November 2020 Portfolio Update

It's a pleasure to report on a decent result this month despite the great rotation from growth to value. Clearly news of multiple vaccines proving effective is fantastic news for everyone but even so the sudden enthusiasm of investors for Covid-damaged stocks took me by surprise. Certainly many of the travel and leisure stocks that have suffered this year will bounce back but I can't help feeling that it'll take time. On the other hand everyone I know is fed up with the lockdown and a huge wave of unmet demand is likely to be released when restrictions ease. In that light perhaps I should have jumped into the fray?

Even without this the majority of my holdings made ground with a good number of standout performers. At the top K3 Capital is once again in favour as people see the corporate finance market opening up along with additional opportunities from recent acquisitions. IG Design has also proved popular as reports of Christmas being cancelled have proved to be untrue and retailers have ordered hefty amounts of wrapping paper and cards. Then, of course, there's the cut-price offer for Codemasters. In my view the selling price is tantamount to daylight robbery, and the shares should be up by much more than 21%, but there you have it. On the downside there were almost no losers to speak of except for Caledonia Mining and LoopUp. The former has fallen back along with the gold price while the latter delivered a shocker of a profit warning. This really came out of nowhere and investors reacted predictably by selling indiscriminately. They might have been right to do so.

Overall then my portfolio was up a very decent 6.6% in the month taking me to 16.0% YTD. This isn't quite my high point for the year but it's a very acceptable result.

Risers: K3C 52%, IGR 42%, DX. 31%, SDI 21%, CDM 21%, DRV 21%, SLP 18%, AFX 18%, BOO 15%, TM17 14%, BUR 14%, III 11%, GAN 11%, VLX 9%, BLV 9%, PLUS 5%, SONC 5%, TAM 3%, SONG 3%, TPFG 1%, SCT 1%

Fallers: LUCE -1%, TSTL -1%, SPSY -2%, CCC -2%, GAMA -4%, BOTB -7%, CMCL -11%, LOOP -60%


Codemasters Group Bought at 422p - November 20

In the last three months Codemasters has made several attempts to sustain a break-out above 400p. Until now these have always failed with the price falling back 10% or more. So I've been waiting for the price to close above 420p on the basis that this is the highest price paid by anyone to date. In the end my patience was rewarded and I managed to double my position as momentum kicked in and other buyers jumped on the same buying signal. It could always reverse again but I think that finally Codemasters is on its way again.

Luceco Bought at 224p - November 20

I took an initial position here on the back of an expectation-beating trading statement. As often happens though the price put in a sharp reverse a few days later and plunged back to the previous resistance level at 220p. This is a pattern that occurs repeatedly but not predictably. With volume falling at these lower levels I took the view that averaging-down was the right action to take. At the very least the shares were back to where they were before the update and the company looks even cheaper with the recently upgraded forecasts. It's hard to see the price going much lower with the series of recent forecast upgrades in the bag but you never know!

Games Workshop Bought at 10197p - November 20

It's pretty obvious that I shouldn't have dumped my outsize holding in Games Workshop back in the summer. My expectation that sales would be harmed by the closure of all stores was dead wrong. If anything a much higher volume of sales emerged as players sat around with nothing to do but paint models. I could see my mistake plainly but at the same time I couldn't quite believe that this growth was sustainable. Again I really should have known better. It took last week's astonishing trading update to shake me out of my torpor. In it we learned that half-year PBT would be not less than £80m (36% growth from H1 2019). When you consider that FY estimates have just £132m PBT for the FY it's clear that either these forecasts are going to get destroyed or the company is going to make just £52m in H2. This seems unlikely and as a result I've taken GAW back to a decent holding size as the share price has wobbled in the days following the update.

Calnex Solutions Bought at 83.7p - November 20

This is a very new listing and ordinarily I avoid these like the plague. There's a structural information asymmetry here, even with a detailed prospectus, and the retail investor is at a disadvantage. Occasionally though a decent company floats at a reasonable price with insiders retaining meaningful stakes in the business. Calnex fits the bill. It provides specialist testing equipment for key network equipment with customers operating in the telecommunications and data-centre sectors. With 5G being rolled out this is very much a growth market and clients such as Cisco, Nokia, Samsung and Verizon aren't about to reduce their testing of critical infrastructure just to save a few pennies. From a quality perspective the company is profitable and growing fast. Revenues over the last few years were £8.4m (2018), £10.5m (2019) and £13.7m (2020) with forecasts indicating £15.4m for 2021. Over the same period earnings have quadrupled with a little volatility in progression as R&D spend has flexed. The catalyst for my purchase came with the maiden interim results which led with a 37% rise in sales, to £7.7m, creating a 90% jump in profits. Momentum in the business looks strong and the shares aren't highly valued on a P/E of ~23 even with the recent price rise. Elsewhere the well-regarded investor Private Punter has written about Calnex here, here and here. I agree with his conclusions and look forward to the next update.


FDM Group Sold at 1003p - November 20 - 15.6% gain
Springfield Properties Sold at 96.2p - November 20 - 3.2% gain
Franchise Brands Sold at 88.5p - November 20 - 14.8% loss
Medica Group Sold at 98.2p - November 20 - 39.0% loss

With the announcement of a second lockdown I decided to clear my portfolio of the companies that hadn't really recovered since the first lockdown and were likely to be further impacted. Fortunately I got rid of my most vulnerable holdings back in the Spring but I'd optimistically held onto this quartet. The results have been mixed. For a consultancy company FDM has proved remarkably robust which is what you get when you have founders at the helm. In the middle Springfield Properties and Franchise Brands have coped reasonably well with the pandemic but I'm not certain that they're about to bounce-back to a high level of growth. The real laggard though is Medica although I do suspect that the refreshed management team are about to turn the company around. Unfortunately the group is wholly dependent on the NHS and it's become clear where the pricing power resides (it's not with Medica). They may be able to grow through acquisition but it's hard to see Medica being able to re-invest meaningfully in order to leverage its high ROCE. So they've all gone and given me a chance to invest elsewhere.

SDI Group Sold at 87.0p - November 20 - 51.7% gain

I like SDI a lot and very much rate the management team. They've done a sterling job of growing the company by acquisition in recent years with an eye on how each business can be consolidated and made more efficient. In addition the share price has been very strong lately which suggests that investors see SDI as a post-lockdown winner. So why have I sold half of my holding? Put simply SDI is still a small outfit and the shares are not all that liquid. In addition I'm basically fully invested and want to take advantage of share price weakness at Games Workshop. The only way to do this was to reduce another holding and SDI seemed an obvious candidate. If the price falls back then I'll look to reinstate a full position; if it doesn't well at least I'll benefit with my remaining holding.

AJ Bell Sold at 401.5p - November 20 - 3.1% gain

I picked up some AJ Bell six months ago on the basis that this is a high quality, very profitable business with high customer growth. The only problem was the high valuation is everyone "knows" the attractions of the business. Still with the share price having gone nowhere for a year, despite steady profit growth, I figured that a break-out above 430p was just a matter of time. To be fair the share price has had 3 or 4 goes at this resistance level but the volume hasn't really picked up and the shares have fallen back each time. Right now they're back at the 400p support level and toying with the 200-day MA. It could go either way from here with the P/E still being a heady 45 while current forecasts have no earnings growth indicated for 2021. At the same time the business hasn't served customers well recently with systems locking up during the recent vaccine announcements and investors repeatedly having issues when logging in. So I'm happy enough to get out at break-even with these funds now switched to Calnex Solutions instead.

Liontrust Asset Management Sold at 1357.93p - November 20 - 2.1% gain

Another share which has failed to make headway this year is Liontrust. Operationally the business has performed well, despite market volatility, with most funds being first-quartile and AUM rising strongly through acquisition and organic growth. The shares aren't even that expensive given a history of double-digit earnings growth and high quality metrics. Even so the price has stalled at the 1450p ceiling multiple times, despite a number of decent trading announcements, and it's hard to see what's going to break this pattern in the near future. As a result I took the decision to redirect some more funds into Games Workshop. The share price action here has been most perplexing since the last trading update but I see this as opportunity to get back on board with a business that I shouldn't have sold in the first place!


Codemasters Group

Ordinarily a takeover approach for one of my holdings would be welcome - or better than a disappointment - as they usually come offering cash at a decent premium. Sadly this opportunistic approach from Take-Two Interactive fails on both fronts. The offer, such as it is, consists of 120p in cash and 0.02834 new Take-Two shares for each Codemasters share. The latter is a movable feast but right now TTWO trades at $161.57 (or £122.25) so you're getting £3.46 per share in the US listed company. With CDM trading at 435p before the announcement the takeover premium is a miserly 7% (and just 11% if you use the more optimistic value of 485p from the announcement). Frankly this is taking the piss. Even more so when you consider that Codemasters is trading very strongly and likely to perform very well as the benefit of new releases/consoles makes itself felt. There's no doubt in my mind that Take-Two are trying to buy the company on the cheap and benefit from all of the upside which rightfully belongs to existing shareholders. So why are the directors recommending this crappy offer? Could it be that this is a chance for them to cash out their options before remaining in their current roles with Take-Two and receiving hefty Take-Two RSUs? They're certainly not going to lose out. Still the directors represent less than 5% of the share count and more than 75% of shareholders have to approve the scheme for it to pass. This is quite a hurdle and I hope that institutional investors will vote against the current offer. I'm certainly going to do this while the current terms stand. If enough of us oppose this derisory approach we have a chance of benefiting from Codemasters for many years to come. (Takeover)

3i Group

I'm sure that when investors saw the share price halve over the span of a month, back in Feb-Mar, they were judging 3i to be a lockdown loser. I can see the logic in this with Action, the discount retailer, being by far the largest holding in the portfolio at £4.3bn and subject to multiple trading restrictions. In the event Action's performance exceeded expectations with strong like-for-like sales, EBITDA and cash flow growth. This has been a stunning investment for 3i which suggests that it's unwise to bet against a winning team even during a pandemic. Their second largest position, a 30% stake in 3i Infrastructure, also contributed strongly to both the NAV and operating cash profit. As a result the NAV has bounced 12.5% since March (and 3.7% year-on-year) to 905p despite the array of lockdowns across Europe. As might be expected the pace of cash investments fell in H1 with just one new investment in GartenHaus (an online retailer of garden buildings) in September. I can see this business doing well. 3i also funded four bolt-on acquisitions to existing holdings and moved from net cash to a small level of gearing. In terms of sectors consumer, e-commerce, healthcare and business services have done well while travel and automotive remain challenging. The key for 3i is that their investments are well diversified and aligned with secular growth trends. I suppose that this isn't the most exciting investment imaginable but I enjoy the private-equity exposure and diversification that it provides. (Results)


These HY results demonstrate the ongoing benefit of operational gearing for Volex. Total sales are roughly where they were 5 years ago, with 3.5% year-on-year growth whereas underlying PBT is up 37% and underlying EPS has jumped 52% from 8.5c to 12.9c. These are remarkable numbers and testament to the efforts of current management to reduce costs and re-focus the company on higher margin opportunities. As a result gross margin is up 200bps to 25.1% while operating margin is now in double-digits at 10.3%. Happily this margin expansion applies across the board, in both integrated manufacturing (IMS) and power products (PP), although margins are likely to fall back a little in H2 as FX and copper pricing benefits reverse. Still the underlying trend is very positive. Looking at the separate segments IMS benefited from high-demand with data-centre customers and in specific parts of the medical device supply chain. Other areas were materially lower (diagnostic imaging and surgical treatment) but not enough to offset the overall gains. In PP some customers reduced their order levels in Q1 before resuming normal operations in Q2 as countries shifted to home-working. In addition EV automotive sales jumped 78% as electric vehicle demand continued to rise. Looking forwards Volex have a strong forward order-book for Q3, as Q2 strength has continued, which bodes well for the full-year. Add on current and future acquisitions, such as that of DEKA in the power product space, and there's every chance that Volex will meet or exceed current analyst estimates. Or to put it another way I can't see a reason why the business should lose its current momentum. (Results)

Caledonia Mining

Caledonia is an object lesson in how gold miners are highly geared to the gold price. Since reaching a yearly high in August the gold price has slumped a massive 9% and is back to where it was in July. Not much of a slump really. Over the same period Caledonia's share price is down over 30% and that's a serious drop. In contrast the operational performance of Caledonia is going from strength to strength despite the pandemic. Each quarter they are managing to mine more ore and refine more gold with a slight improvement in recovery rate. As a result, in early October, management upped their production guidance from 53,000-56,000 ounces to 55,000-58,000 ounces for 2020 with 42,896 ounces already produced in the first 9 months. Given that Q4 production in 2 of the last 3 years has been at record levels, with an average production of 16,084 ounces, I have no doubt that Caledonia will hit the revised range and may even exceed the 58,000 ounce level. On top of this the new Central Shaft is expected to be fully equipped by the end of 2020 and to be commissioned in the first quarter of 2021. This is a three-month delay but production will be immediately enhanced with guidance of 61,000-67,000 ounces in 2021 and 80,000+ ounces in 2022. This is a hugely material upgrade, and forecasts do show roughly a doubling of earnings in 2021, but investors seem to have forgotten about it. Maybe they believe that the gold price is set to continue falling? It's possible that I'm missing something but a 2020 P/E of ~8 seems good value and a 2021 P/E of ~4 looks extremely good value with Caledonia winding down its capex bill while still generating high cash-flow. I think that shareholders will be rewarded in due course. (Update)


It's pretty early in the year with this Q1 update. Still the company has delivered year-on-year growth in revenue, gross profit and operating profit while also achieving its recruitment targets. Right now analysts have indicated just 2.6% EPS growth in 2021 (with 8.9% sales growth). I find it hard to believe that Softcat is doing any worse than this which suggests to me that these forecasts are behind the curve. Positive momentum continues into Q2 and I remain optimistic. (Update)


With US listed firms reporting quarterly this is a useful Q3 update showing continued strong growth. Year-on-year revenue is up 86% to $10.3m with Real money Internet gaming providing $7.7m and simulated gaming making up the rest at $2.6m (both segments grew roughly equally). The cost of providing these services rose slightly less rapidly with gross profit margin rising from 58% to 62%. At the bottom line the loss came in at a hefty -$4.1m due to administrative expenses more than doubling. Primarily this was down to staff numbers rising from 141 to 215, share-based compensation and increased costs due to the US listing. I suspect that share-based compensation was the largest cost here but no breakdown is provided. Still for the time being actual profits aren't important because an investment in GAN is all about capturing the growth opportunity of online gaming growth in the US. Right now Michigan is due to go live in December with Louisiana, Maryland and South Dakota all passing enabling legislation on the recent election day. By the end of 2021 GAN estimates that 50% of all states will have passed new laws with the land grab continuing. The company has a solid track record of signing up with new partners and I can see them retaining this momentum. In addition the board are looking to acquire Coolbet, an Online Sports Betting platform, which should complement the GAN offering. Hopefully the company isn't taking on more than it can handle as it'll be working flat-out for the next year at least. (Results)

Tatton Asset Management

Tatton is a remarkably high quality business at a decent valuation. I say this because consistently high operating margins (>30%) have enabled a high ROCE (>50%) even as the business has grown at double-digit rates. Capital requirements have remained low driving the FCF conversion rate above 100% in many years. Despite this the share price hasn't managed to gain much traction since listing at 156p in 2017. For sure its done alright, being up 81% since that point, but the P/E rating has drifted down from 30 to ~20 now which tells me that the shares haven't kept pace with earnings growth. This is a conundrum as analyst forecasts point to 40% EPS growth in 2020, despite dipping 8% from 14.95p to 13.7p over the year, and Tatton have just reported H1 earnings of 6.55p (up 21% on improving margins). Listening to the results presentation it's clear that the investment part of the group has performed very well so far while IFA services took a knock from mortgage and valuation work cratering during the lockdown. Still the housing market has bounced back strongly since the summer and it's reasonable to have some optimism for H2. It's still hard for IFAs to bring on new clients, which is a headwind, but eventually restrictions will ease and Tatton will be in the right place to benefit. At the same time it's clear that management are on the acquisition trail. One bid fell through (which suggests that they won't pay any crazy price) but they now have a £30m credit facility in place which makes them deal ready. There's a lot to like here and when the share price breaks 300p I reckon that it'll move up quickly to the 400p level. (Results)

Best of the Best

A pretty short update here with trading remaining strong and the online strategy still gaining traction. It looks like H2 will be buoyant which bodes well. Current forecasts suggest that earnings will rise 86% to ~70p but these haven't been updated since June. So there's a decent chance that the upcoming H1 results will blow this estimate out of the water. The water is however muddied as the company remains in discussions with interested parties from a number of sector verticals and including private equity. These discussions have taken rather a long time so far but the fact that a number of businesses remain engaged is positive as they've had plenty of time to walk by now. I would suggest that the sticking points are price, given the level of director holding, and the involvement of management post-acquisition. In this light I see the recent price drift as symptomatic of investors losing interest combined with low liquidity. Hopefully this is just noise and nothing untoward is coming down the pipe.

Codemasters Group

As anticipated these are notably excellent results. Margins remain high with a doubling of sales, from £39.8m to £80.5m, driving a doubling in profits at all levels. Remarkably adjusted EPS of 13.3p is over 70% of the 2021 forecast for 18.7p which suggests to me that analysts remain behind the curve despite a number of upgrades. Driving this performance was the release of three titles (F1 2020, Fast & Furious Crossroads and Project CARS 3) with a strong contribution from the back catalogue. Looking forwards DiRT 5 has just been released and a new focus on Games as a Service is delivering positive results. Sadly this may be of little benefit to shareholders with the derisory offer from Take-Two Interactive on the table. The premium on offer is marginal at best and, as I've stated elsewhere, I believe that Take-Two are trying to make off with the spoils of previous investment before the benefits become truly apparent. I also believe that the management of Codemasters are not acting in the best interests of other shareholders. They will all cash-out hugely when their options vest at which point they'll continue working at Take-Two and will pick up a whole new batch of options. It's also worth nothing that the non-execs have large quantities of options which is not best practice and makes them non-independent. No wonder they support the takeover. So these are great results but I may end up disappointed by the ending. (Results)

IG Design Group

Ever since analyst forecasts for 2021 were slashed by 60% back in July I've been wondering how the brokers arrived at this conclusion. There's no doubt that 2020 has been a tough year for IG Design with the pandemic hitting both their 2020 and 2021 numbers. Even so as Q1 and Q2 progressed management statements spoke of the business trading more positively than their Covid-19 adjusted expectations with existing customer orders covering a high proportion of the FY revenue forecasts. For sure management remained cautious, and the CEO selling his entire holding in August trashed sentiment, but still there seemed to be an obvious disconnect between actual trading and perceptions. Anyway with these H1 results we now know that the year has started more strongly than expected, with the CSS acquisition offsetting reduced trading elsewhere, and now the FY performance will be ahead of market expectations. Amusingly analysts have now pushed their numbers back up by 60% but I think that they're behind the curve. The reason for this is that the board already know that Christmas will be strong with customers reporting strong sell-through rates. They also know that Everyday products sell well in Q4 and that this segment has been strong all year. So if this trend continues then the FY will turn out to be much less gloomy than anticipated. It's been a bumpy ride but it looks like IG Design has turned the corner. (Results)

DX (Group)

What a lovely phrase: "materially better than current market expectations". This is the state of play for DX with just a month to go of H1. Trading has been strong throughout the period, despite the second lockdown, with both volumes and margins improving. Management really are reaping the rewards for three years of hard work, during which they have been consistent buyers of shares, and it's hard not to see the trend continuing. The next update should appear in March and hopefully it'll be positive if people shop heavily over the Christmas period. (Update)

LoopUp Group

Well this is a hefty kick in the nuts. For much of the year LoopUp looked like a lockdown winner, a Zoom-lite for grown-ups, but now it appears to have been pure dumb luck. In fact it's worse than that. A key reason for my buying into LoopUp was the steady rise in analyst forecasts for 2020 with expected profit more than quadrupling. The rate of change for 2021 wasn't quite as impressive but even here analysts more than doubled their EPS forecast from 4.275p to 9.233p. So a big bump this year with management being able to reinvest these super-normal profits. In fact (forgive me!) with recent H1 results generating 13.9p of EPS (88% of the FY forecast) strong operating leverage and high cash generation I figured that we might even be due an upgrade. So paint me surprised to learn that FY revenue will be no lower than £50m (i.e. £18m of sales in H2 compared to £32m in H1) with this drop magnified at the EBITDA level. In H1 the company grew EBITDA to £12.2m and yet it should be no lower than just £15m in H2. In other words we're looking at just £3m of EBITDA for the six months to 31 December. Okay forecasts were for £17.1m of EBITDA (implying a contribution of £4.9m in H2), and the drop is just 12%, but I am lost for words with this second-half collapse. A big part of the problem is that users have switched from PAYG pricing to committed subscriptions while at the same time opting for a cheaper call mix (fewer international calls). Even so business costs must have got out of hand as well for the overall impact to be so great. Still the damage to my holding has now been done (a 50% drop) and the pivot to professional clients (and MS Teams) should bear fruit in the future. I'm not happy but I don't think that the business is a busted flush. It's no Zoom though. (Update)

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

comments powered by Disqus