September 2018 Portfolio Update

Well this proved to be an unexpectedly busy month; perhaps my most active of the year. This could just be a reaction to an indolent August but it seems to me that a number of interesting opportunities popped up in the month and I couldn't resist taking a few of them on-board. In addition a few of my holdings disappointed and, for various reasons, I felt inclined to cull them rather than hold on in hope of a recovery. In fact the word "hope" is something that came up in a tweet a few weeks ago - the gist being that if I find myself holding a share where I "hope" that something positive will happen then that's a sell signal!


Portmeirion Group Bought 1180p - September 18

I've been running through my rules-based watch-list recently to see which new shares rank highly and how my existing portfolio of shares measure up. This is always a slightly tricky exercise since I like to give my investments time to perform, which means holding them through a few reporting cycles, but on any particular date they may not look so attractive. Anyway Portmeirion has popped up in this list a few times but I've always vacillated between this company and Churchill China - and ended up buying neither. This time I decided to be decisive, with ex-dividend dates approaching for both shares, and used both Stockopedia and SharePad to directly compare their financial performance and current forecasts. In the event I could find nothing to choose between them and only plumped for Portmeirion because its historical performance looks to be slightly more stable. With very recent results looking solid I'm quietly optimistic that Portmeirion will keep chugging along.

B.P. Marsh Bought 299p - September 18

I first came across this unusual investment trust earlier this year when Graham Neary covered it in the SCVR. I liked the sound of its alternate approach, which involves providing venture capital to financial services businesses, and long-term history from 1990 before entirely forgetting about the company. Fortunately my memory was jogged earlier this week when a trading update emerged with a lot of detail on how £17m has just been raised and how their portfolio is becoming more geographically diverse. In addition the founder (Brian Marsh) has reduced his holding to a more reasonable 44% and this suggests to me that the trust is positioning itself to grow and move away from being a one-man show. Usefully the share price is currently at a small discount to the NAV of 321p, which excludes portfolio movements since 31st Jan, and the company is able to buy back shares if the discount reaches 20% (which is at 256p). So there's stated downside protection here with the outlook appearing very positive; good enough for me to take an initial stake.

Beeks Financial Bought 118p - September 18

I came across Beeks way back in April, at a Sharesoc Seminar, and wasn't wholly impressed by the offering. Sadly I didn't catch their presentation at Mello 2018 and so didn't buy in at the same time as a number of investors that I know. In the time since then the share price has doubled and, if the word on the street is to be believed, Beeks have gone from strength to strength. With the final results recently released I decided to take a look at how they've performed since listing and to watch both of the highly informative videos available on piworld. In a nutshell my initial concerns about the sustainability of their business appear to have been unfounded; on the contrary I can see that they have impressive scope for scalable growth with a rather large addressable market. So I've changed my mind regarding Beeks, as an investment, and have taken an initial stake at the current ATH. This might seem brave but any share with positive momentum is going to keep making new ATHs and looking at the current forecasts I think that the company is hardly expensive on a P/E of ~20.

Simply Biz Group Bought 187p - September 18

Luckily enough I caught the Simply Biz presentation at Mello 2018 just a few weeks after they listed and came away favourably impressed. However AIM IPOs have a habit of disappointing and so I was disinclined to invest without more evidence of solid trading. Fortunately this emerged today with these maiden interim results. On the member side numbers are up to 3,628 (from 3,367 a year ago) while the distribution channel will benefit from new contracts with Guardian Financial Services and Vitality Invest. In addition AUM is up 5.6% to £615m and the new financial planning system, Centra, is receiving a lot of interest from users. The only area which is flagging is that around Zest, the employee benefits solution, but a re-design is in progress and hopefully that'll be well received. With analyst forecasts pencilling in 15-20% earnings growth over the next few years I think that Simply Biz is good value with the P/E falling to the low teens. With the joint CEO, Matt Timmins, picking up 100,000 shares today it seems that I'm not alone in this perception and thus I've opened an initial position.

AdEPT Telecom Bought 384p - September 18

A few days ago I noticed an interesting tweet from Glasshalfull, who I know to be a very considered investor, regarding AdEPT Telecom. Previously unknown to me I watched some of the recent videos on piworld and was rather impressed by the level of focus in the business. Still it's easy to be sold to by an enthusiastic CEO so I followed this up by checking out the financials, on Stockopedia and SharePad, and it's fair to say that there's a solid history of earnings growth here with decent, and stable, profit margins and returns on capital. Now quite a lot of this growth has come from acquisitions but the company seem to choose these quite carefully in their sector with an eye on gaining access to new customers. The main reason for my filters missing AdEPT in the past was its debt level, which is fairly high at £24m, and the spread on the shares typically being >5% due to the low free float. Offsetting this you have a forward P/E of 13 which seems low for the growth history of the company. On balance then I'm happy to pick up a small holding and see where it leads.

Softcat Bought 795p - September 18

I've had my eye on Softcat ever since it appeared on my QM screen as a decent stock and a competitor to Computacenter (which I already hold). At the time Computacenter was a fair bit cheaper (P/E 18 vs 28) for a similar growth rate and yield - which is still the case. However Softcat has performed substantially better over the past year both in terms of share price and being able to beat analyst expectations. So I took another look recently, as the price dipped 10% or so from its recent ATH, and came away impressed by Softcat's high ROCE (>50%) and excellent track record of decent earnings growth (from 2013 anyway when the data begins). Put this against the last trading statement in July, indicating that profits would be materially ahead of prior expectations, and it seems to me that there's a decent opportunity here. Preliminary results come out on 17th October and if they're equally bullish about trading I'll be making this a full portfolio holding.

Zoo Digital Bought 150p - September 18

As mentioned in my notes from Mello 2018 I've been aware of Zoo Digital for a year or more. However it has always looked stratospherically expensive and largely loss making. These aren't the characteristics which I look for in any business. Still I've kept an eye on Zoo over the last six months and it's fair to say that their services are well-used by customers and that the market for dubbing could be huge. In fact I had readied myself to make a purchase when the share price fell below 100p, which it did a couple of times, but I dithered and suddenly the price jumped 50% and more. Somewhat disappointing for a non-holder but I figured that I'd wait and see where the price steadied itself - which seems to be at roughly 150p - before taking action. The reason for moving now is that Zoo's AGM will be held soon, on 27th September, and I expect to see a decent update statement around ZOOsubs and ZOOdubs. At least this time I'll have a small stake in the outcome!

K3 Capital Bought 300p - September 18

I first came across K3C earlier this year when it popped up in my quality-momentum screen and I stumbled across this positive note on the company. On the numbers front it ticks a lot of boxes in being profitable and cash-generative with a very high return on capital. The management also seem very focused on disrupting the corporate broker market by using technology to bring people together who want to buy and sell small, private companies. Unfortunately at the time I was put off buying any shares and they were literally at their low point of the last six months! Anyway, despite this, I continued to follow their progress and was highly impressed by 53% growth in sales turning into 103% growth in profit with net cash more than doubling. The shares spiked after this but a recent secondary placing has dragged the price back down by >15% and with them going ex-dividend tomorrow I decided now was time to take a stake.


Polypipe Group Sold at 373p - September 18 - 10.3% loss

As mentioned last month I was re-considering my holding here, following underwhelming results, and eventually I concluded that my money was better put elsewhere. Looking back at my rationale for purchase it all came down to Polypipe matching the quality/value metrics which I filter for while still looking relatively inexpensive. At the time the forecasts pointed to a 36% growth in profits, very handsome, and the company looked poised to make solid progress. Sadly these estimates have fallen back over the last eighteen months as the company has faced challenges in a number of areas. None of these should prove fatal but I can see far more attractive investments elsewhere and so I'm out. While a loss is never pleasant I know full well that many of my shares won't quite perform, despite initial expectations, and taking a measured loss in these cases is the price that I pay to be an investor.

Plus 500 Sold at 1375p - September 18 - 30.8% gain

Well I wasn't intending to sell my remaining holding here but when the price blew straight past my trailing stop-loss I figured that I should act to protect my capital. The thing is that the results last month were very good but "the market" absolutely hates Plus 500 at the moment with the share price down by something like 50%. I think that this is a gross over-reaction but then again I thought that the price had got well ahead of itself in the run up to the results. So much for the efficient market. Anyway at least by selling now I've retained a decent gain on my holding while still being in a position to receive the hefty dividend that'll be paid out in late November. In addition there's nothing to stop me buying back into Plus 500 at some point in the future; it'll just have to meet my investment criteria at that time.

Clipper Logistics Sold at 305p - September 18 - 26.2% loss

This is an interesting situation in that I continue to believe that this is a good company which has been dramatically over-sold. However many investors disagreed with the share price dropping by ~20% on the day of the final results back in July. Re-reading the narrative there's clearly some business which will only be fully delivered in 2019/20 and the board note weaker economic conditions, especially in the retail sector, as a headwind to growth. Following this statement analyst expectations for 2019 reduced by 8.6% although this still leaves an impressive 40% growth in earnings. Hardly the outcome of a profit warning, to my mind, but investors are continuing to sell down Clipper so what do I know? Anyway there should be an AGM statement on 28th September, giving a useful update, but I needed these funds for more immediately attractive investments. Obviously this has crystallised a small loss, from this starter position, but I'm reasonably happy with the way in which I've handled the unenviable situation.

LLoyds 9.75% Preference Shares Sold at 157p - September 18 - 12.3% gain

This one can be chalked up as a learning experience. I sold half of my original holding back in January, making a tidy profit, but kept half. Then, in March, I re-bought the ones that I'd sold after the mini-crisis over whether or not these shares could be forcibly redeemed at par. My reasoning at the time was that LLoyds, like Aviva, would be forced to make an official statement indicating that these shares were safely irredeemable and in due course their price would recover. Unfortunately nothing of the sort has happened over the last six months and everyone seems to have forgotten about the issue - apart from those investors selling out. Anyway as I need funds elsewhere, for a more likely capital gain, I've decided to dispose of my entire holding here. It was a fun ride but with interest rates rising I expect future capital appreciation to be limited.


Gamma Communications: Very positive results these with sales up by 18% leading to a dramatic 28% jump in profits as gross margin improves by 90bps and costs remain controlled. As a provider of communications services to the business market you'd expect competition to be fierce and to some extent this is born out by an operating margin of just over 10%. Even so it seems that Gamma enjoys strong customer relationships with user numbers across the business rising in-line with sales. Direct client business is particularly buoyant with material contract wins driving a very confident future growth outlook. The new CEO, Andrew Taylor, is rightly impressed by the company and usefully the old CEO is still available on a consultancy basis; so there should be no transition issues. With analysts forecasting an 18% rise in profits for the year (with the current forecast for 28.2p having risen steadily from 25.6p over the last year) I see scope for further upgrades as these results are digested. A good start to the month. (Results)

Taptica International: I get the feeling that Taptica is very much a Marmite company. Quite a few investors won't touch it because they don't see the earnings process as transparent, and thus dependable, while others look at the price being set for the company and see it as under-valued. I'm in the latter camp although I've certainly had some doubts as the price has slumped since literally peaking on New Year's Day! The key uncertainty was the performance of the newly acquired Tremor Video business but it looks as though they've cracked this with new household names being added and the overall gross margin improving slightly (to 40.6%). Now the fact that the board is considering further acquisitions is a little worrying but hopefully (oops!) they know what they're doing. Looking at the current business I get the sense that the company is incredibly active in starting up joint ventures, targeting new territories and acquiring new blue-chip clients; I'm sure that some of these avenues will fail to gain traction but I like the fact that the company is exploring multiple income streams. At the same time there's a clear focus on cost control since Tremor was operationally expensive at the time of purchase but Taptica have worked to bring these costs under control. With EBITDA forecast to be ahead of current expectations I'm happy to stay for the ride. (Results)

Somero Enterprises: To my mind this is one of those anomalous high-quality shares that's perpetually rated cheaply by the market. It really has everything that I'm looking for: a high and rising ROCE (>50%), great cash generation leading to a net-cash situation and a high yield (>4%), a decreasing share count and a growing addressable market. The problem is that it's a cyclical US company, which just happens to be listed in the UK, and for that reason the P/E is only 12-13. Looking at these results it's more of the same with earnings up by 20%, cash-flow up by 31% and the interim dividend being doubled (although that's partly to do with adjusting the interim/final split). Usefully Somero's two biggest markets, Europe and the US, grew meaningfully with only China and Latin America falling back (although the company remains positive about the prospects in both regions). For the future the board have identified the high-rise structural market as a key area for growth and that sits well with me; this is within their circle of competence and it sounds like a market big enough to make a difference to total sales. With most markets looking strong in H2 I'm tempted to add to my already decent holding here. (Results)

Dart Group: With this AGM statement Dart's chairman is happy to confirm that the positive start previously highlighted in July has continued throughout the summer. Demand for both flights and package holidays remains strong with customer numbers slightly increasing. Since market expectations have only just been upgraded they're not looking to raise these again just yet but the future should be a lot clearer in November when the interim results are published. (Update)

PPHE Hotel Group: Solid interim results from this hospitality real estate company with sales up by 4.4% and like-for-like RevPAR up by 2.9%. More usefully the EPRA NAV per share of £24.21 has been disclosed for the first time and that compares favourably with the share price of £15.15. The company has looked under-valued for a long time but it's useful to have a number which highlights the size of the discount (which is 37%). This gap won't close overnight, and this isn't purely a property play, but it does add to the investment case. From an operational perspective the company has funds available and is continuing to renovate a number of hotels, which improves earnings, and construct brand new ones. What is interesting is that while occupancy levels have improved they're still only 74.9% - I suspect that this reflects the number of rooms that are out of service while upgrades are taking place. In the long-term this effect should fall away and more rooms and public spaces will become fully available to generate revenue. So it'll take a few more years for the story to play out here and I'm happy to retain a decent holding. (Results)

Focusrite: Reasonable end of year update from this audio products company with revenue and earnings reported to be in-line with expectations. Cash generation is always good and net cash of £22.8m looks to be slightly more than predicted (and not far off 10% of the market cap). The business is well positioned for the coming year, although current forecasts are for no earnings growth, but the shares took a bit of a knock on the day due to this cautious statement: "However, we remain mindful and cautious of current major macro-economic factors in the US and UK/Europe, and will continue to watch them vigilantly as they unfold to assess how they could potentially affect our business". Now I'd like to see better forecasts than these but the company does have a history of in-year upgrades so let's see what happens. (Update)

Keywords Studios: Now Keywords is a serial acquirer of smaller companies and so a sales increase of 72% and an earnings increase of 53% aren't quite the whole story - although they are the numbers used to value the company. Instead theoretical like-for-like revenue growth of 8.6% is perhaps a better indicator of how the business is performing as is the gross margin improvement to 37.4% (from 35.6%) and a 19% increase in clients using three or more services. This suggests to me that reasonable growth is taking place, although it may be uneven across the various parts of the company, and that the core strategy of offering multiple services is bearing fruit. Looking forwards more acquisitions are in the pipeline and the group should meet analyst expectations without including these - which implies that there's a reasonable chance of delivering more than 49c in earnings this year (having done 20.1c in the HY). So I'm very happy with progress so far but there's no doubt that the group need to keep buying sales in order to maintain the steep growth trajectory. Perhaps not a share for the nervous! (Results)

Games Workshop: A short AGM statement here indicates that trading is in-line with management expectations. Given that Peel Hunt, the single analyst, is forecasting a 20% drop in earnings for 2019 I wonder how much they are being guided by management? Either way previous years have seen repeated, large upgrades throughout the year so hopefully that'll be the case in 2019. Usefully the board have found some more spare cash lying around and will be paying another special dividend of 35p. This discipline, regarding surplus cash, is one that I applaud! (Update)

Accesso Technology: The first HY is never particularly impressive for Accesso, as it's the winter season, but sales are up by 16.7% with this translating to a 36.2% rise in adjusted earnings (to 30.3c). However with basic earnings falling by 22.4% to 3.85c clearly there are some large adjustments at work here! The very largest adjustment (over half) is for amortisation of acquired intangibles, which is fine, while deferred payments and share-based compensation amount to over a quarter and are perhaps less reasonable to ignore. In addition cash conversion was poor (although H1 is always weak on cash generation) coming in at just 17.2%. On the other hand management see adjusted operating profit as a key metric and this increased by 69.2%. So from a numbers perspective you really need to believe what you're being told for the valuation to make sense. Operationally though the established business (theme and water parks) is gaining market share while new areas (ski, tours, ticketing) are all expanding. I can really see Accesso becoming a global giant over the next decade, which is why I'm invested, but the rate of growth is likely to be lumpy. Interesting times. (Results)

Next Retail: A positive statement, for once, with full-price sales up by 4.5% year-on-year and in advance of expectations. This is good news but the high-street remains under pressure even as the online business makes progress. Fortunately Next has a successful online arm, unlike Debenhams and House of Fraser, and this has allowed the group to survive as so many competitors have fallen. For example Next Retail contributed 2/3 of profits ten years ago while today it's adding less than a third of profits (and this contribution is falling as operational leverage works in reverse with slowing sales). Still the board absolutely have a plan for managing this transition with under-performing stores being closed and lease renewals re-negotiated to bring average rents down by 32%. So while this is a frustrating investment personally, and not very financially rewarding, I remain impressed by the board and the clarity of their reporting. In the long run I'm hoping that Next will be valued more as an on-line retailer than a high-street one but it could be a long journey. I suppose that I should sell my shares but it's hard to dispose of a quality business at a loss! (Results)

Boohoo Group: The price here has been weak for a while and so I awaited these results with baited breath. On the whole they didn't disappoint with 50% sales growth translating into a 31% profit hike (if you're happy with the adjustments). Usefully international sales grew by 62% and add material diversification away from the UK by now accounting for 41% of group revenue. As with the last set of results PrettyLittleThing was the stand-out brand with sales up a whopping 132%; I imagine that by the end of the year PrettyLittleThing will be neck and neck with the boohoo label. This is great news but it's a shame that we only hold 2/3 of PLT and won't get the full benefit of this performance. In contrast boohoo only grew 15% although Q2 seems to have been stronger than Q1. Still with the new automated distribution centre nearing completion it's possible that the main brand will pick up again along with profit margins. With sales growth forecasts hiked for the year I can see why the shares have perked up but I do have mixed feelings about the uneven growth taking place. Still this is a nice problem to have. (Results)

AdEPT Telecom: Nice to see such a buoyant AGM statement with H1 trading benefiting from both organic growth and the acquisition of Shift F7 Group. Given that the latter has been working with AdEPT for more than a decade, in the telecom/data space, they must know the business intimately and see where it complements AdEPT. Unusually the board are so confident in the up-coming results they lay out details of the increased dividend (by 15.3%) which they intend to pay out next year - even with the current dividend a week away from payment. Things must be going well. (Update)

Zoo Digital: Well this update caused a lot of consternation in the market with the shares falling sharply and currently sitting 28% below the recent 170p high. Why the reversal? Well forecasts point to an 18% rise in sales this year and H1 has seen pretty much this growth - but no more. So anyone expecting an earnings "beat" (understandable with a P/E ~80) will be sorely disappointed. On the other hand dubbing, which is the future growth driver, has grown at 3x management expectations and appears to be going down well with customers. Unfortunately subtitling was disrupted during H1 as a major content provider (Disney?) centralised its supply chain purchasing and this halted demand for Zoo's services. On the upside normal operations appear to be re-starting and so H2 should be in-line with forecasts if not better. While this drop is annoying it seems to me that the business dynamics remain unchanged and that, possibly, the reduced price offers a buying opportunity. (Update)

Volvere: Decent interim results from this growth and turnaround investment company with NAV per share up to 675p and PBT higher by 68% compared to 2017. The main driver of the NAV increase was £3.4m spent buying back shares a year ago and with cash back up to £20.4m I imagine that another buy-back could be on the cards. On the profit front all of the heavy lifting was done by Impetus Automotive, with profits rising 30%, while a reduced loss from Shire Foods suggests that this food business is slowly being bought back to health. The reason for believing in Shire's improvement is that Volvere have spent £950K on new equipment and Shire always performs better in H2 when the weather is colder. Unfortunately there are no analyst forecasts for Volvere, because it's so small, and it's hard to know what sort of growth rate we should be expecting. Still the group isn't expensive, when you strip out cash, and the board remain confident in their outlook. (Results)

End of month summary

As discussed above I thought that the Boohoo results were pretty good but even I'm surprised that the shares are up by a 1/3 from their recent low. This really could be a trader's share with this level of volatility. Elsewhere Taptica and Impax both recovered well from prior month falls along with a smattering of other holdings.

On the downside Focusrite has stayed weak following its in-line trading statement and suggestion of market risk - which perhaps ties in with the 2019 forecast of just 1.5% earnings growth. Other laggards, such as Robert Walters and Computacenter, are down for no obvious reason although with the latter things are looking shaky as the shares are just over 20% down from their summer peak.

Winning positions for the month: BOO 32%, TAP 14%, IPX 10%, PPH 7%, VLE 7%, BOOT 7%, GAW 6%, BOWL 6%, ACSO 6%, III 5%, FDM 3%, DOTD 2%, SOM 1%

Losing positions for the month: HAT -1%, CAKE -2%, BMY -2%, BOI -2%, KWS -2%, BUR -3%, NRR -3%, BVXP -3%, XPP -4%, PCA -4%, RFX -4%, BOY -5%, DTG -5%, RM -6%, CCC -7%, RWA -7%, TUNE -13%

Overall this volatile month gifted me a 1.3% rise across the portfolio which was enough to bring the YTD performance up to 12.5%. If all goes to plan my recent changes will add a bit of a boost but, as they say, "no battle plan survives first contact with the enemy". So who really knows what excitement October will deliver!

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

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