Saturday, 27 July 2013

Half year review - Part 2

Continuing on from my last post here. Technically since last time I have one to add to the 'Closed positions' list as I've sold out of MGNS, so I'll start with that.

Closed Positions

MGNS - Morgan Sindall

Whilst I still think Morgan Sindall is not near fair value, this has been an odd case of a) the investment case deteriorating yet b) the share price increasing leading me to sell out in search of better ideas. I originally bought in to Morgan Sindall on a thesis that a) the company has a good, decade plus record of well managed, value-creating growth b) it's an owner-operator share c) It was trading on a low P/E of around 7 whilst earnings and margins were far towards cyclical lows d) it paid a ~7% dividend. Since then, margins have deteriorated even further to a record low (at least as far back as I can see, to 1999) and the dividend has been cut for the first time (at least not since 1999). Whilst I still think this is a function of the cycle which will eventually turn the other way, the market has run up recently such that I was sitting on a ~15% share price appreciation despite the fact that broker forecasts for future earnings have been trending downwards:

Whilst I'd still bet on a medium term regression-to-the-mean here and the long term success of MGNS, it no longer appears as dirt cheap given recent fundamental & share price performance, sitting on a forward P/E of 11. I decided to sell on the basis of opportunity cost given the ideas I have elsewhere.

Open Positions - Contributors

ALLG - All Leisure Group

All Leisure has had a volatile 6 months, rising from 23.5p at the beginning of the year to a high of 52.5p, before falling back to the current price of 31p. I already did a big update fairly recently on ALLG here so I'll just add my thoughts on recent developments. I still think ALLG is one of the cheapest stocks I own, although it does just love stumbling between one-off disasters. This RNS basically sums up the recent troubles - with ship technical problems causing cancellation of a few cruises and the political troubles in Egypt cancelling some more. Both of these will lead to one-off costs of ~£3.1m, not insignificant. Together with the extra synergy costs planned for this year I actually expect ALLG to return a full year loss.

However, this is not necessarily the year I thought earnings would especially shine as ALLG flagged up before that they would already have a number of one-off costs due to integrating the acquisition of Page and Moy (which I still think was an utterly fantastic purchase). The light at the end of the tunnel though is that trading appears to be improving. The medium term bull points appear to be coming to fruition:
"The integration between the cruise division and tour operating division in Market Harborough has gone well and the Burgess Hill office was closed on the 31 May 2013.  The cost to the company and the synergies outlined previously remain in line with expectations.  Where previously the company had experienced later bookings, trading at this early stage of the financial year 2013/14 has started very well across all brands, with the exception of Discover Egypt, which has limited forward capacity.  Sales for Voyages of Discovery are up 30%, Swan Hellenic 21%, Hebridean 19%, Travelsphere 23% and Just You 29%."
Hopefully this should lead to margins returning to pre-2008 levels for the cruising division. Together with the post-synergy contributions from Page and Moy I can see the real normalised earnings power of ALLG being revealed which should lead to a well deserved re-rating by the market.

ARGO - Argo Group

I invested in ARGO after reading Wexboy's excellent extended thesis and agreeing with how very cheap it is. Given the move in share price from 12.5p to 14.8p, together with a 1.4p dividend, ARGO has given decent returns so far yet still trades at a huge discount to intrinsic value and even the cash and investments held on the balance sheet. I still harbour hopes that Wexboy's persistent activism will lead to some of the value-generating moves he suggests being taken up by management. Their funds have been performing really well recently as was highlighted to me by @FlorisOliemans, with the The Argo Fund up ~15% YTD but especially the Argo Distressed Credit Fund which is up a staggering 33.6% this year. These developments should bode well for AUM as well as Argo's ability to attract new business based on this excellent performance (and don't forget earnings! 33% returns do quite nicely under a hedge fund cost structure...). I continue to hold in anticipation of greater gains.

JD. - JD Sports Fashion

My thesis on JD Sports is fairly simple. We have a business which a) has shown good long term growth and returns on investment b) has depressed earnings from taking over a loss-making business, Blacks, from administration which should contribute, not detract, from performance further down the road and c) trades on a low multiple of such earnings. The share price has rallied from ~700p to around 900p yet the business still looks fairly cheap. It's quite interesting comparing it with Sports Direct (SPD), its major competitor, which trades at a price to sales ratio of 3.6 yet JD. can manage only a lowly 0.35! Whilst SPD looks expensively priced to me (and, to be fair, is a better business, although not much better), the comparison is still staggering. The main detraction to me is the reputation of the chairman, Peter Cowgill, who has a number of vocal detractors on message boards due to his behaviour at MBL group. Despite this, I continue to hold (although a smaller position than usual)

JDG - Judges Scientific

I try hard to keep myself rational when considering Judges but it's hard not to love a management team who can deliver such exceptional compound growth. The Judges' story still hasn't changed in my mind although the best share price performance is behind it due to the re-rating that has occurred since my first purchases - on a historic P/E of around 7 - to the current P/E of 20. That being said, the compounding effect of Judge's business model means that a re-rating isn't required for exceptional share price performance in the future - that P/E keeps getting eroded with a rating of ~14.5 on forecasted 2014 earnings (which I think look far too conservative given the potential earnings impact of the last acquisition, Scientifica, as well as the fact that pro-forma organic growth is now up to 13% because of how strongly GDS and Scientifica are growing). I trimmed my holding based on the re-rating having occurred but I intend on holding a significant portfolio allocation for the long-term. If I had to put all my money in a single share and go and live on an island for the next decade Judges is exactly where I'd put it.

KENZ - Kentz

The KENZ price is a funny one that seems to swing repeatedly between about 370p and 430p. The fundamental performance however has been fairly positive, with repeated trading updates about how everything is going swimmingly and new contract wins. KENZ has the headwinds of its major customers being squeezed on capex as miners and oil companies cut back on investment however despite this Kentz has been able to grow earnings. KENZ ticks all my boxes of being a) a high quality company that earns high returns on investment b) having excess balance sheet strength that's being ignored by the market (although I've read recent reports that Kentz intend on using their excess cash to make acquisitions - seems like a good time whilst the whole sector is quite cheap) and c) is available to buy at a single digit P/E, and is even more attractively priced on EV-based metrics. The biggest detraction is the high accruals rate in the past year, although Kentz have given explanations for this that seem reasonable to me. I did a more detailed post about this on Stockopedia here. I added recently at the ~370p trough and made a small trim recently at ~420p (just in case the previous price behaviour decides to continue frequent re-balancing seemed sensible) and am a happy holder.

I've still got LCG, PVCS, SPRP, TNI and TRCS to update on but I'll save these for another post. SPRP certainly warrants a longer mention as it's a new position I haven't written about before and I hold in some conviction as it's ~10% of my portfolio at the moment - lots more share price appreciation to look forward to I hope!

Monday, 15 July 2013

Half year review - Part 1

As it's now (a bit over, I'm slightly late!) 6 months into the year it's time for a portfolio update. Whilst I think 6 months is an insanely short period to measure portfolio performance it's at least interesting to reflect on decisions made in the time period and try and look for areas of improvement.

For reference, here's what my portfolio looked like going in to 2012:

And here's what my portfolio looks like now:


As of this weekend, this corresponded to a total return of 20.4% after costs (An IRR of 44.1%). Whilst good, this is only marginally ahead of the returns I'd have made in the main benchmark, the FTSE Small-Cap Index (ex-investment trusts) of 18.4% although decently ahead of the FTSE All share, which would have grown my capital 12.2%.

I've gone from a total of 16 investments down to 13, so I've gone more concentrated overall. Partly this is down to a conscious choice to limit the number of holes on my investment 'punch card' in order to force me to really think about my investments although I'd quite like to go back up to around ~15 investments as this feels like a good balance between concentration and diversification.

The big positive drivers of my overall return have been from ALLG, JDG and SPRP. ALLG & JDG I felt were my best ideas and hence had big allocations going in to 2012. Both performed well, with JDG reaching new highs recently although ALLG has given a lot of performance back since peaking at over 50p in April. SPRP is a more recent addition I made with the proceeds from halving my stake in JDG (made because it was making up an uncomfortably high % of my portfolio)

The biggest detractors of my performance have been from CLIG and C21. I continue to hold both, and have added more to CLIG recently as the price has fallen.

Closed Positions

FCCN - French Connection

Closed out around 26.5p. To quote a previous post:
As for the rest of my portfolio, since my last post I've sold out completely of FCCN and redirected the proceeds in to KENZ and MGNS (which have both gone up since, nice to have a bit of good luck!). The losses at FCCN were worse than expected and due to the high operational gearing of the company the risk here is too high for me. Against weak comparables from last year the company still reported a revenue fall. The company has net cash of ~£25m, granted, but they burned £10m of cash last year. Even if things don't get worse, which there's no reason why they couldn't, they'd burn through that pile pretty quickly. Operational gearing could make the situation either very, very good or very, very bad here - it's kind of an all or nothing punt. Since I'm an investor who likes to be fairly concentrated and I can't protect the downside here it's one I'm going to pass on.
CHG - Chemring

Sold out at 273.3p. It was a small position for me (I covered CHG in my 'Investment Mistakes' post - it didn't go very well!). A combination of feeling that I couldn't determine intrinsic value anymore due to the rapid earnings collapse as well as a desire to focus on high conviction positions led me to sell out.

STAF - Staffline

Sold out at 339p. I still really like the company and sold far too early (the shares are now 440p) but at a P/E of 12 (when I sold) I felt I had cheaper ideas to invest in to. Also, I was concerned about the need to build up working capital from the Welfare to Work scheme and I disliked the fact it that part of the business relies on government spending for a policy-du-jour. That being said the company has a great long term track record and management have been executing well, so I can understand further price rises.

SIV - St Ives

Sold at 132p. Again, too early, the value investor's curse. Here quality of earnings concerned me, as investors seemed happy to focus on adjusted earnings and dividend yield ahead of true cash flow generation. When I met with management I was told that the restructuring was over and to expect no more exceptional charges - but now the exceptionals no longer live up to their name. I was also a bit weary of the prices being paid for some acquisitions, which are the main source of cash-flow reinvestment. On balance, despite seeming cheapish, I felt that after the price appreciation and my revised expectations for 'real' earnings I had better ideas elsewhere.

SRT - Software Radio Technology

Sold at 23p (D'oh!) as part of a deliberate focus of strategy to move away from hot growth stocks with no cash flow (regardless of the convincing nature of the story!). I felt the growth in sales being made over the last 2 years didn't justify the valuation and given the mandated nature of the sales I felt the story was undermined somewhat. The shares are now 34p, so I'm living up to my own incredibly low expectations of myself when it comes to market timing!


A wind up play I exited after participating in a tender offer at NAV. Overall I made a small ~5% return here, so not bad although I exited early after I changed my mind on the investment due to recent events. First, the new managers published a more detailed look at the assets of the portfolio which were worse than I was expecting. Second, the activist investor on the board resigned and has begun selling down their position. Third, after the tender the share price dropped much less than I expected it should have done given a constant discount to the non-cash assets. The combination of these three lead me to consider ideas elsewhere.

Open Positions - Detractors

C21 - 21st Century

My largest faller in my investment list, down 30% since the start of January (excluding dividends). Sadly this is a case of a GARP share losing the G part. EPS was forecast to grow to 2p (which also seemed reasonable to me given the recent success in winning contracts) but instead is now forecast to come in around 1p instead, quite a difference! The company put this down to delays in receiving orders, teasingly hinting that this is because the 'large value' of the contracts means they have to go out to tender first:

For the five months to 27 May 2013, our trading results are ahead of the Board's expectations but, as in prior years, the Group's sales targets are weighted toward the second half of the year. Generally the market does remain subdued and consequently we are encountering delays in progressing a number of potential sales. Given the value of these, the Board currently expects revenues for the full year to be similar to those achieved in the year to 31 December 2012 at around £14m.
These previously anticipated new sales have been impacted by a number of significant overseas customers needing to obtain funding from local transport authorities before committing to new projects whilst others, who are trialling EcoManager, potentially now being obligated to go through tender processes because of the large value of these contracts.

They also claim additional investment in marketing and sales is hurting short term profits for long-term benefit. If true, this is the kind of long-term thinking I applaud from public companies so I'm willing to give the management the benefit of the doubt here.

Thankfully because I was able to buy C21 with a large margin of safety in the first place even a drastic cut in expected profit doesn't make the shares seem overpriced (and the 30% decline has helped too!) - in fact they seem very cheap even under fairly pessimistic scenarios of growth. They have around £2m of net cash on the balance sheet (against a market cap of ~£10m) and are on a P/E of 10.5, 8.4 ex-cash and yield 6.67%. Should any of these large contracts ever actually appear then the company is insanely cheap although even under a no-growth scenario on sub-peak profits the investment is hardly expensive. I continue to hold.


Currently down 16% on the year and over 20% from my initial purchases. However in this case I've decided to add more and build my position. Why? The shares have been under pressure from two sources. First, they are an emerging markets asset manager and EM indexes have been performing badly. I believe this to be a good buying opportunity rather than any long term problem with EMs and investors are overly focusing on the negatives when there's so many positives - see Wexboy's detailed thesis here - and EMs have historically performed well at similar valuations to today.

The much more worrying second reason is the recent board room shakeup. The founder, Barry Olliff, had to come back to lead the firm once more after the CEO and Finance director both resigned. Both these two were long-timers at the firm which makes this increasingly concerning, although the counter to this is that Barry and other insiders still own large amounts of the company and so still have their incentives well aligned with shareholders. As asset managers are largely 'people' businesses it's ultra-important to have the incentives between staff and shareholders aligned compared to other businesses.

On balance, the cheapness and quality of the business still attract me here. At the current prices investors are getting a >10% yield (which management confirm they will pay, despite low cover) and a low P/E on what I believe are cyclically depressed earnings. I don't know when EMs will come back in to favour but I think that they will eventually, helping CLIG to grow AUM again. CLIG's long-term investment results and refreshing approach to asset management also resonate with me, as I identified in a previous post.

That's all of my closed positions and significant performance detractors covered - I'll save the rest for a future post.