February 2019 Portfolio Update

Shortest month of the year and perhaps one of the busiest in a while - and that's without doing any trading. Instead I've leveraged SharePad to produce some detailed analysis of both Fever-Tree and Medica Group. It's been refreshing to get back to this kind of work and having the right tools has really helped here. I also managed to find time to host the first StockSlam of 2019 in Central London. While I haven't managed to write up the presentations yet I did get round to publishing this short note on Cake Box . Finally, as if that wasn't enough, I attended an equity analysis course in order to pick up some professional tips. With luck I'll be able to post my notes on this at the weekend.



Things I thought about buying (but didn't)

Fever-Tree: Before I began my detailed analysis of Fever-Tree I was pretty sure that I was going to buy some shares. They've done well for me in the past and might do so again. However once I'd established that growth rates in just about all regions had rolled over and that so much of the share price is supported by hopes around breaking the American market then I just couldn't pull the trigger. I still think that this is an excellent business with a sharp management team but these very same directors have sold a lot of stock recently. So if they're nervous with the price at current levels (and clearly don't see a bid for the whole company coming soon) then I think that it's sensible to follow their example.

Medica Group: This stock popped up on my radar last year, at a higher price, and the qualities which attracted me then still remain - namely an improving ROCE level (as profits have grown faster than capex) and a high level of cash generation. On the other hand I think that growth is structurally limited by the need to find and hire qualified radiologists while having broadly a single customer, the NHS, is a clear business risk. So I see Medica remaining a great company in its niche but I can't ever see it growing to become a £1bn operation.

Cake Box: As mentioned above I took a lightning look at Cake Box and there's a lot to like about this franchise business. Namely high margins and ROCE, good cash generation and a fairly low risk approach. However customer reviews are mixed and I wonder if there's really as much room to expand the store estate as management seem to think. After all there are plenty of cake shops out there and quite a few are egg-free. So with this being a very recent listing I think that there's just too many unknowns to take a position right now.

Quartix: This company has come up on my quality screens for a while now what with ROCE >35% and an operating margin >25%. It also looks potentially interesting with the share price down by a third from last summer. However I find myself put off by the fact that earnings are forecast to drop 16% this year, due to declining insurance business, with the forward P/E being ~21 and so not particularly cheap. Add on general illiquidity, the spread being ~8%, and I think the best tactic is to watch and wait.

Howden Joinery: Final results today were not very well received with gross margin under pressure and a slight miss against the forecasts. However this is a high-quality business which knows how to service trade customers efficiently and has a clear road-map for future growth. That said the forecast growth rate isn't high and I think that the share is priced just a bit too richly even after a 6.5% fall today. I'll probably get interested if the share falls another 60p or so since that'll put it on a P/E of ~13. One to place on the watch-list.


Plus 500 Sold at 1042p - February 19 - 24.6% loss

Well this was a short-lived purchase but if you've been paying any attention to the share you'll know that it's just put out a nasty profit warning. As I mentioned back in December there remained clear risks around the ESMA regulations, and acquiring new users, but a sequence of three profit upgrades gave me some hope that they'd mitigated the impact. As it turns out they just got lucky in 2018 and next year they're going to make a lot less money and spend just as much on advertising. In addition it's now emerged that they do make money from client losses, despite repeatedly stating the opposite, and frankly this blows away any trust I ever had in the management. As such this share is now uninvestable for me.

Zoo Digital Sold at 73p - February 19 - 51.4% loss

Another failed trade here with my purchase of Zoo Digital only taking place last September. Looking back what strikes me most strongly is that my purchase was driven by FOMO (Fear Of Missing Out). I'd been watching the company for a while, becoming ever more comfortable with its technology and addressable market, and wanted to take a position before the next trading statement (which I expected to be positive). In reality the AGM update was only fine and the price fell away. I could have sold then but the interim results in November were good and it seemed as though Zoo was back on track. In reality they were one project loss away from disaster and that's what came out in the January update. Anyway after a bit of prevarication I've decided to close out my position as, for better or worse, it's not the type of share that should be in my portfolio.

Things I thought about selling (but didn't)

dotDigital: With the share price here going nowhere over the last year, and with multiple draw-downs over that time, I've been wondering whether it's wise to maintain this position. However I don't like to just sell a holding without some tangible news whether that's in an update or a results statement. So I waited for the HY results, mentioned below, and scanned through them to see if the Comapi acquisition was really working out. As it happens there are some headwinds here, due to the problems that retail clients are experiencing, but management seem fairly sanguine given that they bought Comapi for its platform rather than the clients. With integration elsewhere in the business going well I feel fairly comfortable holding on here.

Beeks Financial Cloud: As soon as I skimmed over the HY results I realised that the shares were going to be knocked back 10-20%. After all no one wants to read about the dreaded second-half weighting over their cornflakes (especially when accompanied by the "broadly in line" phrase). However it's clear to me that demand for the Beeks platform is high and that they've got plenty of room to grow with new institutional clients and new stock markets. So I see this as being the right type of warning in that it's down to business expansion combined with a possibly naive management team who haven't been sufficiently cautious with their expectations. In the long run I think that this will just be a blip on the road to becoming a larger company.


RM: For a cash generative business with a ROCE of ~25%, and yielding ~3%, RM is remarkably cheap on a P/E under 10. However it does operate in the less than sexy educational market which is truly out of favour. Maybe that's why investors were surprised by the strength of these FY results with 19% sales growth translating into a 32% rise in PBT as margins improved. These aren't fictional profits either as cash-flow was sufficient to repay £7m in borrowings and bring net debt down to just £5.8m. Looking forward growth for 2019 is currently put at 5.7% and the board seem confident that they'll continue to make progress in each of their market sectors. Sounds to me as though the downside is protected with a decent chance of an upside surprise. (Results)

B.P. Marsh: A comprehensive, full-year update here with no surprises. Back in July the company raised £17m, with PSC Insurance Group becoming a keystone investor. From this a new investment, in ATC Insurance Solutions, was made along with a number of follow-on investments. At the same time the fund's largest investment, LEBC Group, reported another record year with profit up by 43% with plans for a liquidity event (which could materially raise the value of BPM's holding). With all of this happening it's curious that the company is trading at a 14% discount to its NAV of 333p especially as this NAV was struck on 31 July 2018 and there's been a lot of positive activity in the last 6 months (as well as a number of share buybacks). The only slight negative is that the flow of new enquiries has fallen recently, probably as a result of Brexit, and it would be good to see this pick up again. (Update)

dotDigital: With the share price stagnating I was wondering how good these results could be. As it happens sales grew 33% and earnings grew 16% with decent cash generation (and no acquisitions) taking the cash balance up to £16.7m. This is all pretty much in line with expectations. The keys to this growth were providing a more integrated platform, more sales being pushed through partners (Shopify, Big Commerce and Shopware) and solid international sales expansion. On the whole the business appears to be working on all fronts and the SaaS revenue stream provides some confidence over future earnings. I wonder if the share price will take any notice? (Results)

Beeks Financial Cloud: At first glance these results look pretty good with sales up 36% and profits up 46%. Operationally the business is making great progress with the first Tier 1 client signed up and institutional clients now making up almost 90% of revenue. The problem is that this is expected only to lead to sales being broadly in-line with forecasts (which means slightly below) and PBT is likely to grow only by 25% (when 35% had been pencilled in). This is all down to operational investments, geographic expansion and increased depreciation; in other words costs are higher than expected and it's taking slighly longer than predicted to on-board clients. Not really great news and I can see why the shares are down 20%. That said the business is still growing fast, and its services are in demand, so I'm happy enough sticking with my small position for now. (Results)

PPHE Hotel Group: Really solid results from this hotel group with profit up 17% on a like-for-like revenue increase of 6% despite 5 hotels being partly or fully closed during the year. Impressively the EPRA NAV has now reached £24.57 and with the share price just £18.00 that's a hefty 27% discount. If PPH was simply a property company I doubt that the gap would be so large. At the same time the hospitality side of the business is going very well with occupancy up to 79% and RevPAR up 5% to £97.70. These are some great numbers and I can see why management are confident about the future; one example of this being their plan to purchase a hotel development site in New York. Given their proven track-record developing assets in Europe it's pleasing to see that their ambition remains undimmed. (Results)

End of month summary

I must admit that I've been too busy this month to give my full attention to the portfolio but I don't think that this has made much difference. A number of my shares have been treading water, up or down by less than 5%, on the back of no real newsflow. Of the larger rises I'm not sure why Bioventix has gone up so much but dotDigital, 3i, Softcat and RM have all benefited from solid results or updates as far as I can see. Sadly this also acts in reverse with both Beeks Financial and Learning Technologies down as a consequence of disappointing investors (although I can't say the same for Focusrite or AdEPT Technology).

Winning positions for the month: BVXP 15%, DOTD 15%, III 11%, SCT 9%, RM 8%, PMP 7%, BMY 6%, GAMA 4%, GAW 3%, RFX 3%, BOOT 3%, IGR 3%, PPH 3%, FDM 2%, SBIZ 1%, PCA 1%

Losing positions for the month: NRR -1%, VLE -1%, XPP -1%, BPM -2%, BOWL -3%, BUR -4%, HAT -5%, K3C -6%, WJG -6%, KWS -6%, SOM -7%, LTG -8%, ADT -8%, TUNE -11%, BKS -21%

Overall then I've managed to be up by 0.1% this month and 4.7% for the year. Given the number of profit "adjustments" which have popped up this feels like a solid endorsement for portfolio diversification. On a political note it's starting to feel as though we won't be facing a hard Brexit in a month's time, despite the best efforts of Theresa May, and it's possible that the stock market will take this news positively. Even so it'll still be just a stay of execution and we'll probably be back to square one when the next deadline rolls around. Exciting times for anyone living or investing in the UK.

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

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