August 2020 Portfolio Update

I generally see August as a month in which the market goes to sleep and nothing much happens. Certainly very little company news emerged and trade volumes in smaller shares dropped hugely. However US markets continued rising at escape velocity and this enthusiasm has rubbed off on the UK market even if we are the poor cousin (which we are with Apple reaching a market capitalisation greater than the entire FTSE 100). Actually the latter fact is a sign that investing just in our local stock market is something of a fool's errand as we really are turning into a global backwater. This doesn't stop us making money, of course, but the UK really is home to few world-leading companies and that's disappointing.

Still most of my existing holdings moved up this month, which was nice, even though most of the action looks to have been driven by improving investor sentiment. One exception is Plus500 which came out with excellent results and a very substantial dividend. Analysts still seem to believe that earnings will fall back massively as markets normalise and I'd agree that profits this year have been super-normal. However I see markets as remaining pretty volatile for quite a while yet and Plus500 has bought onboard a huge number of new users who should continue to trade for a while yet if they've made money in this bull market. It's also pleasing to see the Boohoo share price recovering from recent negative press coverage. There's no doubt that the rag trade has some issues with working conditions and dodgy suppliers but I don't think that Boohoo depends on this to be profitable. Instead I think that management have created a well run, growing organisation that has done incredibly well from the lockdown. So I remain keen on the shares and expect them to re-rate on the next trading update.

On the downside there's very little to report although I can understand why IG Design is in the dog-house. Their last update was really quite uninspiring and it's clear that they expect to trade poorly this year even if most of their profits are made during the Christmas period. What really seems to have unnerved investors though is seeing the CEO offload all of his shares in the company. I have no idea why he's done this but it does suggest that he has little faith in the company doing well in the short to medium term. It's a shame as I rate him and the rest of the board for managing the company very well in recent years. I probably should take this as a sell signal, like so many other investors, but I remain hopeful that IG Design will actually do better than the current gloomy expectations suggest.

Overall then a solid month with the portfolio gaining 3.8% to reach 11.8% YTD. In hindsight I'd have done a lot better by buying US tech shares and the FAANGs (along with Microsoft) really were hiding in plain sight when the lockdown began in March. Even then it was fairly obvious that tech giants providing cloud-based, remote-working (or stuck at home) software and services would do well but I didn't expect them to hit the ball quite so far out of the park. It's a remarkable turn of events but I guess that these companies haven't become the biggest in the world by accident.

Risers: VLX 31%, SDI 25%, PLUS 22%, TSTL 19%, SLP 18%, K3C 14%, TM17 13%, FDM 12%, AFX 12%, BOO 11%, CDM 10%, AVCT 10%, SCT 10%, BLV 10%, SPSY 8%, LOOP 7%, BUR 6%, III 5%, CRW 5%, AJB 4%, TAM 3%, LIO 3%, SPR 2%, GAN 2%, CCC 2%, RWS 1%

Fallers: MGP -1%, FRAN -3%, HAT -12%, DRV -12%, IGR -13%


Hipgnosis Songs Fund Bought at 100p - August 20

I've known about Hipgnosis since it came to the market in mid-2018 with its promise of non-correlated returns. For the first two years the share price went nowhere and I remained concerned by who exactly was going to be enriched (management or shareholders). However since March it's become clear that content remains king and that the volume of songs being streamed is on a steep upwards trajectory. This provides a tailwind for Hipgnosis although, at the same time, royalty revenues are being impacted by the drop in live events and other social gatherings where licensed music is played. Anyway over the last two years management have been voraciously hoovering up music catalogues and raising a lot of money to keep the deal flow running. One of these raises involved offering C shares in Sep 2019 with these converting to ordinary shares in Feb 2020 when 95% of the proceeds had been invested. I quite like this mechanism and when Hipgnosis repeated the trick in July, with a retail offering on PrimaryBid, my interest was piqued and I put in an application. In the event the placing was oversubscribed, raising £236m, and the board expect to deploy the proceeds over the next 3 months. In fact 5 new catalogues have been picked up in just the last month alone and I expect the C shares to be converted relatively promptly. From hereon it'll be interesting to see how active management improves the return on these acquired songs and whether any adverse impact from Covid-19 can be mitigated. For now my small position will ensure that I keep my eye on Hipgnosis.

Caledonia Mining Bought at 1475p - August 20

I've been following Caledonia Mining for a couple of years but more out of interest rather than as a serious investment opportunity. The reasons for this are that Caledonia is a single-site gold miner operating in Zimbabwe that doesn't actually own its mine outright. These are all good reasons to make any sensible investor run a mile. On the upside the company has remained profitable, despite volatility in the gold price, and management have done exactly what they said that they would do back in 2018. Essentially this is to sink a new shaft in order to reach a lower ore body and dramatically increase the life of the mine. This will also decrease the all-in cost of production and free up cash-flow for use in paying dividends or acquiring nearby production opportunities. This is all great but why buy now when the share price has tripled since January? Well management have acquitted themselves very well during the pandemic with output being essentially unimpaired by national lockdowns. As a result they're in a good position to benefit from the sharp increase in the spot gold price and my feeling is that gold is likely to climb a lot higher (with a lot of volatility). The fact is that money is being pumped into the global economy by central banks and that inflation is a very obvious mechanism to reduce the debt load in real terms. You also have a lot of investors looking for a safe haven and I don't mind having a little bit of exposure to gold in my portfolio to benefit from this effect. So with the share price coming off 25% from recent highs I've decided to dip my toe in the water with Caledonia.

Property Franchise Group Bought at 188p - August 20

I've been considering The Property Franchise Group as a pair trade with Belvoir for a little while now. They both operate in the arena of property letting with franchisees sitting on the front line - which makes the franchisees very keen to grow sales. They both have a property sales element with trading here being boosted by a combination of pent-up demand and the short-term reductions in stamp duty. Both businesses have proved remarkably resilient during the lockdown and both seem to be bouncing back strongly. However I've avoided TPFG before now as it's quite illiquid and the existing analyst forecasts haven't changed since last October (making them very stale). So I'm wary of results missing these forecasts and having the share price crater as investors rush for the exit. Lately though I've been reassured by the HY trading update, in July, where the period has seen a strong performance with growth returning in June and July. Remarkably total sales are down only 3.7%, although the impact on the bottom line will be greater, and net cash has doubled to £5.7m. This will allow for payment of the interim dividend which is a step in the right direction. I'm still a bit cautious about how the HY results will appear but if the outlook is positive then I expect investors to remain keen on this low-rated, high-quality company.

Best of the Best Bought at 1688p - August 20

This is definitely one of those companies where I had manifest opportunities to get on board and yet failed to execute. I guess I was put off by its small size and low liquidity due to huge director shareholdings. Still the first point has been dealt with by the share price quadrupling in the last four months. The latter is still an issue but may disappear if initial expressions of interest around a sale of the company come to pass (as was notified in mid-June). So why get involved now with the share price so buoyant as investors chase those few shares that are freely available? Well this is a company that has absolutely benefited from turning itself into an online gambling operation and it seems plausible that the triple-digit growth achieved last year could easily be repeated again this year. Right now analyst forecasts are for earnings growth of 86% but the AGM trading update will appear in the next week or two and I suspect that sales growth has remained strong. Equally there could be disappointment if the mooted sale comes to nothing but a forward P/E of ~22 is very undemanding considering the growth on offer. So if the share price does take a dive I expect the dip to be short-lived and to represent an excellent buying opportunity.

SDL Bought at 833p - August 20

As mentioned below I think that the proposed merger of RWS and SDL makes a lot of commercial sense. It's also true that the RWS management have a good track-record of integrating acquisitions and combining them successfully with existing entities within the group. There is some risk of the competition authorities objecting to the deal but if the translation sector really is as fragmented as RWS state then there is no good argument for preventing the deal. Still RWS investors seem reluctant to back the board on this venture as RWS shares have slid 18% since the announcement and the decline shows no sign of levelling out. I find this perplexing as strategically the deal makes a lot of sense in that RWS needs a market-leading AI translation tool (and they already send some business to SDL) while SDL will benefit from being part of a wider ranging, more stable group. It can be argued that the price being paid is too high but it's an all-share deal and so the proposed dilution is independent of the RWS share price. Anyway I like the look of the proposal and decided to buy some shares in SDL on the basis that they are potentially just discounted RWS shares (with a discount of 10-20% being worth having). Time will tell whether I've jumped too soon but the idea made sense at the time.


Judges Scientific Sold at 5448p - August 20 - 7.1% gain

This is a curious sale in that I actually really like the business and the track-record of management speaks for itself. However I found the HY trading update in late July to be unimpressive and I was surprised that the share price didn't fall back. Instead it has remained strong with recent investor enthusiasm pushing it up towards recent highs. The problem, for me, is that order intake has been heavily impacted by Covid-19 with standard routes for sale generation blocked by travel and other restrictions. While there has been some easing on this front it's going to take quite a while for scientific conferences to become viable once again. Analyst forecasts have been reduced significantly to reflect this uncertainty, with these pointing to a 24% fall in 2020 EPS to 149p, but they also suggest a strong recovery in 2021 with EPS rising to 181p. I don't know if either of these expectations will come to pass but they do put the business on a P/E of 30 or more and that feels pretty rich. As a result I'd suggest that the upside is limited even with a decent recovery while there's quite a lot of risk to the downside. So I've taken the decent price on offer and will watch what happens now at Judges with interest.


K3 Capital

As mentioned last month K3 Capital raised just over £30m to fund the acquisition of complementary businesses. This diversification makes strategic sense to me as their core business has a very lumpy revenue profile. Here we find that Quantuma Advisory Limited is being purchased for just under £27m with a maximum combined earn-out of £15m in cash plus 645,513 growth shares. This new division provides advisory services including restructuring and insolvency, corporate finance and forensics. This is really a play on the corporate recovery and insolvency market with the opportunity being one of driving growth through the existing marketing engine and national sales force. As such the purchase should be immediately earnings enhancing. As importantly the Quantuma CEO (Carl Jackson) is staying on, and joining the board, which suggests that he's not trying to cash out while the going is good. Given the price this may well be the last big acquisition possible at the current time and now it's up to the board to demonstrate their integration skills. (Update)

Codemasters Group

This is an excellent update for the current full-year which runs until the end of March 2021. So far trading has been particularly strong and sales/EBITDA will be significantly ahead of current market expectations. With analysts raising their 2021 forecasts by 7%, to 17.6p of earnings, this implies year-on-year growth of 98% (following on from 72% growth in 2020). In this light the forward P/E ratio of ~22 feels low even with the share price heading towards 400p. At the same time current forecasts for 2022 show no growth in EPS at all and this seems out of step with how the business is trading. I understand that it's hard to make predictions when sales depend on big, intermittent game releases but even so I believe that analysts are behind the curve with Codemasters. More upgrades are likely in my view. (Update)


This has been an astonishing year for Plus500 with very high levels of market volatility driving a steep rise in customers numbers and trading levels. This has fed through into multiple positive trading announcements and a doubling of analyst estimates for earnings in 2020. At the same time the forecasts for 2021 have remained stubbornly flat and point to a massive 40% drop in EPS for 2021. I have some sympathy for this divergence since volatility has been and will continue to drop as markets normalise. This will reduce both sales and profits. On the other hand Plus500 have onboarded large numbers of new customers and it's likely that a decent proportion of these clients will continue to trade even if at reduced levels. At the same time the business has shown that it can scale, both up and down, to react to changes in demand. For these reasons I can see why the board are very confident about driving future growth and I would suggest that investors are perhaps too wary of getting involved. As for H1 total sales grew 281% to $564m and EBITDA grew 452% to $361m. Much of this rise occurred in Q1 but Q2 still saw growth around the 150% level. At the bottom line earnings jumped 6x to 298c from 45c in 2019 (compared to the FY forecast of 267c) which leads directly to the dividend tripling from 27c from 95c. The latter is quite volatile, as dividend pay-out is linked to earnings, but this interim payment will be one of the largest that I've ever received. At the same time the board like to pay special dividends and there will certainly be one related to a recent judgement which reduces their corporate tax rate from 23% to 12%. As ever there remains risk from further regulation and market normalisation but right now Plus500 are flying. (Results)

H&T Group

What we have here is a case-study of what happens when analysts haven't changed their forecasts all year and then a company releases its results. It's abundantly clear that unchanged forecasts come from la-la land and that it's important not to get sucked into their false promise. At H&T full-year earnings were 'predicted' to come in at 48.6p and yet within a week of these HY results they'd dropped to 33.3p. Clearly these broker forecasts were junk and yet the share price hasn't moved because I believe that investors were already factoring in the impact of Covid-19. What we knew was that all stores closed on 24th March and that over the 12-31st May period the estate then reopened. So roughly two months of store sales were lost with online taking up some of the slack. A good result then might be for sales/profits to be a third down from 2019 although the calculation is slightly more complex as HAT now has 252 stores compared to 182 last year. On a per store basis sales fell 42%, gross profit fell 39% and all other profit figures roughly halved. Overall this isn't a bad result, given the circumstances, and trading should bounce back although business activity is yet to reach pre-closure levels. Sticking a finger in the air I'd say that the impact of Covid-19 is on par with losing three months of sales for H&T and so FY earnings might come in at ~75% of those for 2019 which would be ~33p. Remarkably this is exactly the analyst consensus and perhaps they've just managed to catch up. Moving forwards the business has zero net debt, a proven model, limited exposure to FX and a tailwind from the rising gold price. On this basis the shares look good value at around 300p and there's more chance of a profit upgrade rather than a downgrade in the coming months. (Results)


It seems that Softcat has successfully negotiated the Covid-19 lockdown with profits to be slightly ahead of board expectations for the year. Given that these expectations have themselves slowly risen over the past year, by about 10%, it's clear that trading has been consistent over that period. On the other hand Softcat haven't received an outsize, one-off benefit from the surge in home working since March. Still cash generation has remained strong and the board are intending to pay the skipped interim dividend along with the final dividend which is welcome news. A good performer in the portfolio. (Update)


This is my sole US holding and it's fair to say that it's been quite some ride since the shares listed on NASDAQ a few months ago. The big driver for GAN is the slow but steady stream of US states that are legalising on-line casino and sports betting. The potential market is huge and GAN are well placed to benefit by providing the picks-and-shovels needed by casino operators. As such it's no big surprise to see revenues up by 99% year-on-year with a 110% increase in real money Internet gaming. Great operational leverage converted this growth into a 459% rise in gross profit with bottom-line profit coming in at break-even (ignoring the one-off $8.8m of listing costs). Given that GAN has spent many years inching towards profitability this is quite an achievement. Looking forwards the company expects to see the Michigan market activating in Q4 with new clients (large and small) being announced on a regular basis. On this front GAN have just picked up Churchill Downs, a Tier One client, which will lead to a step change in revenues over the next few years. Given that this business was won from a competitor it's reasonable to believe that GAN really do have the market-leading platform that they claim to provide. The only sour note in these results comes from FanDuel taking their sports-betting business in-house from the end of August. This generated $3m in sales last year, making it a disappointing loss, but US investors seem to have lost their heads over this unexpected setback and have aggressively sold down the shares. This seems perverse to me, given how positive the Q2 earnings call (transcript) was but what do I know? Either way GAN are benefiting from a huge tailwind and seem to be making the most of it. (Results)

RWS Holdings

This is definitely a surprise announcement with RWS looking to merge with (or takeover) its competitor SDL. Both operate in the language services space, so RWS isn't stepping outside of its circle of competence, but SDL are focused on technology and machine translation. This is very complementary to the RWS strengths of localisation and specialist technical translation. When combined the group will be the largest language services and software company in the world with clients in most territories. From initial due diligence it appears that there is little overlap in their largest earning clients which implies that few sales should be lost due to the provision of duplicate services. Further diligence may uncover some issues at lower earning levels but with luck these won't be material. Instead the board hope to see cross-selling and up-selling opportunities from gaining access to SDL customers and vice-versa. As a result the RWS board expect to see double digit earnings per share accretion in the first full financial year post completion which sounds promising. On the whole this feels like a sensible merger although whether the price being paid for SDL is too high is another question. At the moment SDL is starting to benefit from a strategic recovery process but the final outcome of this is unknown. Still the RWS board believe that they understand SDL well enough to make this offer and up until now they have an excellent acquisition track-record. Finally it's noted in the announcement that both companies are trading in-line with their prior HY updates which is worth knowing. I like the look of this corporate action and hopefully there will be no issues with the various competition authorities that need to be consulted. (Takeover)

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

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