July Week 5 - Part 2 - Somebody, please turn of the RNSs

Portfolio Review;

Quite a few transactions;

Updates from #QTX, #DUKE, #VLX, #GAW, #BATS, #GSK, #PHP, #GETB,  #TPFG & #RELX

As discussed, given the amount of guff - it was a Monster week for me, part two of the blog.

Far more relevant to my and my portfolio than the contents of Part 1.

I dare say a part 3 and part 4 would be more appropriate - if anyone does stay all the way to the end (especially starting at Part 1) - please do let me know so I can pat myself on the back!

I am sorry it is so long - but not that sorry because you didn't write it 😁

Portfolio Review

Given all the updates and what not, I don't know how I should take a measly 0.34% down move on the week.

The biggest contributors in the week were also a result of transaction activity as opposed to market activity.

Think the market is likely just teetering around on low summer volumes so best not to read to much into price movements. 

The month finished down -0.456% and YTD at 9% versus All Share Total Return at -0.7% & 12.3% respectively.

Lessons:

I am sure there were several, but I am not sure how much time I had to think about anything this week - it was just a flood of RNSs.

It was busy week on the transactions - they have been considered for a while but the action itself may have been rash - time will tell and one to think about.

Transactions

Add BOO 

• Has been soft lately following the ASOS results, some Amazon announcement effect and then more dramas about Leicester factories, which were refuted.
• I am not sure how much these stories impact the overall business thesis - I am not sure what the crossover is between people who watch Love Island & read the business pages.
• There is clearly a lot of buying support at that price (me being one of them I guess!)
• Given the position size - it had to be dealt with - and there was very little to say that the deal should be sell.
• Now wait - see how the supply chain / CEO testimony / Sales growth, margin & RETURNS progress

Add IGP 

• Graduating from punt - starting to win new business with reseller relationships.
• Half year results - the deferred income balance quadrupling stood out - note this deferred income is over many years, not one year.
• Had pulled back in the risk off feel and could actually buy some shares.
• Also, part of the macro action re risk tolerance.

Reduce CLX 

• I really like this company but there have been a couple of things around accounting issues, it is also a recent IPO
• Given it is a recent IPO and associated risks, it should be a lower position size anyway.
• 1st accounting I looked into (felt OK), Maynard Payton brought up lengthening amortisation period & other income
• Other income has been fairly consistent but maybe we can expect an "exceptional" impairment charge at some stage
• Given the position size & the risks cited, decided to reduce - no reason I cannot buy back as risks subside. 
• Manage risk not P&L

New Supreme 

• I understand that the fashion is to leave new holdings as undisclosed but I neither have the influence nor inclination to do this;
• Also, I have no intention of adding to this at the moment - given recent IPO & not quite the same metrics as FNX & CLX (my other recent IPOs);
• I was monitoring this but felt it was a little too talked about;
• Anyway, they reported results last week & I was pretty impressed with what I read;
• Good revenue growth, with the growth coming from the higher margin areas (Vapes are big - given BATS results & also Phillip Morris), while a steady cash generative distribution business funds expansion;
• The risks for me were around customer concentration (35% in 2 customers) and I didn't particularly like the CEO can override credit insurance.
• Strong portfolio fit, like the skin in the game & mgt attitude
• High growth in higher margin businesses, good returns on capital & investing in capacity
• A high quality shareholder register
• And the money shot for me was Director's Remuneration - Sandeep Chadha paid himself below the NI threshold
• I don't think entrepreneur is going to be wasteful with S/holder funds.

New NRR & Sell WHR 

• Part of the REITs - all of which combined I consider one holding.
• My REIT portfolio is very defensive on the whole and that lowers the yield.
• At the same time, I held SHED, BBOX & WHR, which are all in the same space & of those three WHR has the lowest yield & similar P:B
• I think the portfolio activity at SHED & BBOX have been better than WHR's, with proceeds + a bit recycled into NRR
• Unlike my existing REIT holdings, NRR trades at a substantial discount to book value (circa 40%) and pays a dividend closer to 8%
• They sold the pub's business at a 15% discount to book value versus 40% above and it was about 25% of assets.
• Will have a healthy balance sheet as a result and rent collection / performance / Hawthorns transaction does not seem to suggest that the book value if off by that sort of amount.
• It improves yield and valuation characteristics of REIT portfolio and gives portfolio more exposure to the reopening/recovery trade, which the portfolio lacks.
• Partly this is putting cash to work as a result of the adapting macro view & if I am using cash to buy at a discount to book value, I guess I am improving the value profile of my portfolio even on cash? 

Portfolio Risers > 5%

IHC up 7.68%

• Last week I said: 
• IHC seems to have been sustained lower, which I find strange in the context of their most recent update, and am tempted to add, although it is not what I would call cheap.
• Guess other people thought so too - shame I did not act on my interest given I clearly have room to add given position size - and I have been waiting for a pull back
• HOLD, could be Add

SDI up 6.67%

• Has been a bit weak lately and the results last week probably re-assured some people who might have reduced pending results;
• Happy with position size and want to see how the one off progresses - Mgt call suggested it is not beyond the realms of possibility for orders to be less "transitory"
• HOLD

Portfolio Fallers > 5%

REAT down 7.55%, BOO down 6.95%

• REAT - I expect it is more noise after the noise last week
• BOO - notes above.

QTX down 5.52%

• Quartix announced preliminary results that were in line with expectations - I am not sure how much to read into the price reaction, but reading the results was on the whole positive around operations. 
• Perhaps I am in denial about the long term but I think these numbers mask a very interesting business - certainly not a hidden gem given valuation - but interesting nonetheless. 
• Revenue down 5% to 12.5m (13.4m), Fleet Revenue up 7% to 11.6m (10.8m). Insurance 0.9m - will be dead.
• Fleet Telematics profits of 9m (8.7m), customer acquisition 4.1m (3.2m), Insurance 0.5m. ADJ EBITDA 2.7m (4.6m), Op Profit 2.1m (4.3m)
• Profits are half the prior year - down 2m - 1m from customer investment, 0.8m from Insurance - Telematics profit margins lower - customers onboarded over year?
• Free cash flow 1.4m - down 1.8m - 500k working capital - guided higher inventory investments, dividend lower, PY had catch up.
• New units sold up 31% (soft comp, but good nonetheless), subscription base up 8%, number customers up 9% - New installations up 13% on 2019 Half year
• France and other Europe - very good growth in new units & subscription base & customers (double digit & 50%+ low base), UK more pedestrian mid single & US high single
• Number of subscriptions per customer are higher in each territory
• 23m recurring revenue base with a 70% operating margin before central - 17m steady state once they stop acquiring new customers vs 210m M/Cap
• Guidance reiterated - 25.6m Revenue, 5.1m Adj EBITDA, 4m Free cash flow
• Margin pressure in the service costs - higher equipment component / supply chain disruption / carriage costs
• 90% Operating cash conversion, 80% free cash conversion. 0.7m interim dividend & expect another 1.3m dividend + excess cash over 2m
• Concerns around valuation given that numbers are going in reverse - clear path to a higher margin growing business - revenues growing at 8-10% and becoming international business
• New CEO - Founder CEO leaving - very clear reporting - and guided very clearly which is why share price only fell 5%
• Hold - I would want it to be cheaper before buying and lets see how things go with the Mgt transition

Updates & Results

There were so many updates this week, especially when I include Monster Tech covered in Part 1 that I am not going to list them out - Quartix is covered above.

And I thought last week was overwhelming!

DUKE Update

• Q1 cash 2.9 (marginally above mgt expectations - think view was closer to 2.8m), record vs normalised Q4 (fair enough - had redemption)
• Realised Berkley in quarter (16% IRR) & investment in OTC/generics/health/wellness in Europe (€10m), Warrants exercised in Xtreme Push - own 2.7%
• Q2 Cash revenue expected at £3.2m, deep pipeline late stage - confident of new deals in short term to further increase cash revenues / shareholder returns
• Hold - could be add but fine with position size.

VLX Update

• Momentum continued into Q1 22, strong growth in consumer electronics & Evs continue to grow
• Medical & complex industrial recovering from 2021 impacts & DEKA continues to trade well.
• Have passed on the copper price increase, challenges with component shortages/material inflation/freight challenges
• Further pipeline for acquisitions, slightly ahead of market expectations - $49-51m - so $51.1
• I wonder if these complex data center/electric charging cables will standardise the like phone charges and USB cables (and therefore less comlex?)
• HOLD - but is a nothing type position at the moment - Needs some action!

GAW Annual Results

• There are other PIs who can explain the merits of this company far better than I can but if there was anything close to the quality of Monster Tech in the UK, this would be it.
• I don't detail below my notes around the Operations/Strategy/Business Update - it is already too long - I think it would be worthy of a write up in it's own right.
• Revenue up 30%, Op profit up 65%, licensing flat, PBT up 65% as well (tax 19%, 20% in PY), Diluted EPS £3.70 (£2.18) - 40p dividend
• I tweeted my favourite lines from the report
• Revenues up 31% on PY (34 at CC) - Own stores 20%, 3rd party retail 55% (no stores up 10%) & online 25%
• Trade number stores up 10%, sales up 39% (closed in last 2 months of PY), 
• Retail sales down 10% approx - number of stores down by 8 to 521 - 90 did not break even (not material in assets) - will continue to adapt - Retail challenging
• Online up 70% on PY - making up for shortfalls when retail was closed - website dated (Agree - for someone fresh, it is What the hell is this thing?) - will take a while to improve
• GM up 72.7% (product mix more legacy, distribution (online), inventory provisions in PY)
• Costs up 14.1m in year - 4.1m on Operations, 1.5m on marketing & support, 1m IT & Branding each, Webstore costs 1.9m, lower retail costs of 5.1m (travel)
• Staff/Mgt bonuses up 11.5m - fair enough - think staff retention is going to be a key competency
• Op Profit nearly doubled to 135.4m (pre royalty of 15m) on £350m sales - 38% Op Margin vs 27% in PY
• 131m Op Cash & 30m Cap Ex - 100m Free cash give or take
• 2-7% average price increase on products, receivables up 10m (half of that is VAT)
• ROC doubled to 184% from 94% (higher Op Profit on lower capital base)
• No details on outlook (half way through the 1st quarter)
• Balance sheet - outflow on receivables, intangible, tangible & right of use additons all double the amortisation charge
• CapEx - 20.7m in year tooling/ERP/production facilities - CapEx to be higher than depreciation over next few years - upgrade back office & webstore
• I think this company is becoming something akin to Disney - almost merchandise led - so when a new story comes into the mix, the creative thought is where are my backstories / merchandising / Prequel & Sequel opportunities
• Incidentally, this mindset is why if I had to pick a winner in the content war, I'd pick Disney.
• Trying to be balanced on this, reading this report, I can't help but think there has been underinvestment in capacity & IT
• Perhaps that is reflected in the phenomenal improvements in ROCE & why CAPEX will be above depreciation.
• Of course, in a growing business it is perfectly natural for CAPEX to exceed Depreciation.
• Personally, I prefer capacity constraints to excess capacity, but as they address those ROCE metrics will not look as attractive (at least in the short term), which may make this less of a market darling.
• Like Apple, it is dependent on product release cycles and from what I see sometimes their products annoy their fans - but customers getting annoyed in this instance demonstrates a very engaged customer base.
• I should add unlike other PIs, this is nowhere near a 20x for me so perhaps I can be more balanced (or wrong) as to how clear (or sustainable) this outcome was/is.
• I didn't spot it and saw it rally from about £13 to £35 before I first purchased in April 2019.
• I also sold it in 2020 mayhem for about £60 (admin transaction, not a sale) and I could not bring myself to pay £60.50 having sold for £60 - it was a very volatile time - Stupid, Stupid, Stupid!
• I bought again later in the year, closer to £90 and added heavily in the Buffetology technical sale
• HOLD at current valuation

BATS

• Total revenue up 8%, combustible up 5.1% & new categories up 50% (impressive 883m business, 8% of revenues)
• Operating Margin at 40%+ and Adj Diluted EPS up 6% to £1.54, Cash conversion 65%. Margin lower due to "investment" in New Categories
• 500mn increase to cost saving target to total of £1.5bn
• 16m current noncombustible customers, target 50m & 5bn revenues (by 2025)
• Travel recovery in 2022, will reduce debt to 3x EBITDA
• Even in the dying business, the revenue is going up - 33% of revenues are seeing increases in volume
• As much as the business is dying, the numbers suggest otherwise & given 7bn free cash flow, is cheap
• As always, if you can stick a pin in the tobacco/regulatory stuff, in light of the quality, profitability & new products growth this is a full on back the truck up stock
• What is the margin dilution from new categories.
• HOLD to ADD

GSK

• Looks like there is a recovery happening and consumer products remains resilient. Reaffirm guidance for current year.
• Expect those numbers are heavily adjusted, but vaccines starting to recover post vaccine rollout/return to normality
• Maybe the pipeline is a little stronger - long development times
• It is cheap & if pharma pipeline comes good, there could be a growth opportunity there.
• Consumer products is a good business, but will have a lot of debt.
• Defensive/"Safe" income stock and held since 2015 and maybe now is not the time to lose patience with this
• Outside circle of competence, but nature of company/reason for holding means it can be outside.
• Bit of a nothing position size
• If thinking as a hard nosed capital allocator, I would not hold this - we have an underperforming Pharma business desperately trying to buy a pipeline & a high quality but overgeared consumer products business
• DUNNO - Sell except now is not the time to lose patience

PHP Half Year Results

• Doing pretty much what it says on the tin - moving to Ireland helping increase net initial yield.
• Ultra defensive real estate trust - trading at a 40% premium to book value (which is absolutely remarkable)
• Reasons for holding still stand - defensive income - govt backed 3.5% yield - interesting in context of Howard Marks Memo
• The income characteristics do not particularly change, Book Value going up & Premium to Book Value going up
• Low return environment - live with it!!!
• HOLD - very small but OK in context of portfolio, makes up for NRR - discount & premium offset each other

GETB

• This is the only loss making company I hold.
• I like that they have a profitable business which is able to fund (tax efficiently) new business lines. Monish Pabrai calls these businesses spawners - Google & Amazon being more famous examples.
• Management have substantial skin in the game - although I am not a fan of the 15% dilution or the terms of the shares vesting.
• Total revenue up 10% (CC) to 7.5m, Recurring Revenue up 12% to 6.8m (90% of total) 14m ARR as at end of June.
• Losses doubled, but includes capitalised development - extra 0.5m investment - Net Cash 2m
• Smart Vault Revenue up 28%, Virtual Cabinet down 1%, profit up 6%. Virtual cabinet losses increasing (includes development spend)
• GM margin still 90% plus, coming down as SV bigger part of business (now 1/3rd of revenues, growing 25%)
• Revenue per user, number of users both going in right direction, Smart Vault moving to larger customer size - should result in better margins
• 300 customers in GetBusy, NetSuite partnership - see if they can start to gain traction here
• SV - Market is £50m they say, larger accounts and growth in US (impressive to compete there) - net churn at 0.8%, larger account sizes driving higher selling prices
• NB: £50m market relates to Intuit product integrations - all accountancy TAM is much larger
• ARPU down but increases is ad hoc services, particularly electronic signatures
• VC - Op Margin at 49.5% - expect costs to be sustained, revenue flat but targeting insolvency - consistent strategy  - flat revenue but removal of license/consultancy - in context of subscription transition, it is OK
• GetBusy - onboarded first reseller (+ Virtual Cabinet), apparently multi functional Enterprise Solution for document & task management - Only 30k ARR (doubled on PY) - need to gain traction here I think, as they say re H2. Cost base on GB to be stable into H2
• As SV becomes bigger part of revenue base, growth should accelerate (overall) as will costs!
• My reasons for holding have not changed, lots of skin in the game a profitable business with excellent gross margin funding other products.
• If the new product GetBusy works, its great, without traction - it is using capital that could be spent scaling SV.  
• Shareholder friendly - Paul Howarth took the time to have a call with me - I was not able to attend the AGM and he offered a call - I was very flattered & impressed.
• Not sure that is necessarily a good thing re my assessment of the company.
• IGP moved from a "punt" to bit more than - I sincerely hope I can say the same about Getbusy
• HOLD

TPFG

• Revenue up 111% to 11.4 (5.4m) - 35% LFL increase on 2020 & 33% on 2019 (7.2m) - 4.2m from Hunters 
• Royalty income up 69% to 7.1m (4.2m), 35% LFL increase on 2020 & 23% on 2019 (5.7m) - 1.4m from Hunters
• Network Income increased 118% to 89.4m (41m) - 38% LFL increase on 2020 to 56.3m
• Sales agreed pipeline up 247% to 29.5m (8.5m), LFL increase 64% (WOW!!!) to 14m
• 73000 properties, EweMove scaling (37 territories sold), Net Debt 5m
• EweMove - 149 territories total - 37 sold in half year - double by end of 2022 to 230 - 30 per 6 months - Probably easier to recruit franchisees while market is booming
• Paying off on acquistion of sales focused - largest UK estate agent now - growth from financial services (with all the sales) & EweMove
• Double whammy benefit of higher sales volumes & higher selling prices/commission income.
• Threats are the B2L changing to build to rent, but should have non cyclical revenue 14m per year, 3m earnings - worse case
• The growth numbers are accelerating from the last update - "never seen conditions like this in my career" - No Way is this year sustainable but am of view that I have downside protection as long term hold
• Fits squarely in the QARP/GARP pile (albeit having the most amazing one off) - valuation is not suggesting unsustainable growth & if I am right, forecasts are conservative
• Could the sales fall of a cliff in H2 (new sales I would suggest yes/2022), but then RMV - New Builds didn't even need to advertise & there is undersupply (which is good & bad for agents)!
• Given liquidity & disappointment risk with said liquidity & it is already a large position
• I can't add even if I want to - was thinking about taking some profits!!
• Not moving on the update and also seems like the housing (more builders) are all going -ve momentum
• Maybe if there is some summer weakness
• Solid HOLD

RELX

• Revenue up 4% (CC) to 3.4bn, ADJ Op Profit 1bn (up 11% CC) - amortisation of acquired intangibles & acquisition/disposal costs - Growth in electronic revenues - 90% of total, lower interest costs & there is some operating leverage
• 30% Adj Operating Margin & 20% Net margin with mid single digit growth
• Adj EPS 40p, Reported 35p (CC 10% Adj growth), dividend up 5%, share buyback remains suspended, Net Debt 2.8x, Cash conversion 112%
• Guidance - FY revenue growth & Adj Op Profit slightly above historical trends
• Exhibitions remains loss making - down 30% on PY (sub 10% of revenues at moment), Risk up 10%, Scientific/Technical/Medical up 5%, Legal up 2%
• SEGMENTS
• Risk, 99% Electronic, 1.22bn Revenue 10%  growth (underlying) 37% Op Margin, return in transactional activity - some interesting products in identity/fraud (given multiples in other sectors vs their installed base)
• STEM, 88% Electronic, 1.26bn Revenue, 5% growth (underlying) 37% Op Margin. Print stabilised following PY declines - winning market share in both publishing models (this needs to be watched to see margins in division) - database/Electronic reference - strong growth - Print decline is accelerating.
• Legal, 88% Electronic, 781m Revenue, 3% growth (underlying), 19% Op Margin, Growth in electronic revenue, Print declines stabilised following PY - development work to aid search/analytics functionality - presumably these guys are going to be involved in machine reading of case precedent?
• Exhibitions 100m - down 40% on PY (201m in half year, although China was shut then) - recovery in China, Japan, some in Asia - can't make revenues - 200m cost - given CoVid Asia - write off current year as well
• 886m half year free cash flow before dividends - FY forecast at 1.75bn - just over 20x on EV basis
• Good cost control over 6 months, pretty solid balance sheet, dividend sustainable and should grow with earnings (maybe a little faster)
• Risks around cyber, IP - customer acceptance and people angry that they make too much money - it is a middle man (but legacy content) - tools make their ownership of content more valuable to customers?
• 15-20% Return on Capital including GW, around 30% ex GW with very good cash conversion
• My thesis stands - high quality mega cap - reasonable price - in fact if Mr Buffett was looking for an elephant sized acquisition, he could do worse than this company
• This is an information business transitioning from Print to digital - the decline in print is masking the decent (higher margin) growth in digital
• This is reflected in improving margins & returns on capital, disrupted by prior year
• Hold - given the size & characteristics of the company - it should have been much larger at the outset (live and learn, don't chase!) 
• Rerated but reasonable just - cheap if you accept financial repression!
• HOLD

And Finally

I don't know about others but this week was tough - I loved it!

As far as I am concerned, if you can't get your game face on for a week like this, you shouldn't play the game.

Then again, all this effort for a measly -0.34% versus a previous life which was more rewarding (financially) and while I had less freedom, I started later.

I often wonder whether this choice is the best decision with respect to capital allocation.

As it turns out, I know it isn't and I don't care. 

For now at least - it has been a raging bull market after all!

As I said last week, you give Homo Economicus a usable hedonic measure, Homo Economicus can supply the mathematics.

Adieu