February 2018 Portfolio Update

Well that was an exciting month after the relative calm of January and 2017 as a whole. For a few days there I was a worried at just how fast the market was falling but for the life of me I couldn't believe that we were on the cusp of a recession - the actual economy, of which the market is a forward-looking reflection, is just performing too well at the moment. In fact I believe that globally we're on the cusp of some excellent growth although we've opted out of this bonanza by miring ourselves in the Brexit swamp. Anyway a moderate amount of trading action took place this month as I reacted to various trading updates and result announcements.


Keywords Studios Bought 1620p - Feb 18

As mentioned in last month's update I took a position here on the basis that the share price seemed to be in a holding pattern in lieu of any news. Well the trading update came out, as mentioned below, and a decent volume of buying pushed the price up by almost 9%. While in some ways it's annoying to buy more shares after the price has gone up I prefer to look on this as valuable confirmation that the company is trading well. From a technical perspective I can see that a break-out above the all-time high of 1661p might be a trigger to buy and, as it happens, the price looked to be heading through this "barrier" on the day after the update. It didn't quite make it, as the market in general tanked, but I'm happy enough to top-up at this level.

Games Workshop Bought 2180p - Feb 18

Given the gyrations of the stock market recently I thought that I'd take a look at which of my holdings had fallen the hardest and appeared good value. While Games Workshop is only my 6th worst performer it is, also, down by 24% from its 52 week high despite being on a ridiculous forward P/E of 12.5. I understand that the good times won't last forever but with a very recent trading update raising expectations yet again, and another dividend in the pipeline, I can't see much to dislike here. I also believe that the 2019 forecast of a 20% drop in profits just doesn't stack up although it would be interesting to see a broker note covering the reasons for this prediction. Either way I figured that I'd redirect some of the capital salvaged from IQE into a company making real, transparent profits.

Henry Boot Bought 300p - Feb 18

Similarly Henry Boot has slipped back from its recent high, despite a recent trading update raising expectations comfortably, and now looks strikingly cheap on a P/E < 10. From a technical perspective the price is back at the solid support level of 300p that has both underpinned the price since May 2017 and, to some degree, held the price back despite strong trading news. While I'm not big on reading the tea leaves I can't see a driver for the price to fall any further while profit forecasts keep getting pushed higher and the return on capital continues to improve. Obviously the Construction & Engineering sector isn't flavour of the month, following Carillion's self-destruction, but I believe that this is just providing an opportunity. On the other hand I could just be adding to a losing position in order to make myself feel better!

Plus 500 Bought at 1189p - Feb 18

Following some excellent results from Plus 500 the Stockopedia ranking engine awards it a StockRank of 99 courtesy of momentum and quality being in the 90s while the value rank is a handy 74. Frankly I agree with this rating given how out of step the P/E of ~9 and yield of ~7% is with last year's earnings growth of 71%, a ROCE >100% and cash generation strong enough for the company to pay out all of its earnings to shareholders. I know that this is a foreign company operating in a sector open to stringent regulation but still the lack of investor interest feels ridiculous! Anyway talking of dividends a back of the envelope calculation suggested to me that the coming ordinary and special dividends would equate to a yield of ~10% and the ex-dividend date was fast approaching. So while I dislike rushing into decisions I just couldn't see a reason not to materially increase my holding here and thus capture slightly more of that lovely cash return.

Dart Group Bought at 778p - Feb 18

To say that the recent trading statement was well received by the market is something of an understatement with the shares up by over 20% since the announcement. Still, as discussed below, I feel that Dart Group are flagging up excellent performance in both this and the next financial year which is a great combination for investors. With expansion into the southern airports of Birmingham and Stansted and generally good conditions for their particular brand of inexpensive but decent flights and holidays I feel that Dart Group are living up to their reputation as a well-run, ambitious but sensible travel company. I may be a little biased having taken one of their packages at Christmas, which was both enjoyable and well-organised, but if other holidaymakers receive the same service then I can see plenty of repeat business being on the cards. Anyway with very little pull-back following the fast run up in price I decided to make this a full holding in the portfolio.


IQE Plc Sold at 107.3p - Feb 18 - 26.9% loss

Well this was always going to be a painful piece to write! I like the compound semiconductor niche which IQE operate in and I was happy enough with the positive tone of December's trading update to buy a few more shares. Since that point there's been a lot of "news" around disappointing iPhone X sales and IQE became one of the most shorted shares in the UK. With the price hovering around my stop-loss I decided that I should wait until the results came out on March 20th before making any decisions since otherwise I'd just be reacting emotionally without any data. Unfortunately when ShadowFall Capital & Research put out their shorting analysis this was exactly the sort of data that I didn't want to see. With a sinking heart I followed their working out and this created an enormous amount of cognitive dissonance in my brain. While no smoking gun the report does raise important and worrying questions about the company and its off-balance sheet ventures. In the light of this new information I realised that I should liquidate my position to preserve capital. Also I have a new note to my future self: don't buy shares that aren't passing my checklist tests even if everyone else is buying them.

BHP Billiton Sold at 1499.4p - Feb 18 - 1.2% gain

The arrival of some poorly-received interim results prodded me into reviewing this long-standing holding and in the event there could be only one conclusion: that this giant company was totally out of step with the rest of my mid-cap portfolio and that I'm not in a position to truly understand the business. So I resolved to jettison my stake and consider where the funds could be used more effectively; perhaps in Dart Group? This is despite the Stock Rank remaining lofty due to a very high quality score. Fortunately it was this high rank that convinced me to double my holding a year ago and thus usefully average down on my much higher purchase prices from 2011-2014. Without this stimulus I'd be exiting with a moderate but annoying loss. I'm sure that BHP will do fine in the long run, so long as the global economy remains strong, but it really isn't in my personal sweet-spot.

Zytronic Sold at 500p - Feb 18 - 65.6% gain

Well this was a position that I didn't expect to sell but when "they" say don't fall in love with a share "they" are right. The problem is a rather wishy-washy AGM statement indicating that profits and revenue are broadly in-line with the previous year. In reality this is a minor profit warning since analyst forecasts were for a small (4%) rise in profits for 2018 and yet "broadly in-line" is code for being a little bit below; so sales and/or margins must be hard to come by at the moment especially with sterling a little stronger than 12 months ago. In addition at the 500p level the shares hit my rough stop-loss rule to sell when a 20% fall from a recent all-time high occurs unless the company is still releasing positive news - which is not the case here. So despite the otherwise excellent quality metrics and excellent cash generation Zytronic had to be shown the door.


Keywords Studios: As hoped for last month Keywords put out a positive update with both revenues and profits comfortably ahead of expectations. Both organic growth and acquisitions have driven this growth. Remarkably eleven companies joined the group in 2017 with two, VMC and Sperasoft, being large acquisitions taking the group further into the Co-Development and Engineering spaces. This is really helping Keywords become a full-service partner to the game development studios. With €30.5m in cash, plus some bank facilities, there is both scope and plans for further bolt-on acquisitions this year. An aspect that I particularly like here is that the group isn't directly exposed to the commercial performance of any single game; this really de-risks their revenue stream and places them fully in the profitable "picks and shovels" category. (Update)

3i Group: In this Q3 announcement it's pleasing to see a total return of 19.4% in the first nine months with NAV up to 701p. Key drivers here are the investment in Action (32% of the total portfolio) with its valuation increasing by 15% (on an EBITDA basis) and the agreed sale of ATESTEO (4% of portfolio) for £277m which is a 52% uplift on its previous valuation. Usefully discount retailer Action is growing markedly, by 244 new stores, and investing in infrastructure as it scales up its expansion programme across France, Germany and other European countries. The second largest holding (10% of portfolio) is 3i Infrastructure, which is quoted, and also performed well with some investments being divested (like Anglian Water) and funds being deployed elsewhere (such as investing in the Wireless Infrastructure Group). So the board are forecasting another year of strong growth and yet the share price has flat-lined over the last 6 months. It might be a good time to top-up but I need to check if the NAV premium, of 35%, is higher or lower than average. (Update)

Games Workshop: A very short update, which I suspect was put out to announce yet another dividend, it appears that sales and high operational gearing will lead to profits being above expectations once again. This is certainly the beneficial side of gearing where there are fixed costs that barely change as revenue ramps up; pretty much all of the additional income drops straight to the bottom line once the cost of goods is taken into account. (Update)

RWS Holdings: Decent in-line AGM statement with Andrew Brode indicating that their focus is all on integrating the Moravia acquisition. This was a big one, at $320m, but it adds business with large technology companies and sales across the globe (USA, Japan, Argentina etc). The track record with acquisitions here is very good and I can see why the board are confident of further substantial progress in 2018. A good company to hold. (Update)

Plus 500: Some pretty stunning results with EBITDA up by 72%, despite sales only growing by 33%, due to the EBITDA margin improving from 46% to a very high 59%. While a large amount of this growth took place in Q4 as the crypto-currency bubble inflated, sucking in lots of new punters, there's no doubt that the company is trading well via a platform available on just about any device. As a result net cash jumped by 77% and the company is returning essentially 100% of profits through a combination of dividends and share buybacks. Given that the total dividend for the year equates to a 10% yield at the current price (which is after the share price has almost tripled in the last year) I cannot fault this commitment to delivering a solid return for investors. Already the board expects revenue for 2018 to be significantly ahead of market expectations and yet this growth is valued at a P/E of ~10. The problem is ongoing regulatory uncertainty as the ESMA and FCA proposals grind to a conclusion combined with this being a foreign company in the volatile gambling industry. Nevertheless it just seems too cheap! (Results)

Dart Group: A nice little update here with trading to 31 March reported to be materially ahead of current market expectations. Given that Stockopedia has consensus earnings at 52.7p I'm guessing that this will be revised upwards by 10-20% to the 58-62p level. If Dart manage to come in above 60p then they'll have improved on a very strong 2016 which will be quite impressive. In addition, although it's early days, the board currently expects 2019 to come in at a similar level. While this may sound like a disappointment in fact analyst estimates pointed to a 15% drop in EPS so this is rather an earnings surprise and they'll need to adjust their spreadsheets. The only fly in the ointment is that the share price is now 20% above the pre-update level and it's hard not to be a little reluctant to pay this new all-time high price! (Update)

dotDigital: The headline news in these HY results is how dotDigital is pursuing its strategic goals of geographic expansion, partnerships and innovation. A big part of this is the recent acquisition of Comapi, back in November, but the group is pushing forward with growth in the US and Asia and initiatives around machine learning. So why did the shares drop by more than 10% on announcement day? Well the "profit" word is barely mentioned in these results and while revenue improved by 25% the adjusted EBITDA figure only rose by 8%. The problem is that analyst forecasts are for 22% earnings growth in 2018 and that seems tough even if management are confident of hitting this number. On the other hand dotDigital are properly growing and generating cash with rising sales in all regions and through strategic partners. Also while the GDPR regulations are slowing sales down now I believe that the company is positioning itself to assist customers pro-actively and I imagine that they'll take all of the help that they can get. So, for now, I'm happy to give the board the benefit of the doubt while remaining thankful that I only have an initial, half-size position; this will only change on an unexpectedly positive trading statement! (Results)

PPHE Hotel Group: Somewhat underwhelming FY results here with EPS of 58p compared to forecasts of 65p (down 14% year-on-year). Still it's been a busy year for PPHE with two new hotels opened and the Croation operations being brought in-house (so they're now consolidated in the accounts) - all of which has impacted profits. On the other hand, as with dotDigital, there are some real strategic wins being scored with debt being refinanced, and a sale and leaseback completed for Park Plaza Waterloo, along with corporate reorganisation in order to provide capital for further growth. Based on previous performance by management, in terms of generating shareholder value, I can believe that all of this activity will be good for investors. It seems that the board share this optimism as currently trading is consistent with meeting board expectations for the year and these can't be much different to the analyst forecast of 77p. A slight note of caution is struck with regard to renovation programs possibly impacting on the guest experience and thus overall sales but I'm sure that they say this in every set of results! Anyway I'm happy to remain a holder.(Results)

End of month summary

It's kind of amusing to think that I was ruing my overall performance of just 0.8% at the end of January when I'd be thankful for such a knock-out return just now! It's been a volatile month and that's not the half of it; at one point I thought I might end up 5% down at least! So to be just 0.5% down for the YTD feels like a victory right now (mini fist pump). Obviously I could have done better with IQE, and up until the publication of the short report I was set on staying in until the results, but sometimes the uncertainty is just too much to bear. In retrospect this is a company far outside my comfort zone and I should never have become involved in the first place. I'm certainly happier without it in my portfolio. Elsewhere it's been a moderately negative month overall although Dart Group performed hugely on the upside, with Games Workshop and Plus 500 a fair distance behind, while Burford Capital slipped significantly on no news (as did FDM and Taptica).

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

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