January 2019 Portfolio Update

Well here we are a month into 2019 already. I can't say that I look back on 2018 with fond memories (at least not from an investing perspective) but I've got a new page in my spreadsheet and optimism has returned to the markets. This happy sentiment may not last but with many of my holdings putting out in-line statements, at worst, and reporting good trading I think that it's only reasonable for their share prices to show a little life!


Robert Walters Bought 565p - January 19

On receipt of the Q4 trading update, as covered below, I decided pretty quickly that this was a holding worth topping up. There's no doubt that the business is really flying in its two largest territories and I like the way in which management are quick to rebalance costs as markets change. This is probably why sales per employee have been steadily increasing since the 2008 crisis. In addition the CEO has recently been buying in the market, adding to his £12m shareholding, and so I feel that I'm in good company!

NB I've put together a lengthy analysis on Robert Walters here which dives deep into its financial performance both individually and against sector peers.

Learning Technologies Bought 100p - January 19

I've been watching this company for a while as I'm a bit of an Andrew Brode fan and I know quite a few people who rate the company highly. That said it's always looked a bit expensive with a rather patchy track record; in other words there's a lot of hope in the price. Still I now have a starter position and two factors have led to this. Firstly the price has fallen markedly from its brief high back in September, which leads to the forward P/E being a half-reasonable 25 or so. Secondly they put out a "significantly ahead of expectations" update this week with adjusted EBIT of not less than £26.5m and net debt sharply reduced to £11.5m. This is excellent news and I fully expected the share price to jump 10-20%. Instead, to spite me, it fell 20% after I'd bought in first thing! I guess some people took fright at a fall in Content & Services revenue even though this is a lumpy business? Never mind - I'll wait for the results to see whether the 2019 forecast of 26% growth is likely to be beaten!


Impax Asset Management Sold at 186p - January 19 - 7.9% gain

Following a fairly muted AUM update this week the share price of Impax has weakened noticeably. Apart from market related falls in the fund's investments the aspect which concerns me is the continued outflow of assets from the newly acquired Pax funds. At Mello in Chiswick this issue was brought up with Ian Simm and he commented that there wasn't a pattern to the outflows and that there didn't appear to be a systematic problem. At the same time he also mentioned that they couldn't necessarily tinker with these funds in the short term since that would be unfair to the managers who've just been taken on-board. So it's possible that everything will be fine but personally I've decided to take my money off of the table for other investments.


Softcat: A short trading update for the HY but very sweet: "we are now materially ahead of where we expected to be at this stage of the year". No wonder the share leapt almost 20% on this welcome news! (Update)

Robert Walters: Nice to see a sparkling trading update with Asia Pacific and Europe driving a record quarter. The former saw Net Fee Income (NFI) up 19% while Europe grew an even better 22% although from a lower level. Notably both of these regions have now overtaken the UK which nicely diversifies the business. At the same time net cash has swelled to £74.1m from £31.1m a year ago. So with NFI up 15% for the whole year this update indicates that results will be comfortably in-line with market expectations which are for a 15% rise in earnings. Personally I expect RWA to come in ahead of the forecast and indicate that the year has started strongly when results come out in March. With the P/E just over 12 there's quite some value on offer. (Update)

Gamma Communications: Lovely update with EBITDA expected to be at the top of market expectations with EPS growing in-line (which means around 22% growth to 22.3p). Usefully cash is up by £3.9m to £35.5m despite €13.2m being spent on the acquisition of Dean One (the first expansion into an overseas market). All seems to be going well with both indirect and direct businesses continuing to grow, with the latter performing strongly in the Enterprise and Public Sectors. Add on the high ROCE and great cash generation and there's a lot to like here. (Update)

XP Power: An in-line FY update which is pretty great in that it implies 25% growth in earnings with the P/E just over 12. To my mind this seems cheap given the high earnings quality and cash generation (never mind a yield of ~4%). However investors are still not convinced and there are a few reasons for this. Firstly organic growth is fairly anaemic with order intake up just 1% with sales up 7% like-for-like. On the other hand if you include the Comdel and Glassman acquisitions then sales were up 17%. Secondly the semiconductor market was weak in Q4, with it falling behind Q3, and macroeconomic conditions aren't great. Still the power supplies from XPP are designed-in by clients and so I expect this reliance on XPP to help support sales going forward. Still a good company in my view. (Update)

Games Workshop: An in-line update despite earnings coming in at 100.8p as compared to analyst estimates for 173.4p over the whole year. Now it's possible that H2 will fail to deliver but sales remain strong in the trade and retail channels while online is acceptable in that growth here has been flat. What's interesting is that this has been a period of capital investment, into a new factory and ERP system, but with these completing it's likely that the business will be more efficient and well placed for future sales growth. A side effect of these changes is that gross margin and stock levels are not where management would like them to be; given how profitable Games Workshop is anyway I'm impressed that they're continuing to optimise and improve. At the current price I think that this share is very much offering value. (Results)

Watkin Jones: Coming in slightly ahead of expectations with EPS of 16.0p (implying a P/E of ~14) and cash doubling to £80.2m this is a solid set of results. Much of this performance was driven by student accommodation with 10 developments delivered in 2018 and 9 currently forward sold for FY19 & FY20 (with 13 schemes in total being finished over the period). This latter element, the forward selling, really de-risks developments for Watkin Jones and helps to ensure consistent profits. Elsewhere there are a number of build to rent developments in progress and I can see this becoming a useful diversification angle. A slight concern earlier in the year was the stepping down of CEO Mark Watkin Jones but the board have found an excellent replacement in Richard Simpson with his very relevant experience in the sector. I think that the board have good reason to be confident about the future and I'll be surprised if they don't better the meagre forecast of 1.9% growth for FY19. (Results)

Somero Enterprises: When you've got a company like Somero on a P/E of just 11, despite high quality metrics and forecast growth, then an 'ahead of expectations' update does feel like validation! I also like the fact that they're hitting their 5-year sales target a year early. The key, as ever, are sales in the US and this market was both very strong in H2 and remains buoyant as we head into 2019. Other markets were, on the whole, decent but China remains as ever a tough nut to crack. Still Somero are continuing their efforts in this region while maintaining product innovation. As an example they're introducing the SkyScreed which is targetted at the structural high-rise market (where manual labour is the only competitor). A real class act which trades at an unwarranted discount. (Update)

Portmeirion Group: The share price here has been in a real slump for the last 6 months so I'm pleased to see them report record revenue of £89.2m, which is ahead of expectations, along with a higher than anticipated PBT. Analysts don't seem to have caught up with this yet but I can see growth here going from 10% to 15% and EPS coming in at ~75p. Not too shabby. (Update)

NewRiver REIT: There's a lot going on at NRR with Canvey Island Retail Park completed, integration of Hawthorn Leisure likely to complete this month and wet-led community pubs up to 20% of assets (producing useful diversification). No one cares though because of the 'death of the High Street'. It's a shame then that NRR have consistently avoided the department store and mid-market fashion sub-sectors to concentrate on areas like food, discounters and value fashion. In this regard they've maintained occupancy at over 95% and have only felt a modest impact from retailer CVAs and administrations. Still who knows what the future holds. Either NRR will see an uptick in valuations or it'll be able to deploy some of its capital buying from distressed vendors. (Update)

Henry Boot: A slightly tricky update in that it's nominally in-line except that trading was slightly ahead of expectations. The fly in the ointment is that a pension-related provision of £1.5m is being taken through the P&L; in all other respects the business has traded well in a tough year. Specifically macro uncertainty has held back developments with three now due to start in 2019 while one sale expected in 2018 just fell into 2019 by a few days! The reason for the decent overall result is that Hallam Land Management performed exceptionally well along with house sales up to 145 compared with 79 in 2017. Overall a good result although earnings are still expected to be 14% down on the bumper previous year. Probably not the best moment to buy although BOOT is pretty cheap and the price could react strongly if all parts of the business start performing. (Update)

K3 Capital: As a corporate financier and business broker K3C is very reliant on client confidence and thus is hard to forecast. As a result these tend to be pessimistic, I think, since they're currently showing a 7% drop in earnings to 13.1p. Taking these HY results at face value this seems like a sensible stance as both revenue and earnings are slightly down ~5% cf. 2018 although the dividend has been raised by 26%. The basis for this confidence is that the shortfall is down to KBS Corporate Finance as a number of large transactions have slipped into H2. Elsewhere Knightsbridge and KBS Corporate both have double-digit organic growth and the WIP pipeline is at a record level. Usefully EBITDA margin is maintained at 43% due to costs being low and remuneration somewhat variable. I'll be watching H2 with interest. (Results)

FDM Group: An in-line FY update which translates into a 20% rise in earnings (which is consistent with the 5-year average). Mountie numbers are up by 18% with all regions seeing an increase; this suggests to me that customers are broadly based and that FDM isn't finding it too hard to locate and train new contractors. Looking forward market demand in all operating territories remains strong and FDM enter the current year with good momentum. With this, and a record of high-quality earnings, I'm more than happy to maintain my position here. (Update)

dotdigital Group: On the face of it DOTD looks to be doing well with HY revenue up 33% to £24.9m and adjusted EBITDA in-line with market expectations. That said this result is due to the core business outperforming while the lower margin Comapi business has fallen back. The problem here is with some retail customers entering administration or cutting back on volume. Hopefully this is just a bump in the road with Comapi being integrated into their cloud product and made available in other channels. Still it's fair to say that analysts cut their forecasts from 3.87p to 3.73p back in the summer; just a 4% fall but perhaps growth is slowing a little from the excellent performance of 2017? Remains a quality business though. (Update)

IG Design Group: Christmas is a key period for IGR, considering that they deal in gift-wrap and similar products, so it's great to see sales up by 36% (9% like-for-like) in the last 9 months. In addition non-UK sales are now over 70% of the total which provides great diversification for this global supplier. Looking ahead the integration of Impact is progressing ahead of expectations and the Not for Resale bags business is doing much better than anticipated. Frankly there's very little here to be disappointed about and I'm looking forwards to the FY results. (Update)

ZOO Digital: OK after all of that good news here comes a real stinker! Problem one is that a single, material localisation project was lost (apparently because the owner and distributor couldn't agree on terms) and this has knocked a big hole in revenues. Problem two is that sales from processing DVD/Blu-ray titles has declined much more quickly than anticipated (margins here are very high) which has made an even bigger hole in profits. The result is that the group should be profitable and cash generative in H2 but the FY results won't be pretty. Now while this is a hefty profit warning I would class it as eminently fixable given the dynamics within the OTT industry and their need for the type of services that ZOO offers. So I think that I'll retain my reduced holding here to see if they do add some significant new accounts in H2 as the board predicts. (Update)

Patisserie Holdings: Well that's it for this astonishing fraud as it falls into administration. I guess that the writing was on the wall when the shares were suspended but still what an outcome. Hopefully a number of directors will end up in jail, since the buck stops with them, but I somehow doubt that this will happen. In fact in a year's time will anyone even care what happened here? Probably not but they should! (Update)

H&T Group: An in-line update for the full-year which is pretty good if you think that it amounts to 24% growth when the P/E is less than 9 and the yield over 4%. I suppose the market is worried about regulation around lending but the board seem to have that in hand as they're now offering longer, lower interest products. As a result the loan book is up by 35% while FX exchange is up 22%, the pledge book is up 8% and jewellery sales are up 7%. This suggests to me that management are on the ball and that the business is firing on all cylinders which makes the low P/E something of an aberration. Looking ahead demand remains strong and I imagine that customers will still need to use HAT whatever happens to the economy. (Update)

SimplyBiz Group: A very recent float, coming to the market in April 2018, SimplyBiz shares have struggled recently with a lack of news. This update definitely helps then with strong revenue growth and EBITDA margins improving. Given that forecasts are looking for a 53% rise in profits to 10.5p, with 4.7p being earned in H1, then this trading performance in welcome. With group membership numbers up 8.5% to 3,726 and a strong capital position (net cash is £6.4m) it seems that SimplyBiz is generating organic growth while also being open to selective acquisitions. It's perhaps a little early to upgrade the 2019 forecast but if things continue in this vein I expect earnings to grow by more than the suggested 23% this year. (Update)

3i Group: Decent Q3 update here with NAV up 3.3% to 802p as holdings in Action and 3i Infrastructure continue to perform strongly. The board still remain cautious about pricing, in the face of competition for assets from a wall of private money, but current investments look good and there are bolt-on opportunities available. What's pleasing is that when the share price fell below the NAV in December I saw this as a buying opportunity since historically a discount has rarely persisted for long with 3i shares. Since then the price has bounced back by just over 10%, helping the portfolio this month, and I can see the company continuing to perform positively. (Update)

PPHE Hotel Group: Solid, in-line trading update (with forecasts pointing at a 25% increase in earnings). Since like-for-like revenue is only up by 6-7% clearly there is some operating leverage here with margins improving and/or costs being controlled. Looking at the RevPAR figure, which is a standard metric for hotel companies, this is up 5% as room rate increased by 2% and occupancy improved to almost 80%. Looking forward the board have other opportunities for improvement in the group portfolio and the impact of newly refurbished properties should really kick in. Great progress here. (Update)

Keywords Studios: After a truly painful 4 months, as the share price has slowly halved, I think that expectations here could barely be more pessimistic. And yet this full-year trading update shows that organic growth and acquisitions have combined to produce an in-line result. Now acquisitions are a key part of the business model, as the board try and consolidate within the gaming sector, and yet the net debt level remains negligible despite spending €26.2m during the year. As such I'm impressed by the underlying cash generation of the group even if not a lot of free-cash flow is coming out of the pipe. For 2019 current forecasts are for another 20% growth in earnings and I wonder if this is likely to slowly rise as new acquisitions are made? With a P/E of ~29 let's hope so! (Update)

End of month summary

Finally a positive month and, remarkably, one which has managed to reverse my entire loss for 2018. The key to this turnaround seems to be that 3 out of my 5 largest holdings managed double-digit increases this month while most of my losses were in smaller positions (and getting smaller by the day). Notably Softcat really bounced back with a positive update while new listing SimplyBiz confirmed its ability to grow and avoid the post-IPO slump which seems to affect so many companies transitioning to the public markets. On the other hand K3 Capital is another recent listing and sentiment around its half-year results has been rather negative (despite pointing to a strong pipeline of deals in H2). I suppose the difference with K3C is that the share price has remained steady since mid-October and so there isn't much pent-up demand just waiting to buy on a little positive news?

Winning positions for the month: SCT 18%, SBIZ 15%, HAT 14%, WJG 13%, GAMA 12%, SOM 12%, PLUS 12%, PMP 12%, KWS 11%, FDM 11%, BUR 11%, BKS 10%, III 10%, RM 10%, BMY 9%, BOOT 8%, TUNE 7%, PPH 6%, DOTD 5%, BOY 5%, BVXP 4%, NRR 4%, ADT 4%, VLE 3%, BPM 1%, GAW 0%

Losing positions for the month: XPP -3%, BOWL -3%, RFX -4%, RWA -5%, PCA -5%, IGR -7%, K3C -7%, ZOO -18%

Overall then I've managed to be up by 4.6% this month and that's a great relief. With Brexit rumbling on I am wondering whether to cut back on my equity exposure, since Theresa May seems hell-bent on avoiding any sort of sensible compromise, but it's hard to do this when individual companies are reporting positive trading. At times like this I'm generally happy to let inertia keep me invested, since that was my tactic last quarter, but it's hard not to feel unnerved by the prospect of a cliff-edge exit from the EU or, even worse, a Corbyn government!

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

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