November 2021 Portfolio Update

Another brutal, testing month in the stock market with almost no respite from the relentless selling pressure. Psychologically it's been tough over the last three months and I've certainly lost my taste for investing. I know that in the long run this will look like another blip (assuming that the global economy doesn't collapse) but that doesn't make the living with it any more enjoyable. As such I'm down 8.5% for the month pushing me to a 3.5% loss YTD. Yes that smarts given that I could have sold everything in May and put my feet up for the rest of the year.

Risers: TEP 15%, UPGS 9%, BOTB 5%, CMCL 5%, CCC 5%, CER 4%, CAML 1%

Fallers: SPSY -1%, SDG -3%, GAW -3%, SCT -5%, KNOS -6%, GAMA -6%, CLG -7%, TM17 -7%, CAPD -7%, LUCE -7%, FXPO -7%, AFX -8%, DRV -8%, RWA -9%, BOO -9%, BLV -9%, MNZS -9%, CLX -14%, DX. -14%, GMR -16%, STAF -17%, VLX -19%, SLP -21%, G4M -24%, GAN -30%


Spectra Systems Bought at 150p

On the face of it Spectra has a lot going for it as an investment. Over the last five years sales and profits have risen consistently along with the operating margin (over 30% now) and the return on capital (heading towards 20%). It generates very significant FCF, always has net cash on the balance sheet and pays a generous dividend equivalent to a yield of 4-5%. The CEO and founder Nabil Lawandy holds around 5% of the company and is happy to talk to shareholders about commercial progress. On this front forecasts only include already won contracts rather than projections of possible wins. This is why the October announcement of a larger than expected order from a long-term central bank customer now means that profits will exceed market expectations. And yet the share price has continued to remain weak - perhaps because there is no analyst coverage and so no one to raise the forecasts. With all of this in mind I've bumped up my holding by 25% to leave it just outside my top 5.

Central Asia Metals Bought at 235p

Recently I was reviewing my portfolio and noticed that Central Asia Metals was by far my smallest position. This is the natural consequence of taking a starter position in May and then having prolonged share price weakness grind it down into an even smaller position. In this scenario a decision needs to be made. Either dump the tiny holding or increase it to a more meaningful level. Looking back over the last six months production levels have been somewhat disappointing with the Sasa mine suffering from ground support issues and a mill shutdown while Kounrad faced a change in its leach blocks that impacted performance. As a result lead production for the year will be below guidance, zinc will come in at the lower end of the guidance range while copper should hit the top end. A mixed bag operationally but not disastrous. On the flipside the spot prices of all three metals remain very strong and CAML is generating a large amount of free-cash flow. So much so that they are now basically debt free and have funds available for acquisition or special dividends. This puts them in a solid position and since I want to retain exposure to a low-risk miner I've doubled my position at what seems like a reasonable price.

K3 Capital Bought at 331p

Last month I sold my entire holding in K3 Capital, before their results announcement, but purely for account management purposes. However I was half hoping that the results would be no more than in-line and that I'd get the chance to re-establish my position. Curiously I was given the opportunity even though the results and outlook are very good. Still there's no point looking a gift horse in the mouth. I was able to get back in a few percent below my selling price and hope to hold the shares for a good while longer.


Sylvania Platinum Sold at 106p - 63.4% gain

On the face of it Sylvania is very cheap and cash generative with the potential to deliver very sizeable dividends. At the same time it has grown to quite a decent position in my portfolio and I've become nervous about it being able to hit its production target for the year. So, with the ex-dividend date behind me, I have halved my stake in the business to bring it in-line with my other holdings. This feels like sensible risk management since I'll still benefit from any further upside but any further hit (if metal prices fall let's say) will be much less painful.


K3 Capital

What a great set of results showcasing the transformation of K3 Capital over the last year. In that period five acquisitions were completed with two of them adding brand-new service lines. Now bear in mind that the core business of K3C before now was M&A and business consultancy. So you'd expect management here to be experts in both finding excellent businesses at a good price and in integrating them once acquired. Fortunately the results look good. Quantuma added a restructuring division which has gained market share during a period when the insolvency rate is low and is materially expanding its international operations. The purchase of randd created a tax division that benefits from high-margins and multi-year contracts. This segment is seeing steady growth and real benefits from the cross-selling opportunity now available as part of a larger group. Remarkably all divisions performed ahead of forecasts and the new year has started well with record levels of buyer activity in the M&A space and a tick up in insolvency volumes as Government support reduces. Beyond this management have executed a number of bolt-on deals to fill gaps in their service offering and improve their sector specialism. This is all very sensible but it does make the group more complex and challenging to manage - which is something that the CEO, John Rigby, is looking to alleviate by broadening the team. He recognises that he doesn't have a background in running a £250m company, let along one four times the size, and this is part of the growth process. I appreciate the lack of ego here and right now K3C looks well positioned for further growth. (Results)

UP Global Sourcing

To deliver such an excellent set of results in the toughest year ever faced by the business is quite some achievement. That'll be why the shares have rebounded so strongly from their pre-result doldrums. Despite issues with stock availability, that held back online sales, total revenue increased 18% to £136m. This growth broadly translated into PBT rising 14% although underlying EPS actually increased 34% to 10.6p if you reverse out the costs of the Salter acquisition. On this front the Salter brand has been fully integrated and is expected to be significantly earnings enhancing in FY22. This is excellent news and is indeed one of the reasons why I bought back in to UPGS. At the same time management are refreshing and relaunching the Petra brand in Germany. This is important because European sales were relatively weak last year, with many retailers being forced to close, and an injection of activity is required to get it growing again. An interesting point here is that UPGS are going straight in at the supermarket level, rather than leading with the discounters, which shows that their brands/products are resonating with the right customers which can only be positive for margins. Currently trading is in-line with expectations (which is for 33% growth in the bottom-line) despite the ongoing challenges of shipping availability and cost. This is a key statement for a company so exposed to cost inflation, manufacturing restrictions and container availability. They are clearly working their socks off to get product delivered which puts them ahead of competitors (even if they can't quite achieve the excellent record of prior years). In my view the management here know their sector inside-out and are leveraging all of their experience to make UPGS a go-to supplier in their difficult times. (Results)

Gaming Realms

This is a decent update with the company remaining confident of meeting its full year targets. This is important because after many years of losses Gaming Realms is forecast to become profitable this year with a big jump in profitability in 2022. Actually this has already happened with the interim results, up to 30th June, posting just under 0.3p of EPS compared to the full-year forecast of 0.9p, but there's a lot riding on H2. Anyway content licensing revenue increased 35% in Q3 and the company now has full licenses to operate in New Jersey, Michigan and Pennsylvania. Right now everything is going the right way and online gaming in the US is only going to get bigger. (Update)

DX Group

With these results unavoidably delayed by issues at the auditor there was some concern that they'd uncovered a material issue. Fortunately a previous announcement put this concern to bed and the full-year results are excellent. At the top-line sales rose 16% to £382m, which is fine, but the big wins are lower down with the turnaround in the freight division turning a net loss in £12m of profit. The adjusted EPS of 2.0p is materially higher than the 1.67p forecast and not far from the 2022 consensus of 2.2p. This is exactly the turnaround that we were promised and management remain confident of further progress. On that front they've announced a new £20-25m investment programme to improve and increase the depot network which suggests that their plan to increase market share is on track. It's worth noting that these results were produced despite DX Express suffering badly from coronavirus restrictions with legal and high-street volumes falling sharply. Still this is behind us now and Exchange members are now getting a much improved service which is encouraging users to renew their subscription for another year. On the freight side of the group margins improved to 10.3% due to higher volumes and efficiency improvements. This is the upside of operational leverage and solid customer service (plus additional depots) should ensure further growth on this front. There are headwinds, principally from driver shortages and global supply chain disruptions, but you can be sure that customers will be working their butt off to get goods delivered before Christmas and DX stands ready to support them. I'm very happy with how things are playing out here and while the share price may be weak the business certainly isn't. (Results)

Best of the Best

This is an update but that's about as good as it gets. Without mentioning any numbers whatsoever it seems that the performance is in-line with expectations. That's a positive and both customer acquisition costs and player engagement levels have stabilised. So there is a business here and it's not going to the wall. However if the cost of bringing in new customers remains elevated (making this the new normal) then margins will be hit hard and the quality metrics will decline. This is probably all in the price given the way it's been hammered but I won't be adding to my position without some cold, hard numbers. (Update)

Caledonia Mining

We received the excellent Q3 operations update last month with the news that production guidance had been narrowed to the top end of the previous range. The Central Shaft really is a hit with increased production (up 42%) far more than off-setting a 7% drop in the gold price to boost revenues by 32% year-on-year. An extra benefit is that the all-in sustaining cost per ounce is down a hefty 19%, to $909, due to fixed costs being spread over more production ounces and reduced sustaining capex. I'm very happy with these numbers and the direction of travel. All we need now is for the gold price to break out of its downtrend. (Update)


There are some pretty eye-popping numbers in these half-year results with sales up 45% and underlying PBT up 22%. Sadly the bottom-line EPS figure is only just up compared to last year because this year a $2m tax charge was incurred while last year saw the benefit of a $1m tax credit. I don't quite understand the reason for the swing, given a fair level of deferred tax assets, but I suspect it's due to earnings being in one region and the tax credit in another. Either way $3m is material enough to drag down the EPS by 15%. More usefully all sectors are seeing high customer demand and the company is managing inflationary cost pressures and extended global supply chains. The former is handled by pushing through price rises (which are contractual) while the latter involves close attention and component substitution where practical. The stand-out sector was Electric Vehicles with 210% growth year-on-year while Consumer Electricals remained buoyant with DE-KA adding a chunk of sales. There may be a slow-down in the consumer market as pandemic buying winds down but right now it's performing well. This is also true of the Medical sector, where hospital access is improving, while data centre demand is high but moderating following a strong 2020. Still margins have taken a hit in this H1 with gross margin down almost 4% and underlying operating margin falling from 10.3% to 9.3%. Clearly it's been a tough period all round and H2 may not be much easier if you take a look at the news. That said the analyst forecasts are undemanding for the second-half with no sales growth required so it won't take much to beat them. On this basis I'm happy to stick with Volex. (Results)


On the face of it these Q3 results are underwhelming with a continued focus on jam being delivered tomorrow. It's also notable that following the Coolbet acquisition around 2/3 of revenues are B2C derived which moves GAN away from being a simple "picks & shovels" platform for other gaming operators. Instead it's exposed to the impact of betting results with these sometimes favouring the operator and at other times favouring the customer. On the other hand Q3 is generally the weakest quarter while Q4 and Q1 are much stronger with trading so far looking good. GAN is now live in 9 states nationwide with another 3/4 states likely in coming months (up from 3 states a year ago) which is a big leap in performance. This is allowing the $125-135m range to be reiterated with a target for $225-250M in 2023 and $500-600M in 2026 at an EBITDA margin target of 30-35% (was 7% in Q3). There's an assumption that more states will open up to iGaming but still that is some serious growth on the table. On the B2C front active customers rose 6% (reaching an ATH in October) but a quieter sports calendar and local reopening impacted revenues somewhat. Also marketing spend increased with cost per acquisition up from $30 to $45; I wonder if this is down to the Apple privacy changes hitting the efficacy of adverts? On other fronts the new offerings of GAN Sports and Super RGS offer additional growth as operators want this content and the negotiation is around how much they're willing to pay. Nothing is included in the guidance for these additional avenues and it sounds as though they can be ramped up quickly (even before the contract is finalised). Finally GAN have signed up Red Rock Resorts to their full sports offering (online, mobile and kiosk based) after doing simulated gaming for 4 years. This is a big opportunity in a key regulated location and with a key retail casino operator which proves the GAN technology. So while Q3 was a bit meh I really can't see a reason to back out of GAN at the moment. In fact it's offering a pretty compelling buying opportunity at current levels. (Results)

Kainos Group

In recent years Kainos has delivered excellent growth through its Digital Services and Workday Practice arms. Last year was particularly strong as the public sector rushed to digitise which makes for some tough comparative numbers this year. Still these H1 results, to the end of September, are pretty decent with revenue up 33% to £142m, bookings up 81% to £187m and the contracted backlog now an impressive £250m (a 38% rise). These revenues are decently diversified across sectors with the split being 42% Commercial, 37% Public Sector and 21% Healthcare. However the period saw a real swing back to the business world with Commercial revenues up 51% while Public Sector sales improved only 6% but from a high base. At the bottom-line adjusted PBT rose only 12% to £29m with one factor being the large 20% increase in staff numbers over the period. The impact on margin here comes from an increased use of contract staff, who are naturally more expensive, and salary inflation as recruitment remains challenging. In addition non-recurring cost savings have reversed pushing profit margins back to their long-term level. This is reflected in the forecasts for single-digit earnings growth, which makes the shares look expensive, but equally this jump in headcount suggests that Kainos almost have more work than they can handle. This bodes well for future growth so long as they continue to keep their customers happy. (Results)


The board at Gear4music have consistently indicated that trading in this year would not match the knock-out results achieved in 2020. This out-performance was driven by the initial lockdowns driving volume growth at increased prices along with reduced costs and only one quarter impacted by Brexit. The clarity of this guidance was most welcome and at the start of 2021 it seemed that they had planned well for Brexit with a scaled-up hub infrastructure in Europe. At the mid-point of the year trading still looked good, after a strong Q1, and the board updated expectations for FY22. However the board are probably wishing that they'd held back because with these interim results they are taking the expectations back to just above where they started. In other words they warned on profits and the shares dropped 20% (having already come off 20% from the ATH). The problem is Europe and the lack of hubs and stock in Southern Europe. Clearly management were banking on this being resolved by now and underestimated the long-term impact of Brexit. Still the new hubs should be fully functional by Q4 although that is after the key Christmas period. So the next update in late January will be a key marker of progress. As for these HY results they are as anticipated with margins falling back due to lower own-brand sales, higher marketing costs and increased freight costs. Operationally management are taking the right steps to improve matters (if later than necessary) and have a decent roadmap of additional sales opportunities. So while disappointed I'm happy to stick with Gear4music as it rediscovers its mojo. (Results)


These are excellent results with sales growth of 25% translating into earnings more than doubling with and without adjustments. That's the beauty of operational gearing when it works in your favour. Significantly this top-line growth is more than twice that seen in the last 3-4 years and appears to represent a step-change for the business. The back-order book of £42.1m is at a record level and the largest ever contract won in March is encouraging other customers to hand big contracts to Cerillion. So the market backdrop is positive and Cerillion are taking advantage of these tailwinds which explains the double-digit growth rates forecast for 2022 and 2023. If these numbers come to pass then the forward P/E of 20-30 does not look expensive. One reason for believing this is that last year saw strong demand from existing customers (up 105% to £19.2m which is 73% of total turnover) which is partly down to these customers being larger with broader requirements. This isn't exactly recurring revenue but these customers have bought into the Cerillion platform and they're not going to move to another supplier without a lot of effort. Remarkably operating costs rose only 3% during the year with personnel costs flat. That's quite an achievement and may be down to the Indian office helping to keep a lid on wage inflation along with selling a platform that doesn't require customisation. Right now then things are looking good for Cerillion and with luck we'll see another update before the H1 update scheduled in April. (Results)

Telecom Plus

Being a recent purchase I was eager to see these H1 results. Not so much for how the business traded in the period but more for a sign of how the future looks given the collapse in the UK energy supplier market. This implosion has been a long time coming, with a steady stream of the weakest suppliers failing during recent years, but now the day of reckoning has arrived. This is great news for Telecom Plus because once again their energy offering will be competitive now that they're no longer being undercut by businesses going for volume over profits. The impact of this ludicrous approach can be seen in these results with revenue edging up 6% from 2020 and adjusted profits falling 5% following an increase in the provision for a historical issue with Ofgem. Looking at the historic numbers this has broadly been the pattern for the last seven years, since Ofgem deregulated the market, but analyst forecasts suggest that this is about to change in 2023 and 2024 (this year not so much as growth builds in H2). An additional tailwind is that inflation, and the emerging cost of living crisis, is driving increasing numbers of people to look for additional income and being a Utility Warehouse partner is one way to achieve this goal. Management have recently restructured the package to pay out more quickly and it seems that potential partners value the opportunity on offer. As Telecom Plus depend on these partners to fuel growth then more partners selling a more competitive product can only be a positive force as customers looks to save money on their utility bills. Clearly I'm not the only investor seeing promise here as the shares have appreciated materially since the summer low near £10 and look set to break through the £15 ceiling that has capped the shares for the last three years. (Results)

Calnex Solutions

It's nice to see a recent IPO do well with the trading update last month indicating that revenue and profits for the full year will be materially ahead of previous expectations. Not a lot has changed in the month since then but demand for testing equipment remains strong and the semiconductor shortage hasn't had an impact since then. Well saying that the big change is that the shares have taken a dive back down to support at 120p after dallying above 150p so something has spooked investors. It could be the fact that while sales are up 20% we have profits reporting flat and EPS down by 18% due to the comparison between pre-IPO and post-IPO numbers. With the adjusted EPS coming in at 2p there does seem to be a lot of ground to make up in H2 to reach the 5p+ level achieved in FY21. On the other hand planned recruitment has been bought forward to meet the customer demand which is both positive and increases costs before these new staff become profitable. This means that administration costs have risen by 43% (from £2.3m to £3.3m) with this rise knocking back profits and reducing the margin from 30% to 25%. This should rebound but travel costs are likely to rise as unlocking continues so perhaps the steady-state margin will be somewhere in the middle. Ultimately Calnex is providing the products that customers want and this will drive bottom-line growth in the end despite increases in the weighted share count. (Results)


An in-line trading update with good growth from both mid-market and enterprise corporate customers as well as the public sector. The hardware supply situation is stable, which is a current concern, and we have year-on-year growth in revenue, gross profit and operating profit. This is basically the same as the last five Q1 statements in that the tone is positive but measured. So why are the shares down 20% since their peak a few months ago? I'm guessing market sentiment and potential interest rate changes hitting valuations because there's nothing wrong with the company. (Update)

John Menzies

Given all of the uncertainty around Omicron it was nice to see Menzies so positive. Apparently trading for the full year is to be at least in line with market expectations after stronger than expected trading in recent months. The air cargo market remains robust with the cargo forwarding business having a record year as they benefit from the continuing expansion of the e-commerce market. Usefully operational gearing is becoming a benefit as ground and fuel services recover while the cost base remains fixed with Q4 in particular seeing higher volume levels. At the same time less than 10% of their business relates to long haul passenger flights so they're hardly reliant on countries opening up for tourism. In this light the shares look strikingly cheap on a P/E of 12 falling to 7 next year as profits rebound which is somewhat below the historical average of around 10 times earnings. Clearly Menzies has never been seen as a quality business but I do wonder if the current board, with Philipp Joeinig as Executive Chairman, can change this perception after a few years of ongoing management changes. He has a solid background in the industry and with £7m invested in the company (bought rather than gifted at higher prices) certainly has skin in the game. There remain risks (principally from the debt load) but with a FY update due early next year we'll soon learn if the recovery continues to gain momentum. (Update)

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

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