June 2021 Portfolio Update

Well that was another brutal losing month, putting me down -3.6% with a YTD return diminished to 9.1%. Market sentiment has utterly turned with positive statements barely being rewarded while negative remarks are just hammered. It's not a bear market, because investors aren't selling everything at any price. Instead they're on the back-foot and bearish with profits being grabbed. It doesn't help that we're heading into summer, when trading volumes fall dramatically, but it's a bit early for that to be a large factor.

Anyway I did almost no trading in the month and basically sat on my hands. Most of my holdings are doing well operationally, despite numerous headwinds, so I'm not looking to get rid of them. The danger with this is that there could be structural reasons for their decline (such as a reversal in commodity prices) but then you're guessing whether the longer-term trend remains intact. I don't have the mindset or inclination for this level of trading hence my decision to do nothing. Instead I hosted another StockSlam with piworld and used my time to speak about Gamma Communications. It's a fine, quality company that's sticking to a solid growth path.

So what did the damage this month? In no uncertain terms it was Best of the Best with a woolly and unappealing outlook statement. This triggered a rush for the exit by shareholders with poor liquidity exacerbating the impact on the share price. In a follow-up call the extent of the pullback was more quantified, and management sounded cautiously optimistic, but by then it was too late. Otherwise a bunch of holdings went sour in line with poor sentiment and a lack of buyers. Still some of my holdings proved resilient with Luceco leading the pack for no apparent reason; at least the Driver Group recovery was stimulated by reasonable results and a buoyant management presentation. Hopefully July will prove more satisfactory but I am concerned that markets will remain weak until September. Maybe I'll just go and sit in the garden.

Risers: LUCE 21%, DRV 18%, CER 17%, G4M 13%, STAF 13%, VLX 9%, TM17 8%, UPGS 6%, CLG 5%, KNOS 4%, SPSY 2%

Fallers: GAN -2%, BOO -3%, SCT -3%, BLV -4%, SDG -4%, CCC -4%, FXPO -5%, GAW -5%, SUMO -5%, FNX -6%, CLX -6%, K3C -7%, SLP -8%, GMR -9%, BUR -10%, RWS -12%, CAML -13%, DX. -14%, TND -18%, CMCL -19%, BOTB -33%


Staffline Bought at 50p

In the recent, successful placing I took my full allocation and applied for as many extra shares as I could in the Open Offer. Unfortunately I was hugely scaled back in the latter part and only received 17% of the shares that I requested. Very annoying but at least the scale of the demand is now apparent. Also the company now has sufficient funds to handle the deferred VAT repayments and has been able to agree a new receivables finance facility. This is all great news and really the board are set fair to succeed in the current recruitment market. I still wish that I'd received more shares though!

Tandem Group Bought at 572p

From the trading and AGM updates mentioned below it's clear that Tandem is trading very well in all of its market niches and that this is more down to management actions rather than the pandemic. That's not to say that Tandem hasn't benefited from the lockdowns, because it has, but management identified areas for growth long before we'd heard of Covid-19. One of these areas involved the introduction of own-brands since these generate higher margins and can be designed to occupy a specific gap in the market. The board also realised that they could sell directly to consumers which proved invaluable when people switched to shopping on-line. However Tandem haven't forgotten about their distributors: they can deliver a bike order directly to a local bike shop for assembly and the sale of accessories. In this way both parties benefit. Anyway to cut a long story short I think that the business is in a good place, despite well publicised headwinds, and that the current price will look cheap in the longer term. Hence my top-up purchase.


Burford Capital Sold at 790p - 24.8% loss

As ever the problem with being fully invested is that to add a holding you need to sell a holding. This is made worse by the fact that I am optimistic about the longer-term prospects for every one of the shares that I hold - none of them were bought for trading purposes. Hence I had to sell something in order to add more Tandem and Burford Capital was first in line for the chop. It's no secret that Burford shares have struggled ever since that Muddy Waters bear report came out a couple of years ago (despite the best efforts of management). That's a long time to wait for investor enthusiasm to return and I can't honestly say that investors seem all that eager to, well, invest in Burford even now.


Tandem Group

It's interesting that this update hasn't been received very well by the market given that it delivers much positive news. For instance trading has remained robust even when compared to the prior year where sales exploded from March 2020 onwards. This strength isn't confined to bikes either and I'd say that this is the weakest segment despite revenue being 21% ahead. In contrast the Ben Sayers golf business is up more than 100% while B2B sales overall are roughly 32% ahead across all ranges. That's impressive. The B2C market is also up 18% with gazebos and the like being strong sellers. It's true that challenges remain around stock availability, freight costs and raw material price increases. However profitability is also considerably ahead year-on-year with the cost base remaining suppressed. Given that the shares are priced on a P/E of 10 or less I'd say that a lot of bad news has already been discounted. (Update)

Clipper Logistics

It's clear to me that, after a few years of pedestrian growth, Clipper Logistics found itself in a valuable position when the pandemic began. As a market leader in e-fulfilment and returns management services it is benefiting from the switch by retailers towards an outsourcing model as they seek to reduce costs and focus on their core business. This, along with a timely entry into the life sciences sector, has accelerated growth and for FY21 revenues and profits will be up by around 40%. Even better the contracts being won are sticky and here management are upgrading both their FY22 and FY23 guidance by mid-single digit percentages in both years. This is a ballsy move which suggests that earnings are set to rise by ~20% in both periods with debt being reduced quickly by strong cash-flow. I'm all in favour of this type of forward guidance and I can see why the board are keen on further expansion in Europe (and elsewhere) given how smartly they've dealt with Brexit related disruption. Even after a strong performance in the last quarter the shares don't look over-priced. (Update)

Driver Group

I cannot deny that Driver Group has been a frustrating investment over the last few years and I probably should have thrown in the towel. Actually I should definitely have dealt with the opportunity cost by now. The problem is that the business has new management and really is regaining its focus. In addition it is set to benefit from a rise in contract disputes arising out of the pandemic with a fair level of certainty. The problem is that the wheels of change turn slowly and that the five-year strategy really does need time to play out. So these interim results aren't very exciting although you've got to remember that H1 2020 was basically pre-Covid while this half-year has been plagued by lockdown restrictions. From that perspective an 11% drop in sales leading to a 22% fall in profits is actually pretty good when you consider that only the Europe & Americas regions made any profit and an increased profit at that. Unfortunately the Middle East and Asia Pacific regions posted small but annoying losses to off-set this positive performance. A surprising issue in the APAC region was that an entire team in Singapore upped and left to join a competitor taking their clients with them. According to management this team had a special contract, meaning that it can't happen again, but it does highlight the risk of a business where talent walks out of the door every evening. More positively Diales, the expert witness support service, is continuing to expand with plans for a forensic accounting service in the pipeline. While sales between now and the end of the financial year (on 30th September) are likely to be as subdued as in H1 this progress at Diales along with cost reductions puts Driver in a good position for FY22. Additional colour is provided in the results webinar for anyone interested in joining this journey. (Results)

RWS Holdings

Another disappointing position is the one that I hold in RWS following its transformational acquisition of SDL last year. Sadly the only transformation so far has been in the share price with it falling by a third from its pre-purchase heights of ~750p last August. The reason for this is that the top-line is up 92% to £326m only because of the acquisition with no organic growth in the core business. Lower down adjusted PBT is up 53% to £50m but the adjustments are substantial since the reported PBT is down 7% to £24m. Now I can perhaps allow £11m of acquisition costs to be ignored and even £7m of exceptional items around restructuring SDL but that still leaves a 20% gap between the profit figures. With all of that in mind the integration does seem to be progressing well, with trading currently in-line with expectations despite currency headwinds as USD weakens. At the operational level Language Services generates almost half of all sales and had a mixed H1 with certain large customers growing while others became cautious due to the pandemic and potential teething issues with the RWS/SDL integration. The other divisions enjoyed equally mixed trading with gains and losses mostly cancelling each other out and margins moving around under the new divisional structure. My take on this is that the RWS/SDL combination is very much a work in progress and so it's disappointing to see Richard Thompson, CEO, leaving the group. The timing isn't great and while Andrew Brode, Chairman, remains both a guiding and a driving force this change in leadership is hardly helpful during a period of upheaval. Still with a forward P/E of ~25, falling to ~20 next year, the business hasn't been this cheap in five years. So from a medium-term perspective it might be worth tucking away a few more of these shares while investors are looking elsewhere for excitement. (Results)

Boohoo Group

Reading this update it's remarkable to me just how much institutional investors hate Boohoo. Here we have a 32% rise in sales for the quarter to 31st May with the two largest markets (UK and USA) up by 50% and 40% respectively. For sure this isn't all organic growth, because Boohoo have been acquiring brands like crazy, but this acquisition strategy has remained focused. All that they've been buying are the brand names, rather than the liabilities, and these are relatively easy to strap on to their existing e-commerce structure. So I think that management are playing a blinder here and that these new labels are diversifying the group into new verticals and customer demographics. Financially the gross margin is pretty stable and guidance remains unchanged with revenue growth of around 25% and adjusted EBITDA margins expected to be in the region of 9.5-10%. With this in mind it's worth noting that Boohoo shares have almost never traded below a P/E of ~30, apart from after their profit warning in 2015, and yet existing forecasts have the rating falling from ~28 this year to under 20 in 2024. This feels extremely pessimistic to me given the management track record. At some point the ESG efforts of the group will be recognised and institutions will want to buy back into this growth story. I want to be significantly invested when that change in tune takes place. (Update)

K3 Capital

Another business that looks more than fairly priced, after a transformational year, is K3C Capital. After already upgrading expectations in March and April this FY update completes the set by boosting the numbers yet again! Here we learn that all divisions have grown strongly with EBITDA nudging up another 5% or so to no less than £14.25m. For once a transformational acquisition strategy has really delivered and K3 is a diversified group without a total reliance on corporate M&A with the volatility that that brings to the party. The only note of caution is that there remains a degree of uncertainty in the markets in which they operate which is probably why the 2022 forecasts show growth of only 5-6%. So it's no great surprise that the share price has weakened a touch lately with results not due to be published until September. Even so the directors remain bullish and with cash of £14m, plus a new debt facility of £15m, they have plenty of firepower for another bolt-on purchase. I wonder if they have a target in mind? (Update)

Best of the Best

Ah where to start with these results? Let's go with the good stuff. There should be no doubt that last year was extraordinary for Best of the Best with revenue increasing 257% and profits jumping 235% as punters looked for some lockdown distraction. At the same time the board had placed BOTB in the perfect place to benefit by closing down all airport operations and moving to an online-only operation. Add on highly targeted advertising and a nimble approach to maximising the attraction of the prize pool and at a certain point the board thought that they were actually making too much money! As a result they beefed up the pay-out level simply to keep profit margins at half decent levels. Even so cash levels more than doubled to £11.8m as the business spends essentially nothing on capex. So all pretty fabulous. Unfortunately there was always the suspicion that BOTB might just be a massive lockdown winner, rather than a sustainable business, with a large placing by directors in March lending some credence to that position. Now we learn that, in contrast to last year, there has been a reduction in customer engagement since April with this leading to lower sales and lower profits. This is pretty rubbish news and it's unclear whether engagement will return to normal levels (whatever those are) or not. What is clear is that it'll be hard to match 2020 which suggests that overall profit will fall. The problem is that no one knows the size of the fall which is why the share price has halved following these results! I have no further insight on the outcome either but I don't believe that the company has become uninvestable overnight or that it will be unable to grow in the medium-term. So my holding remains with an option to pick up a few more shares if the news flow improves. (Results)


The turnaround story continues with profits rising more quickly than revenues as margins continue to trend higher. In numerical terms PBT jumped a solid 37%, on 13% sales growth, which is pretty decent for a company on a P/E of ~18. Also this is against the backdrop of Covid-19 which led to a drop in medical demand even as sales to electric vehicle manufacturers and data-centre customers rose materially. At the moment Volex are leaders in the EV charging cord sector, with Tesla a key customer, with sales surging as people stop buying internal combustion engines. This momentum has continued into 2021 with the medical market starting to recover as customers are once again able to access hospitals. Generally speaking Volex generates good levels of cash although working capital movements towards the end of the year reversed the favourable movement seen at FY2020. Nevertheless debt levels remain low and this is after acquiring DE-KA in February. We should expect further acquisitions to be made, since this is part of the board strategy, and I'm fine with that given the purchase and integration record so far. One area of concern, that is shared by most manufacturers, is the impact of cost inflation particularly with the price of copper and much higher shipping costs. In the former case customer contracts allow price rises to be passed on, with a short delay, while the latter is being managed through close customer contact. These headwinds ensure that it's not all plain sailing for Volex. Nevertheless management at Volex have demonstrated their competence over the past few years and I've no doubt that they will continue to successfully drive the business forwards. (Results)

Sumo Group

An in-line update for the year so far with the backdrop of growth in video games providing a tailwind. All divisions are trading well and the new Secret Mode division has made a good start. There's little else to take from this statement, in terms of trading news, except that the acquisition pipeline remains strong. (Update)


These are stupendous results with net profit up 488% on a revenue increase of just 31% due to a material improvement in margins and great operational gearing. More importantly the narrative provides a textbook example of how to manage expectations after such a pandemic-driven boost. For context the analyst consensus indicates that earnings will more than halve in 2022, despite stable sales, and yet shares are pretty much at an ATH. The reason for this is that management have been very clear that H1 last year was exceptional and that they do not expect to achieve the same level of full year profitability this year. At the same time trading in the first quarter had been stronger than expected and so FY results should be ahead of expectations. This is quite something as clearly Gear4music have handled Brexit with aplomb and on this front they are planning to open new distribution hubs in Ireland and Spain. Makes a lot of sense now that UK and International sales are basically equal as the business has gained traction in Europe. Another key development is the own-brand range where this accounted for 29% of total revenue despite being just 7% of the total product count. Clearly this taps into the beginner/intermediate market by providing a decent product at a keen price while maintaining profit margins for the group. This focus on margin, combined with cutting out lower margin sales, has been instrumental in improving the quality of earnings and that's the real story here. In the early days management made some mistakes chasing growth but now they're proved that they can handle unprecedented pressures and build a sustainable e-commerce enterprise. I like where G4M is heading. (Results)


As mentioned above I took as many shares as I could during the recent placing at 50p. I didn't take this action purely to avoid being diluted out of existence. Instead this fund-raising has transformed the group by removing any concerns about covering deferred VAT payments. At the same time we know that Q1 trading was ahead of expectations which bodes well for the rest of the year. From my perspective Staffline is now in an excellent position to benefit from the buoyant recruitment market as management can fully focus on winning business in its core sectors and running the group effectively. As for last year there doesn't seem much point looking at the numbers even if underlying profitability appeared to improve. Really last year was focused on survival, cost-cutting and restructuring the group to get the most out of its assets. Recruitment GB, which provides flexible blue-collar recruitment, has certainly benefited from this focus as it was badly run for many years. Now lower-margin contracts have been terminated and temporary recruitment is driving this division forwards. In contrast Recruitment Ireland, which is more generalist, has remained well-run and is continuing to win new business despite the incredibly hard lockdown in Eire. Finally PeoplePlus, which provides adult skills and training, was the division that almost bought down Staffline a few years ago but seems finally to be on the road to recovery. A tailwind here is that the government are trying hard to retrain people and get them back into employment which is leading to contract wins at PeoplePlus. Obviously it's early days yet, and the bottom-line would benefit from achieving more permanent recruitment business, but the trajectory is clear if economic conditions continue to improve. (Results)


This AGM update for Tandem is very positive and yet also notably cautious. On one hand forward order books are at record levels (£34.7m now compared to £10.7m last year) with bicycle customers ordering much earlier than usual. So Tandem can have some confidence about future sales but at the same time they do need to be able to source goods to fulfil these orders. This is harder than it sounds with component manufacturers continuing to struggle with demand, raw material prices at significantly elevated levels and freight rates higher than ever as shipping companies have issues sourcing containers. So there are numerous challenges but equally management claim to be handling them well and I feel that this is likely to be true given their long history of operating in this sector. More positively sales in different areas are all strong and equal to, or ahead, compared to the same period last year. So Tandem isn't purely a lockdown beneficiary. Instead their pivot to supplying more own-brands and targeting the B2C market has really paid off. Management sound bullish, despite their caution, and the shares are hardly expensive despite the rerating over the last year. (Update)

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

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