It turns out that March was a remarkably positive month for my portfolio with 90% of my holdings either rising strongly or being broadly in-line with expectations. However with the volume of trading updates and result announcements coming in it was hard to keep track of any specific position. Still a surfeit of information is a nice problem to have as things do get rather boring in the summer when news flow slows to a trickle. What is noticeable is that many companies are either doing very well with earnings rising strongly or are doing terribly because their businesses haven't been allowed to reopen - and yet it's the latter group that have seen their share prices rebound as investors look to a sunny future.
Personally I prefer companies with a little less hope in their share price such Softcat, Belvoir and Luceco. These three companies performed extremely well during the pandemic but they're not just lockdown winners. Instead they're simply well-run companies providing a service or product that their customers are happy to pay for. It's no surprise that this trio were some of my top performers in March, along with Tandem and Sumo, but not far off half of my holdings gained more than 10% during the period. Unfortunately this positive action was offset by a hefty fall in my largest position as GAN investors sold their shares both before and after the full-year results. I don't really understand this behaviour, given that this is a medium-term story, but I guess that some people like to lock in their profits.
Still I managed +1.2% for the month and +7.2% for the YTD which is pretty remarkable given that GAN's fall took out about 5% of my portfolio! That's the benefit of being diversified with a maximum position size of ~10%.
Risers: SCT 24%, TND 20%, BLV 19%, SUMO 16%, GMR 16%, LUCE 15%, STAF 14%, CCC 14%, KNOS 13%, FNX 13%, VLX 11%, TM17 10%, GAMA 9%, TSTL 8%, SPSY 8%, FXPO 7%, G4M 6%, K3C 5%, GAW 4%, PLUS 2%, BUR 1%, BOO 1%, AFX 1%, BOTB 1%, RWS 1%
Fallers: DRV -1%, DX. -1%, BME -3%, CMCL -6%, SLP -7%, GAN -28%
DX Group Bought at 28p
The share price has been weak for DX recently despite the sequence of positive trading updates. It's possible that the price got a little over-extended, as the business returned to profitability, and there's no harm in a period of consolidation. That said I'm impressed by the interim results and took the opportunity to join the group conference call with management. Here the tone was so confident that I decided to add 50% to my existing holding during the call on the basis that liquidity was available in the market. It was an unusual move for me but management is key in any business and doubly so with a turnaround. In speaking and listening to the directors at DX it's become clear to me that they are the type of cost-conscious, plain-speaking, focused management that I look for and that they have a proven plan for making DX a much more efficient and profitable machine for growth. They could just be blowing smoke but they've done this before and have done what they said they would three years ago when they joined the company. It's not all perfect of course and they don't try to disguise that fact. But they're willing to put in the hours to complete the transformation of DX and I'm happy to back them in this journey.
Sanderson Design Group Bought at 122p
This is a recent investment idea which I picked up from the Cockney Rebel chatroom. The thesis here is that this is a business which badly lost its way long before the pandemic with the share price ultimately falling over 80%. The old CEO fell on his sword and a couple of years ago Lisa Montague joined on the back of a successful career in the luxury good industry. Since then the management team has been refreshed and a strategic review completed. This identified that the company has a strong portfolio of brands but I suspect that these were mismanaged. So the medicine of focusing on these brands, the core products of wallpaper, fabric and paint and three key geographies (UK, Northern Europe and the US) is not much of a surprise given the diagnosis. Obviously the lockdown in 2020 threw a massive spanner into the works but since last summer the news flow from SDG has just been improving with better than expected trading performance in July, August and September continuing towards the end of the year. Partly this was down to consumers spending more on home improvement but the board have placed the group in a position to benefit. The last update in January indicated that PBT for the year would be no less than £6.3m which is a big improvement on forecasts. The uncertain outlook has left 2022 forecasts unchanged and potentially lagging the progress in the business which is the reason for investing now.
Ferrexpo Bought at 388p
Following up on my maiden purchase last month I've decided to double my holding on the back of some excellent results. Ferrexpo enjoyed an excellent year in 2020 and notably moved to a net cash position after using its strong cashflow to pay off debt. This has enabled the payment of a large special dividend and there's every reason to expect these pay-outs to continue. On top of this production is being increased and high-grade iron ore prices remain elevated. With China and the US driving a global recovery from the pandemic I'm betting that Ferrexpo stands to benefit. There are clearly risks due to the mine being located in the Ukraine when you consider that Russian troops are apparently massing on the border but is this anything more than sabre rattling? Russia has annexed the Crimea and there is a slow-burning conflict taking place on the Eastern flank of the Ukraine. But it's hard to believe that Putin has any desire to take over the entire country; not that this makes the border skirmishes any less repellent but the risk to Ferrexpo appears remote if non-zero. On this basis the company appears to offer real growth at a decent price.
Plus500 Sold at 1320p - 21.1% gain
This has been a solid performer in my portfolio since I bought in last year with several material dividend payments. However despite being optically cheap the shares haven't made much progress in getting on for a year now. This is despite earnings forecasts for 2021 and 2022 rising steadily over this time against a backdrop of continued market volatility. So I've lightened my position here by a 1/6 to release capital for potentially more attractive opportunities. It's only a small top-slice because I believe that Plus500 will continue to do well, as it matures into more of a financial services business, and I see scope for further chunky dividend payments out of free-cash flow.
Burford Capital Sold at 613p - 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 reduced my position again 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.
Following a number of updates reporting trading to be materially ahead of expectations these HY results continue the positive trend. This is the product of several years effort and it's notable that the business is making solid profits on only a small (7.4%) increase in revenue. The key to this is a significant improvement in the DX Freight division from a loss of £1.4m to a profit of £8.1m. In part DX have benefitted from the lockdown boosting deliveries and Brexit boosting parcel rates but management have also consciously ended marginal contracts and replaced them with ones that provide a decent margin. This is all part of the game plan and you can understand why the board are strategically opening new depots where beneficial. The DX Express division had a tougher H1 due to a fall in Document Exchange revenue and the impact of the lost Passport Office contract. Management have detailed plans in place to improve customer service and retention in the Document Exchange space and hopefully these will stem the decline in this area of the business. Given the way in which the board have improved operations and commercial discipline so far I think that we can be confident of further progress and this outlook statement "we view prospects with an increasing level of confidence" supports this conclusion. Ultimately I like the fact that this is a relatively simple business and that the directors are heavily invested in the turnaround. Like them I view the future for DX with some optimism. (Results)
As K3 enters its last quarter of the financial year it's pleasing to see that trading in H2 already puts them ahead of expectations. All business divisions have been performing well with KBS notably strong. I suspect that some of the corporate transactions intended for last year are unlocking along with some desire from business owners to lock in capital gains at current rates. This is all good news and the update mentions that the pipeline remains strong for the remainder of the year. In addition the new diversified revenue stream appears instrumental in moving the group on from its old feast/famine model. This announcement went down well with investors as the shares gapped up to 300p, twice the level where funds were raised in 2020, before consolidating at a new level above 290p on miniscule volume. I expect to see further material progress as the year unfolds. (Update)
Another positive update from BME with adjusted EBITDA being pushed up yet again to a range of £590-620m compared to the £540-570m announced in January. This is quite some improvement and comes after the board decided to repay roughly £80m in business rates. In other words the business is flying with sales and margins remaining strong. Sadly this good news was over-shadowed by a note of caution for the future and the shares continued their decline from the 600p peak reached in mid-February. The problem is that sales started elevating in March 2020 and this makes for a tough sales comparison going forwards. In addition people stocked up because of Covid-19 and it's hard to predict how this business will unwind as restrictions ease. Hence there are significant forecasting challenges for the new financial year. This news has certainly spooked investors, as uncertainty always does, and it'll take some time to get a more accurate perspective on the new year. Still BME is a heck of a business and I doubt that it'll suddenly go into reverse just because people are allowed to shop in more places. (Update)
This Q1 update is notably light on numbers so there's not a lot to go on. Trading remains strong and the board remain comfortable about the outlook. As is always the case revenue growth will be driven by attracting new customers and growing the active customer base. At the bottom-line continued cost control and efficiency will maintain profits. That's about it but we'll learn more in mid-April with Q1 results publication. (Update)
I always like to see results where top-line growth is in the same ball-park as bottom-line growth. It says to me that the company is stable with defendable margins and little in the way of adjustments or other funny business. With Team17 I'm happy to say that 34% sales growth is echoed by 36% PBT growth and 33% EPS growth. These are very solid numbers and with earnings quality remaining high, as profits convert efficiently into cash-flow, I feel that the business deserves its high P/E rating of ~39. Clearly Team17 has benefitted as the pandemic boosted computer game purchases but equally they released a record 10 new titles with the solid underlying back catalogue generating 78% of revenues. This is significant as it suggests that the games have a reasonable shelf-life which makes sense when you consider the target market. For example the Worms franchise is now 25 years old and yet it rumbles on as new players discover the attractions of its puzzles. Looking forwards there is a whole raft of titles due for release in 2021 and the new generation of consoles should drive sales as consumers upgrade and look for ways to enjoy their new purchase. I don't have a lot more to say here as the accounts are very simple and the growth trajectory is easy to understand. The company does capitalise some development costs, which boosts reported profits, but these are largely amortised within 12 months. So I don't have any concerns about manipulation on this front. I image that while Debbie Bestwick, CEO and Founder, remains happy to be massively invested then I will too. (Results)
This is another long-term holding of mine and one that has also performed well during the pandemic due to certain customers spending heavily. Still that only boosted total revenue by 7.7% while at the adjusted profit level this converted into a mighty 36.6% growth rate. Unusually the adjustments being made are such that the adjusted EPS of 126.4p is actually lower than the basic figure of 133.8p. Normally companies massage their earnings in the opposite direction! Still it's a very fair adjustment as it relates to the acquisition of BT Services France where £14m of assets were acquired for €1 - the catch being that the business is loss-making and future losses will be off-set against this technical gain. Either way management did well in 2020 to deal with difficult markets in Europe and the US along with a significant drop in expenditure from industrial customers in the UK. Fortunately the group is well diversified and Public Sector clients took up much of the slack. This resilience belies the apparent low operating margin which ignores the fact that pass-through costs are a major feature and that reported revenue should be adjusted for this fact. For the coming year analyst forecasts seem off in that the 2021/2022 forecasts have been essentially identical for the last 12 months and they're basically the same as the result for 2020. Given the positive start to the year, and the quiet excitement evinced by the board, it's clear to me that the analysts are out of line. I suspect that we'll receive positive trading updates in due course and if the share price remains weak these will represent solid buying opportunities. (Results)
A very brief update here with trading up to the end of February 2021 being in line with expectations. A decent outcome with the majority of UK and European retail stores closed during the period. In addition we have yet another dividend being distributed from truly surplus cash. This is a regular feature with Games Workshop even if the dividends occur on an irregular basis. (Update)
Last year was volatile for Alpha FX to say the least with the share price dropping more than 60% on fears that the company might go bust. Obviously such a fate was avoided but it felt pretty scary at the time. What's absolutely remarkable is that profits actually grew 20% to £14.6m on a group sales increase of 31% to £46.2m. This was sufficient to generate an underlying EPS of 32.8p which is comparable to pre-pandemic expectations for around 36p of earnings. That's positive but then again analysts raised their forecasts to 35.5p early in 2021 and the numbers have come in 8% below that level. There is no single reason behind the shortfall that I can see. Instead a combination of factors, such as increased headcount, Brexit planning, office moves and client repayment provisions, have increased costs and reduced margins. None of these changes are permanent and they should either reverse or serve to boost future profitability. So I'm inclined to agree with the directors that the business has proved resilient, under the most testing of conditions, and that growth is likely to remain strong if Covid-19 remains under control. One of the keys to this is the entrepreneurial corporate culture of Alpha FX and that comes across clearly in the narrative to these results; the plan continues to be one of building a group that can prosper in the FX and alternative banking space even at the expense of short-term costs. It's probably the latter which has led to an 8% fall in forecasts for 2021 (or brokers have just caught up with the share placing from last April which added 7% to the share count). In this light I'm not too surprised that the share price has fallen back 16% over the last couple of months but this feels to me like consolidation rather than anything more malign. (Results)
This is a company outside of my usual comfort zone in that it's a vertically integrated iron ore miner based in the Ukraine with a single dominant shareholder. So there are evident risks and not just from fluctuations in the commodity price. On the other hand Ferrexpo has a high operating margin and return on capital (both above 30% for the last five years), pays a rising dividend and generated enough cash last year to become entirely debt free. Add on steadily improving earnings forecasts with a price that has just closed above its ATH from a decade ago and the attraction is clear. Ferrexpo really made the best of it in 2020 with pellet production up 7%, iron ore prices up 17% and costs falling 13% to turn a 13% rise in revenue into a 58% jump in EPS to 107.9c. There are good reasons to believe that this trend will persist as a number of key investment projects were completed in 2020, which improved production, while high-grade iron ore prices have gone above $200/ton in February compared to the average of $122/ton seen last year. That's very positive for the current year although it's best not to get over-excited since the pellet premium (above the iron ore fines price) halved from $57/ton to $29/ton as the pandemic reduced demand and exports shifted towards China to take up the slack. Still with these factors in play, and a much stronger balance sheet now then existed a decade ago, there's every reason to believe that the current price momentum can continue. Whether it'll continue for the 50 years of ore reserves that Ferrexpo has on the books is unknown but for now this looks like the right company in the right place at the right time. (Results)
These are record results from Luceco and that's no idle boast with gross and operating margin improvements leading to a doubling of profits. That's a fantastic result, given the difficulties of the year just passed, but Luceco isn't simply a lucky beneficiary of the pandemic. This turnaround has been three years in the making after a disastrous 2018 when profits more than halved. Since then the gross margin has improved by 10.9% to 39.8% with 3.6% of that gain made in 2020. This is primarily down to manufacturing efficiency gains, better sourcing and improved sales mix. To my mind these sound like sustainable improvements that will serve the business well in years to come. This is important because Luceco doesn't sit at the cutting edge or have some exposure to scalable cloud technology. Instead it manufactures switches, LED lighting and extension leads. These are the types of boring product where quality, reputation, cost and availability are paramount. If you can do these things better than anyone else then sales are there for the taking. Looking forwards revenue growth has accelerated from the high levels achieved at the end of the year (with H2 recovering to more than offset a weak H1) which is promising. Inflation in raw material prices is a concern (except that it effects all manufacturers equally) but operating margins should be maintained even if gross margins come under pressure. With analysts forecasting a paltry 8% rise in EPS for 2021 I'd say that there is plenty of scope for this forecast to be handsomely beaten and that the shares don't look expansive even as they head to an ATH. (Results)
Gamma has been an excellent investment for me since I initially bought in three years ago. Not just in terms of the share price doubling, although that's very welcome, but more through repeated high-quality earnings growth of 20-30% at improving operating margins. Much of this growth is organic but Gamma has also made a number of targeted acquisitions in Europe to increase its footprint in Spain, Germany and the Netherlands. Somewhat fortuitously the board also acquired Exactive Holdings in February to bring in Microsoft Teams expertise. Talk about good timing. What is interesting is that the board rarely mentions integration issues which suggests that they're able to find and on-board purchased companies in a consistent manner and without any fuss. It's also worth noting that all acquisitions, totalling £52m, were funded from internally generated cash flow and that Gamma remains healthily cash positive. The rationale for expanding into Europe is that the UCaaS market in Spain and Germany is significantly less penetrated than in the UK but is expected to grow rapidly. On the face of it, given Gamma's success in the UK, there's no reason to believe that their product offering will not be welcome across the Channel. Looking forwards it's clear that Gamma has a product set which is well suited to organisations that wish to work remotely or choose to allow flexible working. The pandemic had essentially no impact on Gamma and analysts remain positive with 20% EPS growth already inked in for 2021. I'm very happy with that. (Results)
These feel like some bumper interim results with a 10% rise in sales driving gross profit up 20% and operating profit up 41%. That's quite some operational gearing. With EPS for the period coming in at 23.3p analysts covering the stock have scrambled to increase their FY forecasts to 44.9p. However this is only a 6% improvement and somewhat below a simple doubling of the half-year figure (which would give you 46.6p). Some of this caution may be down to Covid-related cost savings being a factor in this bottom-line growth but equally management are confident that they will deliver a full year result significantly ahead of previous expectations. What I find interesting is that this performance has occurred despite enterprise customer gross income declining by 9% and certain verticals (non-essential retail, travel, entertainment and events) yet to return to pre-pandemic spend levels for obvious reasons. The slack has been more than taken up by mid-market and public sector clients with some of the largest ever deals being signed off. I like this kind of flexibility in a business as you can't always expect the sun to be shining. Now it's possible that deal sizes will revert to normal levels but much of the spend with Softcat is non-discretionary so I'm not too concerned. They've navigated the pandemic quite ably and without any recourse to government support (unlike some of their customers). Frankly this is a great result and I need to up my exposure to this company. (Results)
This is one of the smaller, slower burning shares in my portfolio. However it ticks so many of the boxes that appeal to me: motivated management, high returns on capital, excellent cash generation and a track-record of double-digit growth. This is all available for a P/E of ~20 while you're getting paid a yield of 4% just to hold the shares. So how did Spectra do last year given that it's heavily exposed to the banknote sector and cash usage took a nose dive? Well sales grew 11% with EPS up 14% to 11.9c as an existing central bank customer demanded more materials along with additional equipment. In addition the company innovated in several areas related to bank note security (such as improving authentication sensors and producing machine readable covert taggants), developed systems to decontaminate and clean bulk banknote volumes and renewed six lottery contracts. Looking forwards the stable central bank revenues will continue to fund innovation in areas that could deliver material growth over the next five years. The investment case for Spectra is thus pretty simple: this is a stable, profitable and growing company operating in specific technical niches. Potential sales are prudently not included in forecasts which explains why the forecast history contains large rises when such contracts are announced. On several fronts Spectra is working with clients who could decide to sign very large, ongoing contracts which would substantially boost earnings. In my view this option value accounts for little of the company's current valuation and that's the attraction. (Results)
And now we come onto one of my most disappointing investments. Following the Muddy Waters bear attack in 2019 the shares have utterly failed to recover to even the level plunged on the day of the attack. This is quite reasonable as reported earnings have struggled to come close to the earnings reported in 2017-18 despite a large increase in deployed assets. This does rather add weight to the argument that unrealised earnings were being used to generate high reported growth levels up until 2019 and this was all a bit of a scam. You can see the problem in these results in that group-wide realisations are up 72% from $354m to $608m and yet IFRS reported income is flat year-on-year while reported EPS is down 20% from 97c to 78c. Which of these numbers provides the most useful representation of the business? The argument put forward is that third-party funds are being used to drive growth and that performance fees on these funds are typically back loaded. This means that the full cost of these investments is being borne now in the expectation of future profits. I can't say if this scenario will play out but the cash-flow statement suggests that closed matters do actually generate cash. In previous years over $500m of cash inflow has been masked by much larger amounts flowing into new legal assets making Burford look like a business that never converts profits into cash. This year there was a drop from 7% to 4% of inbound inquiries turning into closed financial assets which may be down to Covid-19 disruption along with presented matters being of lower quality in general. As a result only $295m was put into new assets compared to $476m of cash inflow leading to a net cash inflow of $180m. This is still a lot lower than the reported operating profit but it is in the same ball-park. As ever management provide no forward-looking guidance and analyst forecasts for a 12% growth in earnings for 2021 are pretty useless. What I would like to see is some unexpected good news from Burford to inject some optimism into the shares. Without that I suspect that they will drift despite potentially being good value. (Results)
Despite sales falling 5% Tandem enjoyed a spectacular year at the bottom-line with EPS jumping 69% from 40.5p to 68.5p. This comes on the back of three solid years of positive earnings but 2020 represents a huge step-change in performance. There doesn't appear to be a single reason for this improvement bar Tandem taking advantage of exceptional demand for bikes and outdoor equipment during the lockdown. Instead it seems that management have been running a tighter ship all round. At the gross profit level margins increased from 30.4% to 32.9% as little discounting was required and low-margin products were dropped for higher-margin ones. This left a bit more profit to absorb operating costs and these decreased a handy 7.5% due to reduced travel/exhibition costs and lower storage charges for reduced stock levels. Together these were enough to lift operating profits by a third. Such improvements can't be expected in 2021 but it seems that management are now more focused on running Tandem efficiently. Usefully directors report an encouraging start to the year with sales in the first 11 weeks up ~90% compared to the previous year. There remain issues in the supply chain and higher shipping rates in general, which will impact margins, but the much larger forward order book should allow the business to make progress. This sense of optimism is reinforced by the acquisition of freehold land next to their existing Birmingham facility which will allow for an expansion in warehousing and distribution. I would suggest that management recognise the opportunity in front of them and are intent on growing Tandem after 20 years in the doldrums. This will be positive for all shareholders. (Results)
Bought in as a replacement for Codemasters it's fair to say that Sumo had a decent year with sales up over 40% with 26% of this growth being organic. This didn't translate into bottom-line earnings, for a number of reasons, but cash generation from operations remained stable. The biggest hit to profits, a hefty £7.3m, came from costs related to the Pipeworks acquisition. This seems quite a lot when compared to the potential maximum purchase price of $99.5m but should at least be a one-off impact. In addition the share-based payment charge doubled to £5m and there were other exceptional costs of £1.2m related to acquisition expenses. I'm not sure that these costs are either one-off or exceptional so that's worth bearing in mind as the company actively pursues its acquisition pipeline. Still IFRS reporting standards have proved no impediment to Keywords Studios becoming a £2bn company and it's plausible that Sumo can follow the same path given the tailwind of a fast growing gaming industry. In line with this growth Sumo is now working on more than 40 projects with 28 different clients (up from 21 projects with 12 different clients a year ago) which is impressive even considering the Pipeworks purchase. Given that Client-IP projects are fairly predictable in that they generate mainly development fees, along with some royalty upside, there's a certain stability to revenues independent of the success of any single game. To add some excitement Sumo also have Own-IP projects where they develop and own a game which means that they are exposed to its positive reception or otherwise. This is a useful side-line but I'm glad that the majority of revenues are contracted (even if management would like more Own-IP projects). This means that more projects and more clients should directly translate to higher sales. Looking ahead the board are very confident and analysts share their enthusiasm with EPS forecast to jump 251% to 9.3p. Obviously there will be adjustments required to achieve this result but Sumo do feel like a decent company in the right industry at the moment. (Results)
Following the repeal of a US federal ban on sports betting in May 2018 this is my "picks and shovels" play on gaming in the States. GAN is a B2B supplier of SaaS solutions for online casino gaming and sports betting in the States. As one state after another enacts legislation to regulate online gambling then GAN piggy-backs on casino operators as they rush in to fill the void. Because this is a state by state process the opening of new markets is erratic but in time I expect the addressable market to be much larger than at present which makes GAN a long-time hold. This is worth remembering as GAN shareholders are a febrile bunch as indicated by the share price almost halving in the six weeks leading up to and including these FY results. Ordinarily you'd see such a drop with a major profit warning or some other unexpected, devastating piece of news but that's not the case here. Instead GAN missed their FY forecast due to the licensing of a patent for $3m (linking real-world and on-line accounts together) slipping from Q4 into 2021. In addition a separate, known impact to revenues came from FanDuel migrating user accounts to their own digital wallet in Q3 - while annoying it was hardly a surprise although with FanDuel accounting for 42.6% of sales there is an obvious customer concentration risk here. Together these factors, along with a doubling of operating costs as the business scaled up, ensured a hefty loss at the bottom-line despite a 17% increase in sales. Looking forwards GAN has signed up a number of new clients and expects 2021 to deliver $100-105m in revenue with half of this coming from Coolbet. This implies a 50% increase in existing gaming sales from $35m to $50-55m which feels like a decent growth rate. I do expect continued share price turbulence but GAN does look attractive with such a regulatory tailwind behind customer growth rates. So are the shares worth a flutter at the currently depressed price? Quite possibly although I am at my portfolio allocation limit of 10% and that's enough exposure for me. (Results)
Disclaimer: the author holds, or used to hold, all of the shares discussed here