01 January 2017
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 2017 provides a ‘year-in-review’ of my current portfolio holdings. I recap how each of the underlying businesses performed during 2016, as well as provide a few remarks about valuation.
As I mentioned this time last year, 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 most likely be caused by the shares I already own rather than by any new shares I’ll purchase.
That’s certainly something I’ll bear in mind when I start hunting for fresh bargains on Tuesday…!
During 2016, my overall portfolio gained 7.6% 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 begins 2017.
I have reviewed 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) FW Thorpe (TFW), 325p, £376m
The year just passed was another good one for TFW.
In fact, the last twelve months confirmed the commercial lighting specialist having achieved that rarity among quoted companies — acquiring an overseas business that subsequently performs better than expected.
After buying Dutch firm Lightronics in 2015, TFW then disclosed within its March interims that the new subsidiary had traded “ahead of expectations”.
September’s finals went on to confirm profit at Lightronics had surged 75% for the year. The performance meant the overall business expanded by about 11%.
I said this time last year that TFW’s cash hoard ought to fund another special dividend.
And although there was an extra payout, the additional £2.3m/2p per share handout appeared quite frugal when the balance sheet carried net cash and investments of £39m/34p per share.
Alongside the cash-flush balance sheet, TFW’s high margins, appealing returns on capital, exemplary cash generation, upbeat current trading and a family management with at least a 50% shareholding remain vital attractions.
My very first disposal of TFW shares occurred during 2016 when I sold 25% of my holding at 234p. I simply felt the valuation had become rather optimistic.
That disposal does not look a great decision at present, given TFW’s price has continued to tread new heights. For now at least, trailing earnings at 11p per share currently support a P/E of 26 adjusted for the aforementioned cash pile.
Long gone are the days when you could acquire TFW shares on a single-digit P/E, as I did between 2010 and 2012 at an average of 79p.
2) Mountview Estates (MTVW), £113, £441m
I reckon MTVW could be my favourite holding.
I’ve been invested in this residential-property specialist since 2011 and have never once sold a share. The position has now become my second largest after buying initially at £41.
Last year MTVW extended its illustrious track record with further net asset value (NAV) and dividend advances.
June’s annual results showed NAV up 8% to a fresh £80 per share high, while the full-year payout was lifted 9% to a new 300p per share peak.
For some perspective, thirty years ago MTVW’s NAV was just £2 a share while the dividend was only 5p. Given the intervening growth, I suppose it’s no surprise the wider family of the original founders — a member of which is the current chief exec — continue to own about 75% of the firm.
Admittedly November’s interim results were not the bumper figures I’d become accustomed to, but NAV still managed to climb to £83 per share.
In addition, the margin on properties sold during the first half was at a record high, while debt hit a fresh low.
Reading between the lines, I get the impression MTVW may now be finding it harder to secure good-value regulated tenancies. Whether that means a property downturn could be soon upon us, I don’t know.
Long term, though, my valuation sums continue to be appear promising.
I calculate MTVW’s property estate could be worth £200 per share should all the group’s properties lose their regulated-tenancy status and are then sold.
3) Tristel (TSTL), 160p, £68m
The actions of TSTL’s directors left a lot to be desired during 2016.
It all kicked off with February’s first-half figures, which showed revenue growth below expectations and a surprise £1m share-option windfall for senior managers.
Long story short, it seemed to me the board had deliberately withheld sales information from the previous trading update to ensure the options came good. Here is my full recap of this sorry saga.
Dismayed with management, I quickly sold 58% of my holding at 123p.
I kept the other 42% because I felt the group’s underlying business remained high quality.
TSTL develops disinfectants that clean medical equipment and are used daily within most UK hospitals. The disinfectants benefit from patent protection, and are generally more affordable and/or more efficient than alternative cleaning devices.
Needless to say, I’ve formed the impression that TSTL’s products are of a higher quality than the executives.
Anyway, a trading update in July revealed a sudden (and unexplained) acceleration of revenue growth during the second half… as well as a welcome special dividend.
The statement coincided with
a charm offensive an open day at the company’s HQ that included a shareholder presentation and a showcase of the product range.
October’s annual figures revealed revenue up 12% and underlying profit up 17%… and my analysis of the small-print concluded the bumper H2 was not due to any accounting shenanigans.
On the contrary, TSTL’s financials displayed high margins, super cash generation and decent returns on equity — suggesting the disinfectants do indeed enjoy a lucrative competitive advantage.
October’s statement also carried bold three-year projections for revenue and margins, as well as outlining the early potential for TSTL’s business in the United States.
I reckon trailing earnings are about 6.8p per share and support a P/E of roughly 22 adjusted for the group’s cash pile.
I bought during 2013 and 2014 at an average of 46p and had previously banked some profits at 79p and 100p.
4) Tasty (TAST), 145p, £87m
Following a strong 2015 — during which the shares surged 70% — the year just gone was somewhat more subdued for this growing restaurant chain.
Final results published in March reported profit rising 28% after twelve new outlets took the group’s estate to 48.
However, TAST’s performance was not entirely satisfactory.
I noted revenue per outlet had dropped 8% on the year and my questioning at the AGM prompted management to own up to a “sales blip”. The full-year statement also acknowledged higher operating costs to help manage the growing chain.
September’s interim numbers were somewhat mixed, too.
In particular, five restaurants had performed badly enough to warrant a £3m-plus write-off.
Plus there was no sign of improvements to revenue per outlet, while the rate of new openings looked to have stalled during the summer.
A further 15 sites are scheduled to start trading during 2017.
I’ve already enjoyed decent gains on this share, having first bought at 50p during 2011 and then again at 98p during 2014.
But during 2016 I trimmed my holding for the first time — by 15% at 179p — as I felt uneasy about the group’s progress given the racy share-price rating.
The Kaye family management own 38% of TAST — and assuming the directors repeat the success of their previous restaurant chains and can take the estate to 250-plus sites — my sums indicate the shares could one day surpass 400p.
But attaining that valuation may be some years away.
5) Daejan (DJAN), £61, £996m
I’m not quite sure why it took me until 2015 to become a DJAN shareholder.
Net asset value (NAV) has expanded by more than 300-fold since the 1959 flotation, while the firm’s long-time family management — which controls 80% of the group — has blessed loyal investors with dependable dividends even during downturns such as 2008/9.
Making up for lost ground I guess, I increased my DJAN holding by more than four-fold during 2016.
I paid an average of £53 a share, which took my average overall cost to £55. Looking back, there were some good opportunities to buy in the immediate Brexit aftermath.
So far at least, DJAN has continued its steady progress.
Annual results in July showed NAV up 10% and the property estate’s valuation surpassing £2bn for the first time.
November’s interim figures then displayed further momentum, with NAV reaching an impressive £96 per share record.
With 60% of the group’s estate located in central or greater London, I suppose near-term progress may be hindered if the capital’s property market comes off the boil. Judging by the latest annual report, DJAN’s time-tested directors were certainly not enamoured with the Brexit vote.
Nonetheless, the board has successfully navigated through difficult times before and a share price that is 36% less than NAV already appears to price in some challenges.
6) Castings (CGS), 425p, £185m
CGS’s first full year in my portfolio offered both highlights and lowlights.
Satisfactory annual figures from this engineering business were reported during June. Operating profit gained 10%, the operating margin was a worthwhile 14.5% while return on average equity came in at a very acceptable 18%.
The illustrious dividend — which has been lifted almost every year since at least 1992 — was raised by 3%. A welcome shareholder bonus was a 30p per share/£13m special payout, which was funded amply by a £40m cash hoard.
However, the annual statement did mention the loss of a major machining contract… and November’s interims then owned up to revenue down 11% and operating profit down 26%. It was CGS’s least profitable first half for six years.
CGS remained confident of finding replacement work, although this income will not appear until the next financial year. The retirement of the seasoned chief exec was also a shame.
Nonetheless, there remains a lot to like about this down-to-earth business — not least its cash-flush accounts and its ability to recover to new heights after the 2009 banking crash.
Despite the firm’s endearing features, I’m not sure this share will ever set the market alight — average earnings growth during the past decade has been about 5% per annum.
My valuation sums point to earnings of 30.7p per share and a cash-adjusted trailing P/E of 12.
I bought my CGS shares during 2015 at 426p and I did not buy or sell during 2016.
7) City of London Investment (CLIG), 350p, £94m
I’ve not been too enamoured with recent developments at CLIG.
What started to turn me off this small-cap fund manager was its plan to award staff greater bonuses… despite the group’s somewhat lacklustre performance throughout the last five years.
CLIG will soon lift its bonus pool from 30% to 35% of pre-bonus operating profit…even though current client assets under management (AUM) — at $4bn — are $1bn lower than they were at the start of 2012.
I complained about the scheme at CLIG’s AGM, and was dismayed to learn the extra pay was a roundabout way of keeping existing clients on board… and that there was no chance of clients paying more to foot the bill.
At least CLIG’s chief exec — and 10% shareholder — sent me a post-AGM letter explaining the reasons behind the scheme.
Anyway, I wrote twelve months ago that maintaining the “chunky” 24p per share dividend would be the CLIG highlight of 2016… and that was indeed the case.
In fact, CLIG’s annual results in July confirmed client AUM down 5%, revenue down 4% and profit down 11%.
Somewhat disappointing, July’s statement also reigned in the group’s prediction of winning more client money… given only six months earlier!
At least, CLIG’s accounts remain blessed with surplus cash and terrific margins, while returns on capital are very high.
Furthermore, the group’s predominantly USD-based income means it ought to become a Brexit winner.
My latest sums suggest earnings could now be running at 27.6p per share — and are on course for their highest level since 2012.
Adjusted for the group’s cash, I reckon the P/E is about 11. The yield is almost 7% — and I dare say the dividend will once again be the financial highlight of the next twelve months.
I invested at an average of 281p between 2011 and 2013, sold a significant proportion of my holding in 2015, but did not buy or sell during 2016.
8) Record (REC), 38p, £84m
I suppose I should not have been surprised by REC kicking off 2016 with disappointing news.
This specialist currency manager has made a habit of losing lucrative clients during the last five years and another sizeable mandate disappeared during the first week of January.
Annual figures during June then revealed operating profit down 10% due to a company-wide 10% pay rise for staff.
The lower profit was somewhat galling for shareholders, given REC’s employees have overseen client-fee income flat-lining at £20m since 2012.
(Alongside my CLIG comments above, I have now become a lot more circumspect of City-type businesses and their pay arrangements!)
REC’s November interims offered little progress, with client fees down 3% and underlying profit down 2%. The statement also reiterated the risk of new collateral regulations having some impact on clients.
Still, there are vague hopes this business can one day come good.
Possible straws to clutch include the company having initiated talk of special dividends, as well as Brexit apparently prompting more discussions with potential customers.
In addition, REC’s investing strategies all recently boasted positive returns — which has not always been the case.
Plus, the accounts are flush with cash, cash generation is still excellent while margins remain a wonderful 30%-plus. The directors continue to own 44% of the business, too.
Ironically for a company that studies exchange rates for a living, the weaker GBP could improve 2017 earnings… without any new clients being won.
During the last twelve months, my earnings prediction has rallied from less than 2p per share to beyond 3p per share as REC’s mainly non-GBP revenue expands against the mostly GBP cost base.
The P/E could be 8 if you believe the cash pile is entirely surplus to requirements.
I first bought REC shares in 2010, I’ve made several buys and sells since, and my average entry price is 27p. I did not buy or sell any shares during 2016.
9) M Winkworth (WINK), 105p, £13m
I increased my WINK holding substantially during 2016.
This share had represented less than 1% of my portfolio twelve months ago, but I decided there was enough going for this estate-agency business to increase my stake ten-fold last year.
I bought at an 118p average and my overall entry price is now 115p after initially purchasing at 90p in 2011.
WINK continues to exhibit many appealing hallmarks. One key feature is the group’s veteran family management and its 49% shareholding. Another attraction is the robust accounts, which showcase juicy margins, surplus cash and terrific returns on equity.
That said, estate agency may not be the greatest of investment sectors right now.
In particular, WINK’s dependence on London’s subdued property market prompted a mild profit warning in November. What’s more, there is always the threat of cheap online competition devastating the traditional players.
For what it is worth, WINK remains upbeat and hopes to open more franchises during 2017. Management suggested at the AGM that a tougher housing market could favour WINK and its low-overhead franchise operation.
But whatever the property market does, I just like how WINK’s franchise model is home to scores of self-motivated, self-employed agents — and it simply collects a commission fee for every property they sell or let.
WINK’s results for 2015 showed earnings flat at almost 12p per share and while September’s interims did reveal profit up 10%, the aforementioned warning has me guessing at 9p per share for current earnings.
My sums point to a cash-adjusted P/E of 8 and a 6.8% yield, which is paid via quarterly dividends.
10) Bioventix (BVXP), £14, £71m
BVXP was one of two new shares to join my portfolio during 2016.
I feared I was late to the party with this one. I invested when the shares were at an all-time high, buying at 1,133p during August.
However, ‘paying up for quality and growth’ has worked out fine… at least so far.
I was certainly reassured by BVXP’s bumper annual figures after I bought.
Issued during October, the full-year statement displayed profit up 36% and a rich mix of impressive financials.
In particular, a second-half operating margin of 80%, alongside a £1m special dividend, were very welcome features… and underlined just what a lucrative activity developing blood-test antibodies can be.
Throw in BVXP’s many other favourable traits — including high levels recurring revenue, super cash conversion, stratospheric returns on equity, a founder/chief exec with a 10% stake — and it’s easy to see why the shares are fancied by the market.
I reckon trailing earnings are 67p per share, which support a P/E of 20 adjusted for the group’s cash position.
True, this coming year could hinder BVXP’s run of growth. The business will lose revenue from an important antibody, which may not be shored up entirely by income from a new product.
So I await 2017 developments with interest — perhaps a buying opportunity will occur if there is a temporary revenue setback.
11) World Careers Network (WOR), 225p, £17m
Progress at WOR during 2016 was better than I had anticipated.
In fact, full-year operating profit actually climbed 16% — a surprising achievement given WOR had earlier warned of rising costs keeping a lid on the group’s performance.
The deferment of certain expansion costs coupled with a Brexit boost — 30% of revenue comes from the United States — underpinned the pleasant surprise.
Still, WOR continues to warn of greater expenses as it looks to garner new customers. It’s largest client — HMRC — continues to pay lower fees, too.
Nonetheless, WOR’s cash-flush accounts, respectable margins and superior returns on equity — as well as the ongoing presence of its founder/72% shareholder as chief exec — give me quiet long-term confidence about this business.
So much so, I increased my shareholding by 76% last year, paying an average of 182p to take my overall entry price down to 260p. I have never sold a WOR share.
My latest sums show the current market cap is more than half represented by cash in the bank, with the balance represented by the underlying business valued at about 8 times 2016 earnings.
I trust 2017 will show signs that WOR’s greater expenses are starting to generate good levels of new business.
12) Getech (GTC), 37p, £14m
I must admit to losing some faith with GTC during 2016.
You see, this provider of geological data to the oil industry has evolved significantly since I bought during 2013 and 2014 at a 59p average.
I had initially been attracted to the group’s proprietary/specialist products and its long-tenured chief exec.
However, two sizeable acquisitions and the appointment of an external new boss has created a somewhat different GTC — and I am unsure what exactly the group’s strengths currently are.
At least the asset-rich balance sheet remains, which at the last count carried net cash of £1.9m and a freehold worth £2.5m.
In fact, the balance sheet has been the main value prop to this business — November’s final results showed a very modest profit and were the worst for some years (the preceding interims unveiled a first-half loss).
Notably, the reported profit for 2016 was in part supported by diverting some development spend directly onto the balance sheet. I must confess, parts of the accounting here are not the easiest to follow.
There is some hope that GTC can recover — clients apparently remain keen on the group’s services and perhaps a higher oil price could increase budgets for 2017. December’s AGM statement was positive, too.
I have never sold a GTC share to date, but I may dispose of a few this year if funds are required for a superb buying opportunity elsewhere.
13) Andrews Sykes (ASY), 445p, £188m
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.
I said this time last year that I hoped ASY’s investment in overseas depots could start paying off — and that appeared to be the case during 2016.
Annual figures issued in May were a tad better than I expected. Revenue climbed 6% to top £60m — for only the third time in ten years — while operating profit advanced 17%.
Further positive progress was reported within September’s half-year statement, with profit up 29%.
If ASY’s second half has gone well, I reckon 2016 could prove to be the group’s most lucrative year since 2008. I’ve also started to wonder whether ASY could extend this trading momentum and deliver a sustained period of rising earnings.
Mind you, the fortunes of the business remain tied somewhat to the weather, while dividends are paid at the whim of the 90% nonagenarian owner.
Once again he treated me to a 23.8p per share payout, which represents a 5%-plus income on the current offer price and a nice 10% income on my original 233p purchase cost.
Note that my 28.4p per share earnings guess covers the dividend by just 1.2x… but that is better than the sub-1.0x cover seen during 2014 and 2015.
I did not buy or sell any ASY shares during 2016.
14) Mincon (MCON), 68p, £143m
I was quite satisfied with MCON’s 2016 progress.
This specialist engineer has struggled during recent years after the mining slump reduced demand for the company’s heavy-duty drills.
However, annual results in March indicated underlying revenue up 8% and underlying profit being maintained.
First-half figures in August then showed revenue and profit both up about 10%, and Q2 looked to be the group’s best-ever quarter since the late-2013 flotation.
The numbers also highlighted respectable margins, a cash-flush balance sheet and plans to devote more resources to new products after various acquisition opportunities failed to materialise.
Mind you, MCON’s most significant weakness — haphazard cash flow due to substantial working-capital requirements — remains an issue.
Indeed, a November update referred to “the outcomes of these debtors”, which reads as if certain outstanding invoices may not be paid.
I can only trust MCON’s family management — which owns 53% of the business — can instigate the necessary improvements to cash flow. I’d also like to think the group’s top-quality products will remain attractive to customers.
This time last year I moaned a little about MCON’s EUR-denominated dividends.
Well, the weaker GBP has meant I am now being paid about 20% more despite the payout being held at €0.02 per share.
I reckon trailing earnings may be around 3.4p per share, which adjusted for the cash hoard supports a P/E of 16-17.
Looking ahead, I wonder if the strong rebound enjoyed by mining shares during 2016 is a signal that MCON’s trading may pick up during 2017.
Anyway, I bought my MCON shares for 44.6p during 2015 and have not touched the holding since.
15) Electronic Data Processing (EDP), 73p, £9m
EDP is a lower-quality, value-based investment that I hope to get rid of during 2017.
This time last year I was relying on a trio of North American funds that owned 28% of the business to “one day stir up some corporate action”.
Well, that day actually occurred during April… when the software minnow announced a strategic review that could involve a sale of the whole business.
Sadly the review has not yet reached a conclusion. But I am hopeful the activist funds will ensure weary shareholders do enjoy a welcome finale.
Attractions for potential bidders, though, include substantial recurring client fees, money in the bank and no significant demands on cash flow.
I bought originally during 2012 and 2013 at a 55p average and have not altered my holding since.
While I await the verdict on the strategic review, there’s a 5p per share dividend to collect — which provides me with a nice 6.8% income based on the year-end offer price.
That said, the payout was just about covered by free cash flow last year and — unless EDP enjoys a trading upturn — I suspect maintaining the dividend will soon require assistance from the group’s cash reserves.
16) BrainJuicer (BJU), 560p, £68m
BJU was the second new share to join my portfolio during 2016.
I bought at 325p during March and April after reading the group’s annual results… which helped me finally understand what this market-research agency actually did.
BJU uses ‘behavioural science’ to evaluate how people react to advertisements, and has pioneered various assessments and techniques to pinpoint marketing winners for many well-known brands.
What was more clear cut to me about BJU was its financial history — which showcased worthwhile organic growth, no acquisitions, very satisfactory returns on equity, a rising dividend and a handful of special payouts.
Other attractions included decent margins, ample net cash and a founder/chief exec who owned 27% of the business.
September’s interims showed the company returning to double-digit growth following a few years of more subdued progress.
The half-year statement also carried a confident tone about future trading, which was underlined with an update the other week that disclosed profit would be ahead of current forecasts.
Looking back, I wish I had bought more BJU shares than I did.
What scuppered my purchasing was BJU announcing a hefty share buyback about a week after I had started buying. The share price climbed, I waited for a decline…and sadly I am still waiting.
Even with the price doing well this year, my holding remains small at less than 3% of my portfolio.
I reckon the shares trade at 16-17 times my 30p per share earnings guess adjusted for the group’s cash.
I decided to sell one share entirely last year
I don’t miss owning the company below. Here are the details:
SOLD) French Connection (FCCN)
I finally gave up on the hapless fashion chain during 2016.
I’d bought during 2011 and 2012 at an average of 31p and sold 28% of my holding in 2014 at 62p. I sold the rest for 40p during September.
True, I exited with a profit of sorts. But this ‘turnaround’ situation had been incredibly frustrating — and created periodic levels of high anxiety during my five-year stint as a shareholder. All told, I am glad to have got rid.
FCCN’s annual results issued in March were the usual mix of depressing numbers — the statement showed the group’s seventh pre-tax loss in eight years and the cash pile down by £9m to £14m.
I wrote at the time the business could not afford a repeat of that £9m outflow.
Roll on to September’s interims, and the bank balance had now dwindled by £6m to £8m. That was a worry — and I could not risk this loss-maker starting to suffer a cash crunch.
Furthermore, news that FCCN’s awful Retail division would still be operating 40 stores by 2020 was extremely unsettling. I had hoped this division could be closed down entirely, and so leave the group with only its profitable Licensing and Wholesaling operations.
The final nail in the coffin was the lacklustre attempt by Gatemore Capital to instigate some change.
I thought Gatemore’s open letter to FCCN contained some fanciful projections and skirted around the main shareholder problem — that FCCN’s management needed replacing. Trouble is, fresh executives will be tough to appoint when the current boss owns 42%.
Anyway, I am now out and am much happier looking to reinvest my FCCN proceeds in more reliable and owner-friendly businesses!
Crikey! These annual posts never become any quicker to write!
Similar to 2014 and 2015, my portfolio membership has not changed too dramatically during 2016.
I started last year with 15 shares, of which only one has since been removed entirely. Meanwhile, just two new companies have been added.
And to confirm, there were no shares bought and then sold during 2016 that did not make this review.
Aside from the occasional portfolio re-balancing, I hope I can continue to keep my portfolio comings and goings to a minimum during 2017. Well, at least that is the plan.
I trust you found this post useful — I certainly did. If you wish to see my portfolio’s 2016 performance in a bit more detail, please click here.
Until next time, I wish you happy and profitable investing!
Disclosure: Maynard owns shares in Andrews Sykes, Bioventix, BrainJuicer, Castings, City of London Investment, Daejan, Electronic Data Processing, Getech, Mincon, Mountview Estates, Record, Tasty, FW Thorpe, Tristel, M Winkworth and World Careers Network.