Sunday, November 18, 2012

Inland Homes (INL) - Part 2

The AGM for Inland Homes (INL) is fast approaching, on 27 November, so given my outspoken comments on excessive Director remuneration at this company previously on my Blog, I thought it would be useful to take a dispassionate look at the detailed facts.

Insomnia has its uses, as I was able to put my time to good use overnight going through the AIM Admission document for INL from Spring 2007, and every Annual Report from 2007 to 2012.

I have tabulated the key figures on a spreadsheet which is available to view by clicking on the link below;

Click here to view spreadsheet

Note there are 4 tabs, the main one which summarises key data (focused on Directors remuneration) and another tab which shows key points from the AIM Admission Document. The last 2 tabs are charts. Switch from one tab to another using the buttons at the very bottom of the page.

Key Findings

Inland was Listed in April 2007, after a Placing of 100m shares at 50p, raising £47.5m cash, after expenses. Yet here we are, 5 and a half years later, and the share price is languishing at 18.5p, or 63% down on the Listing price. By any standards that's a lamentable performance.

It's worse because there has been nothing paid in dividends, apart from the derisory 0.067p per share (yes, you read that right!) in 2012. That's a 0.36% dividend yield. The total cost of the maiden dividend was £122,610, yet it came at the same time that the Directors awarded themselves discretionary bonuses totaling £246,000, on top of generous basic salaries. What does that say about their priorities?

Therefore it's no wonder that shareholders are angry, because what we have is a well-paid Board drawing hefty salaries, whilst having presided over a considerable destruction of shareholder value.

We keep being told how astute these guys are, but are they really? They raised money & invested it at the top of the market, almost went bust shortly afterwards, and even now have failed to recoup even half of the fall in NAV between 2007-2009.

Shareholders have lost 63% of their money (50p Placing price to 18.5p share price now), whilst the Directors & employees have drawn over £8m in remuneration since Listing. It's very clear for whose benefit this company is run, and it's not shareholders! So I feel that Directors should ponder these facts, and how it feels from a shareholder perspective, before they jump on their high horse about their remuneration being challenged.

Also, check out the poor profit performance, and the corresponding level of total pay for Directors & employees (the bulk of which is for Directors);

Enormous losses, which wiped out a third of NAV seem to have only caused a temporary moderation in remuneration, until resuming its upward trajectory in 2011 and particularly 2012, with the large, undeserved bonuses paid, with no explanation that I can see in the Annual Report.

It's a public company, and shareholders have every right to challenge excessive remuneration, and rewards for failure.
Indeed, as they stated in their Admission document from 2007;

"The Company values the views of Shareholders and recognises their interest in the Company's strategy and performance and accordingly the Board positively encourages their attendance at general meetings."

So I am looking foward to a warm welcome from the Directors, and a constructive dialogue at the forthcoming AGM. Hopefully these issues can be resolved.

AIM Admission document (spring 2007)

Inland Listed in April 2007, and the Admission document contains lots of useful information, including about Director remuneration under service agreements dated 8 Mar 2007.

The key points are that Wicks & Malde each have £225k p.a. salaries, plus a further 20% for pensions, fully expensed company cars up to £20k p.a. cost (!), annual discretionary bonuses of up to 100% of salary (!!!), private healthcare, 25 days paid holiday, and the obligatory 12-month notice period.

So pretty generous service agreements, but nobody is denying that these 2 Directors have specialised knowledge & experience. But there again, so does every company Director, in whatever field they operate.

The service agreements were put in place towards the tail end of a long property boom, when these levels of remuneration would not have raised an eyebrow, given the proven track record of the Directors concerned.

However, those times are over, and anyone can make money in a boom. The truth is that Inland's Directors have proven far from successful in more difficult market conditions, especially considering they operate in the South East of England, where market conditions have actually remained fairly buoyant.

Proposal for revised Director service agreements

Therefore my assertion is that the service agreements should be revised, and remuneration reduced to more realistic levels for the current economic climate. My proposal would be these;

1. Revert to the original £225k basic salaries for the top 2 Directors, or rebalance the salaries to reduce the FD to a more realistic level.
2. No bonuses at all - all incentives should be via a new share option scheme, with a strike price of 50p a share, the original Placing price.
3. Freeze the company car allowance for 5 years.
4. Rolling 3-month notice period, there is no justification for 12-month notice periods.
5. Unjustified bonuses paid in 2012 to be returned to the company by Directors.

Remuneration committee

Inland has 2 Non-Execs, who have been in place since Listing in 2007.

My view is that they are not likely to be independent, and made a serious error of judgment in authorising £246k bonuses in 2012. Therefore they should be replaced as soon as possible with genuinely independent candidates who will safeguard shareholder interests.

The existing situation, where the Non-Execs authorise Executives pay, and vice versa, is ludicrous. It should be noted that Non-Exec fees were frozen at a grand total of £55k for 4 years, but then increased by 24% to £68k in 2012.

I would not want to see any further increases in Non-Exec fees for several years, they are quite high enough for a small AIM company.

Individual Director remuneration

Looking at my spreadsheet, I don't actually have any problem with the CEO's salary. It has tracked around £300k, which is perhaps warm for the mkt cap of just £33m, but it's not outrageous.

It should also be noted that the presentation of Director remuneration has changed, such that in 2011 and 2012 the totals included Employers NIC, whereas before they didn't. This skews the numbers somewhat.

I also note that the CEO has not taken the 20% pension contribution that he's entitled to, so credit where credit is due.

The figure that does jump out as too high, is the FD's package. A total cost of £506k for 2012 is absolutely ludicrous for an FD, in what cannot possibly be a full-time role. That is multiples of what a sensible salary would be, of perhaps £150k.

Therefore I propose that the FD's salary be substantially reduced by around half, and no more bonuses be paid.

I've heard that the FD is more than an FD. Well in that case, he should be given a different job title, perhaps "Deputy CEO & FD"? But the onus is very much on the company to justify such a huge salary for an FD.


It's time for a wake-up call at Inland.

The Directors have been paying themselves handsomely for 6 years, whilst delivering only a substantial destruction in shareholder value.

This calls into question the viability of the company as things stand. Maybe it would be better simply to complete the current projects, then wind it up & distribute the cash back to shareholders?

Or if the Directors have a better idea, then let's hear it, but certainly the current strategy of Directors being essentially the only beneficiaries of the company's existence, and shareholders providing the capital for no reward whatsoever, cannot continue.

I look forward to a constructive dialogue with Directors at the AGM, and will be sending this information to the Directors before the meeting, so they can consider their response.

I have absolutely no issue with Directors being well rewarded when they deliver shareholder value, which is why the best form of remuneration is relatively low basic salaries, and incentives linked to the share price in the form of share options. So perhaps we should suggest that Directors propose a new Share Option scheme, together with reduced salaries, in order to properly align shareholder and Director interests for the first time.

If I get time, I'll benchmark Inland's Director salaries against other small Listed housebuilders. Or actually, if anyone else has some spare time, maybe you could do this? I would be happy to publish here (with accreditation) any such work providing it's accurate.

No comments:

Post a Comment