May 2018 Portfolio Update

After the market volatility of Spring, closely matched by uncertain weather, this month felt like a welcome relief as the sun shone on my portfolio. Very little trading took place but there were plenty of announcements to consider - including a humdinger of a profit warning from Photo-Me International right when I was enjoying a half-term break. So much for getting away from the portfolio!


Games Workshop Bought 2444p - May 18

With a decent trading update in the bag I had another look at the analyst forecasts and came to a couple of conclusions. Firstly I believe the forecasts are behind the curve and that earnings are unlikely to drop by 20% in 2019; the new focus of the company has been warmly welcomed by players and I believe that upwards momentum will continue. At the same time there's a disconnect between earnings increasing by ~96% and a forecast P/E of 13. The company is just too cheap and this is why it's ranking at the top of my quality and value screens - with the combined score putting it at the top of my list of shares worth buying. Obviously it's had a strong run over the last couple of years, with the share price quintupling, and I can see why people are banking their gains but I'm happy to take shares off of their hands.

Hollywood Bowl Bought 224p - May 18

Listed for just over 18 months Hollywood Bowl is the kind of private-equity IPO that I normally avoid. However in this case the group wasn't saddled with too much debt, around £30m, and wasn't listed at the peak of the market. Instead BOWL is capitalising on the trend towards experiential spending, debt is being rapidly paid down from cash-flow and refurbishment/extension activities are driving revenue growth. There's also the fact that quality metrics, such as ROCE, are improving rapidly and the directors own a decent chunk of the business; all of these factors make it my kind of share. So I was surprised at the muted reaction to today's interim results since earnings are up by 18%, debt is down by 47% and KPIs (such as game volume and spend per game) are all on an improving trend. Combine this with Phil Oakley's solid analysis of the company and I couldn't help but take a starter position.


RWS Holdings Sold at 366p - May 18 - 56.3% gain

This is a very solid company with a great track record of quality growth - which is why I analysed it back in 2015. However they undertook a very large acquisition last year, for $320m, of Moravia, a localisation services company. I hadn't realised just the scale of this purchase, both in terms of sales and head-count, and I might have sold at the time if I'd realised the extra risk being assumed. On the other hand a number of previous acquisitions have been integrated very successfully so it wasn't unreasonable to give the board the benefit of the doubt. Anyway, as reported last month, RWS came out with a bit of a profit warning for the HY and I've decided that it's better to watch from the sidelines until the business looks to be back on track.

Fever-Tree Drinks Sold at 2768p - May 18 - 56.1% gain

I really like Fever-Tree, both as a brand and as a company, and wrote about them in some depth a year ago. However I'm not alone in liking the share and that's just one reason why they are on a heady forward P/E ratio of 65. Another good reason for this rating is that in prior years the company has repeatedly and materially outperformed analyst forecasts - meaning that what has looked like a very high rating at the start of the year has proved anything but high at the end. However current forecasts are for 11% profit growth in 2018 and this seems like a very low bar - yet in the recent update, mentioned below, the board stated that they are merely in-line with this forecast at the moment. This is a concern since the UK market is pretty much owned by Fever-Tree, and they're only just getting started with their US operations, which makes me think that perhaps the shares need to take a breather while the business catches up. So, for the time being, I'm out.


Plus 500: A simply stunning first quarter performance here driven by the crypto-currency bubble. In simple terms revenues were up by 284% compared to Q1 2017 with these revenues being equal to 68% of sales for the whole year - and EBITDA in this quarter coming in at >90% of EBITDA for 2017 entirely. Quite remarkable and, as the board mention, not to be repeated in the remainder of the year. Instead trading conditions have returned to more normal levels and may well be impacted by ESMA's proposed changes - although expectations for the year have still been hiked. Curiously analyst expectations are for an 18% rise in profits and clearly this is ludicrous given the numbers posted in this update. I suspect that these forecasts will be adjusted and PLUS will look even cheaper (current forecast P/E is <10 with a yield of 5%+) until the price naturally adjusts. The only problem is that next year's figures will look poor compared to such a mammoth performance. There are worse problems to have. (Update)

PPHE Hotel Group: A decent in-line update with all operating regions exhibiting growth apart from the Netherlands - and this is down to hotel renovations in Amsterdam. Now a standard metric for the hotel business is RevPAR or Revenue per available room. For PPH this has been broadly flat in the first quarter with higher occupancy of 73.5% (up by 2.4%) offset by a slightly lower average room rate of £108.9 (down by 2.8%). I don't see this as a problem since RevPAR is stable at around £80. A continuing theme is the programme of investment and renovation projects. The Park Plaza Victoria Amsterdam should be completed in H1 with Park Plaza Sherlock Holmes London following on in 2019 along with other smaller renovations. So long as these bring in the guests and add value, which has been the case so far, I'm happy that the group is operating efficiently. (Update)

Games Workshop: Very succinct announcement. Profits to date are slightly ahead of expectations due to continuing growth trends and high operational gearing (which means that costs are largely fixed). Next update will be in early June after the year end. Nice. (Update)

Treatt: Something of a favourite with quality share pickers Treatt has been unloved over the past year with the share price falling by almost 25% from its ATH at one point. The reason for this seems to be uncertainty regarding the relocation of their UK site, which is a big project, and margin pressures as key raw materials have increased in price. In addition there's the continued recovery of GBP which has turned a beneficial tailwind into a blustery headwind. Despite all of these factors my impression of the company, from its various trading statements, is that operationally it's performing well with strategic objectives being met and margins improving along with sales and profits. Looking at these HY results this trend is continuing with profits up by 20%, from sales growth of 14%, driven by the core categories of citrus, tea and sugar reduction. The outlook is also positive with several new projects poised to lift the top-line while US tax cuts are materially improving the bottom line. All in all I'm happy with the way in which this business is being managed and feel optimistic that they're on the right track with their new strategic plan. (Results)

Next Retail: After a number of very subdued, if not downright pessimistic, updates Next really hit it out of the park this time with full price sales up by 6%. Within this there is the familiar story of high-street retail falling again, by -4.8%, but online more than compensates with sales up 18%! Now some of the credit for this is down to our mini-heatwave in April but on the flip-side the extended snowy weather hit sales in the other direction and so things kind of even out. What's nice is that they've come in ahead of internal forecasts and so the board are in a position to raise their FY guidance by £12m and this translates into EPS growth of 3.7% (was 1.4% previously). Although bear in mind that this is reliant on £300m of share buybacks, as these alone will lift the EPS by 4.7%, of which £195m has already been spent. Personally I prefer special dividends but I can see the upside of buybacks when the share price is low and the business under-rated. (Update)

Patisserie Holdings: I do like to see results where profits are increasing faster than sales since this suggests good cost control and improving margins. For example here sales rose by 9%, which is decent in the current retail climate, while profits moved up by 13% (which is in-line with analyst expectations). Also when Luke Johnson says that the balance sheet is strong he isn't trying to divert attention either; net cash is up to £28.8m and that's after opening 10 new stores out of operating cash flow. Impressive organic growth there with all of the stores being profitable from week one. This really is how a roll-out plan should work. What really amazes me is how the board make this growth look simple, almost inevitable, when they're putting in a huge amount of work below the surface. Reminds me a little of Next Retail and I mean that as a compliment! (Results)

Fever-Tree Drinks: A poorly received AGM statement today saw the price marked down by almost 6%. The reason for this is that the business is merely trading in-line with market expectations while previous years have always indicated material out-performance at this stage of the year. In addition brokers are forecasting a measly 10% growth in profits for 2018 and that's pretty rubbish when you're on a P/E north of 60. Still the UK market is solid, although the subtext is that future growth will be in step with market growth in the mixer category, and progress is being made on taking direct control of distribution in the US. If this takes off then the current share price could be a bargain and I guess that's what most investors are waiting for. (Update)

Taptica International: Rather than a standard update, although trading is mentioned to be in-line with expectations, this is a Q&A with the CEO in response to dramatic share price weakness recently. On the face of it the company looks cheap, on a forward P/E < 10, but people are concerned by GDPR and advertising on Facebook. In essence Hagai Tal reassures by indicating that neither of these directly impact their business model. On one hand they have the performance division, which is all about optimising mobile advertising, and this doesn't store personal data (although it does have unique markers). On the other there is the Tremor Video business which is all about brand advertising and targeting particular demographics. With the latter Taptica do buy 3rd-party data but only from reputable sources! So things look fine but I suppose that there are still questions to be answered at the Capital Markets Day in the summer. (Update)

3i Group: Pretty good FY return here with NAV up by 20% to 724p, more or less in line with share price performance over the year, although it's fair to say that III sits at a fair premium to its underlying NAV (>40% currently). This is because the main business lines, private equity and infrastructure, are both performing well with good opportunities for reinvestment. This progress seems to be a continuation of the recovery that III has experienced, since the crash of '09, with big investments in Action (a discount retailer) and the 3i Infrastructure Fund paying off. I must admit that I quite like the portfolio diversification which III provides, since it's unlike any of my other holdings, and the gist of the lengthy report is that most of their investments are doing well with selected disposals and investments enhancing their portfolio of assets. The results also seem to have caught the eye of investors with the share price breaking out of a year-long consolidation phase. Currently at 1029p the next target is the ATH of 1072p achieved in September 2000! (Results)

Accesso Technology: It's notable that 80% of the year's trading remains in front for Accesso, their normal seasonality, but this AGM statement gives a taster of where they're heading. In brief this is continued good trading in the amusement-resort sector, with Cedar Fair extending for another 5 years, with a big push into other verticals. This includes ticketing for the opening ceremony of the Special Olympics USA Games, providing a ticketing platform for Marriott International's Gaylord Hotels and engaging with Henry Ford Health System. I get a real sense of momentum here and it's no surprise that the share has pushed on to a new ATH. (Update)

Watkin Jones: Sentiment around this student accommodation provider has been subdued over the last six months as fears over profit sustainability collided with CEO Mark Watkin Jones deciding to step down. Fortunately a well-qualified CEO, Richard Simpson from Unite Group, has been located and these HY results look pretty solid. Revenue is up by 18% and profits are up by 12% (the latter would have been higher but 2017 included £2m in one-off joint venture profits). This is in-line with forecasts of 10% growth for 2018, at the very least, and the board remain confident going forwards. On the development front plenty of student accommodation sites are being added to the pipeline, for future years, with build to rent gaining a lift from the recent development agreement with M&G. It's a shame that Fresh Property Group, the management arm, will lose ~5000 beds this year, as the Curlew Student Trust winds up, but they will be compensated for early termination and by 2021 growth should take them past the current level of 16,185 beds under management. Lots of growth to come then in a variety of areas. (Results)

Polypipe Group: I was initially a bit alarmed when this AGM trading statement referenced adverse weather conditions and their impact on sales. Fortunately the impact seems relatively small, at £8m, and the board remain confident of meeting expectations. Underlying revenue growth, excluding weather effects, came in at ~5% and that seems like a reasonable start to the year. That said hopefully the good weather lately will push sales in the other direction! (Update)

Henry Boot: In short an in-line update which is reasonably creditable given the poor weather earlier this year. On the other hand forecasts are for a 13% drop in profit compared to the exceptional performance of 2017. This may be why the share price has been tightly pegged to the 300p level for a whole year with two attempted breakouts failing to gain any traction? Still all three parts of the business seem to be trading well. First Hallam Land, the strategic land business, has 10-20 sites being sold this year with 170 sites in the portfolio. Then the property development arm has a number of residential and industrial projects under development with all looking to be on track. Finally the construction and plant hire business has been impacted by weather but it looks as though they've dealt with the problems and expect a performance similar to that of 2017. Pretty solid then. (Update)

NewRiver Retail: Having spoken to Allan Lockhart, CEO, at Mello 2018 I was pretty confident that these results would show progress on debt management and portfolio diversification with a continued focus on the core local shopping centre portfolio. It seems to me that the board remain keen to scale up NRR, hence the acquisition of the Hawthorn Leisure pub portfolio, which is great but does seem to mean that shareholder rewards are likely to be delayed as the portfolio matures. Still there's always the dividend yield of over 7% to consider. Ordinarily this would be big, flashing warning sign indicating a business in difficulty but here I believe that sentiment is heavily against any REIT exposed to high-street retailers while over-looking the specific focus of NRR on community shopping centres. Usefully this report includes a list of CVAs this year and it's good to see that NRR is only lightly exposed to about half of the administrations with New Look being the worst at 1.9% of the rent roll. This is far from the most exciting investment around (IQE?) but it generates income and has decent asset backing with the outside possibility of getting taken over one day. (Results)

Photo-Me International: Well this came as a bit of a kick in the teeth. Firstly 2018 profits are reported to be just broadly in-line if you include a one-off investment gain of £3.7m. In other words underlying profit will be down by ~10% even as turnover is up by ~6%. This all points to a big drop in profit margin and the culprit appears to be a very difficult market in Japan where there is a massive over-supply of photo-booths. In addition 2019 is forecast to be a tough year, with pre-tax profit of at least £44m implying a 15% drop from current analyst forecasts. Restructuring costs seem to be driving the majority of this fall but I also suspect that profit from Asia (~15-20% of total profit) is being wiped out by Japan even if the rest of the world remains stable. Finally there's mention of the high dividend being maintained, which seems reasonable given the cash on the balance sheet, but this does raise the idea of a future cut. All in all I think that the problems in Japan can be fixed and Photo-Me should prosper but the next couple of years are going to be painful. (Update)

End of month summary

With the stock market breaking through to an all-time high my inclination is to accumulate cash at the moment rather than make new investments. As a result I'm up to about 10% cash in my portfolio; not a lot compared to some people but historically I've been 95-98% invested at all times. I should point out that I'm not predicting an imminent bear market but I expect shares to pull back over the next few months even if only as a result of traders going on holiday in August. So I'd like to have a bit of financial firepower available.

Looking back over the month the stand out winner was Games Workshop, up 22% and almost my largest position, with Accesso, Boohoo and Plus 500 all gaining by substantially more than 10% over the period. Sadly this sterling effort was rather hampered by Photo-Me crashing 30% and dotDigital, Taptica and XL Media all slumping by more than 10% on the back of GDPR fears. On the upside at least the flood of GDPR emails has dwindled to a trickle now that the registration deadline has passed.

In summary these are all of my winning positions for May: GAW 22%, ACSO 19%, BOO 16%, PLUS 13%, CAKE 11%, NXT 10%, BUR 10%, TET 9%, IPX 8%, WJG 8%, PPH 7%, CCC 4%, PCA 4%, TUNE 3%, HAT 2%, SOM 2%, BOOT 2%, III 1%, BOI 1%, PLP 1%, GAMA 1%, BVXP 1% and FDM 0%

And the losing ones were: NRR -2%, LLPD -2%, XPP -2%, DTG -3%, KWS -6%, RWA -7%, XLM -10%, TAP -13%, DOTD -19% and PHTM -30%

The overall result, despite these hefty falls, was a creditable rise of 3% for the month with the YTD return now heading towards 9%. Given my aversion to story stocks, and making trades on the back of non-RNS news-flow, I'm very happy with progress so far. Steady as she goes!

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

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