April 2019 Portfolio Update

Once again I've enjoyed a quiet month with regard to the markets and have done little apart from watch the dividends roll in - thanks XP Power! It's not that I've been putting my feet up though. No, real life has more than occupied my time and that's no bad thing. I did, however, enjoy reading this recent piece on AIM investing (Staying Safe on The Planet Aim) which echoes very much my own approach. The only part which I don't do well is putting together a few basic calculations to validate my thinking when a new RNS comes out. This clearly works for the author (https://twitter.com/dosh100) though as his regular tweets demonstrate.



Things I thought about buying (but didn't)




Things I thought about selling (but didn't)



AdEPT Technology Group: Decent FY trading update here with sales and EBITDA rising in-line with market expectations. Debt should also come in slightly lower than forecast with the dividend rising more than expected to 9.8p. Given that this is a "buy and build" business it's pleasing to read that recent acquisitions appear to be both performing and integrating well. With Ian Fishwick moving to the chairman seat it sounds as though the pace of acquisition is likely to be maintained. Given that the shares are on a forecast P/E below 11, and yielding almost 3%, I'd say that they're looking good value right now. (Update)

Ramsdens Holdings: An in-line FY trading update which implies earnings growth of circa 8%. Usefully they've seen growth across all four of the main income streams (Foreign Currency, Pawnbroking, Jewellery and Precious Metals) which suggests a certain level of resilience in the business. With the acquisition of 18 stores and 5 loan books from Instant Cash Loans last month it seems reasonable to assume that next year should see some decent growth at the top and bottom line. With shares currently on a P/E of ~10 and yielding almost 4% they seem more than fairly priced. (Update)

Watkin Jones: Yet another in-line HY trading update with forecast growth of 2-3% somewhat more muted than last year. On the flip-side the business cleverly de-risks earnings by forward selling their student accommodation developments; this ensures that they're not over exposed to future economic conditions and don't have too much cash tied up with work in progress. Right now there are over 7500 beds across 17 sites scheduled for completion over the next three years with 11 of these sites already forward sold. To add growth the group is expanding its Build to Rent pipeline with 3 sites already having planning permission and another 3 progressing through the planning process. So while growth has fallen back recently I'm confident about the medium term as recent initiatives bear fruit. (Update)

K3 Capital: Sadly this is a far from in-line update! Apparently a number of large transactions may not complete before the end of the year leading to rather a large hit to profits. Previously the forecast was for EBITDA of £7.1m but now we're looking at £4.5-5.0m. Taking the midpoint of £4.75m this would be a 35% drop from last year's figure of £7.4m. Naively applying this to last year's EPS of 13.9p gives us 9.0p for this year and a current P/E ratio of around 15. Fortunately the other business lines are trading well, and growing, but clearly they don't provide as much profit as the Corporate Finance Division. Right now the board are leaving their forecasts for 2020 unchanged which broadly makes sense as the current year doesn't finish until 31st May. The fundamental problem is that deals at K3 Capital are lumpy and tricky to forecast. So while I'm not overly pleased by this turn of events I don't think that the business model is broken and there could be a decent buying opportunity if some of these big deals do actually complete. (Update)

Keywords Studios: There's little doubt the KWS has been under the cosh for the last six months with the share price halving from £20 to under £10. Sadly I didn't have the guts to add to my holding earlier this year even after the positive trading statement in January (which was spot on). Oh well. Impressively all metrics are up, with revenue increasing 66%, adjusted EPS up 53% and even ROCE up to 19.4% despite an additional eight acquisitions. Now it's fair to say that like-for-like sales growth was a lower 10.1% with this being pulled down from an actual 14.9% by poor performance from the recent VMC acquisition. This was known to be a turnaround situation at the time of purchase but clearly integration has been harder than expected. Looking forward the year has started well and in line with expectations (which is good since these indicate a doubling of earnings over the year). Usefully they're also building exposure to the streaming space which is very wise as I expect this channel to be huge in the future. Just wish that I'd bought some more a few months ago. (Results)

Hollywood Bowl: The aspect of Hollywood Bowl which I most like is the simplicity of their business model: all they do is provide ten-pin bowling venues and continuously focus on improving the visitor experience. Sounds simple doesn't it? The key, as with so many things, is getting the execution right and here the board have an excellent track-record of generating organic growth at high margins without taking on too much debt. This means that expansion is measured (two new centres were opened in H1) with older centres selected for refurbishment as required. So in H1 total sales grew 5.3% (with LFL growth of 4.4%) and this is in-line with expectations for 6-7% growth over the whole year. A nicely run business that I'm happy to hold. (Update)

PageGroup: I only bought shares in PageGroup a month ago, on the back of excellent FY results, and have been waiting for this Q1 announcement to see if momentum has continued. On the face of it, yes, with all four regions growing and 12 countries growing over 20%. The only weak spot seems to be the UK, for obvious reasons, and even that managed a 1.7% improvement. In hard terms this means that gross profit grew 11.7% to £208.8m which is in-line with current expectations. What I particularly like about the group is its balanced worldwide revenue stream which exposes it to both high-growth markets such as China and South America along with mature markets like Europe and North America. While this won't protect the group from a global slowdown it does insulate it from local market effects such as Brexit. Looks good so far. (Update)

Games Workshop: As my largest position by some margin I've had my fingers crossed for a positive update and the company hasn't disappointed! Against the backdrop of broker forecasts indicating a 6.8% drop in profits, with PBT coming in at £70.4m, it turns out that PBT will be circa £80m! In other words almost a 15% increase on expectations. With there still being another couple of months until the year end I can see even this improvement being beaten. In addition there's enough spare cash around to fund another 35p dividend with the total for the year coming in at £1.55 (which is a yield over 4%). With forecasts for both 2020 and 2021 sitting at some way below the £80m PBT for this year there's a lot to like about Games Workshop and it's hardly expensive on a P/E of ~16. (Update)

IG Design Group: Good FY trading update here with all regions performing well and results in-line with expectations. For reference these are for 30% sales growth to translate into profit growth of 35-40%. While the acquisition of Impact Innovations has really primed the pump here organic growth still comes in at a shade under 10%. I particularly like the fact that ROCE is expected to increase year-on-year as this indicates that Impact achieves even higher returns than the original IGR business as ROCE here was already trending towards 20%. A very nice business with all parts ticking along nicely. (Update)

Robert Walters: After the recent PageGroup update I was eagerly looking forward to seeing if Robert Walters would report similar buoyant conditions and it looks that way. All four key regions have shown near enough double-digit growth with the UK no weaker than any other business unit. The only country to lag seems to be France and I can understand that what with the "gilet jaune" protests and all. Net cash is also up to £59.5m, which seems decent when the market cap is only £435m. As a result I'm happy to hold here as the world economy appears to be stabilising despite moderate uncertainty in a number of countries. (Update)

XP Power: The share price of XPP has fallen dramatically over the last six months over concerns about weakness in the semiconductor manufacturing sector. It's clear, in this Q1 update, that the slowdown is still a problem with both orders and sales down compared to 2018. That said this only accounts for around a quarter of revenue and other areas (industrial, healthcare and technology) are all growing. In addition the Glassman acquisition from a year ago seems to be performing well in that it has offset weakness elsewhere. According to the directors they're still confident of hitting forecasts (of 10%+ growth) for the year although there will a second-half weighting. While this isn't a welcome move the board have been pretty honest in the past and I regard them as a safe pair of hands. With the P/E ratio sitting at ~14, along with a 3.5% yield, I don't see any reason to do anything with my holding at the present time. (Update)

FDM Group: Expectations for the current year are that sales will increase by 12.5% and earnings will rise by a smaller 5.5% (or perhaps 13.8% if you're using Stockopedia). These figures seem a little behind events with sales up 16% in Q1 as Mountie numbers jump from 3310 to 3848 (also a 16% improvement). While it's early in the year, which explains why the board aren't upgrading their forecast, I do wonder if there's an element of under-promising to deliver great results going on (since previous forecasts have tended to rise throughout the year). One to keep an eye on. (Update)

Focusrite: All things considered I think that TUNE have delivered excellent HY results here so the 5% fall today must have been triggered by a gloomy outlook statement! Looking at this the board reference import tariffs in the US, Brexit uncertainty and foreign exchange rates but these are nothing new. On the upside they have a strong product pipeline for 2019 and have successfully dealt with macro factors in the past. Curiously broker forecasts are for a measly 2% rise in EPS over the year and yet earnings for the HY have leapt by 23% on sales up by 4%. This is a great outcome with profit margins improving markedly and cash up 15% to £26.2m. A slight future concern is that sales in the US were impacted by tariffs rising from 0% to 10% and that these could increase to 25% which would damage demand. Clearly this is a factor worth keeping an eye on but with the business performing well operationally I see no reason not to maintain my holding. (Results)

PPHE Hotel Group: This hotel group has provided an interesting ride for investors this year. At one point the price was up almost 10% before the three largest shareholders placed £149m of shares and caned the price! Still what really matters is whether the business is performing well and this Q1 update suggests that management continue to be on the ball. The key measures to look for are occupancy and average room rate and these are up by 2.6% and 4.3% respectively leading to RevPAR improving by a solid 7.9%. Looking forwards PPH are pushing ahead with their art'otel brand with developments in Hoxton and Battersea Power Station progressing well along with plans for a new hotel in New York. I see little evidence of the pace slackening here and if anything the board are busier than ever - which bodes well for the future. (Update)

End of month summary

The big winner for me this month was clearly Games Workshop with it moving from being my largest holding to becoming by far my biggest holding. It's slightly uncomfortable for it to be such an outlier but as Jesse Livermore wisely said: "It never was my thinking that made the big money for me. It was always my sitting." Surprisingly though Keywords Studios put in the biggest increase, going up over a third, which shows just how out of favour it was before those recent results. Once again K3 Capital is the dog of my portfolio, down over 20% again, but I remain of the opinion that this is a sentiment problem more than anything else. All the broker needs is a bit of good news!

Winning positions for the month: KWS 35%, GAW 32%, LTG 25%, IGR 15%, PAGE 14%, BOWL 14%, GAMA 12%, BOOT 10%, SCT 9%, FDM 9%, III 9%, PMP 8%, ADT 7%, XPP 7%, DOTD 6%, PCA 4%, BOY 4%, BMY 4%, TUNE 3%, PPH 2%, BPM 2%, WJG 2%

Losing positions for the month: RWA -2%, BUR -3%, SBIZ -3%, NRR -4%, BKS -4%, RM -4%, SOM -5%, RFX -6%, K3C -20%

Well, like a lot of other investors, I seem to have had a heck of a month. Possibly one of my best ever although I don't have any records to demonstrate this thought. Overall I made 6.3% for the month, despite being over 10% cash, which leaves me at a remarkable 15.6% for the year so far. Clearly this more than makes up for the disappointment of 2018 but equally I'm keen to preserve this performance rather than let it disappear as happened six months ago. At the same time I'm seeing very few quality shares near any level where I'd be happy to make a purchase and that also makes me nervous. This isn't enough to make me want to sell up and sit in cash but, as ever, I think that it's sensible to remain attentive to market conditions. Fingers crossed that these remain calm!

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

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