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!

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