ShareSoc Company Seminar - June 2018

I skipped last month's seminar unfortunately and was starting to miss seeing any new companies when this meeting came around. Hence I was ready to find out about some new and quite varied investment opportunities. ShareSoc did not disappoint.


This has got to be one of the most venerable companies on the stock market. S&U was founded by Anthony Coombs' grandfather back in 1938 and, despite being quoted since 1961, has remained in family hands ever since. This steady stewardship is clearly a positive, in that the family are looking for steady and sustainable growth, but it does mean that the free float is rather limited with the family still holding 53% of the shares. Still I rather like this family involvement as I'm absolutely certain that management are justifiably proud of their solid profit and dividend record and aren't about to make any radical changes to the business.

Since the millennium the company has been increasingly focused on motor finance in the non-prime rather than sub-prime space. This means that customers have a just slightly impaired credit rating (rather than one that is perfect or non-existent) which means that they pay a healthy interest rate (average 17.8%) rather than an extortionate one. Still the company needs to be picky about which loans they will make and out of 80,000 applications per month they only approve 25-28% - and only 10% of these loans will end up being written (i.e. 2000 per month). The average loan is for £6200 and initially each loan starts in negative equity, despite the car itself being held as security, because the repossessed value is lower than the forecourt price. Out of every 100 loans about 15 will have a fixable problem and another 8 or 9 customers will terminate the loan early; altogether this leads to a 93%+ collection rate.

Clearly the company is very good at what they do but Anthony was keen to stress that they remain vigilant. The credit crunch helped, as this bought higher quality customers into their market, but they're still tweaking their credit scoring system to lower impairments and achieve a better return on capital (although this trend is slightly reversing). This keen focus is very creditable since any other outfit with 18 successive years of record profits might just rest on its laurels. One idea the board explored was setting up a bank a few years ago, to raise cheap finance, but with increasing regulation and taxes this has now been shelved. They do want to raise gearing from the current 69% level though and will probably increase their 50m in term loans or the 85m revolving credit facility in order to do this. Shares won't be issued as this would dilute the family below 50%.

A potential area for growth is that S&U are doing bridging finance on a trial basis for a maximum term of 12-15 months. This pilot venture, Aspen, is now making monthly profits and can't really have bad debts as the loan is secured on the property up to maximum LTV of 85%. While this off-shoot will only be fully evaluated at the end of the year it does seem to be growing into a proper business that can provide material revenue. It's not all perfect though as the customer acquisition cost, on a 400K loan, is around 1.6% (or over £6000) but perhaps this will reduce as Aspen scales up. Overall I'm very impressed with S&U but the share price does seem up with events having risen by 25% in the last 6 months.

VolitionRx (VNRX)

This company came as a bit of a surprise, given that VolitionRx is listed in New York, but I didn't mind listening to the CEO, Cameron Reynolds. The USP for this life-sciences company is that they're developing a routine blood test to detect a variety of cancers - which is something of a holy grail. Currently cancers are diagnosed both badly and late, due to tests being invasive and/or expensive, and test compliance is low. The science here is that they're looking for nucleosomes as markers and these are both early stage and don't require much blood or new equipment. These nucleosomes occur in the blood as dead cancer cells are broken down and with so many cells being born and dying there are lots of these biomarkers around.

Oddly VolitionRx appear to be the only group looking at nucleosomes? They have 17 patent families and seem to have the field to themselves; this hardly seems possible but maybe the big money is looking elsewhere? Anyway they have lots of trials in progress (27 I think) with results due this year and a test for colorectal planned for 2019/2020. In order to bring in some earlier revenue they are also launching a research only kit shortly; other companies will be able to incorporate the technology in their own products and license it from VolitionRx.

Up till now small trials have detected 80% of stage 1 cancers, which seems great, but I believe that the false positive rate is also high. Hence the additional, larger trials. In Europe the accuracy needs to be ~90% to avoid unnecessary extra tests; apparently in the US a lower accuracy is acceptable since no one wants to be liable for missing something! It's also possible that if they just target people who are non-compliant anyway then a higher false positive rate may be acceptable? For comparison the PSA test is accurate but has a very high false positive rate; so really they just need to be better than the current tests.

If the (relatively cheap) trials really do pan out then the company is financially in a pretty good place to retain most of the benefits. They have $14m in cash and a quarterly burn rate of ~$3m. The founders own about 25%, institutions also about 25% and the rest of the shares are with retail investors. With an aim to be profitable in a few years VolitionRx will probably do another fund raise (previously they've done 4 raises of $10m) and that should be enough. A very interesting story then but not really one for me.

Majedie Investments (MAJE)

Another interesting company, previously unknown to me, is Majedie Investments. Originally this was a rubber plantation in Malaysia (incorporated in 1910 - take that S&U!) which turned into an investment trust in 1985. The attraction for retail investors is that this is a way to invest in global funds, as managed by a boutique manager, with the added benefit of an equity interest in the manager. The arrangement feels rather complex but Majedie seem to have a large investment team and a broad mixture of products (with 45% not being exposed to daily stock market movements). There's also a 3.6% yield and the fact that the current discount is ~12.4% (more than the 7.8% average since 2014) to consider.

With so many moving parts I didn't quite get all of the points made by David Barlow, CEO. However the trust is largely family owned (just over 50%) and capacity in the underlying funds is purposefully limited in order to maintain performance (i.e. they're not just looking for AUM growth). The investment process is flexible and based on fundamental research with a bias towards managing risk and minimising draw-downs. The flagship fund is UK Equity, with just 2 down years since 2003, while the smaller UK Income fund looks for out of favour companies with a decent dividend and yields 4.4% itself. There's also the Tortoise Fund which is long/short absolute return with a value bias and hopefully low volatility. So, like I mentioned, there's a lot going on under the covers with this trust.

One point made in questioning is that the fee levels are quite high; 75bps for the main funds and 150bps for Tortoise with the TER being ~1.4%. Now the water is slightly muddy here as the investment manager pays a dividend back to the trust which helps to offset the relatively high costs (~0.75% is perhaps more common). So I'm not quite sure how this all comes out in the wash. Ultimately if you buy into the trust you're really looking to ride along with the family office investment and have to hope that they're balancing their internal positions effectively. I can see the attraction, with the discount to NAV and low gearing, but it's all a bit too opaque for my taste.

Caledonia Mining (CMCL)

I'm not sure if I've ever seen such a varied line-up before but for the grand finale we heard from Caledonia Mining, a gold miner based in Zimbabwe. Unlike many miners this is an established, profitable producer with space for a new mine under the existing one! The mine itself has been going for 100 years and Caledonia have been doing lots of drilling, below the current depth of 750m, to locate significant ore bodies. The results are so positive that the company are sinking a new shaft to 1300m with 4 new production levels (originally they only planned for 1000m and 2 levels). However the equipment is already on site and they're looking at another 15 years of extra mine life for not a lot of extra cost.

Now this is all very well but Zimbabwe is an economic basket case despite the recent removal of Mugabe as President. These political changes are making the country more investor friendly with the removal of an indigenisation requirement and efforts to encourage investment in agriculture. Still the country is desperately short of foreign currency and Caledonia have to expend a significant amount of energy locating funds to pay external suppliers. That said the government is keen for them to prosper and pays them an export incentive equal to 10% of revenue - which means that they get $1341 per oz at a gold price of $1300! So these are interesting times and if the next election, on 30th July, goes well then there could be lots of other opportunities opening up in the country.

Financially the company is in a very good place with $13.4m of cash, increasing production and a plan to reduce their costs down to $700-800/oz (currently $850-900) by 2021. Right now capex requirements are high with $56m already spent, out of a total cost of $70m, on drilling the new central shaft but this outflow will tail off over the next 2 years with commissioning scheduled for 2020. After this point sustainable capex should settle at around $5m pa. Cash generation is obviously pretty good though as the current yield, payable quarterly, is already ~3% and likely to increase beyond 2020. Another positive is that there are satellite exploration opportunities around the Blanket mine and these could be used to top up throughput in their process plant (which is standard CIL with 94.5% recovery on a good day). This makes sense as they have 3500 tonnes per day of capacity yet the main mine is only projected to produce 1800 tonnes per day.

Of course there are some real negatives with Caledonia which is why they're on a P/E of ~6. For starters they only own 49% of the mine. The rest was appropriated in 2012 with 10% of the mine being donated to the local community and another 41% sold to employees, local partners and the government for $30m. This loan should be paid back over time but I have no idea if this is actually happening. Then there's the technical fact that the shares are listed on 3 exchanges (NYSE, TSX and AIM) and daily volume is very small. This means that there's poor liquidity and it's hard for anyone to buy a decent position in the stock. Management only own 2.3% of company, so they're not the problem, but clearly there's little daily interest in the shares. Still Caledonia is an interesting prospect.

The author holds none of the shares discussed in this article.

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