I am not a fan of the management, as when it does reasonably management do exceedingly well but when it does badly management still do well. However it was bought under the Magic Formula screen and that has certain rules that I feel obligated to follow, including living with uncomfortable buys. In reality I think the base technology has a lot of potential in the right owner’s hands.
I will sell this if it hits its Stop Loss without any qualms as it does make me uncomfortable to hold something where I do not feel the management is well aligned with the shareholders.
A couple of weeks after writing this BMN did hit my Stop Loss and I sold for about a 21% loss.
REDD bought a national accident and repair group. Not only does this enable them to reduce some costs associated with keeping their vans on the road they are also able to strengthen their relationship with their insurance customers. Overall it seems well priced and strategically sensible so I have added to my holding. My average in to REDD is now 193p.
Mid month REDD produced its results for the year ending 30th April 2020. On one side I dislike the complete rubbish they are producing with EBIT, EBITDA and Underlying numbers. On the other side the accounts are clear enough that you can ignore the pages of drivel and quite easily find the real numbers. (Just as an aside this is a business with circa £644m of debt – If they do not see interest as an important figure they are complete idiots. If they do see interest as important and report EBIT and EBITDA to the shareholders then they think the shareholders are complete idiots). Looking through the real numbers I think this is a business well capable of producing £64m PBT and throwing off much of that as cash. As such I think it is undervalued and added a little more. My average in price is now 206p, up from 193p.
MPAC put out ½ year results to 30th June. I have written about this on my blog. Overall OK but not great given Coronavirus.
The week following these results MPAC bought Switchback of Ohio USA. The cost is $13m with a $2m earn out and can be funded withing the company’s existing cash. There seems to be four main rationales for this acquisition (1) Switchback is mainly focussed on the US craft beer market so it is an add on to the food and beverage offering from MPAC and from what Tony Steels the CEO of MPAC has said it seems to be a less advanced system than much of the MPAC range so presumably lower cost, (2) It is based in the US so MPAC can now be an American firm in its biggest market. It has a large operation in Canada but it isn’t the same as being an American firm. (3) MPAC can add to the service side of Switchback with its One MPAC service offering and it can take the Switchback offering to the European market. (4) Absent good growth in its existing markets an acquisition is one way to attract shareholder interest. And that certainly seem to be the case for MPAC.
Sold TSTR. Loss 8.9%. I operate a system with a set action point for each share. It is a bit like a stop-loss but it forces me to do one of three things. Option 1 – is to buy more. If I like the company and the price has gone down, then I can buy more for less so add. This is probably my default option. Though as my go to strategy is Schloss based sometimes I buy stuff on little research just because the price looks cheap. So there is Option-2 which is sell. Usually this means that I have had further time to look at the business and it has not persuaded me to add so when it hits my Stop I should sell. This happened with TSTR. It hit my warning level and I could not validate buying any more so I sold. Option-3 is to dither. I am human and there is little in my portfolio that I cannot rationalise. If I can’t say why I am holding then I should have sold before. If you have ever read the Art of Execution by Lee Freeman-Shor dithering is the worst thing to do. But you are a better person than me if you have never failed to act.
PPHE – half year results to 30th June 2020. They run hotels it was an absolute car crash. In the end holding is very much a bet on three things. One that there will be a new normal in the next few years, two the new normal will broadly reflect the old normal, three the company has the funds to get to the new dawn.
1-I am not a virologist but I know some people in this area. Coronavirus 19 is a virus. As such it mutates to not kill its host (killing your host kills the virus so not a good strategy). This mutation is also one reason why making a vaccine is so difficult. Like the flu C19 will become manageable in a world context and a partially effective vaccine will mitigate the effects in rich countries. I see this as happening some time in 2021.
2-Whilst many things will have changed PPHE is already talking about 80-90% occupancy at weekends. As we adapt business use of their hotels will revert to similar levels
3-PPHE seems to have the cash position to allow it to get through the period I see it needing to cover.
Historically PPHE has had a EPRA NAV of £25.30p a share. I think EPRA overstates but if we cut it by 50% to £12.65 with the share price at circa £10.50 I see my current holding as reasonably valued with a big potential upside if I am right on the time to revert to the new normal. I also note that there are currently 6 vaccines being bought by the UK government for 100 million doses in November 2020. None of these are proven to work, but if they do, or indeed any of the other vaccines do then we could see an even quicker return to the new normal.
PPHE also hit my action price so added. Takes my average buy from 795p to 806p. Being in the hotel trade this is not going to recover till late 2021 at the earliest but its op/co prop co gives it flexibility. It is not IMHO overcapitalised and the CEO also brought in his son as an alternate director which I think/hope is a sign that he does not think things are too bad. I am hoping he doesn’t plan to throw his son under the bus.
BPM put out a ½ year trading update. Broadly positive in tone BPM did note that whilst it sees the current share price as low relative to NAV and has considered buying back shares it prefers to hold cash reserves at the moment. To be fair as BPM is an investing company retaining sufficient cash is an ongoing issue, and has been for the last few years, as realisations have not happened. Though BPM has maintained its dividend. Sadly BPM does not seem to me to have a clear path to a realisation event whilst the original founder remains the largest shareholder. And in the short term for him to exit could lead to a definite fall in the share price.
FXPO declared a further dividend payable towards the end of October. I added a few more taking my average buy price from 169 to 171.7p. The company continued to try and get Vitalii Lisovenko appointed as a non-executive director. Due to his connections to the largest shareholder there was a substantial vote against and he was only appointed with the votes of the controlling shareholder. The company has promised to revisit this appointment within 6 months. How is a little unclear, but FXPO for all its current business success is still going to command a lower rating than a company with less corruption issues sweeping around it.
AV. Sold its Singapore business. Though it retains a 25% holding in the business. This was at 1.9* NAV. AV. Itself is only rated at 0.9. Most importantly this was a transaction that many others had mentioned but the new CEO Amanda Blanc actually delivered. This I think will significantly help AV. As they finally seem to have a CEO who will take some hard decisions and deliver the actions the company has been talking about for some time.
The CEP subsequently bought £1m of shares and I added a few more to my position moving my average buy price from 270p to 276p.
AEO delivered a Business Update. Broadly the company is winning business as it offers an increasingly digital delivered product. The company has been able to pick up some talent from competitors, though as the landscape changes some of that talent may not have the skills needed in the modern environment. Quite a lot of spending is going on retraining and upskilling. The business when it updates for the ½ year to June 2020 will declare a loss of between £150,000 and £250,000. Given it is now September this variation suggests to me that the extra £100,000 is whether management want to throw the kitchen sink in. Most importantly the company will after paying all its deferred tax bills maintain a positive cash figure over £1m. The company’s market cap is only £1.8m
SOM put out results for the 6 months ending June 2020. I bought this on a Greenblatt screen so my holding is low. I have never understood why a US based machinery supplier is listed in the UK and I absolutely loath the use of adjusted EBITDA metrics. I think EBITDA is a bad measure for the vast majority of businesses. Particularly for capital intensive machinery manufacturing. I think Adjusted EBITDA borders on criminal, even more so when you look at detail at the very real costs being stripped out of the adjustment.
That said Somero like many US machinery suppliers had a reasonable C19 so far and like many capital intensive businesses the slow down in the pace of the business has allowed the company to build up its cash balances.
Unlike some others Somero felt it had sufficient cash to declare an interim dividend. Payable in October to those on the register on the 25th September.
Whilst Gross Margin declined from 56% (H1 2019) to 54.7% it remains impressive.
Also whilst it is hard to make proper judgements during the early stage of release it does look as though some of the new products are gaining traction.
The company is expanding its sites in Michigan and Florida, reinforcing its US bent.
Even at the current reduced levels the ROCE looks to be impressive and the only concern that leapt out of the balance sheet was the increase in inventories. When you are selling less you need less stock not more, though this may be simply a timing effect or a reflection of the move to some new products.
Overall this is for me very much a Greenblatt company – hold your nose and buy. I have added to my still small holding and my average buy in is now 227p
MA. Put out figures for August showing increasing levels of business. Particularly for card not present transactions. It is possibly worth remembering that MA. can charge a little extra for CNP transactions.
Bought some more LGEN. After a fall of circa 15% I hit my warning level. Given the buy thesis was only last month and I have seen nothing new on this I added on the basis that if it is on sale I ought to have more. Average buy price is now reduced from 230p to 218.7p.
CGEO also hit my warning level. This company now trades at 0.3 times NAV and whilst I recognise that it will be some time before the discount gets closed my system of buying on a trigger with this level of discount means this is an add point. Average buy price reduced from 401.89p to 390p.
MSFT announced a new dividend level 9.8% above the old. I think whilst an increase was expected this is higher than many had sought. On top of this they spent circa $7.5bn of its cash on buying Zenimax Media. Zenimax controls Bethesda Softworks which gives MSFT control of a variety of what I thought were Xbox leaning games franchises. DOOM, Wolfenstein, Prey, The Elder Scrolls. The issue for me is that a few years ago it was being suggested that MSFT would get out of gaming. Now that the world is moving to digital gaming MSFT is making a clear statement of intent. This is reinforced by the news this month that MSFT will be enabling streaming of Xbox on the Apple platform.
On the more traditional side T-Mobile in the US signed up to provide Microsoft 365 as part of its Small Business Plan. In the US T-Mobile is the aggressor so I see this as a positive both for T-M and MSFT.
Based on all of this on a down day I added some MSFT. (Avg buy now $185.31)
I took a very small position in BLU this is at best an early stage technology investor. To be fair its holdings look to me to be somewhat of a mishmash, though a couple are in the gaming field. Market Cap is £8m and one of its investments Guild esports looks to be listing before Christmas. What its valuation will be and as a consequence what BLU’s holding is worth is still very much an unknown. I see quite a lot of commentators suggesting that BLU’s holding in Guild is worth more than its entire market cap and as a consequence on listing we should get a real rerate. But what they seldom mention is there has been a seller out of BLU who has been in longer and presumably is fully aware of the float. I am holding for the potential rerate, but not so much as to cause me pain should it not go ahead. I doubt I will still be holding at YE.
Subsequent to this BLU also announced some progress in its investment in SatoshiPay which had its first customer and a further small investment into a European egaming platform focussed on contact sports such as rugby. Still don’t expect to hold past the YE. (Avg Buy Price 0.00215p)
ARTL came out with a trading update. NAV is 211.2p a share and the current share price is 167p. Currently it has provided about £37.2m of loans on which it is charging 9-13% interest. £37.2m of actual property through various vehicles. A £2.6m legal case (much of which, though not all, was paid post the period end). And £52.7m of cash £124.7m in total with liabilities of about £9m. The company was a property business and is becoming a funder of property acquisitions with an ability to get 9%+ and a decent covenant. The real issue is whether they can sensibly redeploy the cash it has. Clearly in this market there is no rush but if we are sitting here in 6 or 12 months time and the situation doesn’t look that different this becomes a good business for the directors but not necessarily the shareholders. Given the pile of cash dividends are pretty easy to declare and the yield historically is about 2.4% whilst we wait.
Sold remaining holding in BLND. After the New Look CVA further decimated the Retail portfolio valuation and with no clear idea as to what will happen to offices and whether the BLND campus offerings will now go ahead as planned I divested the last of my holdings for a circa 40% capital loss. I have been a big fan of BLND over many years and they have been a very good dividend payer, but New Look was the last straw and demonstrates that management haven’t the confidence to say no. I am keeping BLND on my watch list and if there is a decent recovery or a significant further fall I may add again.
JOUL & TW. both hit my lower level trigger / Stop Loss and neither had convinced me that they were strong holds. As such both were sold. TW. about a 21% loss, JOUL about a 9% loss.
MNG also hit my lower level trigger, however I have become more confident in the business mid-term so I added and reset the trigger. Average in price is now 172p.
Bought some INTC. This seems to be undervalued at the moment. It is about 25% below its EPV level and almost 30% below its high for the year. I am not an expert on Chip development but I am persuaded that the recent fall is largely due to product delays which are (a) small delays so not massively cash flow changing in the long term (b) Are less delays than many people have suggested and more a move to a slightly better than first intended Chip. There is validity in the argument that Intel has for a while not been able to generate significant growth, but as it can generate free cash flow in excess of $16bn and is forecast to do so for this year and next, and in some forecasts the year after I feel the downside is limited. Though I have to admit I do like a large cash funnel pouring into shareholders pockets. It is why I started in Apple. This is not currently intended as a long term hold, but I have noticed a number of value investors talking about INTC and pointing out its relative operational strength and its cash generation. It is only a small starting holding bought on a day of market weakness but so far I am happy with it.
PALM came up with a trading update. All read very much like a role of the dice plan. Multiple areas that might win, but no clear plan. The company admits it will need to fundraise in the next 12 months. This would seem to me to be best done with good news underlying the offer – ie we have struck lots of gold in X. The fact that they still seem to be all over the shop suggests to me that they have no clear focus on X, which is disappointing. As it is I have small holding and their operations are in Canada and Australia too very stable countries and I have just had 2 gold briefings both of which extol the often missed value of low risk jurisdictions over high risk. If this is all the news at the time of the fundraising I will keep my hand in my pocket. As it is Palm is currently bouncing off the acceptable low for its holding in my portfolio and should it breach I will sell rather than add.
I have also added a starting position in SCS. (Avg Buy Price 208p). I dabbled in SCS a few years ago and it was not a pretty tale. Broadly the market is highly competitive. Everything is on sale for 52 weeks of the year. On top of which people can negotiate a “Manager’s Offer”. And most of the furniture sold by the big guys isn’t that great. So less cash sensitive purchasers go up-market.
However we are possibly in a positive zone at the moment.
(A) SCS is number 2 in the UK, Harveys was number 3, but has gone bust.
(B) The effects of C19 on many smaller retailers has been huge and I expect a number of small competitors to also leave or struggle in the market
(C) Like my holding in Lookers I think there is a lot of holiday cash looking for a home, and there is real pent up demand to use this to buy a car or a sofa.
D) SCS has a market capitalisation of circa £77m. And cash of £82m. Now creditors are £82m on inventory of £18m and lease liabilities under IFRS 16 are £138m but with landlords under the cosh those lease liabilities are only as valid as management make them – CVA anyone.
The company produced its results for the 52 weeks to July 25th 2020 which included a fair amount of lockdown and they were pretty awful. They also try to use “Underlying” earnings the accounting term for which is “Bullshit”. But that aside they produce GAAP accounts and and aspiring to make 2019 figures in the future doesn’t seem to me to be unreasonable.
So on a very arbitrary basis mkt cap of £77m less ½ cash £41m (some of it will be deferred tax both VAT and corporation, the rest is needed to pay bills, fund working capital as business resumes, show suppliers they are solvent etc). No benefit for revising leases. If they don’t start on this low hanging fruit I will be unimpressed). You get a business costing £36m capable of delivering £11m post tax and with an opportunity over time to grow. Seems not expensive. And once the price settles, it has been going down since the results, I plan to add more.
APP also put out a trading update at its AGM. It was largely unexciting as the Company rebrands itself and changes its operations from being a Christmas club style operation to a staff Appreciation business. Clearly the business has been hard hit by C19 and the current results are only in the middle of the ranges theorised by management. So not good and not bad. Market Cap is £55m with £23m of cash. With Cap less Cash of £32m the company could historically deliver £5m of profit. Given the refocus and the issues many corporates have had, I am a little uncertain as to whether this is a sensible number to use going forward a PE of circa 6 or whether it should be adjusted. Either way the business is not that currently exciting so it is a hold. As it also is heading towards my low trigger and I have not been impressed by the TU then this too may be sold if it crosses the trigger.
Material Gainers in the month: AEO, MPAC
Material Fallers in the month: GOOGL, AAPL, BPM, DIS, MKL, PPHE
Nothing in this note should be taken as investment advice. My actions are solely for my own situation and not yours.