February 2021 Portfolio Update

Well that was certainly a month of two halves. For the first two or three weeks it was all plain sailing with, I think, my gain over the period edging towards 10%. Sadly almost all of this performance was given back in the final, tumultuous week. With IG deciding to drop the small-cap market like a hot potato (and a particularly badly handled hot potato at that) and everyone suddenly getting spooked by the prospect of inflation I think that I saw red all week. Once again the markets proved that gains tend to be slow on the way up while losses are fast and brutal on the way down.

That said I don't think that it's time to strap on the tin-hat just yet. For one thing the UK economy is still shut-down, as are many other countries, and it doesn't look as though we're going to unlock at more than a snail's pace. This artificial limit on supply will ensure that demand goes through the roof when people are released from their bonds irrespective of the fact that so many of us just want to get out there and live. So the companies which have survived should do very well over the remainder of the year. In addition interest rates remain so incredibly depressed that you almost need some inflation in the system to even start the process of recovery. The trick will be balancing this inflation to ensure that it doesn't get out of hand. It's this part that has everyone worried.

Surprisingly, after all that excitement, I managed a rise of 1.1% for the month putting my YTD return at 5.5%. About half of my holdings rose in February and the other half didn't. Leading the way, for a second month, is Best of the Best as investors reacted positively to the end of the Formal Sales Process. I'm glad to see the back of this distraction and very pleased that the board didn't fall for a derisory offer. This business is going places and I'd like to stay for the ride. Also up strongly was Sylvania Platinum as the PGM basket price continues to soar and various newsletters repeatedly point out just how cheap the shares are at current levels. On the flipside I can't identify any particular reason for shares like Gaming Realms or Computacenter being down by 10% or more on no news. I expect that it's just the usual market volatility that is part and parcel of investing.

Risers: BOTB 26%, SLP 18%, FNX 13%, GAN 9%, K3C 7%, RWS 7%, KNOS 6%, TND 4%, GAW 3%, DRV 2%, CMCL 2%, PLUS 2%, G4M 1%, STAF 1%

Fallers: BOO -1%, BUR -1%, SCT -3%, BLV -3%, GAMA -6%, VLX -6%, SPSY -8%, DX. -9%, TM17 -9%, LUCE -9%, AFX -10%, CCC -11%, GMR -12%


DX Group Bought at 33p

Since first buying into DX at 17p last October (I was late to the party) I doubled my position last month as a late reaction to the positive AGM statement. At the time I knew that a trading update was in the offing and determined that the group was likely to have continued trading strongly. This was partially a hunch, given news around how busy all delivery companies were over the New Year, but also a bet on the board continuing with their successful strategy. Anyhow the trading update was excellent and analysts have raised their 2021 earnings forecast by a mighty 33% (the 2022 estimate is unchanged for now but the direction of travel is clear). So I thought that I was being pretty clever by topping up during the mid-morning slump (avoiding the excitement at market open) but in the last few days the price has fallen back to support at 32-33p. It doesn't matter in the long run but this is another reminder that if you don't see a breakout on news then the chances of consolidation are high.

Games Workshop Bought at 9992p

I've been buying back into Games Workshop pretty steadily over the last few months as it has unleashed a sequence of positive trading updates. Over this period the share price has been consolidating between £100 and £117 with occasional forays outside these levels during moments of optimism and pessimism. The reason for this, I believe, is that the Buffettology Fund has been repeatedly running into a hard limit that prevents them holding more than 10% of the fund in a single share. So even if Keith Ashworth-Lord remains confident in the business he's still had to reduce his holding and sell shares. This will remain an ongoing technical issue but eventually the shares will break out if trading remains strong. Still this effect has been rather fortunate as the volatility has allowed me to bring my average buying price down quite substantially and I now have a significant position in the business. With other indications suggesting that licensing efforts remain strong and that games (both physical and digital) based on Games Workshop IP are selling well I don't see an underlying reason to be concerned about the future.

B&M European Value Retail Bought at 566p

It's fair to say that B&M performed extremely well during the pandemic which led to a steady increase in analyst forecasts and a re-rating of the shares. Despite this B&M still passes just about all of my quality, momentum and value screens which makes it a rare beast indeed. In the last week the share price conclusively broke out above resistance at 570p, hitting 600p, before retreating 5% to test the new support level. These factors suggest that the odds are in my favour if I invest now. Add on the strong news flow of the last six months with forecasts being ratcheted up on a continuing basis and you've got a business that's on a roll. The last update, at the beginning of January, indicated that group revenue rose 22.5% in Q3 with UK like-for-like growth of 21.1%. As a result of this trading performance the board decided to voluntarily repay £80m in business rates and pay another special dividend, this one amounting to £200m. I'm not surprised that adjusted EBITDA will come in ahead of consensus estimates. Looking forward I think that B&M will continue to do well as the lockdown eases since people are eager to get out and spend while the business has proved its resilience and attractiveness to customers.

Calnex Solutions Bought at 121p

I've decided to buy back into Calnex at roughly the price I sold at in January for one key reason. We now have a recent trading update providing new information. Most importantly customer spend has remained high in H2 which means that sales will be ahead of expectations. In addition lower costs have led to higher margins which means that profits will also be ahead of expectations. This is an excellent result so soon after listing. However the CEO does say that customer orders may have been pulled forward due to the pandemic, although I don't see how the two are linked, and that spending is reverting to more normal levels. As a result forecasts haven't been raised for 2022 and for now these show a slight dip in earnings. Personally I'd rather have sales being made now, rather than in the future, and I suspect that 2022 will be a good year as the 5G transition continues. If this leads to upgrades in due course then I'll add to my position.

Ferrexpo Bought at 354p

With all of the talk of inflation, and a commodity boom in the wings, I decided to initiate a position in Ferrexpo as the shares broke out to new highs above 350p. The investing thesis is pretty simple in that Ferrexpo is a cheap, quality company with rising analyst forecasts. Of course mining companies are almost always assigned a low valuation multiple on account of their dependence on volatile commodity prices along with a lengthy capex cycle. These businesses are primed to boom and bust. However the 2020 forecast has more than doubled in the last year, to 88.9p, while the 2021 forecast is up almost 4x to 109p. Over the same period the share price is up a bit less than 3x which means that it's lagging the consensus upgrades. An additional factor here is that Ferrexpo has ramped up production recently with a 22% rise in iron ore pellet production from Q3 to Q4. Having completed this expansion project it's easy to see why earnings are projected to rise by more than 20% and the company is in a position to pay multiple special dividends.

Sumo Group Bought at 324p

With Codemasters disappearing from my portfolio I've been looking for a replacement gaming company to sit alongside my Team17 holding. Sadly there isn't much of a choice in the UK market with just Keywords Studios, Frontier Developments and Sumo Group being available for investment in the UK. Comparing these three Keywords has performed extremely well since listing with its roll-up strategy driving consistent growth. However it's on an extremely high P/E rating with 215% EPS growth in 2021 required just to bring the multiple down below 50. Frontier Developments is similarly highly rated but with the impediment that earnings have been historically lumpy with a big rise in one year consistently followed by a fall in the next. That leaves Sumo which is a little less expensive, on a P/E of ~45, due to the fact that it only moved into profit in 2019. So the track record is much shorter and it's hard to know if the forecasts for 30% growth or more will actually be achieved. Right now though we know that sales and EBITDA will be ahead of consensus market expectations and that the shares are trading below where they were when this announcement was made. The board are rightfully very positive about the prospects for 2021 with the potential for further acquisitions. Now feels like a good time to be a part of the Sumo journey.

Gear4music Bought at 760p

I was perhaps a bit hasty buying into Gear4music back in January when they announced results to be ahead of recently upgraded consensus market expectations. This seemed like a slam-dunk buying opportunity to me but the shares immediately nose-dived, rather than breaking out, and fell back almost 20% in a month. This behaviour made little sense to me and I wasn't entirely surprised by there being another ahead of expectations announcement little more than 4 weeks later. Apparently EBITDA will now be no less than £18.2m, up from £16.5m, which indicates that UK and European trading continues to be strong. With this in mind, and the share price at a recent low, I was ready to double my holding at 8am when the market opened. As an aside trades from the day before indicated that you could buy at 729p and sell at 713p. I wasn't sure that I'd be lucky enough to buy at around 730p and reckoned that I might need to go in at the 750p level given how market-makers mark up prices after a positive announcement. In the event shares opened at 760p and closed at 810p - the moral here being that it's not worth quibbling about a few pence around your target price when you're investing for a much larger long-term move.


RWS Holdings Sold at 610p - 2.1% gain

This has been a steady, high quality performer over a good number of years. Sadly the SDL acquisition last year seemed to spook a lot of investors and the share price has been persistently weak since then. This doesn't worry me too much since the RWS board have a consistent track-record of successful integration and I think that they've under-played the benefits of the merger. That said there could be ongoing issues now that we've left the EU and I probably bought more of the shares than was prudent at the time of the acquisition announcement. So with this in mind, and to give myself the opportunity to buy elsewhere (such as with DX Group), I've reduced my position by half. I think that RWS will continue to do very well in the medium term though and will probably increase this position again if trading proves stronger than anticipated.

GAN Sold at 1927p - 182.5% gain

Here we have one of my most outstanding performances ever what with GAN moving its listing to the US and being perfectly positioned to ride the wave of online gaming deregulation. I do not think that the story is over yet, not by a long shot, as more and more states pass enabling legislation in the next few years. So I plan to maintain my exposure to this trend, through GAN and GMR, for a good while yet. However with the share price at GAN heading to an ATH, causing GAN to become almost 20% of my portfolio, I've decided that a small top-slice would be sensible. As a result I've sold one-sixth of my holding to lock in some of the gain. This is my first disposal and with luck it won't be the last if the share price continues heading upwards. Given that analyst forecasts are moving higher this point may arrive more quickly than expected.

Burford Capital Sold at 610p - 41.8% loss

I've held Burford for a number of years now, through the bear raid and beyond. I still believe that the business is sound, cheap at current prices and cash-generative in the medium term. However, I thought that the US listing would provide a rerating catalyst on the basis of the shares being listed in a much more liquid market with much greater disclosure requirements. The shares did advance on this news but not significantly. I also thought that the recent results, indicating the resilience of the business during a pandemic, would stimulate some investor interest. Again I was disappointed. Frankly I don't see what else the directors can do apart from keep churning out decent results. At any rate I've halved my position here to release funds for investment elsewhere on the basis that I'm incurring a real opportunity cost by holding Burford. I still think that they'll come good eventually although it may require success in Argentina to unlock the value inherent in the business.


DX Group

This is a super update. In short DX will materially exceed current market expectations for adjusted PBT (no EBITDA here). This performance reflects strong progress at DX Freight which is rather important as it's been loss making for quite a while now. Given that turning around this side of the business has been a key goal for management it's pleasing to see that both volumes and margins are improving. Previously I asked the directors why they didn't just sell the freight business and concentrate on the profitable DX Express segment. Their reply was that they were confident that they could materially improve DX Freight and that this would make the group as a whole much stronger. In other words the board are fully committed to this business. Because of the new lockdown margins at DX Express are slightly lower due to higher B2C deliveries and less B2B work but this will reverse when the lockdown eases. Impressively the analyst estimate for 2021 has just been lifted by 33% from 1.06p to 1.41p putting the shares on a P/E of ~23. Hardly expensive given the business transformation. If the shares breakout over 38p then there's no overhead resistance until about 80p. (Update)

Staffline Group

This is another turnaround story, like DX, with new management and a fundamentally sound business. However the new board haven't been in place that long and we're earlier on the recovery path. So the year ending 31st December 2020 won't have been profitable at the bottom line but, as this update indicates, operating profit will be marginally ahead of expectations. More importantly significant progress was made improving the operational, financial and governance processes and board composition, including strengthening the Group's financial position. These root and branch reforms put the group in a much stronger position for 2021 and I happen to believe that economic tailwinds, as we emerge from lockdown, will boost this recovery. So I can see why market forecasts point to an EPS of 3.6p for 2021 with the P/E rating being ~15. This is inexpensive for a start but when you consider that the group produced annual earnings of ~45p in 2018 (adjusted for a doubled share count in 2020) then you can see the potential for a re-rating. There remains the potential for another fund raise, to further strengthen finances, but the company is in a much better place than it was a year ago due to a focus on working capital. There remain challenges but the board remains cautiously optimistic. As do I. (Update)

Tandem Group

It's fair to say that Tandem does not meet my usual investment criteria. It is small (£26m market cap), illiquid (>5% spread) and ignored by all brokers which makes it hard to value. It also used to have a hostile board and little investor interest (as indicated by an unchanged share price for much of the 21st Century). However in the last six months the shares have tripled as Tandem benefited from high lockdown-induced sales and a refreshed management team. I picked up some shares a few months ago on the basis that the shares were still cheap and there was a chance that sales could continue growing at a decent pace. As it happens H2 revenue came in at £20.2, after a strong Q4 offset a weaker Q3, giving FY revenue of £37.1m. This is 4% lower than 2019 but PBT will be materially higher due to a combination of reduced expenses and higher margin domestic sales. No numbers are given around what the actual profit will be. The outlook is strong though with sales to the end of January up 75% compared to 2021 with the forward order book also substantially ahead. There are some issues around freight though, with ballooning rates making some imports unprofitable, while some product lines are both hard to get hold of and subject to material price increases. So the trading environment is hardly benign but this statement is clear about the measures being taken to mitigate these issues. (Update)

RWS Holdings

This is a nicely positive update. The original RWS business has seen good sales growth in Q1 with a significant double-digit percentage increase in adjusted PBT. The newly acquired SDL business is performing in-line which is perfectly reasonable at this point. Integration of SDL will be a primary focus this year and so far this is progressing to plan. Beyond this no specific guidance is given. We'll learn more in the updated scheduled for April following the half-year completion in March. (Update)

Gaming Realms

It seems that Gaming Realms is on a roll with FY20 revenue to be 4% ahead of expectations. Apparently December was a record month with strongly growing licensing sales driving this performance. The positive momentum has continued into 2021 which I can well believe given the volume of recent news flow. Particularly exciting is the provisional supplier licence granted in Michigan and a multi-state contract directly with BetMGM. It seems to me that Slingo is a valued brand and the board aren't over-egging things when they refer to a strong pipeline of new partnerships. It feels as though the company is at a turning point with the potential for profits to come in above market expectations. (Update)

K3 Capital

These are the first results from K3 Capital following the transformational acquisitions of Quantuma and randd. Considering that this period covers the summer months of the pandemic it's pleasing to see decent sales growth from the new businesses. In 4 months of trading Quantuma made £9.3m of sales, up from £7.7m, while randd made £2.6m (up from £2.1m). The core KBS business fell back from £8.0m to £5.9m, which is not especially surprising, but even so the adjusted EPS was up at 6.9p compared to 6.25p despite the hefty increase in share count. Although, it's fair to say, this EPS figure is calculated using an average of 61.7m shares over the period compared to the current share count of 68.5m. This is technically correct although if you take the full share count then EPS is basically flat year-on-year. This suggests to me that the acquisitions were an excellent move and that we now have a high margin, cash generative, and debt free group capable of significant cross-selling. This is borne out by the positive outlook which states that KBS is seeing strong levels of performance while randd and Quantuma are growing steadily despite the reduced insolvency market due to Government support. This potential growth is backed up by analyst forecasts indicating 33% EPS growth in 2022 and 29% in 2023. It seems to me that we could see an upgrade to the current forecast, which the business is comfortably in-line with at the moment, and future forecasts as a result of organic growth and further bolt-on acquisitions. With this potential being available for a P/E of ~23 (along with a 3%+ yield) I think that K3 Capital is good value at anywhere below 300p. (Results)


As expected these results for 2020 are extraordinary with revenue up 146% to $872m, earnings up 249% to 471c and cash up 103% to $594m despite continuous share buybacks and a very high dividend pay-out. An absolutely remarkable performance which won't be repeated in 2021 and we should be thankful for that. This is why current forecasts have earnings halving in 2021 to just 224c (although this estimate has risen 60% in the past year, from 139c, so earnings upgrade momentum is very positive). Still even with such a drop in earnings the forecast P/E is under 9 so you're hardly paying a high price for such a cash-generative business. What is interesting to me is that platform usage remains elevated so far and that the board are bringing in targeted hedging to reduce market risk. The latter change will address some of the criticism that Plus500 benefits from customers losing - which is true but equally Plus500 loses when customers win which is what happened in Q4 2020. Really this all ties in with the plan to change Plus500 from a CFD platform to a multi-asset fintech group with products beyond CFDs. This seems like a sensible way to reduce revenue volatility and the company certainly has enough cash to fund the announced spend of $50m on R&D over the next three years. Still it's hard to know how the share price is going to react in the short term as markets normalise and the next update won't appear until early April when Q1 is complete. Hard to call. (Results)

Burford Capital

On the face of it this comes across as a solid year-end update even if PBT will be modestly down compared to 2019. For once analyst forecasts appear to be on the mark with the consensus being a 10% drop in EPS to 90.3c. If this is the outcome then Burford will be on a P/E of 10 which feels pretty cheap given the narrative to this announcement. Management talk about this being the best year ever for the business with record realised gains and cash generation with the total portfolio larger than ever at $4.6bn. This didn't make it to the bottom line because most of the realisations occurred in the managed funds but still this suggests that the company is making sensible investment decisions. This success takes the concluded case ROIC up to 92% which is the highest-ever year-end level. A key question with all of these legal finance companies is whether their claimed profits actually turn in to cash. For Burford almost all of their realisations turned into cash in 2020 with end of year receivables just $30m (compared to cash receipts of $519m). That seems like a good conversion ratio. On the downside new commitment rates fell sharply in H1, which included the first lockdown, before rebounding in H2. However full year commitments were still down around 40% compared to 2019 since it wasn't possible to make up all of the lost ground. I do wonder how this drop will impact future profits but hopefully it'll come out in the wash due to the variable durations of legal cases. On the whole then I'm happy with this update but it's clear that investors still aren't bullish on Burford. (Update)


A good set of interim results here with this being the third six-month period to be impacted by the pandemic. As a manufacturer of medical disinfectants the impact on hospitals globally has given with one hand and taken away on the other. On the downside a sharp reduction in medical procedures has pared back sales in the Medical Devices segment which is by far the largest generator of revenues for Tristel. Fortunately sales of the Cache Surface disinfectant system rose steeply last year before falling back to a higher, normal level in Q1 and Q2. These factors, along with some Brexit stockpiling by the NHS, drove overall sales growth of 15% in H1 with 20% of this rise overseas and 8% in the UK through increasing volume rather than price rises. This stronger growth in foreign markets, over a number of years, has allowed overseas sales to reach almost 60% of the total and I don't see this process changing as the UK is a mature market for Tristel. Further meaningful growth will come from India, where approval has been received, and USA/Canada where the lengthy approval process continues. Positive news in the latter territories will be massive for Tristel. In the short-term it's unclear how H2 will play out since the NHS may or may not recover to previous levels of examination activity before the end of the financial year in June. Nevertheless I'm encouraged by how well the board have managed the pandemic so far and I can see non-UK sales making up for any shortfall in the UK. (Results)

Fonix Mobile

With any new listing it's a relief to see positive early updates/results as an indication that investors haven't been sold a pup. In the case of Fonix sales are up 25% with this growth filtering down to both the adjusted EBITDA and EPS income lines. All three business segments of payments, messaging and managed services grew during the period and in-line with management expectations. As reported in the IPO documentation no customers have been lost for quite a few years, which continues to be the case, and 21 new customers have signed up from different sectors. This growth should continue, with a strong pipeline of new business opportunities, which rather suggests that analyst forecasts are behind the curve. A simple doubling of the H1 numbers implies sales of £49.2m and EPS of 7.2p which is 5-10% ahead of how the single broker covering Fonix sees things playing out although there is an element of seasonality to the business so it's best not to get too carried away. Still on a P/E of ~22 Fonix isn't exactly expensive for a high ROCE, cash-generative business with strong operational gearing and a prospective dividend yield of 3.5% (with 75% of profits being paid out as a dividend). It may take time for investors to become comfortable with the business model but this is a simple operation which clearly meets a customer need with its technology platform. Definitely worth holding. (Results)

Sylvania Platinum

It's fair to say that Sylvania is picking up a lot of investor interest as PGM prices continue trending upwards. There's an argument to be made that Sylvania is dirt cheap, on a P/E below 5, and I'm not going to disagree with that conclusion. In the space of a year the average gross PGM basket price has jumped from $1830/oz to $3184/oz and this re-rating shows no sign of slowing as Rhodium continues to be bid upwards. Rather fortunately this increase in selling price masks a 9% decline in production from 40,003 ounces to 36,335 ounces as the scale-down in host mine operations reduced feed volumes. It's not clear when this volume effect will reverse, given how the chrome market remains depressed, but managers at Sylvania are working hard to boost production by other means. One possibility being explored is looking to re-treat low PGM grade tailings that would otherwise have been sterilised. If this can be done profitably, which seems plausible at current PGM prices, this should boost production and expand operational life beyond the current 10 years remaining. Frankly I don't know how these moving parts are going to play out but management are confident that they'll hit their target of 70,000 PGM ounces for the year and historically they've delivered on their promises. So I'm happy to collect my windfall dividend here and retain some exposure to precious metals as commodity prices increase. (Results)

Best of the Best

This is the update that we've all been waiting for. Trading in Q3 remains strong and the company is on track to outperform its previous management expectations driven by the traction of the pure online model and increased confidence in marketing investment. The excellent cash conversion of the business is apparent as the cash balance is above £10m despite the payment of a £3.75m special dividend in February. At this rate we can expect quite a few more chunky dividends. Even better the Formal Sale Process has been concluded without any party making an offer. This is excellent news as Best of the Best is only just getting started, in my view, and I expect the CEO, William Hindmarch, to continue exploring ways to expand the proven on-line model. Things are just getting exciting. (Update)


A short update stating that trading performance remains strong. This applies both in the UK and Europe which suggests that Gear4music are a Brexit winner. In fact anecdotally I hear that UK customers are moving away from German competitor Thomann because it's more expensive and complicated to order across the border these days. So with EBITDA expectations moved up another 10%, to not less than £18.2m, I feel pretty comfortable that this estimate will be raised again in the April FY trading announcement. (Update)

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

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