins, up to 5.25%, and a reduction in the term of the facility from March 2013 to June 2012.
As at 31 March 2009 the available bank facilities totalled £12.5m of which £12.0m was drawn down. So there's very little headroom. I queried this at the AGM and the finance director, Mike Angus, said that OpSec also had £4.2m of cash at its year end, so the headroom is £4.7m rather than £0.5m.
Please give us a clue
Another Surrey man asked for some guidance on trading for the current financial year. The AGM statement (released at 10am rather than at 7am -- very naughty Stephanie, PR supremo at Weber) said that profits would be strongly weighted towards the second half. The question was rephrased, the board was asked about market expectations -- OpSec's nomad is expecting £2.3m operating profits and 1.9p EPS for the year to March 2010.
A good shaking
The late release of the AGM statement is indicative of OpSec's need to have another look at its PR. The write down of the recent acquisition could have been better worded in the latest accounts, likewise the cash flow situation. Remuneration needs to be reviewed, having in place over 20 share-based payment schemes is just silly.
But the most amazing thing is the lack of movement at board level -- as Surrey Man#1 said: the non executives really do need to review their positions. The appointment of new non executives may entice a few people to have a fresh look at a group that still has some of the hallmarks of a start-up company with its cash flow problems and restructuring.
OpSec is probably a punt at this time. A director bought a few shares earlier this year, demonstrating confidence, but the interim results are probably going to be ugly and the balance sheet is very ugly.
More from Alice:
Discussion board poster AliceInWonder1 is a serial AGM attendee and is keen to encourage other private investors to take a more 'hands on' approach with their holdings. He holds shares OpSec Security Group.
