January 2018 Portfolio Update

They say that investing is a learning process and that's certainly true in my case. While I've had various amounts of money invested in shares for almost 15 years now I've never quite reached the point where I feel that I know or do enough (quite the opposite in fact). An example of this is that I've never systematically recorded my reasons for buying shares (or continuing to hold them for that matter) and without an audit trail it's hard to identify what I'm doing well/badly. This became obvious when I wrote my review of 2017 and so this post is the start of my attempt to be a bit more organised when it comes to trading.

Essentially my plan is to write up short, contemporaneous notes of my investment decisions on a monthly basis. This will include brief thoughts on trading statements and results even where I do nothing as deciding not to trade is just as significant a decision as buying or selling. Finally I'll probably tag on a few sentences regarding the portfolio performance in the month and which shares made the difference; this should make other people feel better if nothing else.


H&T Group Bought 355.5p - Jan 18

As a first trade of the year I've promoted H&T Group to a full position size. My initial holding was only taken out in December but their Trading Update of 8th Jan speaks of profits being ahead of market expectations with the Personal Loans book increasing by a remarkable 94.7%. Note that this follows a previous "above expectations" update on 3rd Nov. So H&T clearly have the wind in their sails and aren't notably expensive on a forward P/E of 12.4 when they're flagging up 33% profit growth for 2017 and 13% in 2018. This latter figure feels too low given the way in which the business is performing.

Boohoo.com Bought 205.5p - Jan 18

Like many small-cap investors I've been aware of Boohoo for over 3 years now; all the way from Paul Scott's prescient post identifying their early profit warning as an excellent buying opportunity. Sadly I wasn't open to this at the time and missed out as the share price 10-bagged. Such is life. Still I've kept half an eye on their trading and operating performance and noted how the management have done an excellent job in growing their Boohoo brand and bringing new ones (PrettyLittleThing, Nasty Gal) in house.

So when the price stopped defying gravity last summer, and entered some sort of consolidation phase, I started to wonder if a buying opportunity might be presenting itself. On the face of it the trading announcements and interim results all appeared positive although I can see how weakening margins and large director sales could have encouraged some holders to bank their gains. Anyway on 11th Jan Boohoo put out their post-Xmas Trading Update and I couldn't help but notice their doubling of sales in the key UK and US regions with strong growth elsewhere. A stark contrast to traditional clothing retailers and encouraging enough for me to open a position.

Henry Boot Bought 338.4p - Jan 18

Following their Trading Update, mentioned below, I didn't hesitate in promoting my holding here to a full position. For such a positive update I was surprised at how little the share price reacted but then again it came out on a fairly negative day for the market and previous upgrades have pushed the price up a number of times over the past year. Also the comment regarding the annual property portfolio valuation coming in below expectations could have put off some buyers. Either way I think that the shares are notably cheap on a P/E of 11 with the ROCE being both reasonably good, and improving, while leverage is well under control. The shares are very cyclical though, as shown by the fact that they lost 80% of their value in 2007/08, and so they'll never warrant a huge rating but I do think that they're doing well operationally and seem to be on something of a roll.

FDM Group Bought 964.2p - Jan 18

On receipt of their Trading Update, discussed below, I felt happy to make this a full position. Solid growth is taking place in all geographic regions with Mountie numbers up by 17% overall and continued demand showing in all areas. Given that the group is self-financing with an ungeared balance sheet, an operating profit margin >18% and ROCE >68% I'm finding very little here to dislike about the company. I suppose that a P/E of ~30 puts it on the expensive end of the spectrum but it's been at this rating for the last 3 years with the share price tripling in this time - exactly the same as the profits.

Accesso Technology Bought 2332.5p - Jan 18

I've long admired Accesso and its relentless drive for international growth under the stewardship of Tom Burnet. I heard him speak about the company way back at Mello 2014 and was incredibly impressed by his grasp of the ticketing industry and ability to explain his long-term strategy. Sadly I didn't buy any shares, at a mere £7, as I judged them to be too expensive! Fortunately I've kept them in mind over the years and watched them expand into being a more holistic customer experience solution provider as those strategic aims outlined so many years ago come to pass. In their most recent Trading Update it's clear that all areas of the business are performing well with the latest acquisition TE2 particularly strong. A good time to add more in my view.

Keywords Studios Bought 1462p - Jan 18

I first came across Keywords Studios back in 2015 when Andrew Day spoke at a ShareSoc seminar. Looking at my notes I can't quite believe that I didn't immediately take a position but hindsight shows us that they've successfully acquired and consolidated for the last 2 years - and this was my biggest concern. Like Accesso the company has a very clear strategy for bringing together small operations in the computer gaming sector and providing access to larger clients along with cross-selling and cost-saving benefits. So far this repeatable process has worked well with the share price up by 7x since this meeting! Anyway with a trading update imminent I think that the share price is treading water waiting for decent news and this is as good a time as any to take an initial position.


Natwest 9% Preference Shares Sold at 172.2p -Jan 18 - 102.2% gain

I've held these solid preference shares for the better part of a decade and in that time they've provided excellent capital growth and a very healthy yield (of 6-10%). Now though the share price seems to have plateaued at around 170p and the yield is down to 5.2%. This doesn't mean that they won't go further but right now buyers seem to have lost interest and the price is sitting at a 20-year high. So when I needed to release some funds in order to top up Henry Boot it wasn't a tough decision to wave goodbye to this stalwart holding. Every share has its time in the sun but I believe that these have largely run their course now.

LLoyds 9.75% Preference Shares Sold at 184.9p - Jan 18 - 69.2% gain

As with the Natwest preference shares I bought these slightly higher-yielding prefs a while back and, in a similar pattern, their price has also levelled off with the current yield at 5.3%. My gut feel is that while these type of shares will always have a place in an income portfolio the risk now is that their capital values will fall when interest rates start to normalise. Of course we've been expecting this to happen for the last decade and so far not a lot has changed on that front! So I've only sold half of my holding here in order to retain an economic interest in what happens next for LLPD.


Next: I was unsure how Next might report given their weak trading over the last couple of years but, surprisingly, Q3 improved on expectations with both Retail and Online strengthening. Obviously the high-street stores are still a real drag with 2017 profits forecast to drop by 5.7% compared to 2016 but perhaps trading has stabilised here. As ever the company is a cash machine with around £300m of surplus cash forecast for 2018 and this is enough to buy back almost 5% of the company; quite amazing although I'd rather have a special dividend. A quality company and an easy hold. (Update)

Plus 500: I'm a little bit wary of holding this online CFD provider, given its historical troubles and volatility, but strong momentum in Q4 trading and customer attraction leading an ahead of expectations announcement is always welcome. It looks like the crypto-currency frenzy has really helped push trading here and I'm sure that this boost will continue for a while yet (even if this particular bubble bursts eventually). Definite hold. (Update)

Taptica: Working in the advertising space Taptica acquired Tremor Video DSP in August and it seems that integration has occurred faster than expected with profitability being reached in this calendar year. The core business has also expanded, especially in the Asia-Pacific region, and adjusted EBITDA will be ahead of expectations. Curiously sales will be in-line and so EBITDA margins have improved which is great news. Definite hold. (Update)

Robert Walters: Some recruiters suffered in 2017 but these guys have improved their net fee income in every geographic region with Europe being particularly strong. Usefully 70% of the income is international and that should help the group withstand Brexit volatility. Really no obvious areas of weakness and with cash of £30.7m in the bank and an out-perform trading statement in December business is looking really strong here. Definite hold. (Update)

Games Workshop: As was perhaps expected these interim results sparkled with profits near enough tripling, compared to 2016, and cash generation doubling. All areas of the business seem to be performing well, without requiring high investment, and this is why the return on capital has risen from an excellent 40% to an astonishing 119%. I don't think that these growth rates are sustainable but it does look as if the company has transformed the way in which it operates and it's hardly expensive on a P/E of ~16. Definite hold. (Results)

Focusrite: Pretty terse AGM statement with no profit guidance given. Still confirmation of continued strong growth in both revenue and cash generation is worth having. Not much more to add except that I believe this to be a quality business operating in a well-defined niche for music and audio products. Hold. (Update)

XP Power: Strong trading in all regions with Comdel acquisition bedding in. No guidance on profits but cash generation looks good as they seem to be paying off the acquisition cost and heading back to a net-cash position pretty sharpish. I wonder if the 2018 forecast for a mere 6.5% growth in profits is a bit under-cooked? With luck we'll see something like 2017's 20% increase in forecast profits over the year! Definite hold. (Update)

Somero: I love the focus and clarity of this company and it seems that customers recognise this too with sales and cash generation improving in most regions (especially Europe). Enough for revenues to be slightly ahead of expectations and EBITDA comfortably ahead which suggests that costs are being controlled and margins are improving. There are also the corporate tax law changes in the US to consider which should help the company and stimulate increased demand. Sounds positive to me and a definite hold. (Update)

Watkin Jones: Since floating a couple of years ago WJG has expanded the amount of student accommodation that it builds and moved into the build to rent sector. To reduce risk new developments are forward sold to external investors which means that they aren't financed with debt and, in fact, the company operates with net cash of £41m on the balance sheet. Overall a 13% increase in sales led to a similar increase in profit and current forecasts are for a 9% rise in 2018. On a P/E of ~14 I don't see the company as being expensive given the quality of their earnings and positive outlook for the coming year. (Results)

Henry Boot: A sequence of profit upgrades last year continues into this year with strong trading in the final couple of months leading to profits being comfortably ahead of revised expectations. In addition the 2018 expectations are already being slightly raised even at this early point in the year. The only fly in ointment seems to be that the valuation of their property portfolio has come in below management expectations; although without any figures the size of the miss is unknown. Still looking good and perhaps a little under-appreciated in my view. (Update)

New River: I've been a little worried about NRR as its price has been dropping for the last six months but this Q3 update reassures that their portfolio is performing well and significantly better then the wider UK retail market. What this seems to mean is that like-for-like footfall has risen by 0.5% over the quarter (2.7% above the benchmark) and by 1.9% in December (4.5% above benchmark). Occupancy remains high at 97% and the average rent has held reasonably steady at £12.70 per sq ft (although a slight decline from £12.82 per sq ft in Sep 2017). So they do appear to be performing well and have almost no exposure to the troubled department store sector. (Update)

Computacenter: Following a number of profit upgrades in 2017 the full-year figures are raised yet again (ahead of board expectations) in this pre-close update. Usefully management give some clear guidance on why 2018 will be a period of consolidation as some one-off costs occur and historically extended credit terms adjust to a more normal footing over the year. That said positive momentum in their markets should continue and the company must be pretty confident since just a day later they launched their £100m tender offer to shareholders. I don't intend to tender my shares but I appreciate the way in which this deal is structured so that no one gets shafted. (Update)

FDM Group: Another outfit reporting good performance in H2 this is enough to ensure that profits will be ahead of previous expectations. Impressively the number of consultants (known as Mounties) deployed in all territories has increased by 17% with APAC showing a high 30% growth in headcount. This momentum continues with positive demand in all markets plus growth in new market verticals (along with building a presence in new geographies). Sounds pretty good to me and that's why I've updated my holding to a full position. (Update)

dotDigital: The last 6 months have been busy here with the acquisition of Comapi and progress in other strategic areas (such as strengthening partnership relationships). Usefully the acquisition is bedding in well with revenues since purchase ahead of original expectations. In various geographies sales are growing well with channel partners/integrators such as Magneto and Shopify driving this expansion. That said a note of caution is sounded with regard to GDPR regulation and the fact that sales to European customers are taking longer then normal; on the flip-side the dotDigital platform can assist them to achieve compliance and so maybe there's a silver lining. (Update)

XL Media: In a simple notice of results the board managed to slip in that they can "confirm that trading remained strong throughout 2017 and in line with its previous trading update on 21 November 2017". Usefully the company is also hosting a presentation for retail/private investors when they release their notes on 13th March. I like this level of engagement with smaller shareholders. (Update)

Fevertree Drinks: Another stunning update from this drinks distributor with profits comfortably ahead of market expectations. This is all down to strong sales growth across all channels, formats and flavours in the UK driving revenue up by 96% with other regions growing by 39-57%. Particularly exciting is the transition to taking US operations in-house with investment here being bought forward to meet demand. Frankly I find this to be an astonishing company and very much hope that it doesn't get taken over in the near future! If I wasn't already overweight here I'd be tempted to top up.(Update)

Accesso Technology: A fine update from Accesso with adjusted EBITDA substantially ahead of expectations on the back of lower revenue growth; the implication being that EBITDA margins are much improved. Driving this is strong trading across the group with recent acquisition TE2 performing well ahead of expectations and with lower costs. While sales from TE2 are described as non-recurring its speciality of personalising guest experiences suggests that customers are likely to keep coming back if it makes their clients happy. In addition debt is down to <$6m so cash generation is strong. Time to top up this position. (Update)

PPH Hotel Group: An inline update from this lifestyle hotel group with like-for-like revenue growth of 10% and RevPAR up by 11.5% (benefiting from strong growth in Germany and Croatia). Usefully debt refinancing and sale-and-leaseback activity in the year have generated a lot of capital to plough back into the portfolio; which means plenty of renovation and plans to build an art'otel in London. A slightly cautious note is struck by indicating that 2018 might be subdued due to cost pressures and renovation work but in the long term this share should deliver. (Update)

Polypipe: An inline update here from the largest plastic pipe manufacturer in the UK. With analyst estimates indicating just over 22% earnings growth for 2017 that's not too shabby for a company on a P/E ~15 (although this growth is a little down on 2015 and 2016). In the same announcement we also find that they are selling their French operations for €16.5m; this seems like an excellent idea given that the operating margin for this part is just 2.2% and it sells into a very competitive market. Other than that it looks like business as usual here. (Update)

End of month summary

In contrast to a superb December I'm afraid that January was rather a soggy month for the portfolio; despite being over 2.2% up mid-month a volatile few days this week have dragged my performance down to 0.8%. Drilling into the portfolio the big gainers are Plus 500, Somero and Next while the big fallers are IQE, Games Workshop and Boohoo; other than that most of my shares just kind of bobbed about despite the deluge of solid trading updates. With more results and updates to come I'm sure that February will be just as exciting.

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

comments powered by Disqus