April 2018 Portfolio Update

Finally a pretty quiet month, with the stock market recovering from its wobble in March, and so much the better for that in my view. I made very few changes this month but after enjoying Mello 2018, up in Derby, I now have a list of companies worth further investigation. I don't know whether these ideas will convert into investments but having met management I do feel that I understand these businesses in more depth; on the other hand it's best to be a little cynical as directors are often very good at painting a rosy picture. Tricky thing this investing lark.


Impax Asset Management Bought 160p - Apr 18

A few weeks ago I saw Ian Simm, founder and CEO of Impax Asset Management, give a presentation on the company. With IPX popping up on my quality screen, as well as being a near miss on my growth screen, I was naturally interested in hearing what he had to say. In a nutshell he started the group twenty years ago in order to invest in the environmental and renewable energy sectors. Since then the group has slowly but successfully increased its fund size and laid down a solid performance history. With the transformational acquisition of Pax World in January the group is now at a healthy scale and possibly a little undervalued given the potential for synergies. With interim results out on 7th June we don't have long to wait for up-to-date figures.

dotDigital Bought 87p - Apr 18

Another company which scores highly on my screens, this time for quality and momentum, is dotDigital. It has an excellent track-record of profit growth, with good cash conversion, and forecasts are pointing at 23% bottom-line growth this year. However with GDPR coming into force this month I feel that positive sentiment towards the company has been somewhat subdued lately. As a result I've done some reading around to see how pro-actively dotDigital is dealing with this challenge and it looks like the company is positioning itself to help clients handle and cleanse their data in order to be compliant. So it's reasonably likely that the group will be a net beneficiary, rather than a victim of GDPR, as the additional regulation pushes clients into their hands. That said I have bent my rules here by not waiting until an out-perform trading statement before increasing my position; hopefully I won't regret this decision.

Gamma Communications Bought 720p - Apr 18

This is an interesting stock in that it's been almost entirely overlooked by investors; the only substantial write-up that I could find is this one from the Motley Fool last year. Operating as a provider of voice, data and mobile services to business customers Gamma Communications seems to deliver an excellent combination of quality (ROCE ~26%), growth (~28% p.a. for the last 3 years) and cash generation (£38m net cash). Final results came out last month and these demonstrated strong demand in almost all areas of the business with only Mobile Services being a little slow to develop (although with improvement in H2).There is some change in the air with long-time CEO Bob Falconer retiring but Andrew Taylor, CEO Designate, is in place and so the handover should be smooth. Still the outlook for 2018 is positive and while analysts are pencilling in earnings growth of just 14% at this stage the stock has a history of earnings upgrades and hopefully this pattern will repeat in 2018.




Watkin Jones: An in-line statement here for the HY with forecasts of around 10% earnings growth to 15.1p for the year. As these forecasts have risen by only 2.5% over the last year it seems that WJG is in a consolidation phase. The narrative is more upbeat referring to the student accommodation market remaining strong and solid progress being made in the build to rent sector. A slight disappointment is that Fresh Property Group are due to cease managing 5,124 beds for the Curlew Student Trust as the portfolio has been sold. This is a big chunk of the 16,185 beds which they currently manage but they are already lined up to manage 14,016 beds for the 2018/19 academic year. So hopefully the impact of this change will be mitigated. (Update)

Treatt: Another in-line statement with the business currently focused on factory relocation plans and capital investment. At the moment FY earnings are pencilled in at 17.6p, roughly the same as 2017, although earlier forecasts reached 19.8p and so this is an 11% decrease. What's interesting is that sales are forecast to rise by 6.5% in 2018 and yet they're already up by 11% in this half-year. It may be unwise to read anything into this though as profits aren't mentioned in the same light. Still the citrus, tea and sugar reduction business appears to be performing well and Treatt will materially benefit from the recent US tax changes. I'm content to hold. (Update)

Keyword Studios: Given that KWS is on a forward P/E of ~40 expectations for growth are high. Fortunately these results see profits advancing by 55% with adjusted earnings up to 31.2c (against a 25c forecast). I've got to admit that this sounds good although with such an acquisitive company it's hard to get a feel for the underlying performance - although like-for-like revenue is reported to be up by 15% (compared to an overall 57% increase). The key here is that this is a very fragmented industry and KWS are very good at integrating acquisitions (and still remaining in a net cash position). As an example two small acquisitions were announced alongside these results and KWS have agreed a credit facility of up to €105m which I assume will be used for further purchases. Given that analysts expect earnings of 46c for the year (which the company is in-line with so at this early stage) there's everything to play for here. (Results)

Robert Walters: Following an excellent 2017 this update shows that momentum is continuing with net fee income up by 17% (adjusted for currency). All geographic regions are performing well but Europe (up by 32%) and Other International (up by 54%) are outstanding. At this rate Europe could overtake the UK region and possible challenge Asia Pacific for the top spot. Given that current forecasts are for a 15% rise in earnings (with this forecast itself having risen by 50% over the last 12 months) I can see plenty of scope for further upgrades as the year progresses. I also like the fact that cash is up to £34m now. A great business - I'm looking forward to the next update in July already. (Update)

XP Power: A short in-line statement here with momentum from 2017 carrying on into 2018. Forecasts are for a healthy growth of 27% in earnings to 171p, putting the company on a P/E of ~21, which feels reasonable to me. There are some currency headwinds with reported Q1 order intake ahead by 9% while this would be 19% at constant currency. On the other hand the Comdel acquisition is pulling its weight with Comdel providing 7% of this 19% growth. Cash generation remains good with the small net debt position of £9.0m reduced to £6.8m just in the first quarter; at this rate the debt could be paid back this year. A decent start to 2018 then and I'm happy to hold. (Update)

Focusrite: Really excellent HY results here with earnings up by 23% to 9.0p and great cash generation pushing net cash up by £5.5m to £19.7m. Given that 2018 forecasts are for an EPS of 15.9p, and I can't see a particular H1 bias in previous results, I suspect that forecasts will shortly be raised yet again (a constant theme with TUNE). Operationally the company has seen revenue growth in all major regions and segments with five new products launched during the period. I can see why the CEO states: "We remain confident about the outlook for the rest of the year and beyond: future product plans are taking shape, the geographic expansion continues and the strategy developments are bearing fruit". From an FX perspective there is a natural USD hedge in place, as Chinese contract manufacturers price in USD, while EUR exposure is actively hedged. All in all this seems to be a business which is really in a sweet spot. Happy to hold. (Results)

Palace Capital: I've been feeling rather frustrated by PCA, since they completed the big RT Warren acquisition in October, and was expecting more gloom in this update. However it turns out that profits are likely to be ahead of expectations which is a turn up for the books. As usual there's lots of detail in the update but the important news is that discussions are ongoing with regard to selling 60 of the RT Warren residential units. They were always peripheral and selling them will release capital for further acquisitions. That said Hudson House, in York, is currently being demolished and it seems that PCA are going to proceed alone with the development after previously stating that they would only develop with a joint venture partner. I just hope that they know what they're doing. A point worth considering is that PCA are clearly dealing with liquidations in the casual dining sector, which means that they're losing tenants, but on the flip-side new and existing tenants appear to be paying more in rent reviews. Perhaps Palace Capital will surprise me yet. (Update)

RWS Holdings: Well this update went down like a lead balloon with shares dropping by 17% on the day. The culprit was those dreaded phrases "broadly in line" and "second half weighting". Looking more deeply there are two problem areas: FX changes as GBP appreciates against USD and the recent Moravia acquisition not performing as expected. With the first RWS appear to hedge their Euro exposure, but not their Dollar exposure, and last year's tailwinds have turned into a sales/earning headwind this year. If it doesn't abate then earnings are likely to be slightly below expectations. On the Moravia front this purchase was expected to be immediately and highly earnings enhancing from the start and yet Moravia now appears to be on the back foot as client business has fallen back. On the other hand all other areas of the group are performing well, debt is under control and RWS have an excellent track record regarding acquisitions. So for the time being I'm prepared to give management the benefit of the doubt as I don't get the sense that their end markets are fundamentally under pressure. (Update)

Boohoo: With meaningful share-price weakness heading into these results expectations were negative. In the event these final results exceeded prior expectations with adjusted EPS coming in at 3.23p. Admittedly this ignores £3.2m in share-based payments but still a good result. As expected profit margins decreased by ~2%, due to marketing and pricing costs, but with a target of 9-10% now set for adjusted EBITDA margin there should be no more falls here. Looking forward all brands seem to be growing in all geographies and sales growth is expected to be in the 35-40% range during the coming year. It all looks pretty promising with PLT driving growth in the group - enough so that Boohoo are leasing a 600,000 sq.ft. warehouse just for this one brand. That said I'd really like to see an out-perform trading statement come out in order to support the valuation with a forward P/E ~50 - the next update is likely to be in early June. (Results)

FDM Group: A short AGM statement here but it's useful to hear that lower margin contractor revenues are being replace by higher margin Mountie sales. This is very much in line with FDM's strategy of increasing in-house Mountie headcount (up from 2,826 to 3,310 over last 12 months) with sales from this source rising by 13% year-on-year (17% in constant currency). No reference is made to analyst expectations but these point to a 17.5% increase in profits (to 34.5p) with this forecast improving from 31p in April 2017. A promising start. (Update)

Computacenter: An update for the first quarter this one starts well by mentioning that performance has been better than expected and 2018 is likely to be another year of progress. This optimism is reflected in the forecast earnings coming in at 68p, a 10% improvement on 2017, with this forecast having already risen from 57.5p over the past year. Backing this up is a rise in group revenues of 19% (ignoring a one-off licence sale) with the UK and Germany driving this growth. From a product split perspective Supply Chain work is in strong demand, which should continue, while Services revenue is broadly flat and under some growth pressure (in order to maintain margins). Looks pretty good to me and the market seems to like what Computacenter are offering. (Update)

End of month summary

Well it's been a positive month, which is nice. Last month I was asked to include a table of my holdings, with their monthly performances, to give a more complete overview and I'm happy to do that. So this is how April played out:


Obviously the stand-out performer was Plus 500, up by a third on the back of the crypto-currency bubble and still powering on, while both Boohoo and Keyword Studios made headway on the back of well-received results. The only dog was RWS Holdings and I remain in two minds about my position here. On one hand it is very close to my stop-loss price and so should be sold to preserve capital. On the other hand I've thought quite deeply about the profit warning and feel that it is more of a timing issue than indicative of a business in decline. If anyone has any thoughts on my reasoning here, either positive or negative, I'd like to hear them.

My reasoning is this:

1) A key issue is that GBP (against USD) is appreciating from the lows plumbed in 2017. Given that >85% of sales are non-sterling (which is why I like the company) this is an appreciable headwind for unadjusted profits. These pressures were mentioned in the Feb AGM statement although, at the time, the board remained confident of further substantial progress in 2018.

2) FX volatility is both nothing new and outside the control of the company. It's possible to mitigate the impact by hedging and RWS have hedged their estimated EUR exposure at 1 euro = 90p until 30 Sep 2018. It appears USD exposure hasn't been hedged and I suspect that the board decided against this despite the increased USD exposure arising from the Moravia acquisition. They may be kicking themselves now.

3) Moravia clearly isn't performing as strongly as expected with lower than expected volume from clients. This is unexpected since at the time of the annual results the expectation was: "The Group expects the Moravia acquisition to be immediately and highly earnings enhancing."

4) I think this why the update implies that the board had always anticipated a second-half weighting to the year when (in fact) the potential for such an imbalance hadn't been mentioned before. Quite the reverse really.

5) The free float of shares is somewhat limited with Andrew Brode holding 33% of the company and >37% held by institutions. So share price movements are likely to be amplified by this illiquidity. OTOH just imagine how much today's drop has cost Mr Brode (on paper at least)!

So it's not a great trading update but other areas of the company are performing well and there is a strong sales pipeline as they go into H2. In addition the recent US tax changes should make a significant difference with the rate dropping from 35% to 21%. I may be looking through rose-tinted glasses but I don't see the update as being a profit warning so much as an adjustment based on discrete factors. Could take some time for the price to recover though. Thankfully the rest of the portfolio made up for RWS with an increase of just over 5% for the month and a move into the black for the year. Let's hope that May follows the same trend!

Disclaimer: the author holds, or used to hold, all of the shares discussed here

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