July 2019 Portfolio Update

A month to forget!


Hollywood Bowl Bought at 219p - July 19

I've held a starter position in Hollywood Bowl for about a year now and have been very happy with its steady progress. The share still passes my quality and value screens easily and is perhaps even better value than it was a year ago. After all the price has barely moved but profits have increased while debt is notably reduced. In addition analyst estimates for 2019 have edged up gradually over the last year to 13.7p and now point to earnings growth of 9.2%. I think that this could be a slight underestimate given that at the HY profits rose by 13.6% to 8.92p and they could easily make 5p in the second half. However when it came to actually buying any shares in the market I had a devil of a job getting a quote from a market maker for the deal size I had in mind. In the end I decided to put in a limit order at 220p and leave it for a couple of weeks to see if anyone would fill it. As it happens my order executed a few days before expiry at a price which looks more like the offer than the bid! Chalk up a victory for patience.

SimplyBiz Group Bought at 218p - July 19

I've held SimplyBiz for a while now and was pretty happy with their core business. However their acquisition of Defaqto, back in March, struck me as a genius move. In a stroke they materially grew the company while gaining a very complementary business line. Given that management believe that Defaqto will be earnings enhancing in the first year (which makes sense given that it generated £5.3m of EBITDA on £12.8m of sales in 2018) then it strikes me as odd that analyst forecasts have actually reduced a little in the last few months! At the time I didn't want to chase the price up, given that it's performed strongly this year, but after hitting a high of 240p the price came back almost 14% before stabilising at just below 220p. With a pre-close trading statement imminent I judged this to be on opportune moment to double my holding at a reasonable level. Guess we'll know shortly!

Quartix Holdings Bought at 278p - July 19

As mentioned below I like the strategy that management are pursuing here: which is to move away from low-margin insurance business in order to focus on higher-margin fleet sales. This has the effect of temporarily depressing both the top-line and the bottom-line but makes absolute long-term sense. Obviously you need to believe that the board are up to the job, and not just blindly reacting to circumstance, but the signs are that their fleet sales efforts are bearing fruit in a number of markets. In addition the founder, who still has a large stake in the business, remains at the helm and I see him as remaining highly incentivised to make a success of this change. With sales momentum moving in the right direction this seems to me to be an opportune moment to make this a full holding.

Softcat Bought at 943p - July 19

Management at Softcat have really delivered over the last few years, in spite of the wider economic conditions, and this performance shows no sign of dropping off. Now I have to admit that when the price dropped below 600p back in January I was poised to top-up my holding but psychology got the better of me. A combination of still feeling a bit beaten up from the previous Autumn along with general nervousness around share price weakness made me hold back. Then, of course, an excellent update came out and the shares jumped 15% - which made me feel as though I'd missed the boat! Anyway since then the shares have rallied to almost £10 before dropping back a little despite the continued good news. With the flow here remaining very positive I decided that I either had to make SCT a proper holding or sell it and in the end I see it as a quality business that I'd like to continue holding - hence my purchase.

Things I thought about buying (but didn't)




Things I thought about selling (but didn't)



H&T Group: I don't normally comment on acquisitions but this is a biggie with H&T taking on 65 stores from The Money Shop along with an extra 29 pledge books. The price that's being paid, £10.6m plus £4m of working capital required to run the stores, seems pretty low but they aren't getting any freeholds in the deal. What is interesting is that of the 65 leaseholds over half will either expire or come up for re-negotiation in the next 18 months. So it sounds as though these stores have been starved of capital and that H&T are in a prime position to improve their offering and ditch any stores which don't make a profit. Now it's true that this transaction will raise the debt level of the group, which I'd like to see kept at a low level, but some of the cost is being covered by a £6m placing and the directors believe that strong cash generation from the combined business will lead to rapid deleveraging. So this feels like an opportunistic deal that fits well within the H&T business and will provide useful additional scale. I like it and I'm not alone with the placing taking place at a zero discount. (Update)

Robert Walters: When an in-line update is followed by a sharp 10% fall in share price you've got to wonder what a warning would have done! With RWA Q2 produced solid 9% growth in the Asia Pacific region with Europe rising a strong 13% to become the second largest fee generator. Offsetting this goodness the UK continued its gloomy trend by contracting 8% although the other international regions almost reversed the absolute UK drop. Even then the UK managed positive fee growth over the whole of H1 (probably not by much though) so it's not all doom and gloom despite our self-inflicted political turmoil. In fact I think that this is a very decent update and that the business is in a good place with 76% of the net fee income being generated outside the UK. With the shares being on a historically low P/E of 10 I think that they offer a lot of upside and so I see no reason to panic prematurely. (Update)

RM: Solid interim results from this educational technology provider. On essentially flat sales the adjusted operating profit rose 17% while EPS jumped a remarkable 25% to 9.1p. What's perhaps more important is that the two growth segments, RM Results and RM Education, performed strongly in the period with operating profits up by double-digit levels. The anchor holding the company back is RM Resources, which supplies resources to schools and is really a legacy business in managed decline. Up till now the board have managed this transition effectively and I see them continuing this trend with the acquisition of SoNET Systems (which supplies e-testing software that complements RM's existing e-marking capability). Looking at the valuation the company is really pretty cheap on a P/E of ~9.5 but then again it's been at this level for a decade now so you've got to wonder what's going to be the catalyst that will drive a re-rating. On that point I'm not so sure but with trading going in the right direction there's probably no harm in just waiting. (Results)

AdEPT Technology Group: These FY results came in pretty much bang on forecasts with sales up by 11% to £51.3m and fully diluted EPS up 6% to 29.8p. During the period the group acquired Shift F7 in August and ETS Communications in November. Neither of these is a surprise as ADT is all about buying and integrating businesses within the fragmented IT service market. However these have lifted debt to a high but manageable level so it's good to hear that the focus for this year is on developing organic sales and converting cash flow with an eye on reducing borrowings (although acquisition targets will continue to be assessed). The benefit of these purchases is that managed services sales increased 19% to £38.5m and now provide 75% of total revenue (fixed-line revenues fell, by design, 9% to £12.8m). This transition is fully planned and looks to be moving in exactly the right direction with recurring revenues at 79% of the total. Ordinarily you might expect such a business to be reasonably highly rated, particularly considering more than 5 years of double-digit earnings growth and a ROCE >10%, but the forward P/E is only 11 and the well covered yield is heading towards 3%. For sure there are risks but the directors own ~40% of the shares and haven't put a foot wrong yet so I trust them to continue sensibly growing the group. (Results)

Gamma Communications: It's nice to have a positive update for once and this hits the mark with EBITDA and EPS expected to be slightly above market expectations for the year. Currently these point to earnings improving 18% to 35.6p so perhaps we can expect just over 36p now? The key to this progress seems to be growth across all business areas with the indirect channel business signing more partner deals while the direct business has picked up contracts with clients such as Hogg Robinson and the HM Land Registry. The new Dutch business is also performing in-line and the board are looking for other acquisition targets in Western Europe. So the group looks to be on a roll with an improving client list. If the share wasn't priced for growth I'd be tempted to add to my holding. (Update)

Pagegroup: Wow another profit warning even though I didn't immediately class it as such. That's not so surprising with the Q2 numbers showing it to be a record quarter with 16 countries growing over 10% and really everywhere bar Greater China and the UK rising significantly. I mean shouldn't a record quarter lead you towards beating expectations? Apparently not as the company outlook is that 2019 operating profit will now be at the lower end of forecasts - which means somewhere around £156m and around a 3% drop. And yet the share price has fallen 16% since the announcement? I think that investors have been mightily spooked by the fee earner headcount being reduced in France, Greater China and the UK (where conditions are challenging) with the suggestion that these problems could spread to other regions. Clearly management see trouble on the horizon and certainly recruitment firms are well placed to be early indicators of an economic slowdown. As a result I'm mindful not to be backward-looking with PAGE, and to jump to conclusion that we're being offered a bargain price, but the group really is doing well in so many areas. On the whole I'm inclined to see if the current pessimism is warranted before making a decision and that means waiting for the interim results in August. (Update)

Somero Enterprises: A very short update reiterating that nothing has changed since their last (unwelcome) update in June. This is actually quite positive as it suggests that the issues which led to the profit warning (apparently the bad weather) have actually been contained and trading isn't getting any worse. What we need now is for trading to pick up more than expected but I suppose that's unlikely while Trump is still throwing out new tariffs like confetti. Still I'm happy to continue holding such a quality business as Somero. (Update)

Palace Capital: A snappy update for AGM attendees. The big project for PCA is their Hudson Quarter scheme in York with construction aiming for completion in early 2021. The news here is that some apartments have been opened up for sale and interest is stronger than expected. In no time at all 22 apartments have been reserved (total price £5.8m) and deposits paid. This is good news and it bodes well for the launch of the second phase. (Update)

Strix Group: A pre-close, in-line update is always welcome. It seems that debt has reduced further, which is very positive given acquisition and expansion spending, and that profits are growing. Also positive is the fact that US/China tariffs haven't caused any problems and that the core kettle safety control market is stable. The water filtration market is more challenging, with the market declining 7% in the UK, but one hopes that management are dealing with this headwind. One reason to believe this is their comment that margins have been maintained by focusing on operational enhancements and cost improvements. So it's pretty much business as usual with growth potential in their new product initiatives. A nice business. (Update)

Scientific Digital Imaging: No real surprises in these FY results given the two recent trading updates. Sales rose by 20% (with 15% of this coming via acquisition) with PBT increasing an excellent 24%. Just as important cash generation grew 28% to £3.6m and this has helped keep debt at a negligible £1.6m. I see these results as testament to the hard work put in by Mike Creedon to turn-around SDI over the last 5 years and put the business on a stable footing. Looking forwards all of the recent purchases will make a full-year contribution and they should benefit from support by the parent company (whether that's in providing funds for R&D, upgrading facilities or benefiting from sales opportunities). I get the feel that all of the individual businesses are profitable and cash-generative in their own right but will be able to flourish within SDI - which makes analyst forecasts for 30% EPS growth in 2019 look quite achievable. There's also the distinct possibility of further acquisitions this year and the track-record of SDI is pretty good here (in that none have had to be written down). Lot's to look forward to then. (Results)

Learning Technologies Group: Definitely an excellent update with earnings (well, EBIT anyway) to be materially ahead of expectations. Still with LTG being a highly acquisitive business this can't necessarily be taken at face value. However the Software & Platforms division (excluding PeopleFluent) has seen strong organic growth in H1 and this is forecast to continue in H2. This performance is matched by organic growth in Content & Services as well which is very promising. An aspect that I particularly like is that the EBIT margin has meaningfully improved from 26.3% to ~32% which supports the idea that a greater share of sales will convert into profits going forwards. As a result the shares have almost doubled from their February low and don't look awfully expensive given the growth rate on offer. (Update)

dotdigital Group: A really solid FY update and one that I see as being under-appreciated by the market. For a start sales of £51.3m are well ahead of forecasts for £46.7m and this should translate into an operating profit that's slightly ahead of expectations for around £12.3m. At an operating level recurring revenue is up to 86% of the total and ARPU has grown by ~14% to £966 per month. What I find interesting, given how well DOTD is performing, is that the Dynmark and Donky business units are being closed now that Comapi has been fully integrated. I quite like this as it suggests that management are focused on their core SasS product and see no reason to keep brands alive if they're not profitable enough. In addition the board remain focused on strategic partnerships as a means to drive revenue. Magento is the big driver here with over 20% of total sales coming from Magento customers while Shopify, Microsoft Dynamics and other partners seem to be growing strongly. Really impressive execution here with the only disappointment being that the shares are finding it hard to break out from the 100p level! (Update)

Beeks Financial Cloud Group: Finally! At long last BKS have made some more Tier 1 client wins and that's a bit of a relief. One such client could have been plain luck but three substantial clients suggests that the company is offering a service that's worth having. Both new clients are in the Fixed Income sector, which is a strength, and should benefit from the group's low-latency connectivity. This all happened after the June year end though so it's no surprise to see confirmation that the company traded in-line to that point. Of more interest will be the outlook statement when the FY results emerge in late August. Still it's nice to see some positive activity after a few frustrating months and with luck the business will go from strength to strength from now on. (Update)

FDM Group: It looks as though the group has delivered in-line results for the HY but the shares have slipped 10% in the last week. Why? I think the culprit is an outlook statement which mentions lower activity in the UK government sector with some US financial clients also reticent to spend freely. It's plausible that government needs will remain subdued for a while but Rod Flavell, CEO, remains confident and I don't mind backing him. After all the business has an excellent record of high-margin profit growth with a very high return on capital and substantial free cash-flow generation. The reason for this, I believe, is their focus on in-house trained "Mounties" who are deployed to customer sites, as required, in order to provide a consistently decent service. A high utilisation rate of 96% suggests strong demand for the FDM service and "Mountie" headcount is increasing in all regions as the company focuses on recruitment. On this front I especially admire their willingness to on-board ex-Forces personnel and returners to work as I see this as a way to find otherwise overlooked talent and ensure a fair degree of loyalty. With Rod & Sheila Flavell (CEO and COO) having around £130m tied up in the company, with no sales since listing, I'm pretty happy keeping my much smaller position despite the political uncertainty as quality is hard to find. (Results)

Quartix Holdings: There aren't many surprises in these interim results given that the numbers were flagged up in the June trading update - although FCF of £3.2m is slightly better than the forecast of £3.0m. What's more important is that new Fleet installations have risen by 48% with the subscription base growing 12% to over 138,000 vehicles (both slightly better than indicated in the update). This gives really cause for optimism, despite total revenue dipping by 3%, because QTX are consciously moving the business away from low-margin insurance business. The latter declined by 35% to just £2.5m and going forwards the impact of contraction here will reduce as its contribution to total sales diminishes. In contrast telematics services have been recently launched in Poland and Spain with a general increase in spending on marketing, sales resources and distribution. So it's clear that Andy Walters, CEO, sees fleet subscriptions as the future. I happen to agree with him and see recurring revenues benefiting from this investment over the next 2-3 years with both profit and FCF rising sharply. (Results)

Softcat: With the full year almost complete it seems that SCT are continuing to trade well. This follows a previous "ahead of expectations" update for Q3 so it's apparent that the underlying business is really delivering growth. As a result I think that we should see around 34p in EPS for FY19 and quite possibly a hike in the estimates for FY20 and FY21 - given that analysts have only pencilled in 6% growth for both years! This is very out of step with the last few years of double-digit growth and feels very pessimistic. (Update)

Robert Walters: It's great to see RWA producing a record HY performance as the shares have been very weak for almost a year (losing a third of their value). That said their remains macro uncertainty in a number of markets and so I can see why the board are cautious enough to say that they're still just trading in-line with expectations. The key area of weakness is unsurprisingly the UK with operating profit marginally down. All other regions are growing strongly though with Japan and France, the group's two largest markets, growing their net fee incomes at double-digit rates. So I do wonder if the board are being overly pessimistic which would make the currently depressed share price a great buying opportunity? After all where else can you find a sub-10 P/E company on a PEG of 0.9 which has a ROCE >30% and high FCF conversion? I can see why investors are worried about a potential recession but this is a globally diversified outfit with 74% of NFI derived from international sales. Still sentiment matters and I suspect that the share price won't do much recovering in the short term since recruiters are one of the first services to get the chop when markets tank; which will slash earnings, drive the P/E skywards and provide a buying opportunity! (Results)

SimplyBiz Group: With a pre-close statement coming out last year at around the same time I was looking forward to this update to gauge the impact of the Defaqto acquisition. Unfortunately it's a bit hard to tell as the update doesn't separate organic and acquired growth. What we can say is that sales are up 20% while adjusted EBITDA is up 30%. This suggests a decent improvement in EBITDA margin. With the shares being on a P/E of ~16 they don't seem particularly expensive for decent growth and quality metrics (ROCE is ~20% with an operating margin ~15%). In addition this is a recent listing which hasn't profit warned in the first year which suggests to me that it didn't float with unrealistic forecasts that couldn't be met. Instead the board are getting on with the job of growing their customer base and extending the range of services offered to these clients. I'm very happy with this flavour of focused approach and hope to see a bit more colour added when the results come out in early September. (Update)

Bodycote: There's nothing like operational gearing in reverse to make a bad situation look worse. For the HY Bodycote managed to almost keep sales level, at 1.5% down, but at the bottom line profits fell by 6% to 25.6p. With analysts forecasting an EPS of ~54p for the whole year there's quite a H2 weighting here. Right now management think that they'll make up the short-fall due to strength in the civil aviation sector but I am concerned that weakness in the automotive and general industrial markets will prove difficult to overcome. The problem is that the latter markets provide 2/3 of sales while aviation is just over a quarter of turnover. Set against this is the fact that management are well aware of the challenges and have sort to mitigate them through price increases and cost control. In addition there have been some targeted acquisitions which should benefit trading in the second half. In addition Bodycote is a high-quality, low-debt business with a mid-teens ROCE that's priced on a relatively undemanding P/E. So I haven't quite decided what to do with my holding here. (Results)

NewRiver REIT: Could this property company be any more unloved? On the back of Neil Woodford dumping his large holding into the market it seems that other investors are following suit and the share price is in the toilet. Surely, then, this Q1 update must be diabolical? Well yes and no. For sure there continue to be retail sector headwinds, it's no secret that the dividend is not covered by earnings and I'm sure that the NAV has further to fall before eventually recovering. On the other hand NRR disposed of £27.5m in low-yielding assets at just 1.6% below book value and so, at least in these cases, the NAV was barely over-stated. These funds were deployed into assets yielding over 50% more (9.8% vs 6.0%) so a continuation of this process should boost cash-flow. Operationally occupancy remains high at over 95% while average rent is stable and just 0.5% of gross income was impacted by CVAs and administrations. So I think that the directors are running their estate just as well as they can given its retail exposure. With that in mind my plan is to do nothing with NRR and see how things play out over the next couple of years. (Update)

Burford Capital: From one unloved company to another (coincidentally also a Woodford holding) we have Burford Capital reporting record interim results. Key figures here are PAT up 36% to $225m, new investment commitments up 36% to $751m and ROIC net of losses increasing to 98%. Great numbers which are thoroughly out of step with analyst forecasts for anaemic growth of ~5% in earnings for the full year. So why the disconnect? Well Burford depends on the outcome of legal claims and these are both irregular and lumpy which means that the results will definitely disappoint at some point. However the flipside of this is that Burford's returns are entirely uncorrelated with either the stock market or the economy which I find a rather attractive feature. In addition as the investment portfolio grows (it's now at $2.25bn) then the sheer number of cases will tend to smooth the returns from one period to another. So I find it bizarre that BUR is priced at just 11x earnings although I understand how other people see this as a made-up number given its reliance on unrealised gains. Still they've barely had to restate these numbers at the point of realisation so I believe that their valuations are prudent. As such Burford appears to me to be one of the most compelling opportunities out there and I can see myself adding to my holding. (Results)

Games Workshop: This has been an amazing investment so far but, if you believe CEO Kevin Rountree, it's possible that the best is yet to come. Without wishing to sound as though I've drunk the Kool-Aid I can see where he's coming from. It's not so much the models and the games, which seem to be very popular, but their plans to expand IP licensing and leverage the Warhammer universe which excites me. It's pretty clear just how well this can work if properly handled (e.g. the Marvel universe) and I don't see the company chasing poor licensing deals just because they are there. So I find it odd that brokers appear to be continually behind the curve with their forecasts; right now the consensus stands at 3-4% growth for each of the next two years. This seems unrealistic to me given the many ways in which GAW is gearing up for growth by investing in manufacturing, warehousing, training and IP development. So my expectation is that the forecasts will rise over the next year as analysts catch up to reality. If this wasn't already my largest holding, by far, I'd be quite tempted to top up at the current price but it's always prudent to have some restraint as problems can hit even the best run company. (Results)

Keywords Studios: As an investment it's been pretty hard to hold KWS over the past year with the price more than halving. In contrast the business has performed well with sales expected to rise by ~39% in H1. This is an acquisitive outfit though and so constant currency, like-for-like growth of 17.3% is perhaps a more useful metric. Operationally all service lines are performing well with the two largest, Functional Testing and Game Development, growing at an impressive 20% or so. Sadly this buoyant trading hasn't quite filtered down to the bottom line with PBT up just ~15% to €18.4m. Looking at the forecasts for €45m this is a 40:60 H1:H2 split which leaves some ground to be made up. Still the update addresses this head on by pointing out that high customer demand has required them to accelerate investment in infrastructure, recruitment and training which has raised the cost level and depressed margins. In other words what looks like bad news is actually good news in that this investment should pay out in the second half. Looks pretty healthy then. (Update)

End of month summary

Well it just keeps on getting worse doesn't it? And that's without considering the self-inflicted political mess that we find ourselves mired in. Still it's no surprise that the UK stock market is weak, given the level of uncertainty that companies are having to deal with, and my portfolio hasn't manage to avoid this trend. I suppose that I should be glad that I didn't have any major profit warnings in July though as that really would have been the dagger through the heart! Anyway I have very few winners to report with QTX, LTG and BKS being the beneficiaries of good trading news. On the downside having 5 holdings drop more than 10% is quite painful and so much of this seems to be down to investor risk appetite diminishing rather than recession type conditions taking down profits across the board.

Winning positions for the month: QTX 31%, LTG 17%, BKS 12%, KETL 9%, RFX 7%, CRW 5%, WJG 4%, ADT 2%

Losing positions for the month: SOM -1%, PPH -2%, SCT -2%, PCA -2%, IGR -2%, BUR -3%, BOWL -3%, BPM -4%, GAMA -5%, DOTD -6%, SBIZ -7%, SDI -7%, NRR -8%, GAW -9%, KWS -9%, BOY -11%, FDM -12%, PAGE -13%, RWA -18%, K3C -20%

Overall this was a very negative month, down 3.0% overall, and that pulled the overall return so far down to around 13.5%. Definitely a disappointment given the generally positive updates that most of my holdings have offered up (and it was a busy month for company news) but that's all in the rear-view mirror now. Hopefully one day the UK will emerge from the current chaos and there will still be some decent companies left standing!

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

comments powered by Disqus