March 2019 Portfolio Update

I was a little distracted from the markets this month, as real-life took charge, but the portfolio did just fine without my active oversight. On the whole most of my trading actions were driven by price alerts where I'd previously identified a level at which I would be happy to either buy or sell. To some degree this took the emotion out of these decisions, since I'd already done the groundwork, but it's always a slight worry to trade against the market.

Still I did manage to write up the StockSlam from last month, where a number of interesting companies were highlighted, along with some notes on the two accounting/investing courses that I attended (Introduction to Accounting and Introduction to Equity Analysis). In the middle of the month I also managed to make my first ShareSoc Seminar of the year and found all of the presenting companies to be worthy of consideration. All in all another busy month but with more thinking than action!


XP Power Bought at 2044p - March 19

In my view the shares of XP Power are being sold at a bargain price right now and this analyst report from Edison is in agreement. Right now the forward P/E is under 12 and it's clear, looking back over the past decade, that XPP goes through peak-to-trough cycles in valuation - with it being in the trough right now. So if trading continues as predicted, with the industrial, healthcare and technology segments continuing to grow well while the semiconductor manufacturers take their foot off the gas, then the company will continue to grow profits at a single-digit rate. In addition XPP is rated much more cheaply than similar companies, while offering a better yield, and I'm inclined to believe that the market has over-shot with its negativity here. Hence I've topped up my position.

Pagegroup Bought at 452p - March 19

As mentioned below I think that the FY results for 2018 are really impressive and that Pagegroup have an excellent runway for continued growth (assuming that that we don't fall into a global recession). Now fear of the latter is probably holding back the share price but even so the current forward P/E of 12-13 is discounting an awful lot of bad news (and the ratio hasn't been this low since the financial crisis). My perspective is that Pagegroup is probably the best UK listed recruiter with a great presence outside the UK and a desire to keep growing (without blowing up the business). Thinking about the latter management have a very sensible set of public KPIs (around diversification and growth mainly) and their explanations of why these are important and how the group performed are quite clear. This gives me some confidence that the board understand the various dynamics underlying their business and how to manage them.

Bodycote Bought at 832p - March 19

Like many decent companies the shares of Bodycote have had a torrid time since last summer with a maximum draw-down of 35% at the low point of 676p in December. Since then the shares have staged a decent recovery up the £8 mark but I wasn't going to increase my holding without seeing the FY18 results and hearing about the outlook for FY19. As it happens the numbers were very good, a little ahead of expectations, and management are happy with how the year has started - although it's early days. Given these positive results, and an improvement in margin and ROCE that looks sustainable, then I was pretty happy to double my position here given that the P/E ratio is ~15 and that's very much at the low end of the 5-year range (with peak P/E being >20). There are always risks to any purchase but I do feel that with Bodycote I'm getting an excellent business at a decent price.

Games Workshop Bought at 2794p - March 19

I'm definitely not an investor who studies the charts avidly but I do tend to take notice of trends on the basis that they persist. With Games Workshop it's pretty clear that 2800p has provided a base under the share price for almost a year with several bounces from this level. So when I received a notification of the intra-day price dropping below 2800p I took a quick look at the current valuation and forecasts. On the face of it current year estimates for a 7.6% drop in profits, to 170p, are rather negative but the company has already done 100p in H1 and I don't see much evidence for a slowdown. In fact they're investing for growth and I suspect that their business is pretty Brexit-proof. As a result I've increased my holding by 20% to take advantage of the current market volatility.

Things I thought about buying (but didn't)

Computacenter: I held these last year but sold out when a trading update was received badly by investors. However the price has come back a lot from the mid-year high and has bounced strongly this year. Recent results for the FY were positive with profits up 16% and supply chain revenue growing strongly. However forecasts suggest just 4% growth in 2019 and the H1 comparison will be difficult given how much the business grew last year. That said the company are expanding in the US, on the back of an acquisition, and this could be very positive? FCF generation is poor though, and has been for quite a few years, which I don't fully understand. The problem for me is that Softcat is a much higher quality business although it is valued to reflect that while CCC is only on a PE of ~15 and does tend to out-perform expectations. Still forecasts have fallen a little recently, following the results, so I think that it's reasonable to remain cautious here.

Team17: I've had had half an eye on Team 17 since they listed last year as they seem to be a well-run company in an expanding sector. However the share price has been under some pressure as the Fortnite effect has dampened expectations across the whole sector. FY results for 2018 are pretty positive with good cash generation and a decent list of titles to be released during 2019. Some negatives are: no dividend as cash is going to be reinvested in the business and a reduced gross margin (from 57% to 46%) due to increased 3rd party sales. There's also the fact that this is a new listing (most seem to trip up in some way during their early years) and the forward P/E is ~27 which is rich for teen levels of growth. So a nice company but there are better opportunities elsewhere IMO.

Integrated Diagnostics Holdings: This came up in my quality screens earlier in the year but I passed over the business due to it operating predominantly in Egypt and being subject to currency fluctuations. Still FY results are very good with strong growth, cash generation and a good dividend. EPS is up to 3.35 beating forecasts and growing 35% (expectations were 3.13). There's also great forecast growth for 2019 and 2020 at >20% for each year. Compared to peers IDHC matches up well although cash generation slightly falls behind. It has better margins though and ROCE is really going in the right direction. That said I need to understand why they are listed in London and why the dividend cover seems low - the dividend is 3.04 EGP so cover is just 1.1x. I need to dig some more into IDHC but they do have a good write-up on Cube Investments.


Bioventix Sold at 4015p - March 19 - 352.3% gain

This is an amazing company, no doubt about it, but with the share price rising by almost a third this year I couldn't help feeling a touch nervous when it hit £40. The problem, as I see it, is that the annuity-like earnings profile cuts both ways. On the positive side the antibodies being sold today should continue to provide a steady stream of earnings for years to come. On the negative side it's very doubtful that earnings will ever jump 50% or a 100% in a single year; Bioventix customers just don't work that way. So with the P/E ratio breaching ~35 (given the current year forecast for 112p in earnings) I find such valuation expansion hard to stomach compared to forecast growth of 4% in 2019 and 13% in 2020. Fortunately (or unfortunately?) my position size wasn't large enough to move the market so I took advantage of the exuberance to exit entirely and give myself some cash to play with as we move into the Brexit end-game.

Volvere: Sold at 1101p - March 19 - 23.8% gain

As mentioned below it's quite clear that Volvere is currently under-valued with almost nothing in the price for the two operating businesses that they own. On the other hand it's quite possible that the Lander brothers will do absolutely nothing with their cash pile for a good while since they are very patient. Then even if they do find a business to buy it's going to take a few years for them to turn it around at the very least. So I don't see much excitement taking place here in the short term. In addition this is a horribly illiquid share and the spread is wide at the best of times - which means that you want to be selling when other people are buying rather than when they are rushing for the exit. Putting these things together I realised that I needed to be prepared to sell Volvere, if a better opportunity emerged, and that's exactly what has happened with Games Workshop hitting its support level. Still a pretty decent return in just over six months.

Things I thought about selling (but didn't)

Somero: With the results due, and this being my largest position, I decided to sanity check my position. This entailed looking at all updates since the last set of final results. Most of these were in-line, which is good, with the latest one in January providing a modest beat. On the flip-side analyst forecasts for 2019 are for not a lot of growth. At HY they produced 18c EPS which is 45% of forecasts - so some ground to make up - although the FY update indicated that this wouldn't be a problem. Looking ahead the US construction market remains strong with a healthy backlog. This is confirmed by this transcript around recent results from US Concrete. So it seems that the main US market remains buoyant and we know that this accounts for 2/3 of sales at Somero. My expectation then is that Europe remains subdued while Latin America and the Middle East are doing ok. Hence Somero is a hold!


Robert Walters: Excellent FY results here from this international recruiter with NFI (net fee income) up 14% and PBT up 21%. Pretty decent for a P/E of ~12. Of course the reason for the lowly rating is that hiring is one of the first things that gets cut when companies feel the pinch and economic conditions are surely turbulent right now. That said RWA saw growth in all regions, with Europe and Asia Pacific especially strong, and the present year has started well (with the next update out on 15th April). In addition fully 73% of NFI is generated outside the UK and this surely gives it a decent cushion whatever happens with Brexit. As an aside I see that the auditors challenged the board in a couple of areas, where judgement is required and thus numbers can be manipulated, and then satisfied themselves that the treatment was reasonable. This is good to read and for once the auditors seem to be doing something useful. (Results)

SimplyBiz: Holding shares that have recently floated is definitely more nerve-racking than I would like but fortunately SimplyBiz has delivered with these maiden results. With group revenue up a handy 15% improved margins have pushed EPS up to 11.92p (beating the 10.5p forecast - with help from a reduced tax rate). As a sign of the asset-light, cash-generative nature of the business a high conversion ratio has reversed a £1.6m debt position at listing to a £6.4m cash position today. Some of this will flow back to shareholders as dividends with the rest providing ammunition for acquisition opportunities (which the board are actively seeking). Looking forward new legislation is likely to push more advisers towards SimplyBiz while long-term population trends should lead to more customers needing advice in the years to come. (Results)

XP Power: After a near 50% fall in share price over the past year it's pretty clear that XPP has fallen out of favour with investors and it's not entirely clear why. Certainly the company is exposed to the semiconductor industry, which was soft in Q4 and will probably remain so until H2, and there are a couple of decent acquisitions being digested but even so a P/E de-rating from 25 to 12.5 seems harsh! With these FY results both sales and profits have come in ahead of forecasts with an adjusted, diluted EPS of 172.8p (vs. 167.4p forecast). Operationally management are on the ball with a new factory in Vietnam about to become operational (avoiding Chinese tariffs) and a focus on higher margin, own-designed products (with these up to 80% of revenue). There is still economic uncertainty but only 24% of sales relate to the semiconductor industry and 2019 has started with a healthy order book. While the chairman, James Peters, mentions a dreaded second half weighting to sales I think that this is more reasonable than with some companies given the track record of XPP so far. (Results)

FDM Group: This really is my favourite type of company: high margin, high ROCE, cash generative, growing strongly and still run by the founders (who own 15% of the shares). For 2018 the trend of double-digit earnings growth has continued with EPS up 12% on a lower sales increase of 5%. The reason for this difference is that FDM have cut back massively on contractor revenue to focus on their higher margin Mountie business. The interesting thing about FDM is that it runs its own training centres to re-skill graduates, ex-Forces personnel and returners to work in order for them to succeed in IT roles. To my mind this must produce great employee commitment and a fairly consistent staff skill level. Looking forward FDM is seeing strong demand across all territories (although the bulk of work is in the UK) and analyst forecasts point to more double-digit growth in 2019. A really nice company which doesn't seem to get talked about much. (Results)

Pagegroup: I've been waiting a while for Pagegroup to put out these results and confirm that trading remains strong; I'm not disappointed. With sales up 13%, and profits up 20%, these are record earnings for this global recruiter and there's no real sign of this momentum slackening. On one side analysts are pencilling in growth >10% per annum for the next three years while the company itself has a strategic plan to expand up to £1bn of gross profit and £200-250m of operating profit (a 25-30% increase from today). So there's an appetite for growth and with exposure to EMEA, Asia Pacific, UK and the Americas I can see them achieving this even if one territory (such as the UK) hits trouble for some reason. From a quality perspective ROCE is 45% and CROCI 21%, despite the EBIT margin being just 9% (which is good for a recruiter), and yet the forecast P/E is just 12.4 with a yield north of 5% (including special dividends). I see real value at the current price. (Results)

Bodycote: After reading these results this morning, and watching the management webcast for analysts, I've wound up feeling pretty positive about their prospects. In the year just finished they managed to hike the operating margin 100bps to 19% with 20% the near-term target. This improvement allowed a 6% rise in sales to translate into EPS up 14% and FCF up 17%. Pretty impressive given the slowdown in orders seen from automotive and general industrial clients. The key drivers here were their Specialist Technologies arm (which has high margins), growth of 21% in Emerging Markets and Civil aviation revenue advancing 8%. From the webcast it's clear that CEO Stephen Harris has been a driving force in improving Bodycote and there's no particular reason to think that this trajectory is about to change. As an example while a reasonable chunk of sales are made to the automotive sector only about 11% of total sales are reliant on internal combustion engines and none at all are dependent on diesel engines; hence some of the well-publicised headwinds in the sector shouldn't have such an impact here. All in all a good set of results. (Results)

Gamma Communications: Continuing the trend seen since flotation in 2014 once again GAMA has posted a healthy double-digit increase in sales and profits. For FY18 revenue improved 18% while EPS jumped 25% as costs remained under control and margins strengthened. The most sales (74%) came from channel partners re-selling GAMA products and this market is pretty buoyant with sales up 14%. The remainder of sales were made direct by Gamma and here the increase was a strong 24% with some key wins from larger organisations (such as ALDI). The product offering is an integrated communications service encompassing fixed-line and mobile along with add-ons for video conferencing, application sharing and anything else that might help a business to collaborate. In today's wholly connected world this is vital functionality which most companies are only to happy to outsource to a trusted provider. Looking forward they've got lots of recurring revenue and should continue to grow, despite increasing competition, so long as they remain focused on their core business and don't get distracted. (Results)

H&T Group: In theory this chain of pawnbrokers should be one of my more stable and resilient shares but investor sentiment is just as fickle here as anywhere else. For 2018 the business traded well with earnings up by 13% on the same increase in sales. The key drivers here are pawnbroking, retail and personal loans although FX and other services add some diversification. What's interesting is that HAT want to become the premier provider of alternative credit in the UK and I can well believe that demand for these services will remain strong no matter what happens to the economy. At this end of the market, sub-prime and near-prime, interest rates are impressively high (49.9% is seen as a lower interest rate) but then so are impairments; if I'm reading the numbers correctly then personal loan impairments have actually reduced to 69% of revenue compared to 75% in 2017 and that's a good thing! I presume that actual defaults occur at a much lower, though hardly negligible, rate and that explains why banks don't touch this area. Still with lots of small shops and local knowledge I'd have thought that HAT is well placed to provide this service. With a P/E of ~10 and analyst forecasts for 2019 indicating 7.5% growth I continue to see HAT as a relatively unexciting part of my portfolio providing some form of Brexit hedge. (Results)

Somero Enterprises: This is another one of my perennially cheap shares despite a history of quality earnings and cash generation. Last year was no exception with 10% sales growth translating into EPS growth of 23% (adjusted for amortisation and stock options). With cash piling up on the balance sheet (now $28.2m and in excess of operational requirements) the board have decided to pay out another special dividend (and one almost equivalent to the ordinary dividend). The main contributor to this largess was strong growth in North America (the largest market) and elsewhere in territories like Australia and India. From a product angle sales of boomed screeds rose 9% while ride-on screeds grew an impressive 23% (the latter cost less while the former generate almost twice as much revenue) with a new machine designed for high-rise buildings now available and attracting interest. With Somero being very sensitive to economic conditions I'm always careful to consider their outlook statements and this one is a cracker. Essentially they've got a number of meaningful growth opportunities in a range of areas and customers are reporting project backlogs extending past 2019. While the market will turn at some point the environment for Somero is currently very positive and a bit out of line with a P/E of 12 in my view. (Results)

Burford Capital: It seems that this is a confounding proposition for both analysts and investors - principally because the company intentionally provides no earnings guidance whatsoever. The reason for this is that the timing of court cases is unpredictable and outside the company's control. Personally I believe that this presents an opportunity since Burford often exceeds expectations - this time delivering 151p vs prior forecasts of ~130p. Clearly this won't happen every year but Burford is hardly priced as a growth share with a P/E of ~14 in spite of its track record (e.g. earnings were up 26% in FY18). That said this is a long-term investment for me since there will be volatility in future earnings that's likely to whipsaw the share price around. The key metric for me, from the results (, is the dramatic step-up in investment seen in 2017 and 2018: both years saw £1.3bn of new commitments. It's this investment that will pay out over the next 2-5 years, in aggregate, much as a bio-tech company invests now for future profits. In addition the volume of single case commitments rose sharply, by 175%, in 2018 and this is positive since 75% of these single case users return to do more business with Burford. So my overall impression of the company is that it's becoming larger, more diversified and more experienced in selecting investments with potential. All of this suggests that Burford is my holding with the most upside and that if given an opportunity I should buy some more! (Results)

Focusrite: Good in-line trading statement here with a strong pipeline of new products ready for launch this year and the next. There aren't many numbers in the update but sales of £40m in the HY is very good since forecasts are for £79m over the whole year and typically Focusrite does more business in H2. Net cash is also looking good with this reaching £26.2m, up from £22.8m, which suggests that the forecast for £28.5m is likely to be beaten. That said analysts are currently predicting just 2% EPS growth this year, which doesn't go well with the P/E of ~27, so the business does need to keep up this momentum in order to drive an upgrade to forecasts. (Update)

Softcat: Following on from their "materially ahead" statement in January these are stunning results with sales up 21% and earnings up 40% with a cash conversion rate of 103%. Given that Softcat has a second half weighting, with H2 typically being 1.5*H1, then 13.8p for H1 gives you 34.5p which is above the consensus estimate of 31.9p for 2019 and the 33.9p indicated for 2020! Now this optimistic calculation may not come to pass but the business is growing across all offices, customer segments and technology lines with profit per customer also growing by 18.7%. In other words demand for Hybrid Cloud, Security, Software services remains undimmed which doesn't surprise me as IT is becoming ever more complex and customers needs all of the help that they can get. Looking through the results it's hard to pick out anything negative; my best guess on this front is that Softcat is an entirely UK focused business and with Brexit around the corner it's vulnerable to supply chain disruption and any slowdown in the UK economy. That's about it though and if the share wasn't on a punchy P/E rating of ~26 I'd probably pick up a few more shares; however it is and so I'll stay my hand for now. (Results)

Volvere: After all of the excitement last year this is very much a "steady as you go" trading update. Right now the company has interests in two operating businesses and Shire Foods is by far the largest. It's had a difficult few years but managed to create a pre-tax profit of £0.59m on sales of £18.3m (3.2% profit margin) in 2018. Volvere plan to invest another £2m in plant and equipment this year and hopefully this will start paying back in relatively short order. Sira Defence is massively smaller, turning over just £300,000, but Volvere believe that it has some useful IP which has value to clients. These are both outweighed by the cash pile of £34.1m though with this equating to a cash per share value of £10.94. This is roughly the price at which you can currently sell the shares (which are very illiquid)! With the NAV per share being £12.92, which puts them on a 13% discount, there doesn't seem much point selling now anyway. NB I don't know why the company quotes a NAV of £12.48 as this doesn't seem to add up? Slightly strange. (Update)

Bloomsbury Publishing: Short, in-line update for this independent publisher. Both the consumer and non-consumer divisions are performing well although I get the sense that the latter is perhaps doing slightly better. There's not a lot more to say except that net cash is up to £27m which is a little behind forecasts for £29m. (Update)

Learning Technologies Group: The share price here has been under a lot of pressure since last September with a "shorting dossier" by Stockviews (in late January) hardly helping. Nevertheless this FY results are pretty good, if you believe the numbers, with revenue up 83% to £94m and adjusted EPS up 68% to 3.23p (vs expectations for 3.04p). Equally impressive is the reduction in net debt to £11.5m, down from £15.7m at the HY point. Of course much of the step change here is down to the acquisition of PeopleFluent with this markedly increasing sales in the US and raising recurring revenues from 38% to 68% of total sales. A slight concern is that LTG still has a healthy pipeline of acquisition opportunities and to be honest I'd be happy for them to take a step back and let everything consolidate. This seems unlikely though if they're going to hit their new 2021 target of £200m in run-rate revenues and £55m of run-rate EBIT. Right now trading is in-line with net debt diminished even further to ~£5m. With current forecasts showing a 22% increase in EPS to 3.9p, putting the shares on a forward P/E ~18, it seems that LTG is being priced quite conservatively at the moment and this may prove to be a decent entry point. (Results)

SimplyBiz Group: Ordinarily I don't comment on acquisitions but this one is special due to it being very material for SimplyBiz. The plan is to buy Defaqto, a well known fintech platform, for £74.3m creating a group with a number of combined opportunities. Specifically Defaqto will take SimplyBiz into the General Insurance and Business markets while SimplyBiz opens up the advisory and asset management markets (along with the side benefits of being listed). With Defaqto being really quite profitable in its own right the purchase should be immediately earnings enhancing, even before any synergies. The market certainly seems to have taken a shine to the deal with the shares rising to 206p, a decent lift from the 180p placing price, and I'm in some agreement considering the natural fit between the two companies. Interesting times. (Acquisition)

Portmeirion Group: This decorative pottery group has a solid track record of slowly but surely raising its earnings while maintaining solid margins and cash generation. For 2018 sales and pre-tax profit came in slightly ahead of expectations while EPS of 72.12p came in slightly behind (forecast to be 72.5p). The key to this progress is keeping on top of the UK, US and South Korean markets (each provides very roughly a third of sales) while keeping control of inflation from labour and energy costs. Now it's fair to say that the style of pottery that Portmeirion produce isn't to my taste but it's consistently popular in certain countries and Portmeirion are continuing to add new ranges in a similar theme; so I have some confidence that they'll continue to grow in their steady fashion. Apart from Brexit causing issues with raw materials and uncertain tariffs there's not a whole lot to go wrong here; on the other hand sales aren't about to double or anything like that so I suppose that the upside is somewhat limited as well. As a result Portmeirion is never going to be one of my larger positions but I value its predictability in the lower half of my portfolio. (Results)

Henry Boot: A winner in the unpopular sector category Henry Boot engages in land promotion and property development with a certain amount of long-term success. Unfortunately 2018 wasn't as successful as the record-breaking 2017 and conditions remain challenging for 2019; so there are good reasons for the group being on a P/E of 9.5. Still the board are fully cognizant of market conditions and have taken action to reduce gearing down to a very low 6% while remaining disciplined with the contracts they enter into. So there's no overlap whatsoever with those disastrous contractors such as Carillion and Interserve - that's the benefit of a family-run business. In contrast Henry Boot have a very nice spread of revenue between land development for other housebuilders, developments on their own account and smaller units such as public-sector construction and plant hire. The problem as an investment is that there's not a lot of forecast excitement with single-digit rises indicated for the next few years. As such this is never going to be a large position, as with Portmeirion, but I'm confident that the business will perform well over the long term. (Results)

RM: Short, in-line update here. With forecasts pointing at profits being flat for the year, if not down very marginally, it would have been nice to get something more optimistic. The share price did fall slightly on the day but it's more than recovered now. I guess the fact that this is a quality business on a P/E ratio < 10 means that there really isn't much downside so long as the board keep operations on track. (Update)

End of month summary

I'm trying to be much more disciplined in my purchases these days after mixed results in 2018. As part of this I'm now identifying buying levels in advance and this seems to have worked well with both XPP and GAW (where the former is my largest riser of the month). Curiously SOM was also a double-digit winner despite the CEO's large share sale putting a dampener on the share price. On the downside I haven't done too badly although I'm surprised to see K3C down over 20%. I know that it's a corporate broker, which is exquisitely sensitive to business confidence, but the board claim to have a number of deals in play which should drive profits for this year at least.

Winning positions for the month: XPP 23%, SBIZ 20%, SOM 16%, GAMA 15%, RWA 14%, SCT 9%, HAT 9%, RFX 9%, NRR 9%, FDM 7%, TUNE 7%, BKS 5%, III 4%, KWS 3%, BOY 3%, GAW 2%, LTG 2%, DOTD 1%, WJG 1%

Losing positions for the month: BMY -2%, ADT -3%, PMP -4%, IGR -4%, BOWL -5%, PCA -5%, BUR -5%, BOOT -5%, PPH -9%, K3C -21%

A very solid month thankfully although it wasn't without volatility. At one point I was up more than 10% for the year, which feels quite remarkable, but a couple of hefty placings (from PPH and SOM) quickly knocked the shine off of this intra-month performance. In the end I made 4.1% for the month putting me up 8.9% so far this year. Given that this is just for Q1 I'm very happy with my performance so far although I'm far from sanguine about the future. The fact is that there are numerous reasons to be very cautious which is why I've moved to a 10% cash position and have no plans to deploy these funds in the short-term. Oh for a crystal ball!

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

comments powered by Disqus