Year In Review 2017

01 January 2018
By Maynard Paton

Happy New Year!

I trust you have enjoyed the festive break and are now raring to do battle with the market for another twelve months!

This first Blog post of 2018 provides a ‘year in review’ of my current portfolio holdings. I recap how each of the underlying businesses performed during 2017, as well as provide a few remarks about valuation.

I find writing these 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!

And here’s something I always remind myself at this time of year — 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 was certainly the case during 2017, when a fair chunk of my gains were wiped out by one long-time portfolio holding!

During 2017, my overall portfolio gained 10.5% 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 2018.

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), mid-price: 361p, market cap: £418m

TFW extended its straight run of record results to four years during 2017.

TFW’s interim figures were impressive, with profit up 20% and all group divisions doing well.

The preliminary numbers then divulged the firm’s largest subsidiary — Thorlux — had delivered 25% second-half growth.

TFW’s books continue to show high margins and a bumper cash pile, and I was not surprised the full-year payout was lifted for the 15th consecutive year.  (Sadly the cash hoard did not repeat the special payout of 2016.)

Mind you, the coming twelve months could be tricky for TFW.

Long-time chairman Andrew Thorpe became a part-time exec last year and his successor, while a safe pair of hands, has already indicated the 2017 performance will be difficult to replicate during 2018.

I just hope Mr Thorpe has not bowed out because he has foreseen a slowdown. At least he and his family still have approximately £200m riding on the share price.

I acquired my TFW shares between 2010 and 2012 at an average of 79p, and sold 25% of my holding during 2016 on valuation worries.

I did not touch my holding during 2017, but my valuation nerves remain given the cagey outlook and a lofty, cash-adjusted P/E of 26 supported by trailing earnings of 12.4p per share.

Click here to read all my TFW posts.

2) Tristel (TSTL), mid-price: 250p, market cap: £107m

TSTL was the only share I top-sliced during 2017.

I sold 21% of my holding at 289p because I thought the valuation of the disinfection specialist had become too extended. At the time, my optimistic sums for 2019 were projecting earnings of almost 12p per share and a multiple of 25x.

I must add that every time I have sold TSTL shares it has turned out to be a mistake. I bought during 2013 and 2014 at an average of 46p and sold on the way up at 79p, 100p and 123p. I should have just held tight.

Indeed, TSTL’s disinfectants are now proving to be very lucrative for shareholders.

The group’s first-half statement and full-year announcement both showed a 20%-plus margin before expenses relating to the firm’s US expansion.

Meanwhile, revenue and profit gained 19% and 25% respectively last year.

Although TSTL’s products appear top notch, I do have a few niggles about the board.

For a start, plans to expand into the US have become protracted and the real milestone event — FDA product approval — is now forecast for 2020. The board first disclosed it was working towards an FDA application in 2015 and the original plan was for approval by June 2017.

I have also become a little frustrated with the executives when they do not give straight answers at presentations about the finer details of their guidance.

And don’t get me started with option packages after the fiasco in 2016 and another scheme set for 2018.

To be fair, the directors continue to hold an annual investor open-day event in a marquee in the firm’s car park. I can’t fault them for putting on this useful showcase.

I am hopeful that 2018 will bring further robust progress and tangible developments with the US project.

Click here to read all my TSTL posts.

3) Bioventix (BVXP), mid-price: £24.75, market cap: £127m

BVXP was my star performer of 2017, with the year characterised by two sets of bumper results.

The antibody developer said first-half revenue and profit had surged 32% and 48% respectively, while the full-year statement displayed revenue and profit up 31% and 38% respectively.

The annual performance was BVXP’s best ever, and extended the group’s run of substantial yearly growth to seven years.

The accounts remain among the best in the stock market, not least due to their stratospheric 79% operating margin and immense 145% return on equity ratio. The cash continues to pile up and shareholders were rewarded with another special dividend last year.

I have to admit that BVXP’s growth during 2018 may not be so impressive. One of the group’s antibodies has ceased earning royalties, and revenue could stagnate — or even decline — this year if a recently launched antibody is slow to produce income.

I bought during 2016 at a fraction above £11, which did not seem an obvious bargain at the time…

…but with trailing earnings having since zoomed to 90p per share, the price I paid now looks very reasonable.

Throughout 2017 the near-term P/E has looked rather racy at about 25 or more.

However, this business does have exceptional economics… and quite often it pays to hold on to such firms even when their immediate valuations appear rich.

I did not buy or sell any BVXP during 2017.

Click here to read all my BVXP posts.

4) Mountview Estates (MTVW), mid-price: £112.00, market cap: £436m

MTVW remains one of my more established investments. I have owned shares in this residential-property business since 2011 and, after buying at £42, have never been tempted to sell.

True, MTVW’s results during 2017 were not as spectacular as those of 2016.

The firm appeared to blame Brexit for a standstill full-year profit and its weakest first-half performance for four years.

However, net asset value (NAV) continues to climb higher, and gained about 7% to a new £89 per share high during the twelve months.

It’s worth noting that this year’s statements showed group borrowings being reduced to £25m — their lowest level since 2001. Gearing on MTVW’s £346m property estate is therefore 7% — the lowest percentage for at least 20 years.

I had wondered whether the debt reduction was a sign of management caution about the housing market. But the first-half statement revealed the firm had spent £25m during just eight weeks buying additional properties in London.

Long term, my valuation sums remain promising.

I calculate MTVW’s estate could be worth £209 per share should all the group’s properties lose their regulated-tenancy status and are then sold.

Click here to read all my MTVW posts.

5) City of London Investment (CLIG), mid-price: 410p, market cap: £110m

The dividend will once again be the financial highlight of the next twelve months.

I wrote that a year ago and, sure enough, the dividend continues to be CLIG’s main attraction.

Following six years of being stuck at 24p per share, the payout was upped by 1p to 25p per share during 2017… and continues to support a 6%-plus yield.

The dividend lift reflected CLIG’s positive financial progress during 2017.

January witnessed details of the fund manager’s best interim results for seven years, while July’s annual summary confirmed profit had surged 48%.

The performances were achieved mostly by i) the weaker Brexit GBP translating the group’s USD revenue into greater profit, and; ii) a rising market — CLIG’s emerging-market benchmark has soared 35% since this time last year. I should add CLIG’s own funds have gained about 20%.

Similar to Record (see below), it is not obvious that CLIG is winning extra clients and where exactly future growth will come from.

However, the accounts do remain blessed with surplus cash and high margins.

Furthermore, my latest sums suggest earnings could be running at almost 40p per share — a new all-time high — while the cash-adjusted P/E may be around 9.

I invested at a 281p average between 2011 and 2013, sold a significant proportion during 2015, and have since just sat back and collected the dividends.

Click here to read all my CLIG posts.

6) Castings (CGS), mid-price: 450p, market cap: £196m

Last year was never going to be thrilling for CGS.

Results issued during 2016 had already owned up to a revenue shortfall within the engineer’s machining division, and progress throughout 2017 was rather lacklustre.

The annual figures showcased the worst yearly performance since 2011 as operating profit dived 19%. Ratios such as operating margin and returns on equity dropped to relatively average levels and the dividend — which has been lifted almost every year since at least 1992 — was raised only 2%.

CGS’s first-half update then admitted the machining division had incurred losses following a management review, and that the department’s future revenue would not rebound as previously expected.

Still, CGS’s main foundry division continues to perform quite satisfactorily and, what with the group’s large cash position and LTIP-free board culture, there remains a lot to like about this no-nonsense outfit.

Unfortunately, I doubt the firm’s old-fashioned attractions will help spark much life into the shares during 2018. The machining-division difficulties are likely to see near-term earnings slide to about 27p per share, which supports a possible cash-adjusted P/E of around 14.

I bought all my CGS shares during 2015 at 426p and have never sold any.

Click here to read all my CGS posts.

7) Daejan (DJAN), mid-price: £60.60, market cap: £987m

This low-profile property business was not the most exciting share to own during 2017.

True, the business issued record annual results during July. The highlight was net asset value (NAV) advancing 12% on the back of valuation gains to breach the £100 per share mark.

However, the improvements to rental income and the dividend were modest — 2% and 5% respectively. The family management — and aggregate 80% shareholder — blamed Brexit for the pedestrian advances and the “additional level of uncertainty”.

Interim figures in November unveiled further modest progress, with NAV creeping to £103 per share, revenue inching 2% higher and the first-half dividend being left unchanged.

Still, this is a business that is managed for the long haul. NAV has surged 350-fold since the Freshwater family took charge in 1959 and I am hopeful of further valuation uplifts over time.

Indeed, it’s worth recalling that, a few years ago, DJAN revealed it had “accumulated a major property holding” close to a planned Crossrail station in central London. The area apparently has “significant potential for increases in rental value arising from improved transport links” once Crossrail starts operating during 2018/19.

Debt represents just 11% of the property estate, too.

I first bought DJAN shares in 2015, since when NAV has increased by 21% and the share price has barely moved. My average buy price is £55 and I have never sold.

The £61 shares represent 59% of the £103 per share NAV and I could well buy more during 2018.

Click here to read all my DJAN posts.

8) Record (REC), mid-price: 44.5p, market cap: £89m

REC became an income stock during 2017.

The boutique currency manager declared a special dividend within June’s annual statement and said it would contemplate distributing further surplus earnings as special payouts in the future.

The yield based on the ordinary dividend is presently 5%, and may be more than 6% if current-year earnings are paid out in full once again.

It’s about time REC did something worthwhile for shareholders.

For some years now, the business has struggled to gain new clients as its currency-hedging strategies floundered in the QE era. It was somewhat ironic that the firm’s 2017 results — the best for six years — were buoyed mostly by translating EUR and USD revenue into the weak Brexit GBP.

The 2017 results also revealed a £10m tender offer, which seemed primarily designed to benefit the group’s (now) 27% owner/founder/chairman.

REC’s interims were the usual frustrating affair, with further costs eating away at earnings and no progress being reported on new-client recruitment.

At least the accounts remain flush with cash, cash generation is still excellent while the operating margin continues at a super 30%-plus.

I first bought REC shares in 2010 and my average entry price is 20p following several bouts of buying and selling. I did not buy or sell any REC shares during 2017.

Click here to read all my REC posts.

9) Tasty (TAST), mid-price: 31.75p, market cap: £19m

TAST was by far my biggest disaster of 2017.

I had already become unnerved by the restaurant chain during 2016, when I trimmed my holding by 15%. In retrospect, I should have sold a lot more!

TAST’s annual results in March were accompanied by a profit warning that cited a “challenging” trading environment.

Management also admitted profit for 2017 would be below that recorded for 2016, and scaled back the number of new openings for the year from fifteen to seven.

TAST’s H1 statement in September was grim, with profit collapsing towards break-even as revenue per restaurant dived 8%.

The books also revealed a hefty £9m write-off, which told me that perhaps a quarter of the chain — some 16 sites — were trading well below expectations.

Although TAST’s share price has been thumped, I am convinced the firm offers good turnaround potential.

For one thing, TAST’s directors have previously helped develop two multi-bagger restaurant chains. I am sure the board — while having been a tad complacent of late — hasn’t suddenly lost its sector expertise.

Plus, there now seems to be a little more urgency with the recovery plan — and the development of a new restaurant concept seems particularly promising.

Anyway, I bought heavily during 2017. I increased my holding by 275% and paid an average 45p. After first buying at 50p in 2011 and again at 98p in 2014, my average purchase price is now 54p.

All told, I just think TAST’s £19m market cap is too low when the directors have helped build other restaurant chains and sold them at £200m-plus.

Click here to read all my TAST posts.

10) M Winkworth (WINK), mid-price: 104.5p, market cap: £13m

I increased my WINK holding by 11% during 2017.

I bought at an 104p average and my overall entry price is now 110p after initially purchasing at 90p in 2011.

Buying more shares in a traditional estate agency could be seen as a contrarian purchase.

I mean, isn’t buying and selling property all going to be done online one day… via sites such as Purplebricks (PURP)?

I’m not so sure.

I keep looking at PURP and can’t help but think the foundations of that business are somewhat shaky. You can read my Comments here, here and here.

Meanwhile, WINK makes a profit (unlike PURP) and pays a dividend (unlike PURP).

True, WINK’s progress during 2017 was not spectacular. Both April’s annual results and September’s first-half announcement revealed profits down 26%.

However, I’m pleased WINK continues to perform better than Foxtons (FOXT) within the stagnant London housing market. The books remain blessed with large cash reserves and robust margins, too.

For what it is worth, WINK’s family management remains positive and claims the difficult trading in the capital could lead to more self-motivated franchisees joining the firm during 2018.

Right now my sums point to a cash-adjusted P/E of less than 10 and a 6%-plus yield. I could buy more WINK this year.

Click here to read all my WINK posts.

12) World Careers Network (WOR), mid-price: 227.5p, market cap: £17m

WOR’s progress last year was somewhat disappointing.

After the recruitment software developer showed greater revenue and profit during 2016, May’s half-year results warned that an ongoing investment programme would depress earnings for both 2017 and 2018.

Preliminary figures issued during November then confirmed profit had plunged 42% as the business continued to spend heavily on extra marketing and product development.

It was notable WOR experienced a much weaker second-half — indeed, for a few months during H2, the business registered a loss. Management has also mentioned forthcoming client-fee reductions.

At least the balance sheet remains robust — about £10m of ‘surplus’ net cash represents close to two-thirds of the current market cap.

A lot now rests on WOR’s 72% shareholder/founder/chief exec, and whether his strategy of reinvesting substantial sums into the business is ever going to pay off.

WOR has previously recovered strongly from hefty investment phases, but the current phase has become much longer and costlier than earlier efforts.

I have never sold a WOR share and I did not add to my position during 2017, so my average entry price remains at 260p.

I can only hope 2018 sees WOR’s greater expenses starting to generate some level of new business.

Click here to read all my WOR posts.

12) S & U (SUS), mid-price: £22.58, market cap: £271m

SUS was the only new share to join my portfolio during 2017.

I bought into the motor-finance specialist in January at 2,070p after being attracted to the firm’s impressive underwriting and consequent 16-year run of consistent organic growth.

I was sure it was no coincidence that SUS’s track record was achieved by a family executive team that extolled the virtues of “steady, sustainable growth” alongside a £100m-plus shareholding.

The rating was a modest 11-12 times earnings, too.

So far at least, SUS has served me well — although some worries about lending write-offs have since emerged.

During March, the group published very respectable annual results, with profit up 26% and customer numbers up 30%. However, the figures also showed the bad-debt charge up a mighty 60%.

Roll on to September, and the H1 bad-debt charge jumped by 73%.

I have to admit, the bad-debt trend does not look encouraging.

However, the veteran chairman has been quite relaxed with his commentaries while the annual report (point 4) does indicate the board has regularly ‘over provisioned’ bad debts in the past.

All told, it’s a situation where I simply have to trust that the seasoned managers know what they are doing.

At the moment my sums signal possible earnings of 230p per share and a debt-adjusted P/E of 13. The group’s resilient dividend supplies a 4.2% income.

Click here to read all my SUS posts.

13) Mincon (MCON), mid-price: 96.5p, market cap: £143m

This time last year I wondered whether “the strong rebound enjoyed by mining shares during 2016 [was] a signal that MCON’s trading may pick up during 2017”.

The answer was yes :-)

True, MCON’s 2016 figures showed profit up just 2% as the specialist engineer plugged away serving the mining sector with its heavy-duty drills.

However, the statement’s bullish narrative — which included “setting aggressive objectives for growth in sales and profits” — heralded the start of significantly improved trading.

This Q1 statement set the ball rolling by announcing underlying revenue up 25%.

Then September’s interim update showed profit up 38%. The RNS also included MCON’s best-ever quarter as a quoted business, and talked of “meaningful growth” for 2018.

Mind you, MCON’s progress has not been perfect.

In particular, cash conversion — while improved — is not as good as it could be. The business carries lots of stock and customers can take a long time to pay their invoices.

I’m hoping the family management — which owns 57% of the business — will soon instigate the necessary improvements.

I reckon trailing earnings may be around 4.2p per share, which adjusted for a £27m cash hoard supports a P/E of 20. The stock market clearly thinks MCON’s trading rebound has further to run.

I bought my MCON shares for 45p during 2015 and have not touched the holding since.

Click here to read all my MCON posts.

14) Andrews Sykes (ASY), mid-price: 555p, market cap: £235m

I was very satisfied with how ASY performed last year.

The air-conditioning hire group revealed its full-year figures had reached their highest level since 2008, with revenue up 9% and profit up 20%. ASY’s H1 statement then showed revenue up 17% and profit up 28%, which left the group on course to make 2017 its best year ever.

The performances were all the more impressive for being achieved entirely through organic growth.  Certainly the group’s European depots are starting to become more significant, with their H1 sales up 48% to currently represent 20% of the group’s top line.

The figures also emphasised the high margins, cash-strong balance sheet and superior returns on equity that led me to buy the shares back in 2013.

I’m now hopeful that ASY’s ‘lost decade’ of 2006 to 2015 — when revenue and profit remained broadly stagnant — will gradually fade into a distant memory.

The market seems to be forgetting the past, with the cash-adjusted P/E being re-rated to 15 during the year.

I must add that the generous 23.8p per share payout continues to provide a nice 10% income on my original 233p purchase cost.

I did not buy or sell any ASY shares during 2017.

Click here to read all my ASY posts.

15) Getech (GTC), mid-price: 24.25p, market cap: £9m

I must admit to having a change of heart with GTC during 2017.

At the start of the year, I labeled the supplier of geoscience software a “debatable holding“.

I had bought originally during 2013 and 2014 at a 59p average, and was attracted by the group’s proprietary/specialist products, high operating margin and its long-tenured chief exec.

However, GTC’s oil-sector clients stopped spending during the oil-price downturn, and the firm eventually sought a replacement boss after its high profitability dwindled to zero.

First-half results in April were very unremarkable, and I did admit “I do wonder whether I should remain an investor after all”.

My view changed during November, after GTC issued its annual statement and I attended a company presentation.

Despite GTC’s shaky track record, it has become clear to me that the firm does have an attractive core business. The group’s specialist software products sustain significant levels of repeat licensing revenue and apparently remain quite valuable to customers.

I have never sold a GTC share, and I increased my holding by 31% at 24.7p during November and December. My average buy price is now 50.6p.

Click here to read all my GTC posts.

16) System1 (SYS1), mid-price: 367.5p, market cap: £46m

The Company launched its new name and re-brand on 1st April 2017 and this marks the start of a new chapter.”

So said SYS1 last year. Sadly the new chapter did not start very well.

SYS1 — formerly known as BrainJuicer — issued a profit warning during the summer and the shares were my second-worst performer of 2017.

Up until then, all had been going well for this market-research agency.

Record 2016 numbers were revealed during February, with underlying revenue and profit both up 15%.

A change of year-end meant SYS1 had another chance to showcase its annual performance in June, this time complementing the announcement with a 26p per share special dividend.

However, June’s update also admitted to slow Q1 trading…which eventually led to the aforementioned warning.

Interim figures in October were not as bad as I had feared — H1 profit slumped ‘only’ 70% — and I noted one half of the business continued to perform very well.

Nonetheless, management remarks concerning greater competition — and guidance that projects a 55% profit drop — could make 2018 a difficult year for this holding.

I bought SYS1 at 325p during 2016 and was attracted originally to the company’s proven history of organic expansion, its evangelical boss and the simple, cash-rich accounts.

I think the business has the wherewithal to recover, although calculating at what price to buy when earnings are so depressed is not straightforward. I hope an obvious purchase opportunity will arise in due course.

I did not buy or sell any SYS1 during 2017.

Click here to read all my SYS1 posts.

I decided to sell one share entirely last year

I don’t miss owning the company below. Here are the details:

SOLD) Electronic Data Processing

EDP was a lower-quality, value-based investment that I finally got shot of during 2017.

This time last year I was hoping the software tiddler’s “strategic review” could result in a handsome sale of the business. In particular, I was confident a trio of North American ‘activist’ funds — with a combined 28% shareholding — would ensure a welcome outcome.

Unfortunately, events didn’t really play out as I expected… with a bombshell issued in March.

Despite announcing the strategic review eleven months beforehand, EDP admitted to holding early-stage talks with just the one potential bidder. For good measure, the group owned up to a pension-scheme error and admitted more money would be needed to bolster the fund.

I sold out entirely, and I see EDP is no further forward with its strategic review 20 months after its launch.

For what it is worth, I bought EDP during 2012 and 2013 and my average buy price was 55p.

I collected 20p per share as dividends along the way, which helped give me a total return of 60% over four-and-a-bit years. I sold out at 67p including all costs.

That 60% return is not a disaster by any means, and is a profit at least…

…but I do think about how other shares have performed during the same time, and believe my money could have been served much better elsewhere.

Click here to read all my EDP posts.

Wow! These annual posts always take forever to write!

Similar to 2014, 2015 and 2016, my portfolio membership did not change too dramatically during 2017.

I started last year with 16 shares, of which only one has since been removed entirely. Meanwhile, just one new company has been added.

And to confirm, there were no shares bought and then sold during 2017 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 2018. Well, at least that is the plan.

I trust you found this post informative — I certainly found writing it to be useful. If you wish to see my portfolio’s 2017 performance in a bit more detail, please click here.

Until next time, I wish you happy and profitable investing!

Maynard Paton

PS: You can now receive my Blog posts through an occasional e-mail newsletter. Click here for details.

Disclosure: Maynard owns shares in Andrews Sykes, Bioventix, Castings, City of London Investment, Daejan, Getech, Mincon, Mountview Estates, Record, S & U, System1, Tasty, FW Thorpe, Tristel, M Winkworth and World Careers Network.

6 thoughts on “Year In Review 2017

  1. Richard

    Hi Maynard, a great read thanks.
    I dumped TSTY earlier last year (2017) do you see any risk that they could de-list from AIM?

    Reply
    1. Maynard Paton Post author

      Hello Richard

      I guess TAST could be subject to a low-ball offer from the Kaye family.

      The Kayes did announce they were considering an offer for Prezzo during the first half of 2008, but the mooted bid was scuppered by the banking crash.

      The greater risk could be a discounted placing, whereby the Kayes inject more cash into the business at a low price and gain greater control without a bid premium.

      Maynard

      Reply
  2. Joseph

    An excellent write up. Thank you Maynard for this and for the related blog. They are both masterpieces in objective, intelligent and educating portfolio analysis. Extremely interesting and thought provoking.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *