March 2018 Portfolio Update

Another volatile, and cold, month with the FTSE swinging one way and another. While my portfolio struggled higher, courtesy of sparkling results from some of my holdings, this was against a backdrop of my less-loved shares slipping relentlessly backwards on limited news-flow. On the whole I don't like to sell a share just because it's gone down since that's the nature of volatility - in any one year I expect most of my shares to oscillate by at least 20% for no good reason. So my preference is to wait for concrete news and then make a decision. Still I don't mind saying that it's a lot easier to follow this plan in the abstract than it is to sit tight as a share drops by 3-5% every day without having the decency to rally every once in a while!


Focusrite Bought 365p - Mar 18

Focusrite keeps a fairly low profile and maybe that's ok given how it's a small company servicing a specific market niche. This does, I think, lead to the share price treading water between updates though. This is a shame as there's a profitable, growing, cash-generative business here. On the other hand for investors this means that positive updates can lead to some sharp upward moves such as the 20% increase since the trading update a couple of weeks ago. Luckily I was in a position to react quickly to the announcement and managed to establish a full position at a decent price. Given the earnings momentum that Focusrite has had since listing I feel reasonably sure that this will continue even if the ride is a little bumpy.

Burford Capital Bought 1313p - Mar 18

As mentioned below the FY results for Burford exceeded all expectations which is probably why the shares rose by 40% over the next week. I was quite keen to increase my position here but I couldn't happily weather the vertiginous rise in price despite the relatively low multiple being asked for outstanding performance. Fortunately the founders came to my rescue by announcing a placing of around 4% of the company at a price of 1350p (a 12% discount). I can understand why they'd like to lock in some very substantial gains but personally having the share price pushed down to around 1330p delivered a useful top-up point for this private investor. I fully expect Burford to beat expectations in the future and having a full position is the least that I can do.

Lloyds 9.75% Preference Shares Bought 170p - Mar 18

Back in January I disposed of some of my holding in these high-yield, fixed-coupon shares as they seemed fully valued. This turned out to be rather good timing as a few weeks ago Aviva created a disordered market by stating that they could redeem their preference shares at par. Given that this is just 100p, and the Aviva prefs were trading at 175p, things got ugly very quickly. In the ensuing panic these Lloyds shares dropped to 153p. Fortunately the cudgels were quickly taken up by Mark Taber and Sharesoc with the intent of proving to Aviva that they were misguided in their opinion. It looked as though a lengthy legal battle was on the cards but fortunately, once some very heavyweight investors weighed in on the side of sense, the Aviva board folded pretty quickly and it seems that irredeemable will mean exactly that in the future. So I re-established my preference share position to take advantage of the welcome news and a HY dividend which should arrive in May.


Berkeley Group Sold at 3745p - Feb 18 - 32.5% gain

On the back of a recent negative trading statement, and clear signs that the London property market is weakening, I've decided to take my profits in Berkeley Group and move on. I don't believe that there's anything fundamentally wrong with the company, and its profitability and quality metrics are simply fantastic, but the beauty of being a private investor is that we are beholden to no one. So my gut feel is that I should reduce exposure to residential property, and probably property in general. Life seems to be getting harder in this sector and I've acted accordingly. The other aspect which annoys me is that the board set out an excellent capital return plan for shareholders and initially this provided a handsome dividend; recently though they've diluted this by carrying out large share buy-backs and in my opinion the benefits of this to shareholders are limited. I'd rather have the cash as anything else is of limited attraction to me.


XP Power: Really excellent FY results here with earnings of 146p (up 31%) and dividend of 78p ahead of analyst expectations. Most of the 38% sales growth driving this outcome is organic too since the Comdel acquisition only took place on 29 September. As a result of this £18m purchase XPP have moved to a small net debt position of £9m but since they have also paid out £14m in dividends this is an excellent result (i.e. £19.4m of free-cash flow offset much of outflow in cash). Trading seems to have started well in 2018 and a second production facility is being built in Vietnam which should be complete by the end of the year; a bullish sign in my view. The main risks seem to be a global economic downturn and increased competition from low-cost Asian suppliers operating in the low power/complexity end of the market. In the latter area XPP are moving to higher power/complexity products and providing a value-added service to customers. So they're not complacent and I can see them performing well over the next few years. (Results)

Robert Walters: Another set of strong FY results with earnings of 42.9p (up 55%) and dividend of 12.05p ahead of analyst expectations. In fact these earnings are better than the 2018 forecast of 42.2p so the company is really flying! Usefully 71% of sales came from outside the UK, with Asia Pacific and Europe being the largest regions, although the UK pulled its weight in 2017 with 16% net fee income growth converting into an 84% jump in profits. There don't seem to be any laggards in the 28 counties that RWA serves and right now the year has started strongly (so I can see the 2018/2019 forecasts being hiked). There are risks of course as recruitment is a business with seemingly few barriers to entry but since a bit of a shocker in 2012 the group has grown strongly and consistently. The company also hasn't over-extended itself with acquisitions and retains £31m of net cash; so the balance sheet is pretty sound. It's possible that Brexit and IR35 will throw a spanner in the works but 68% of the revenue comes from permanent positions and the business is globally diversified so I'm not too concerned. If the world economy keeps growing then RWA should do well. (Results)

Dart Group: There's lots to like in an update which includes the phrase "materially ahead". In this case heavy discounting pressure has eased and the Leisure Travel business is growing strongly. Usefully this improvement in trading is carrying forward into 2019, the next financial year, and the board expects profits to be broadly in line with 2018. This doesn't sound like much to boast about does it? Previously though analyst forecasts were for a drop in earnings of around 10% compared to 2018 so this is more of an improvement than it first appears. Hopefully the momentum will continue with the two new operating bases in Stansted and Birmingham drawing in customers. (Update)

FDM Group: A lovely set of results with 23% revenue growth dropping straight through to a 26% rise in profits and 32% increase in cash to £48.3m. For the start of 2018 the group has seen "continued strong momentum" which bodes well for the current forecast of 32.8p. As that's a rise of just 12%, with only 8% pencilled in for 2019, I can see both of these forecasts being upgraded as the year plays out. Currently half of all sales are generated in the UK & Ireland but North America is growing quickly and could easily catch up in a couple of years (Rest of World contributes about 10% of revenue). So there's useful geographic diversification although it's fair to say that roughly 2/3 of the operating profits originate in the UK & Ireland - mainly because operational gearing works in reverse in smaller, growing regions due to sizeable fixed costs. However I see this as investment for the future as FDM is focused on training its Mounties to be effective with multiple Academies set up in all regions. I like this focus and the fact that FDM trains ex-Forces personnel; I imagine that this investment leads to real staff loyalty. A quality business all round. (Results)

Focusrite: Good trading update with revenue, profits and cash up compared to HY17. Specifically sales are up by >25% (constant currency) and cash is up by 38% to £19.7m. I don't know why profit growth isn't mentioned but in 2017 a 24% jump in sales translated into profits improving by 45%! I doubt that this performance will be repeated but the current analyst forecast of 3% profit growth for the year feels very low. Also last year's March trading statement didn't mention profits, and sales were only up by 12% at that point, so I'm feeling pretty happy with the way things are going. The main narrative is positive, with growth across the product range and different geographies, with a decent boost from demand over Xmas. Some headwinds in the US to consider but overall a good enough result to make this a full position. (Update)

XLMedia: In reading these final results it's apparent just how much acquiring websites and companies is a key strategy here. Just in 2017 the company swallowed up GreedyRates, ClicksMob, Securethoughts and a Romanian network amongst other additions. The upside of this is a reduced reliance on gambling (down to 64% of revenues) and Scandinavia (down to 32% of sales) which highlights some useful diversification. Now I can't say that I really understand how XLMedia makes its money but when it's increasing profits by 27% (as it has for a number of years), with margins and ROCE around the 30% level, yet is priced on a P/E ~16 then it's hard not to be attracted. However current 2018 forecasts are for a meagre 4% rise in profits which I find strange as the company is clearly executing on a strategy that has performed well for a number of years and there's no sign of it failing to work (although legislation in the gambling and data protection sectors remains an unquantifiable threat). There's also the discount which needs to be applied to any foreign company on AIM and perhaps that's why share price is taking a breather by dropping 16% this year? One to watch carefully. (Results)

Computacenter: This is a provider of IT infrastructure services in the UK, Germany, France and Belgium that's hugely benefited from geographic diversification. In 2017 Germany and France performed strongly with profits up by 57% and 80% respectively. In contrast the UK managed top-line growth of 9% but the bottom-line shrank by 18%! Still, for the group, profits improved by 20% which is fine when you're on a P/E of ~17. In contrast the expectations for 2018 are that France will be tough, with significant contract renewals, while the UK will return to profit growth and Germany should keep rising. This mixed picture may be why forecasts are for just 8% profit growth overall this year? Nevertheless I see Computacenter as a quality business with a ROCE around 20% and excellent cash generation - enough for the company to return £100m to shareholders recently (although the capital return plan was needlessly complicated and a special dividend would have been more welcome). The group are also riding the trend for customers to outsource and reduce costs and I don't see this trend subsiding any time soon. (Results)

Fevertree Drinks: Familiar to most gin drinkers it's clear that Fevertree is over-valued on a forward P/E of 66 when you see the pedestrian forecasts of 10% growth in 2018 and 16% in 2019. Hardly deserving of such a stellar rating. However since listing the board have under-promised and over-delivered on a consistent basis. For example last year the company put out 4 trading statements and every one stated that earnings would be materially ahead of expectations! As a result earnings increased by 65% to 39.2p and while that's lower than the triple-digit growth of previous years it's still outstanding. Combine with a 33% operating margin, ROCE of 41% (and rising) plus cash balances doubling to £51m and I'm pretty happy with these results. It's also clear that the company sees future growth opportunities through establishing their own North American operations and investing in new mixers which can play nicely in the "brown spirits" category. Given their track-record of execution I'm happy to continue backing the management in this pursuit. (Results)

H & T Group: Given that H&T is a pawnbroking and loan company it's definitely something of a Marmite share. What can't be denied is that the board have successfully revived the company from a horrific 2012-15 as the gold price plummeted and a major competitor, Albemarle & Bond, fell into administration. While pawnbroking remains the heart of the company they've leveraged their high-street position to add personal loans, FX and jewellery sales to the product offering. As a results profits soared by 48% to 30.9p facilitating a handy 10.5p dividend (a yield of 3.2%) with both operating margin and ROCE improving to double-digit values. Now some of this gain comes from sterling depreciation translating into a higher gold price and this tailwind won't last forever which is probably why 2018 forecasts point to an 18% decline in profits to 33p (with 36p in 2019). However even with this drop the forward P/E is just 10 and this feels relatively inexpensive to me. Obviously there are regulatory risks here, and perhaps competitor Ramsdens Holdings offers a better risk-reward balance, but I'm pleased enough with the progress made by H&T. (Results)

Somero Enterprises: I've held Somero for a number of years now and following the 5-year plan established in 2014 they've steadily grown sales, reduced debt and improved margins. The reason for this I believe, apart from the general economic recovery, is that from CEO John Cooney down to the most junior member of staff there's a clear focus on the customer. It's not just that Somero supply advanced concrete levelling machines - they also provide 24-7 support globally and use customer feedback in deciding how to incrementally improve their hardware. Financially this all paid off in 2017 with an 8% increase in sales translating into a 15% rise in profits and 16% more operating cash. As a result Somero have retired all of their debt and are planning to pay special dividends when they have more than $15m at year-end. With high activity carrying forward into 2018 and a boost from the US tax reform I see the coming year as one offering further solid progress. (Results)

Burford Capital: When a company is on a P/E ~16 it's hard not to be impressed if they more than double income and profit with a tripling of investment commitments to $1.34bn (up from $378m). This truly is a business on a steep trajectory with $128.5m of third-party litigation funding already committed in the first 2 months of 2018 compared to a meagre $1m a year ago. In fact it's hard to put into words just how well Burford Capital are performing over a range of metrics so I'd suggest downloading their investor presentation instead. What's remarkable is just how deep the pool of investments really is: the company received 1561 inquiries in 2017 and whittled this down to just 59 closed investments. This is less than a 4% commitment rate which suggests to me that they're taking only the creamiest cases that match their portfolio requirements. Curiously I believe that analysts are behind the curve, with a forecast 25% drop in earnings for 2018, because Burford don't provide forward guidance. I think that this gap is where the opportunity lies for us private investors. (Results)

Berkeley Group: A scheduled update covering the first 4 months of H2 this was poorly received by the market with the price dropping almost 6%. The reason is plainly the unremittingly negative tone of the announcement with affordability, planning and transaction costs all acting to constrain house production levels. This means that the current business plan, which ends in 2021, should be achieved but there's little chance of sales growth beyond that point. Now the 2018 forecast of 517p, a 15% increase, should be comfortably met since 308p is already in the bag for H1 but the 2019 forecast of 357p for the whole year (a fall of 30%) starts to make more sense now. I mean it sounds pessimistic but the board certainly aren't setting any positive expectations at all with this statement. (Update)

Polypipe Group: This is one low-profile company with just a single trading update between the H1 results in August and today. Still the FY results are solid with underlying earnings up by 10% to 27.2p (forecast was 26.8p) and dividend up to 11.1p (~3% yield). Cash generation is also reasonable with net debt down to £148m with another €16.5m due from the disposal of Polypipe France. A slight concern is the level of adjustments here since the basic earnings come in 16% lower at 22.7p. The main culprit is £4m of costs related to the closure of their Dubai manufacturing facility and since this relates to the diplomatic cold war between Qatar and everyone else I am happy to see it as exceptional. However another £5.5m arises from amortisation charges on intangible assets from acquisitions and I'm less keen to see these removed - but they were in 2016 so at least the comparison is fair. Anyway forecasts are for reduced profit growth of 8% in 2018 and this is in-line with the mixed outlook given by management. On one hand the residential market is strong and price increases should benefit margins from Q2 but there are some delays in the commercial/infrastructure segment and the renovation market is subdued. Still the shares aren't expensive on a forward P/E of ~13 and the quality metrics for the business are good. I'm inclined to wait until the AGM trading update comes out in May and will review this position then. (Results)

Accesso Technology: The share price has been strong here lately so the results needed to be good and they certainly seem to be. Basic earnings are up 20% to 29.0p and adjusted earnings are up 10% to 40.3p although I don't agree with all of the adjustments (share based and contingent payments primarily). This appears to be above expectations of about 34p and with the 2018 forecast at 53p and 2019 at 70p I'm not surprised that the market has reacted positively. More importantly it's clear that Accesso is transforming itself from servicing theme parks to becoming a global guest management company with the ability to meaningfully assist customers in many different verticals. It's been a remarkable journey under the leadership of Tom Burnet and reading the narrative in these results I get the sense that they're just getting into their stride! To a degree it can be argued that all of this, and more, is already in the price but equally with 81% of revenue being repeatable and solid contracts with numerous global clients I think that this quality somewhat de-risks the high P/E. (Results)

Henry Boot: Super results here as intimated in the January trading statement. When the share price slumped by 15% following this "ahead of expectations" RNS I did get a little worried but here we are with earnings of 32.1p. This is a 49% increase over 2016 and a decent beat of the 30.6p analyst forecast with no adjustments required (which I particularly admire). Part of the reason for this is that profits anticipated for 2018 (from both residential units and fast progress on a conference centre contract) proceeded faster than expected and made it into 2017. To my mind this indicates a quality business that is really delivering for clients. In line with this ROCE improved to 18.6% for the year, up from 14.4% and above the target return of 12-15%. I like the fact that management care about their return on capital as this suggests that they're not chasing business for the sake of it. Given that a good start has been made to the year I'm not sure why analyst forecasts suggest roughly a 10% fall in profits. Personally I see Henry Boot as a company that's both managed and performing well. (Results)

Next Retail: Objectively I don't have a good reason for holding Next given that it feels like it's just barely holding its own as the High Street is gutted around it. Subjectively though I value its proven management, wonderfully clear reporting and excellent quality metrics. As predicted EPS declined by 5.6% to 416.7p and yet, in some ways, this feels like a little victory. Underlying this we can see that retail profits dropped by a stunning 24% as fixed operating costs took a chunk out of the margin (down from 15.3% to 12.7% and forecast to dip further to ~10%). This is horrific. Fortunately online profits increased by 7.4% and these handily outstrip the retail profits (with a margin of 24.4%). In addition management have a clear view of where they've gone wrong, particularly in their product range, and how they're going to fix these problems. I wish other directors had such a clear understanding of how their business works and perhaps that's why I like Next Retail so much? Anyway at this early stage they think that EPS will increase marginally by 1.4% in 2018 as they address their problems and I think that I'll continue to back management in this endeavour. (Results)

Bioventix: If I could only own one share then Bioventix would be that share. It's fantastically profitable, and cash generative, with a reliable sales pattern that is protected by a significant intellectual moat. In the last six months the shares have been marked down over fears that the scheduled loss of £1m in sales from NT proBNP wouldn't be made up elsewhere. Fortunately in the HY period other antibodies more than filled the gap with total sales up by 13%. On the downside increased costs meant that profits only increased by 9% - or they would have except for a customer finding that they owed £772k in back-dated royalties! With this included profits are up by 39% to 54p but this isn't a sensible guide for the FY and underlying earnings are more like 43p. Still the company is executing well and revenues from Troponin should start to make a meaningful contribution from now on. There's a lot to look forward to. (Results)

Taptica International: On the face of it Taptica looks strikingly cheap as the P/E of ~12 is out of step with earnings improving by 50% and ROCE very high at near 40%. However this is a foreign company operating in the mobile advertising space and quite a lot of the growth is coming from acquisitions. So it's sensible to be sceptical. Still organic revenues seem to be up by 35% and operating activities delivered $30m in cash (the level of cash generation and ability to pay off any acquisition related debt is a definite attraction). What's interesting is that the company is nearer the start of its journey than the end with a specific aim of being truly global with ten key hubs in the next three years. This seems quite achievable with 2017 seeing significant growth in China, the US, Japan and Europe through the addition of new clients and higher engagement with existing customers. So while I can understand investors being dubious about the sustainability of profits at Taptica I think that they'll continue to prosper just so long as they continue to add value. (Results)

End of month summary

Another tough month with interest rate rise concerns being replaced by fears of a global trade war and a Facebook led decline in US technology stocks. It's hardly a conducive environment for a bull market. The end result is that despite many of my holdings putting out excellent results any rises have been matched by falls elsewhere in the portfolio.

Now while I don't use fixed stop-losses I do have alerts in place to warn me when a share has fallen by 20% from high-water mark. This is the trigger for me to re-examine my holding and decide whether I should listen to the market and sell (as I did with Empresaria) or continue to hold (as happened with Fevertree). Now with dotDigital (and quite a few other holdings) I can see nothing wrong with the quality metrics, profits are forecast to rise by 22% in 2018 and the company isn't very expensive on a P/E of 25 when most years have seen double-digit growth. It's true that only 13p of earnings were reported for H1, and historically H2 has been a little weaker for the company, but they have just acquired Comapi and that should add something when they release their omni-channel offering in April. The only obvious issue is GDPR and its implementation causing clients to hold back. Equally though dotDigital have been preparing for GDPR and can help clients to achieve compliance. So given all of this, and the board's confident assessment that they will meet FY expectations, I'm going to retain my position but with raised attention!

Looking at my winners and losers what's interesting is how last month's laggards, Burford and FDM, are my 1st and 3rd biggest gainers for March. It just goes to show how any share can drop by 10-20% on no news before reversing direction when some actual, good news comes out. This is a happy thought as six of my holdings have fallen by >10% this month with Boohoo being the stand-out disappointment at -20% - so I'd rather like them to turn things around in April! On the other hand my portfolio is now just slightly down for the year at -0.35% and that compares favourably with AIM down by 3.4% and the FTSE All-Share down by 7.3%. Hoping for a quieter April though.

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

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