However now things are a bit calmer I do think there is a need to carefully consider my portfolio in light of the C19 world. Both being in it today and where it will take us going forward. Given this it has been a busy, though generally small transaction value world in the portfolio this month.
One thing I am trying to focus on is that depending slightly on your discount rate the DCF model gives about 90% of the value to a business from the cashflows over 1 year out to infinity. Clearly the point at which you sell can dwarf any other free cash moment (dividend), and a stellar growth rate has an effect. But given I see the next 12 months as likely to be difficult my thoughts on valuation are gearing towards that 90%.
I also think that in the current market there is going to be a premium for survivorship. Many smaller companies will cease to exist. Whether they close, go bust or get subsumed into a larger competitor will vary but I think a lot of businesses may not be around in 2 years time. Alternatively there will be plenty that have mortgaged their existence to government support and will be like the Japanese zombie companies of the 90’s. Surviving but unable to drive forward.
Results
Georgia Capital; CGEO gave out a mixed set of results. These I cover in more detail in my buy section.
Treat gave out what would have been before C19, a solid set of ½ year results. Everything is going to schedule, the company is unaffected by C19 but individual markets are both doing very well and rather poorly, depending on the market and geography, much as expected and as previously indicated. IMHO this result was largely baked into the price.
FXPO; A decent set of largely looking back before C19 results. Costs generally heading down, sales generally heading up. Pricing stable. But C19 is clearly going to have an effect here so I am looking more to the next set of results and the company’s re-organisation. (See buy section below).
Sales
I sold out of Cenkos for about an 8% loss. My investment in Cenkos was predicated on the fact that it had significantly more cash on its balance sheet than its market capitalisation. There were other factors, that would I hoped help this to change as the share price rose, but the cash significantly underpinned the whole thesis. (Limited downside, decent upside). However at the full year 2019 there is an awful lot less cash. Without the underpinning I felt the thesis had changed sufficiently to sell out of my position completely. As such whilst there were results I didnt really bother with them.
I sold a portion of my MCAP position. I think this is a great company with a bright future. However it has for a couple of months now been above the 10% limit I set for any one position. As recent share price performance seemed to be leading this even further from the limit as it was becoming 12% of the portfolio I divested some. This gave me about and 85% gain off my average purchase price. This is still a problem as despite my divestment and the overall portfolio going up 6% this month the company is rising as a % of my overall portfolio
I sold about a third of my ELTA position for a loss of about 30%. ELTA was, as per previous writings, a significant value play. The group is being wound up and management saw the achievable prices as significantly above the group’s market capitalisation. Unfortunately the biggest part of the Group is TGI Friday’s and getting this back to previous value is going to be IMHO a drawn out affair. The second biggest part is the shoe chain Hotters, which seems to target comfortable shoes for ladies of a certain age. I do think there is some premium for survivorship bias, which I think might work for TGI, given it is part of a group and in reality controlled by Edward Bramson who I expect could fund it through to a realisation if he can see the eventual value. But I felt my exposure was too high given the very real change in the thesis for the group with C19. That said the group is restructuring and maintains that it is still looking at end 2021 for full realisation of assets. So I have not sold completely. In reality my sale here was particularly badly timed as the shares have come back strongly since the day I sold.
I sold a third of my position In British Land. Loss about 30%. I think it remains one of the premier land opportunities in the UK and the thing about land is that they are not making any more of it. But NAV protection is lower than it was and I am less sure about office usage as a long term investment. I do still hold 2/3 of the investment but that is on longer term watch.
Since this transaction British Land has produced a set of "holding" results. It reflects C19 and it shows that its portfolio cost more than it is currently valued at. But what is on hold is whether the portfolio would be bought at that value by anyone else. If property does hold up BL may be a target for an overseas buyer. Its office portfolio is blue chip, its retail not so much, but only 30% of the portfolio by value. I dont think that there is much doubt that BL will survive.
I sold 11% of my position in $MKL. Gain about 35%. It hit a stop line so I derisked a little. Over 5 years I think this will be ahead, but much less confident over 2 years. If it falls another chunk to my next action line, I will probably start buying back.
I sold out of my Sylvania Platinum position. Profit about 22%. Company hit my fair value price. This is a well run company in a decent market but my fair value price, unlike some others reflected that the business is dependent on supply from mines that may be closed by the mine owners. The company intends to move to tailings should this occur, but this is an uncertain prospect and there is no clarity on when the mines might reopen.
Sold RLE. Loss about 42%. This is a small property company in the Midlands. NAV protection out of the window and there is now too much debt on the balance sheet. I think the company will survive and it has sufficient flexibility to turn property from offices to housing. Subject to local council approval. But overall I think British Land is a better land opportunity for the next 5 years. Not a badly run company, but not in a good market.
Sold BILN. Profit about 15%. I think this is a very well run company and it was one of my top 10 holdings. I have every confidence in the management and that the company will survive. I do however think it is now and for the next few years in the wrong industry. That is not to say that the share price cannot go up from here. I have some limited knowledge of the industry and as far as I can see the intention seems to be across the board to proceed with the vast majority of green lighted projects. So the next 6 months+ could look good, but beyond that business is going to be very hard. Good management can seldom beat a bad industry so I am selling but putting BILN on a watchlist for a future buy.
Buys
I added to my holding in Berkeley Energia (My average buy price is now just under 11p) – My initial holding was limited by available cash and 2 weeks later I had done further research that enhanced my confidence so I doubled the position, though it is still under 1%.
A new position in $GNUS. (Average $1.31) This is a micro-cap Cartoon Maker. Creating “content with a purpose”. It has Arnold Schwarzeneger doing a character in its health stream, and Warren Buffet’s Secret Milionaire Club doing financial literacy. Because its content is “worthy” it can get Jay-Z and Bill Gates, amongst others, for guest appearances. It has been building up its portfolio, and recently has done two oversubscribed placings at $1.2 and $1.5 for working capital and content. It has now set itself up as its own TV company with programming appearing on a number of digital providers. The benefit for the customer is its free to them and paid for by advertising. Whether that is an entirely clever idea in the current market remains to be seen. That said because its content is clearly toddler and tween directed advertisers should be able to see its audience. It also has a range of toys being licensed and produced by Mattel. This is not an easily traded share and as such not for someone who might want their money in a hurry.
I have taken a small position in Lookers (23.91p). This is a company that has come up on screens a number of times. I think there is a chance that this business will go bust, but I also think that there is a significantly better chance that I can double my money in the next 24 months. The current mkt Cap is £90m and its EPV (historic) is £600m. Even if business in 12 months is broadly ½ with a £300m EPV I would be interested. I also think that this is one industry where survivorship bias will play a factor and I expect this will work towards the larger players like Lookers.
Another small position is Tri-Star Resources – (24.5p) TSTR owns about 40% of SPMP an antimony and gold production facility in Oman. After my purchase it began first shipments of antimony and is planning to grow operations to 100% of capacity by the end of the year. As an asset in the right hands SPMP is worth more than TSTR is getting its 40% valued for. However there are two very significant issues. Firstly TSTR is in arbitration with its JV partners, one of which is the Omani development fund over ownership levels. Essentially the local JV partners believe they should own more of the project. Secondly to develop the business requires further capital and no financing deal has yet been secured to fund this. I would guess that the Omani development fund has the money, but clearly wants additional equity not just interest for this. Odey is a significant investor with prices around the 30p and 60p mark. As such it has a real interest in making this work and could fund the deal if needed. However does it want to put money into Oman whilst there is a disagreement with a branch of the Oman government. This is very much a very slow watching brief. I don’t expect much price action until something significant occurs and then it could rise like a Phoenix or drop like a stone.
I added to $MA (Avg buy $135.35) and $V. (Avg. $117.54) I fully accept that with lower trade levels these companies will have a couple of slower years. But C19 actually feeds to the long term thesis of removing physical cash and both of these companies continue to both build their network and acquire related offerings.
I also did an exercise on a Greenblatt screen. Looking for the top 20 companies under the standard screen. I set minimum Market Cap at £75m, ROCE at 10% and Earnings Yield at 1.
I also then only looked at companies that were at least 50% lower than they had been in the last 12 months. So not just a C19 fall could get into the portfolio. I also wanted some clear proof of a level of shareholder awareness. I wanted management to be able to show that they realised shareholders were more than just an annoyance. Normally by paying a dividend or share buy backs without mass share issuance.
I then eliminated anyone who was very much the same sort of business as something I already owned, so whilst Motorpoint scored well I had and decided to keep Lookers, so no Motorpoint.
I do realise that at this point purists will be thinking that it has been proven again and again that adding factors often worsens a screen and human overlays are also well proven to make a screen a lot worse. Humans make a lot more mistakes than a well programmed computer. But even with all this understanding I felt that in the current environment my factors were sensible as was one last screen for whether I felt the company could be broadly in a similar position to 6 months ago in 18 months time. Whether we cure (vaccine) or adapt (herd immunity or death rate) I think in 18 months time we will be broadly back to normal in terms of the world and business getting on with their life. Some businesses (restaurants) will be in a dramatically different world, but most will be back to a more normal position though probably in a noticeably reduced economy.
The businesses that got through all the screens and I have taken a position in each were;
Bushveld Minerals (14.4p) – A producer of Vanadium I have had a position in this before and whilst to be honest the company is not one that thrills me part of the process is to accept the results and buy the companies it throws up. Management do own circa 6.5% of the business and it trades at about 1/3 of its EPV.
Ferrexpo (Avg 137p) – This is an iron ore pellet producer that so far has seen limited share price effects from C19. It intends to pay a dividend in July. Its share price weakness was from losing its CEO who has had to stand down to defend legal issues that are unrelated to FXPO. Again not something I would normally rush to buy, though it is theoretically below NTAV and its EPV is £4.2bn against a Market Capitalisation of £840m. With the changes in the boardroom making the company better set for the future (not waiting for the old CEO) I doubled my investment to a more normal starter size.
That said the AGM saw a clear battle between the old guard aligned with the previous CEO (Mr Zhevago) who owns 50.2% of the company and a number of significant independent shareholders. Mr Zhevago’s potential crime relates to embezzlement from another business so I guess they want him and his allies well away from the cheque book. The Chairman, presumably a supporter of Mr Zhevago has ended up resigning and an ally Mr Lisovenko did not get sufficient independent votes. He is trying to stay on the board and another vote will occur. So potentially a decent business with possibly a number of value crystalisation events occurring.
Georgia Capital (428p) – This is a Georgian Conglomerate with investments/subsidiaries in a number of sectors in Georgia. Some of them are going to have been very affected by C19, others much less so. Again not a business I feel comfortable entirely with. That said they do have a photo page of all the senior directors and managers across the group. I do not know whether it is true of Georgia as a whole but there are a number of senior women, which I think is a good sign, though they are all very pretty, which I would suspect is not a statistical norm. Because this company is small £170m mkt cap and in Georgia the value that is supposedly there relatively speaking is huge. Circa £450m on the balance sheet.
Since writing the above the company has had a Q1 update. In which NAV per share has fallen 35.6% to £7.84 really due to 3 factors. Absolutely the most substantive is the effect of C19. Georgia like many countries went into a form of lockdown and the hospitality business part of the group has closed. Other parts are impacted and management in the Q1 update went through each part. The second major factor is that the group has a lot of debt in $ whereas its operation currency is the Georgian Lari. During the last period the Lari has fallen against the $ making the debt more expensive and decreasing by circa 5.4% the NAV. The third factor is that one of the realisation strategies for Georgia Capital has been to float operating units on an exchange. They tried this with Georgia Health Group but there has been little interest or liquidity and so this is being taken back into the group. Clearly if nobody wants the assets you have to sell then they have a lower real NAV. This was certainly an area for questions during the analyst call.
To be fair both the presentation and the questions made me feel that management were open and honestly trying to build a quality group. I am concerned that a major part of the realisation strategy does not seem to be working at present but there does seem to be an opportunity over time to develop a strong cashflow stream that long term investors could benefit from. Overall the business development did look as though it had been going well and generating decent cashflows pre C19 and certain utility parts of the business are unlikely to be overly C19 impacted. I am not adding at the moment but will be watching with interest.
Photo Me International (Avg 45p) – Photo Booths, laundrettes and kiosks. I would have though an awful business at the moment. But cash positive and I expect that launderettes will do OK in the short term. Wash your hands and wash your clothes. Again a bit of grin and bear it. Again a significant EPV value above mkt cap and in this case a decent pay out as a dividend. With strong management buying in the month I made two buys to raise this to a normal starter level.
Joules (Avg 110.5p) – It’s retail, but in fact 50% of the business was digital before C19. It has a significant Director/PDMR shareholding and there are a few other factors of note. But again it is very much the screen says yes.
Somero (194p) – It is a widely discussed business and quite possibly best in breed at what it does. It was overpriced IMHO for a while, though perhaps not any more. Going forward I think we are heading more and more towards both automation and precision so there should be a market for what it does, which might be helped by onshoring. That said it is a business that I have been aware of for a while and I have not felt the need to buy it before.
These were the only ones of the top 20 thrown up by the Greenblatt screen. That made it through my other factors. I have taken a small 1/2R position in each of these. I have set a sell price for each, that with the exception of BMN is close to double my buy price. I will sell if it hits that. I will also sell in 24 months time if there is insufficient promise. (normal Greenblatt is 12 months rebase, but these are not normal times).
I have logged all of these into my normal screens so will be following the news and will add to the position if I feel that I am more confident in their ongoing value. I will also drop if they seem to be becoming a car crash.