June 2020 Portfolio Update

It's a relief to be reliving a relatively ordinary month for once with most of my holdings rising or falling by negligible (single figure) percentages. There wasn't a lot of news to wade through either and I did almost no trading. In fact I didn't spend much time at all thinking about shares this month which makes for a pleasant change. It's easy to end up feeling that you have to do something when you're a private investor and that can easily be counter-productive.

Once again GAN did much of the heavy lifting, as my largest holding, and after listening to their recent analyst results call I'm convinced that there's a lot more to come. Most obviously they're in the sweet-spot of enabling gaming clients to launch real-money on-line gambling sites as state after state votes to legalise this industry. In addition they're in the final stages of stealing a Tier 1 customer away from a competitor and this will both diversify and expand revenue generation at a material level. So I'm not surprised to see such positive momentum in the share price. On the other hand investor enthusiasm can turn on a dime and this can be clearly seen in the hefty decline in my Avacta holding. Operationally management are delivering everything as promised but sentiment curdled and the share price halved as investors swarmed for the exit. They might have made the right move, as a lot of risk remains, but I remain impressed by the science and the potential for a game-changing Covid-19 saliva test.

Overall this volatility left me at -0.6% for the month and up 9.1% for H1 2020. This remains a result that I'm happy with even if other investors, with much more concentrated portfolios, are talking of triple-digit returns. That's never going to be an approach that I can live with so there's little point in being disappointed by the appearance of relative under-performance. Here are the numbers for completeness:

Risers: GAN 16%, DRV 10%, VLX 8%, LIO 7%, HAT 6%, BUR 5%, GAMA 4%, FRAN 2%, CCC 2%, MGP 2%, III 1%

Fallers: PLUS -1%, TM17 -1%, AJB -3%, SCT -5%, SDI -7%, AFX -8%, RWS -8%, CRW -9%, JDG -10%, IGR -13%, SPSY -13%, SLP -17%, AVCT -40%


Avacta Bought at 120p - June 20

This has been an excitingly volatile investment so far with the price doubling and then doubling again. With this in mind I'm not surprised that the board have decided to raise a chunk of money (up to £48m) at current levels. The reasons for doing this are to fund a rapid scale-up of their Affirmer diagnostic opportunities along with expanding the cancer therapy pipeline. More specifically £10m will go towards working capital around Covid-19 and expanding product development capabilities. The remainder will boost a range of different cancer therapies that use Affirmer technology. Frankly this makes perfect sense to me as there's no advantage to the company being capital constrained if they're to meet the potential demand for wide Covid-19 testing. The risk of this venture coming to nothing remains of course but I've increased my holding here by 25% through the PrimaryBid placing. It's the first time that I've used their platform and I must say that the process, so far, has been very smooth.




Gamma Communications

As an IT communications provider Gamma should be well placed to benefit from the lock-down. In the lead up to this point they did indeed see heightened demand and growth has remained positive since then. Cancellations also remain at normal, low levels which makes sense since functioning businesses have been well supported so far. Where customers are not trading Gamma has allowed them to "hibernate" their services and not pay for them. With less than 5% of end users taking this option, at any one time, the EBITDA impact of £1.2m is relatively small. While the board have taken some action to reduce operational/capital costs they're still investing in product development and considering acquisition opportunities. With cash of £46m, after spending £22m on acquisitions, they have enough balance sheet strength to pursue this course and remain very cash generative. This explains why they feel able to pay their previously announced final dividend and I see no issues with them doing this. Growth rates may slow a little as we emerge from the pandemic but this is a solid investment for modern times. (Update)


Another company profiting from the crisis is Plus500 since their income is highly correlated to market volatility. In the first quarter large numbers of new customers signed up to the platform with customer trading levels reaching record heights. In Q2 this trend has persisted with over 100,000 new customers joining already; this is ahead of expectations for the entire period. However this growth does not automatically turn into outsize profits because Plus500 do not fully hedge their customer positions. This means that, in the short term, aggregate gains/losses by customers directly impact upon revenues. In the long term the board expect these fluctuations to balance out but they do lead to volatility in the reported figures. As such analyst estimates for the full-year have recently been hiked and the board expect to trade in-line with these numbers. Given that market volatility is likely to remain high, and a decent chance that markets will fall after the recent recovery, I think that these forecasts may end up being beaten. With Plus500 being very cash-generative and having low capital expenditure requirements then such an outcome should be quite rewarding for shareholders. (Update)


Announcements from Avacta have arrived thick and fast over the last couple of months. Most of these have included the promise of jam tomorrow for all. This update is no different except that real progress is being made by their partner Adeptrix and we have a commercial timeline. The big news here is that Affirmer reagents have been evaluated using model samples and are able to identify spike protein fragments at standard concentrations. The next step is to evaluate the assay using patient samples before moving to manufacturing, clinical validation and approval in the summer. This is a very rapid timescale which implies a certain level of confidence in the process. In an additional comment Avacta are making very good progress with Cytiva and expect to soon provide further updates. It's all very exciting and could all come to naught but so far things are going well. (Update)

RWS Holdings

On the face of it these are somewhat underwhelming HY results with sales down 1.6% and earnings down ~7%. However there appear to be mitigating circumstances with Covid-19 slowing the onboarding process and IP Services facing a tough comparative from last year. This leaves the group having to make up some ground in H2 if the recently reduced forecasts (down from 23p to 20p) are to be hit. That said management aren't providing any financial guidance at this point despite a strong start to the second-half. They do mention their focus on Life Sciences and technology customers though and the fact that these sectors should benefit in a post Covid-19 world. Looking forwards I expect RWS to continue adjusting to a changing patent landscape as they have done in the past. As a sign of this they have just made two small but significant acquisitions. Iconic specialises in neural machine translation within specific industries. Automated translation has been a threat to RWS for as long as I can remember but with Iconic, and other initiatives, it's clear that the board are looking to actively use this technology where appropriate. The second acquisition brings in Webdunia which is a leader in translation and localisation in India, Thailand and the US. With the Indian and Asian Pacific regions seeing strong growth in patent demand this is a very complementary business. So while RWS has suffered a little in H1 2020 I'm optimistic for their future growth. (Results)

FDM Group

A very short AGM statement but positive in that the group has traded comfortably in line with the Board's revised expectations. Given current circumstances a cash balance of £53m ensures financial stability if the economy worsens. Notably the number of Mounties in place has fallen from 3812 to 3706, year on year, but that's respectable in light of Covid-19. Looks pretty good to me. (Update)

Team17 Group

This HY update runs to 30th June and so should include the full benefit of the lock-down. As anticipated the company has seen higher than expected back catalogue demand, especially during April and May. More specifically the key franchise titles, such as Worms and Overcooked, have achieved higher sales and player game time. Alongside this the company has maintained recruitment levels, as they expand their second development studio location, and they've signed an additional seven new games for release in future years. So momentum is continuing on all fronts which bodes well for the future. In the short-term management remain cautious, as new consoles are launched and demand returns to more normal levels, but in the medium-term are very positive. (Update)

Volex plc

These are some very solid results, indicating that the turnaround is on course, although with a year-end of 5th April they are pre-Covid-19. The evidence for an improvement in revenue quality is that profits increased by 30-50%, depending on which adjustments you allow, while sales grew just 5%. This ties in with profit margins improving materially as the group moves away from supplying commodity items, focuses on controlling costs and reduces debt. This improvement allows management to make sensible bolt-on acquisitions, without undermining the balance sheet, and so far purchases have been both rational and profitable. With regard to Covid-19 I initially thought that the greatest danger would come from factories being closed in China for an extended period. In reality there was only minimal supply-side disruption as factories reopened promptly and the slack was taken up by other global sites. The problem now lies on the demand side and Volex have little influence on this front. That said their increased focus on the medical and data-centre markets should provide some resilience on the sales front. Even so there will be some impact in the current year, with weakness in the medical equipment and electric vehicle sectors, which partially explains the recent 50% cut in analyst forecasts (from 20c to 10c). I think that this is over-kill, with the first third of the year performing ahead of expectations, but it does set-up a potential "earnings beat" later in the year. I'm happy to hold here and may add to my position on weakness. (Results)

NB. This is an excellent presentation on these results: https://investormeetcompany.com/investor/meeting/full-year-results-for-the-year-ended-5-april-2020

H&T Group

The big news here is that all stores are now open after a three-month hiatus. Personally I believe that they should have remained open, as an essential service, but that's in the past now. Sales were obviously near-zero during the closure but management mitigated the impact through cost-cutting, such as putting all store staff on furlough, while the rising gold price has provided a timely boost. Remarkably debt reduced during the period and the full revolving credit facility with Lloyds is now available to be drawn as the pledge book grows. From a customer perspective HAT have been supportive with an interest holiday, deferred loan payments and an online pawnbroking portal. All of these measures will generate an additional drag on profit but should reap some benefit from customer loyalty. Ultimately I believe that management have made the best of a bad situation and, as they say, HAT is in a robust financial position to continue serving customers. That is perhaps as much as we investors can expect for the time being. (Update)

Driver Group

A "steady as she goes" set of HY results from this niche engineering consultancy. A turnaround has been in progress for the last three years, after the company lost its way, with a keen focus on containing costs and taking only profitable business. This transition is illustrated by gross profit rising 26% (and PBT rising an impressive 64%) even while sales contracted 6% due to a slow-down in the Middle East. It's a resilient outcome although largely pre-Covid with a period end of 31st March. On the pandemic front the board have acted decisively by reducing capex, cutting salaries and drawing down on debt facilities as a precautionary measure. The flip-side of the current crisis is that a large proportion of engineering projects are likely to be delayed, or have other issues, which is when a consultancy like Driver gets pulled in to assist in negotiations. So I can see the group doing somewhat better than merely surviving Covid-19 as they continue to focus on operating in an efficient and agile manner. One point which did raise an eyebrow, when looking at the numbers, was a large swing in working capital with almost £2.5m being absorbed by higher debtors and lower creditors. This pulled the net cash position down to £3.3m and raised concerns over outstanding debts turning into impairments. However net cash has bounced back to £5.5m since then which backs up management comments around having strict discipline with regard to managing their working capital position. The shares are illiquid though so I'll wait for a badly handled pullback before topping up. (Results)

NB. Results presentation: https://webcasting.brrmedia.co.uk/broadcast/5edf76215e278421d0696f87/5efb059575c33f15e49279fd

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

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