01 January 2016
By Maynard Paton
Happy New Year!
I trust you enjoyed the festive break and are now raring to do battle with the market for another twelve months!
This first Blog post of 2016 provides a short ‘year-in-review’ of each of my current portfolio holdings.
As I mentioned at the start of 2015, I find writing such reviews extremely useful — not least because it encourages me to double-check my investment logic to ensure I am still invested for all the right reasons!
Something I always remind myself at this time of year is that the greatest portfolio upsets I’ll experience during the next twelve months will be more likely to be caused by the shares I already own rather than by the new shares I’ll purchase.
That’s certainly something I’ll bear in mind when I start hunting for fresh bargains on Monday…!
During 2015, my overall portfolio gained 18% on a bid-price-to-bid-price basis that includes all dividends and dealing costs. This next Blog post outlines that performance in more detail, as well as clarify how my portfolio starts 2016.
I have summarised each of my holdings below in order of size within my portfolio. Of course my calculations, logic and theories could be all wrong so please do your own research!
1) Tristel (TSTL), 141p, £59m
TSTL blitzed my expectations during 2015. Just about every statement this hygiene-product specialist issued last year confirmed (or suggested) that trading was ahead of forecasts.
Back in February, some impressive interims spotlighted the group’s 15% annual revenue growth target, while May’s full-year trading statement unveiled further bumper trading. Then followed August’s special dividend and October’s annual results, which revealed operating profit had surged a terrific 40%.
To round off a super year, December’s AGM indicated (at least to me) that City forecasts for 2016 could now be exceeded. The current question then is just how long TSTL’s business momentum can continue, and whether it is all in the share price. I mean, my present guess for earnings is 5.5p per share, which supports a lofty cash-adjusted P/E of around 24.
This share has been a star performer for me — I bought during 2013 and 2014 at an average of 46p and then banked some profits at 79p in 2014 and 100p in 2015. However, I continue to hold 75% of my original stake because TSTL’s disinfectants are repeat-purchase products that boast patent protection and ought to enjoy predictable demand.
That said, the company now represents a hefty 18% of my portfolio, so I may trim my holding further if a suitable bargain opportunity crops up elsewhere.
2) Tasty (TAST), 197p, £105m
I’ve banged the drum for potential multi-bagger returns from this restaurant chain for some years now… and TAST’s progress during 2015 has not altered my view.
Final results published in March displayed a strong second half (profit up 57%) while the follow-up interims released in September outlined an acceleration of new outlet openings. It is also becoming clear that TAST’s expansion will be funded by debt — as opposed to the equity placings that propelled the management’s two previous multi-baggers (ASK Central and Prezzo).
For the coming year, I expect TAST can open at least another 10 locations to take its total estate close to 60 sites. Something to consider, though, is the impact of the forthcoming National Living Wage on TAST’s staff costs.
I’ve already enjoyed decent gains on this share, having first bought at 50p during 2011 and then topped-up at 98p during 2014. However, I have not sold any yet because if TAST can replicate the success of Prezzo and get to c250 outlets, I believe the shares could one day surpass 500p.
3) Mountview Estates (MTVW), £125, £489m
If only all quoted companies could be as straightforward as MTVW.
This residential-property trading specialist has a very simple business plan and just seems to churn out dependable net asset gains and useful dividend advances. I’ve been a shareholder since 2011 after paying £41.
Last year MTVW delivered handsome figures — record annual results (NAV up 8%) published in June were followed by a best-ever first-half announcement in November. Looking to the year ahead, I’m expecting further good progress given the buoyant housing market and the positive comments from the veteran family owners.
That said, if the property market continues to rally, MTVW may find it hard to secure good-value purchases. Alternatively, if the property market turns for the worse, recent levels of profitability may not be sustained.
Long term though, my valuation sums appear promising. I calculate MTVW’s property estate to be worth £188 per share, or 50% greater than the recent £125 share price. I’ve yet to sell any MTVW shares because of this inherent asset discount.
4) FW Thorpe (TFW), 245p, £283m
There were no complaints here during 2015.
TFW’s seasoned executives continue to issue dependable results, with very satisfactory double-digit revenue and profit advances showcased within both March’s interims and September’s finals. High margins, an asset-rich balance sheet plus the promising potential of new LED products continue to be the main attractions to this lighting specialist.
I trust 2016 can bring more of the same dependable progress. And you never know, net cash and various investments of almost £39m could — or probably should — fund another special dividend during the year ahead.
Nonetheless, the group’s AGM statement the other month did mention a “mild softening” in some markets. So I would not be too surprised if the company’s recent growth rate moderates a little.
I bought my TFW shares between 2010 and 2012 at an average of 79p and I’ve not sold any since. Certainly the group’s popularity among investors has increased since my purchases — for years this firm was valued on a single-digit P/E, but now my 10p per share earnings guess supports a racy cash-adjusted P/E of 21.
5) Castings (CGS), 485p, £212m
CGS was one of four new additions to my portfolio during 2015. A steadily rising dividend, asset-flush accounts, a modest valuation plus conservative management all caught my eye in September, when I paid 426p to become a shareholder.
So far at least, I have not been disappointed with my investment.
November’s first-half results showed the country’s largest foundry reporting revenue, profit, cash and the dividend all marching higher, while the directorspeak underlined the prospect of higher earnings for 2016. The figures revealed the high-margin Machining division becoming an influential profit contributor, too.
True, CGS earns almost half of its revenue from just three large customers, while long-time boss Brian Cooke finally relinquished his executive duties last year. So the loss of a major contract or some management mishap may not be too far away.
My valuation sums point to earnings of 34.1p per share and a cash-adjusted P/E of 12, which does not look too expensive for a business that has grown its revenue and profit by 7-8% per annum on average during the last decade.
6) City of London Investment (CLIG), 345p, £92m
All things considered, I was quite happy with CLIG’s achievements during 2015.
This emerging-market fund manager saw its benchmark index plunge 17% last year, although its own client portfolios dropped only 5%, from $4bn to around $3.8bn, during the same time.
The year started well. February’s interims showed operating profit up 27% and gave vague hints of a lift to the dividend — which had been stuck at 24p per share for the previous four years.
July’s annual results then showed earnings up 25%, although the group did downgrade its assumptions for 2016 after collecting less new client money than expected.
Then came the Chinese market rout, which pushed client funds down 17% to $3.5bn by mid-September.
I was surprised CLIG’s share price remained steady during that time, so I cut my holding by 42% at 335p. My then sums suggested earnings may have been running at 19p per share — not enough to sustain that 24p per share payout.
CLIG’s funds have since rebounded with the market, and my latest sums are projecting earnings of 24p per share — suggesting yet another year of a standstill payout.
All told, I am hopeful this high-margin, cash-rich and owner-friendly outfit will one day lift its dividend — but that is only likely to happen when fresh client funds have been secured.
I bought at an average of 281p between 2011 and 2013 and receiving the chunky payout will I’m sure be the highlight of the year ahead. The yield is almost 7% and P/E is 12-13.
7) French Connection (FCCN), 37p, £36m
This ‘value’ holding caused me the greatest amount of anxiety during 2015.
The shares of the hapless fashion chain began the year at about 60p — only to fall as low as 20p following a profit warning in April and a grim set of interims in September.
However, news in November of stable trading — alongside a £2.4m compensation windfall — has thankfully sent the shares back towards 40p.
Looking back, I probably should have just sold FCCN at the start of the year when I admitted in my opening company review:
“The group’s track record is extremely haphazard and I would not rule out further setbacks occurring. A quality buy-and-forget investment it is not.”
Throw in my complicated valuation model that suggested the shares could top 100p, and I was simply asking for trouble.
Anyway, I held on and — as luck would have it — there are glimmers of hope that the chain’s losses can one day be resolved. Management has decided to shut additional under-performing stores, and has been lucky enough to secure that £2.4m windfall after being forced to close the group’s outlet on London’s Regent Street.
One day I trust FCCN’s shop estate will break even — it has lost a cumulative £60m-plus since 2006 — and that the group’s very profitable Wholesale and Licensing divisions can support a market cap much higher than the present £36m.
Until then, I’ll just have to pray that boss Stephen Marks continues to close more stores while maintaining a better range of stock. If he doesn’t, then he can expect another letter from me telling him to step down and appoint a more dynamic chief exec.
I bought in during 2011 and 2012 at an average of 31p and took some profits in 2014 at 62p. Suffice to say, I am very keen to see these shares rally during 2016 so I can exit at an advantageous price… and reinvest into something a lot more predictable!
8) Record (REC), 28.5p, £63m
REC was a somewhat frustrating investment during 2015.
The currency specialist offers some attractive fundamentals, not least high margins, net cash and directors with substantial shareholdings. But the year’s newsflow was up and down, prompting me to buy more shares… only then to sell some.
Winning a substantial client mandate in March prompted me to top up at 35p, and I made further purchases at 37p in June when a 10% dividend lift underlined the group’s confidence.
Roll on to August, though, and that earlier substantial mandate had disappeared… and another client then withdrew a sizeable sum during October! I managed to sell part of my enlarged holding at 36p and 37p following those withdrawals, and so bank a very small profit on some of my earlier purchases.
November’s half-year statement owned up to mixed investment results for clients and I am crossing my fingers that further mandates do not disappear in 2016… and that REC’s 5%-plus yield is sustained.
Whereas at one point in 2015 I was predicting current earnings of 2.76p per share, I am now forecasting 1.96p (using £1:$1.48) to support an underlying P/E of 10.
After all my dealing, I managed to end up with 36% more REC shares that I started the year with. My average entry price following my very first purchase in 2010 is 27p.
9) Getech (GTC), 30p, £10m
GTC is one of two shares on which I’m shouldering a hefty paper loss.
I bought during 2013 and 2014 at a 59p average and sadly the bid-price is now 28p. Still, I have yet to sell a share and I remain hopeful this provider of geophysical studies to the oil industry will one day recover.
Funnily enough, I was pleasantly surprised by GTC’s financial progress last year. In particular, interims issued in March disclosed revenue and profit moving higher alongside promising comments about future contracts. Final results in November then outlined further progress during the second half.
However, those final results also carried a profit warning for 2016, which was very disappointing given management had sounded upbeat just three months earlier. Trading is likely to be depressed this year and I just hope the group can avoid the losses it racked up during the 2008/9 downturn.
Helping me keep the faith is GTC’s proprietary/specialist data products and its asset-rich balance sheet. I calculate the books effectively carry net cash of £2.3m and a freehold of £2.6m — in comparison to which the market cap is only £10m. In fact, the £5.1m value attributed to the underlying business is actually less than the £5.5m valuation of an acquisition made last year.
All in all, I am convinced this share could at some point make for a good oil-price recovery play — and I would not rule out a top-up during 2016.
10) Electronic Data Processing (EDP), 67p, £8m
EDP ranks alongside French Connection as one my lower-quality, value-based investments.
Results last year underlined this software group’s lack of pedigree. May’s interims were impacted by the loss of a significant client while preliminary figures issued the other week confirmed revenue had sunk to a 30-year low.
Factor in a haphazard profit record, sub-standard margins and a management team that looks past its sell-by date, and I hope to be rid of this share sooner rather than later.
Still, all is not lost. The firm enjoys significant recurring income while cash and property represent more than half the £8m market cap. Meanwhile, the underlying business could be valued at 8 times my latest 3.25p earnings per share guess.
Plus there is a trio of North American funds holding an aggregate 28% of the business — and I’d like to think they will one day stir up some corporate action.
For 2016, I would love for EDP to signal some long-awaited revenue growth. In reality, I suspect the year’s highlight will be the promised 5p per share dividend to support a near-8% income at 67p.
I bought originally during 2012 and 2013 at a 55p average and have since collected some worthwhile payouts, but have never sold a share.
11) Mincon (MCON), 54p, £114m
MCON was another addition to my portfolio during 2015. Initial attractions to this Irish drill manufacturer included canny family managers, substantial cash reserves and a seemingly prominent competitive position. I paid 44.6p during February and March.
I am pleased this particular shareholding has regained its poise following my purchase. Supplying the crippled mining industry with drill equipment was not easy during 2015, and the group’s first-quarter statement did indicate a sizeable profit setback.
However, subsequent updates revealed an improved performance and I would like to think the business is now all set to deliver resilient numbers for 2016. Nonetheless, I recognise any further problems in the mining industry could dampen demand for MCON’s drills.
I upgraded my 2015 earnings guess in November to 3.1p per share, and the current profit run-rate gives something like 3.8p per share (at £1:€1.36) for 2016. Adjust for MCON’s cash hoard and you get a possible P/E somewhere between 11 and 13.
MCON was the first Irish company I’d ever invested in and I’ve since learnt:
i) Irish shares attract 1% stamp duty on purchases;
ii) UK stock brokers can take two extra weeks paying euro-denominated Irish dividends as sterling, and;
iii) Irish dividends are subject to Irish withholding tax.
All that adds an extra layer of aggro for this share, but it is more than counter-balanced by the long-term quality of the company’s board and drills.
12) Andrews Sykes (ASY), 330p, £139m
This air-conditioning hire group continues to exhibit the high margins, cash-strong balance sheet and superior returns on equity that led me to buy the shares back in 2013.
Annual figures issued in May showed an improved trading performance, which in turn led to further progress being reported within September’s half-year statement. For 2016, I’m hoping ASY’s investment in overseas depots can help sustain the momentum and perhaps push total revenue beyond £60m — for only the third time in ten years.
Mind you, the fortunes of this business remain tied somewhat to the weather while dividends are paid at the whim of the 90% owner. At least he treated me to a 23.8p per share payout last year, which represents a 7% income on the current share price and a nice 10% income on my original 233p purchase cost.
However, the high yield is at the expense of earnings, which I calculate to be running at 23p per share — that is, just below the dividend — and which support a P/E of 13 adjusted for ASY’s cash hoard.
I did not buy or sell any ASY shares during 2015 and, barring any sizeable share-price movements either way, I suspect that will remain the case for 2016.
13) World Careers Network (WOR), 205p, £15m
What a disaster this share has been.
I bought WOR during February and March this year at an average of 320p, only for the company to warn about lower revenue within April’s interims… and then warn about higher costs within November’s finals!
Nonetheless, I continue to have faith in this recruitment software outfit. A respectable track record, cash-flush accounts, a blue-chip client list plus a long-time founder/entrepreneur in charge all remain important attractions.
For 2016, I’m hopeful revenue can recover to offset the growing expenditure on product development. For what it is worth, WOR’s profit also reversed significantly during 2009 and 2010 due to rising development costs, only then to rebound five-fold by 2014.
Some will say a dominant 80%-plus family shareholding and a gigantic bid-offer spread should always make this share out-of-bounds. I must admit, when I asked about a possible de-listing at WOR’s AGM last month, the boss admitted the board occasionally “discuss the pros and cons” of such a move.
My latest sums show the current £15m market cap is half represented by net cash, with the other half represented by the underlying business valued at about 8 times 2015 earnings. Crazy as it may seem, I am not averse to buying more of these shares in 2016… although I’ll demand a much greater margin of safety than my initial purchase!
14) To be disclosed
Sorry — I will disclose this new holding when I have bought enough shares or the price advances well beyond my buy limit.
15) M Winkworth (WINK), 135p, £17m
This estate-agency business continues to represent my smallest holding at under 1%. I have to confess, I did consider selling the position last year purely to improve the focus of my portfolio.
Nonetheless, I have kept the faith with WINK’s family ownership, super-high margins and worthwhile quarterly dividends. I’ve also held on because this franchise business ought to be straightforward to run — it simply collects a management fee from its franchisees for every property they sell or let.
Progress during 2015 was lacklustre. Annual figures in April revealed a stagnant second half while interims in September owned up to a disappointing profit shortfall. A trading statement in November then acknowledged greater-than-expected costs and a London housing market being stifled by higher stamp duty.
Looking to 2016, I am not expecting any miracles here and I trust WINK’s dependence on property deals within the capital does not spark a further setback. However, the declaration of a small special dividend the other week did suggest the business was confident about its future.
I’m guessing profits dropped 15% during 2015 and that earnings come in at 10p per share, giving a cash-adjusted P/E of 11 — which does not look that excessive to me. There is a useful 4.8% yield on offer, too.
For what it is worth, I last bought at 90p in 2011 and sold most of my holding during 2013 and 2014 at a 173p average.
I decided to sell three shares entirely last year
Here are the details:
SOLD) Burford Capital (BUR)
Well, this decision is not looking too clever. I sold my entire stake in this litigation funding operation during February at 136p… and the shares now trade at 193p.
Why sell? Well, I spent a good two days sussing out BUR’s accounts before I got rid and I came to two conclusions:
i) I’d rather spend my time on simpler companies, and;
ii) I thought the upside potential was limited given the risks involved.
Having had a quick skim of BUR’s latest figures, I can’t say I regret my decision too much. For all the company’s talk of 71% returns on invested capital, I calculate the business has grown its total net asset value by only 9% per annum since the end of 2010. Holding the NAV back have been sizeable operating expenses (lawyers are not cheap) and the business being unable to invest all of its cash.
I note some pundits have started to value BUR on a P/E basis, but I maintain this is an asset-backed company where profits relate mostly to gains from the group’s legal investments. The last reported book value was about 130p per share and, assuming you wish to make the most of BUR’s future gains, I can’t see the point of paying more than that.
SOLD) Pennant International (PEN)
Selling PEN was one of my better decisions of 2015.
Attracted initially by the group’s veteran leader, asset-strong accounts, modest valuation and upbeat prospects, I paid 74p for the shares during 2013. But I rushed for the exit at 79p in March when PEN’s annual results gave far too many signs of profit trouble ahead.
To cut a long story short, the results:
i) glossed over a weaker second half;
ii) revealed an even greater dependence on two large customers;
iii) showed an apparent U-turn on a tax refund;
iv) unveiled sudden and significant expenditure on intangible development costs;
v) contained further adverse cash-flow movements and;
vi) included what I viewed to be a cynically timed upward property revaluation.
Throw in some doubts about management pay, too, and PEN became a textbook study for finding warning signs in a small-cap. Sure enough, September’s interims then revealed first-half losses, contract delays and an admission that full-year profits might be “significantly below expectations”.
I can’t see myself revisiting this share, even with the price currently around 40p.
SOLD) SeaEnergy (SEA)
And finally to my best decision of 2015 — selling SEA.
This share could have caused a portfolio catastrophe — I bought at a 31p average during 2013 and 2014, and the price now is 5p. I’m just thankful I sold last February and March at 27.4p!
True, SEA has been affected by the oil-price downturn — the group’s main business supplies photography services for oil rigs. But at the start of 2015, some inconsistencies in trading updates suggested all was not going to plan… and I was spending far too much time trying to suss out what was actually happening.
One particular lesson I’ve learnt from SEA’s troubles is to avoid — at all costs! — managers that are highly paid but have delivered very little for shareholders. In this case, the company’s high central costs continued to over-shadow the profit from the main acquired subsidiary… which left the coffers bare for when times became difficult.
All told, I wanted to spend more time evaluating better-quality businesses with better-quality executives — and I am so relieved to have abandoned ship when I did!
Phew! These annual posts never become any quicker to write!
So similar to 2014, my portfolio membership during 2015 has not changed too dramatically. I started last year with 14 shares, of which three have since been removed and another four (one of which I have not disclosed) have been added.
And to confirm, there were no shares bought and then sold during 2015 that did not make this review.
Aside from the occasional portfolio re-balancing, I’m hopeful I can continue to keep my portfolio comings and goings to a minimum during 2016. Well, at least that is the plan.
I hoped you found this Blog post useful — I certainly did. Please click here If you wish to read about my portfolio’s 2015 returns.
Until next time, I wish you happy and profitable investing!
Disclosure: Maynard owns shares in Andrews Sykes, Castings, City of London Investment, Electronic Data Processing, French Connection, Getech, Mincon, Mountview Estates, Record, Tasty, FW Thorpe, Tristel, M Winkworth and World Careers Network.