October Week 3 - TINARIF

 There is No (good) Alternative;

Transactions - doubting management, market or myself - #IXI & #IGG

Updates from: #BVXP, #SUP, #REAT, #IXI, #SRC, #PHP, #ULVR, #TATE, #AVON, #CLIG

A far quieter week for me on the portfolio front and maybe also the market front - I spent more time reading outside of the portfolio and evaluating some of the wathclist and approach to portfolio management.

Public Service

Fairfax Financial Holdings

I came across the above referencing Fairfax Financial Holdings, which led me to investigate an opportunity to  invest alongside Prem Watsa at a discount to book value (and reported market value) - not done it, but it is interesting.

The Annual Report is available here and it makes for interesting reading for those interested in Insurance, Investment & India - I am tempted to open a position - there does seem to be some pretty impressive approach to capital allocation (and at least historically) impressive capital allocation.

Fairfax Annual Reports

Also, in preparation of all the fun the COP26 promises to be, I came across the below from Ed Conway of SkyNews - a lot to think about here - a lot of opportunities & risks, whether that be related to investment or even something bigger.

The 4th Industrial Revolution

Maybe in stead of publicity stunts like insulate, we need to elevate the debate.

Fortunately for me, such debates are above my station.

Cursory Macro/Market Observations

To be honest, nothing really caught my eye in the last week - I am sure stuff happened - just didn't strike any chords.

The things that did stand out was the Bank of America Fund Manager Survey & John Authers There is No Alternative - Resistance is Futile.

Fund managers moving out of bonds - allocating to equities & allocating to cash - interesting barbell approach.

The phrase fully invested bear has been around a long time, the most hated bull market, this time it is different and TINA is probably the best soundbyte.

I imagine the reason it stuck with me as it mirrored my own actions, especially the reasonably large switch from cash to equities over the last month/6 weeks.

I don't have any bond holdings - I have some "bond proxies", REITs & Duke which is effectively a hybrid debt investment company.

In the meantime, selling call options seems like an attractive way to add a bit of yield - actually if markets only ever go up - why not sell some puts too!

Also, I am sure there was some speculation about inflation, lack of inflation, stagflation, whether central banks will raise rates, whether governments will spend money or tax.

Some of those things will become clear on Budget Day - I don't buy Banks but the suggested reduction of the Bank levy could be quite a big deal - and seems to have gotten limited attention.

Tesla reported results - I see as I write they have entered the trillion dollar club on the back of 100k cars from Hertz and Tom Brady doing some marketing - why not?

I haven't looked at Tesla results in a while - every time I do I get tempted to short but I am a lot less petulant these days.

The company applies LIFO (last in first out) inventory accounting and is benefitting from a reduced production costs, I can see why gross margins are improving so rapidly.

It will also explain why even though deliveries are ahead of production, the value of inventories (not units) is up - for what its worth the actual unit numbers do seem to add up just about.

International Reporting Standards (not US GAAP) I don't think allow LIFO - but to be honest who cares about GAAP - there is quite the difference between GAAP and Non GAAP earnings.

S&P raised Tesla's credit rating which is always nice.

US tech this week will be far more interesting than last week - but I am biased.

Portfolio Review

A week of being a tracker - which may explain why it felt like something of a nothing week and the portfolio movements I believe are largely noise driven (I think).

In the risers and fallers list, only one had a report of any note.

Two companies were sold: 

One for good reasons even though it may be a bad / emotional sale and 

the other for hopefully good reasons, but I would be lying if an element wasn't a case of a quiet week with not much on and maybe the reasons are justification for this - at best it is a bit of both.

Lessons:

It is not a lesson yet, but I dare say both the sales may prove to be lessons - although with Ixico, I doubt I will follow the story - I can imagine that story really p1ssing me off!!

On the comment on IGG, value alone should not be a reason to invest - should value alone be a reason to not invest?

And, no I am not talking about Tesla.

Transactions

Sell Ixico 

• On 18th October, Ixico greeted us with a short but seemingly positive update which one might think would get quite the reaction on an announcement that said:
• FY Revenue 9.2m (forecast 8.7m) PY 9.5m, Order book 18.8m (PY 21.7m - 7.1m loss of Huntingdons trial) Good assuming genuine one off?
• Sounds like there has been operating cash flow - 2m CAPEX development, EBITDA materially ahead 1.2m
• 2022 outlook - sounds very cautious - return to revenue growth (but at lower level than historic) & lower profitability - one time beneficial EBITDA & investments
• The market was pretty unmoved by the materially ahead announcement and my notes at the time were: HOLD - Agree there is trial risk with their contracts & the earlier stage they go, the higher the failure risk - see how it reacts - materially ahead vs guarded outlook - don't let it get too big!!
• On 20th October at 4.27pm no less, they informed us of Another contract loss - 3.1m of 18.8m order book - trials immediately suspended - 0.8m in revenues in 2022 financial year.
• A cynic might think that the market being unmoved and this announcement at a time where few would be able to react is related.
• I am not sure & my speculation will err towards cynicism - I sold pretty much first thing the next day - it already did not fit my criteria - it was also a a straight up dick head thing to do by the company / management / advisors.
• As far as I am concerned, the company is not worthy of my time, effort or capital - Bargepole.
• When I sold GetBusy and referenced companies I preferred, Ixico was preferred - how wrong I was and fortunately did not use the proceeds here!

Sell IGG 

• In part this sale was driven by the shit from cash and a feeling that I was too rash / aggressive re cash levels - cash actually turned out lower because I failed to include a purchase of Fundsmith.
• Anyway the reasons are as follows - do let me know which ones sound most plausible:
• If strategy is to run structurally lower cash, then portfolio needs to be more defensive - and do want to cut the higher beta - couple of ideas that I think are sleep easier
• Technically/Momentum is not looking good. Fundamentals cheap - but higher risk with TastyTrade - questions around the outlook given active customer numbers - medium term comment
• Personally - markets have been churning - strong results get little response while warnings get punished, lots of churn / lots of flat - that is no fun
• Something makes me a little uncomfortable with management - specifically the change in classification from historic core to growth - think this is purely to hide that previous core will be (understandably) negative - and the Q1 update said they would not next report the results in January (which suggests they don't intend to provide a Q2 update) - which I might be reading too much into
• Within the sector CMCX is cheaper - management ownership vs the doubts here - ie IGG is no longer best in sector - albeit a better risk manager
• I am a little loathe to sell but there is a gut thing - I am holding in spite of wanting to sell exclusively on valuation - value alone should not be a reason to invest.

Portfolio Risers > 5%

AAZ 6.78%, BOTB 6.71%

• Absolutely no idea, otherwise known as technical reasons.

Portfolio Fallers > 5%

SDI -6.45%, BVXP -6.37%, QTX -5.88%, IHC -5.12%

• SDI I think comes out flat on a two week view and similarly IHC is likely pulling back after quite the rally in the previous week and maybe some reaction to minor director sales.
• QTX - I found it interesting in that the drop in price seem to follow an announcement of Buffetology increasing their holding - which would suggest a few sellers around - there was no trading update or CEO succession update - nice to see share options with a share price that resembles market value.
• BVXP reported results that disappointed the market.

BVXO down 6.37%

• Revenue up 6% to 10.3m, PBT 8.1m (down 1% from 8.2m) - 500k swing in FX - 80% profit margin - I think that is good, Cash 6.5m - dividend increased 20%, special dividend reduced 30% - total £1 - Receivables build, received post year end
• Vit D - 48% of revenues stayed flat (impacted by less diagnostic work - will be part of clinical diagnostic in the long term), Troponin which needs to replace a lot of historic growth & 1.28m worth of expired revenues - doubled in size from 0.33m to 0.68m - will continue to grow in the next financial years. China - modest increases - geopolitical technology risk & development of antibody technology companies in China - Interesting that they see a competitive threat in China
• Particularly pleased with Pyrene (mid size, high prob) - pollutants lateral flow test - making their own tests - encouraged them to look into Industrial Safety Market - minimal sales now - Biotin & THC (mid/small, high) - economics don't work - need to see if you can reduce cost of production
• Significant investment in Fanrham facilities - Lab & Office - base for future research activities & improved production systems
• Outlook - diagnostics market been challenged due to CoVid prioritisation (true) - return to previous trajectories - Troponin will grow regardless - will not have 1.3m in revenues - Excellent technical progress - they seem excited about the industrial pollution exposure (manufacturing to prove the market) - this and others in pipeline - shareholder value in years ahead
• Rabbit antibodies a threat - some lost opportunities, Synthetic not directly competitive - if I understand correctly synthetic can be used with existing antibodies to improve diagnostics - (THC)
• Director purchased 16k worth - not big - assuming no growth, looking at 7m PBT - 5m PAT - 203m - 40x - 2022 will show flat to -ve year - return to growth in 2022 - Troponin & Pollution - Vitamin D normal trajectory - 27% in 2019, 10% in 2020 - call it flat
• Strange one with the market - my BVXP sale consideration was a feeling - large holding vs short term headwinds - reading these results (I don't particularly understand the science part), it was as close to what I expected to read as a set of results has been - maybe others were expecting more or there wasn't the valuation support.
• Having read through the results, I am of the view that not much in the market is higher quality - share price reaction disappointing (understandable) but I am more comfortable reading these results - lack of growth in current year may well hurt share price (Falling Star on Stockopedia) - but I think this is one where patience will pay off overall several years & interim losses will need to be tolerated - risk to thesis is more around technology disruption
• Take of 4.4m for R&D expensed in last 4 years - should have some long term value - 13m total assets - 33% ROA - relies on Vit D staying flat (vs growing) - 75% + EBIT Margins 2.5% dividend - 3% growing earnings stream with some upside from pollution - so profitable it is untrue - it is expensive no matter how you cut it!
• Would argue valuation does not give any credit to R&D activities - because the company has Revenues/Earnings - people value on that basis - if we give 50m M/Cap to Pipeline & capitalise expenditure - get closer to 25x - still not cheap
• It is also telling that H1 2020 Revenues £5.1m, H2 2020 £5.2m, H1 2021 £5.2m, H2 2021 5.7m - which looks to me like a recovering trajectory (1.28m to not appear next year though)
• HOLD - Already a large holding - if it gets sub 150m M/Cap on same trajectory - I think it gets very interesting - would be getting closer to 4/5% Free cash / dividend yield

Additional Updates & Results

As I noted above, the movers & shakers this week were not the reporters this week, so this section has a little bit more, although majority were pretty short updates.

The short updates from the smaller companies first and then a couple of the larger caps too.

Supreme

• Pleased with strong performance in 1st half & remains confident in achieving FY expectations, +ve Vaping & particularly strong in wellness/sports nutrition. Lighting - some brought forward sales
• In house manufacturing so relatively unaffected by supply chain dramas & been able to manage batteries & lighting - cognisant of challenges able to manage them - group margins particularly strong
• Not a single number & remains confident suggests that they might not be confident in the future (?) Narrative confirms part of thesis - the growth is coming from higher margin business - happy with the Add.
• HOLD
• Side note - vertically integration seems to be proving an advantage in this new normal of repeated shortages - which speaks to one of the watchlist items I am getting more tempted by.

React

• 230k contract win - 25 weeks to end of March 2022 - deep cleaning to one of its customers in the rail sector - won't be a bad thing - will help FY (don't think interim will be that good)
• A little concerning that they didn't comment on trading for the year to September 2021 in an announcement post year end.
• HOLD to SELL - Mainly because it is a MicroCap but seems to have decent momentum with contract wins - price action - pulled back from 6 year resitance & selling has been on low volume
• Only one remaining in the MicroCaps & Arcontech - I am more comfortable with these two than I ever was with Ixico or GetBusy

SRC

• 73m in revenues in Q3 - strong trading performance in first half has continued - all platforms in line with expectations, Nordkalk completed 31 August - integration progressing, trading in line
• South Wales Margin improvement, Jersey planning permission for large expansion of quarry - remainder positive - expect Q4 to see continuation of demand
• Supply chain / inflation - efficiencies where possible, fixing energy costs (WILL BE VERY ENERGY INTENSIVE), price increases where necessary (think they can pass on), additional haulage & own investment in vehicles/drivers (Interesting) - Vertical Integration
• 84.8m in HY + 73m - 158m - not sure how much is Nordkalk - forecast 251m - should be within reach if NK is approx 20-25m / month
• HOLD - Like the company for what it does for the portfolio - basic materials/inflation - lot of margin improvement in forecasts  & that is at risk

PHP 

• 10.1m€ acquisition in Ireland - rented to Health Service Executive - 17.5 yrs lease term - WAULT accretive - contracted rent roll almost 139m (was 138m I think)
• Again, if WAULT accretive, probably not yield accretive - have a look at dividend sustainability here at next report
• HOLD to Sell - This and BBOX - I do wonder what it is I am smoking that convinces me to hold these on 3-4% dividend yields and substantial premiums to book value

ULVR

• 1.6% acquisition + 2.5% sales growth LFL - all on prices - 4% vs down 1.5% volume - did say the margin compression was temporary & would pass on price rises - lots of moving parts - only thing consistent is price rises
• E-commerce 12% of sales up 38%, volume declines SE Asia - CoVid dramas - 9 months volume growth much more palatable than quarterly & balanced with volume/price - as it should be
• Priority markets China, America, India - all doing well - a lot going on the results in terms of those overall figures - volumes either suggest effective strategy/capital allocation or alternatively demonstrate effects of strategy
• LATAM is getting hit on the price rises - raised prices in all regions - Beauty & Personal Care has highest growth products - trends out of home dining - Cornetto - Their ice cream business - remarkable marketing - take a choc ice call it a Magnum, Cornetto - ice cream in a cone, Vienetta - vanilla ice cream in a brick - I had a Solero after many many years today!
• The fact that there are moving parts working differently is one of the appeals of this company & I have more tolerance for the strategy of acquisitions - rather than trying to build some new brand - let others spend the money & you acquire the winner (at a premium) but lower risk to success
• Classic bond proxy - if it is the end of bonds, it is likely the end of bond proxies - alternatively in this bubble / barbell of growth & reflation - the boring middle is being left behind?
• HOLD - Could be Add given IGG sale but then would start dominating the income portfolio - although would make it right size in overall & happy to hold as a do nothing company

TATE

• Pro-Forma information presented on the disposal of commodities business
• 3.6bn EV today - less 600m Commodities business, 500m special dividend, 400m additional cash proceeds - 2.1bn going forwards - ADJ Op Profit new business PY 160m 
• 13x Op Profit - removal of business with sub 10% operating margin - remaining business at 30% (sucralose - no growth) and 14% - blended 13.3% - targeting 50-100bps margin improvement per year over 5 years
• 6 month revenues to Sept 2020 520, March 2021 1060 - 970 vs 475 - mid single digit & Sucralose similar - not much seasonality, a little Half on Half growth vs commodity business
• Would like to see the Pro-forma balance sheet - expect little debt in the remaining business but with stranded assets & net finance adjustment - not sure how much of the assets are being transferred - Commodities has almost 2/3rd of the depreciation charge and US has about 2/3rds of Assets by geography
• Which if can be taken as broad split - would suggest that 160m is being generated on a 600m Asset base - which does sound like a pretty profitable business - Historic ROCE 17% - less assets & higher margins should materially improve that and there will be growth - 
• If take 1/3rd of for cash proceeds - looking at 450p share price on 25p EPS LTM excluding share of JV - which will be 25% of Solutions profits - call it 30p - looking reasonable - and business will look better - My guestimate was not far off - Smile to self!
• Retain the commodity business - can be run more aggressively on the balance sheet - which should all going well result in cash flow for investment
• HOLD - As noted on last purchase - should have accepted the technicals - do like it though and may well add when technicals are more respectable - Stand by selling is from income funds 
• May well require some administrative stuff depending on what the revised dividend policy

And Finally

I was going to say the Trillion Dollar club is reporting this week, but I see one of the members reported in the previous week.

At the same time, I have a few portfolio holdings also providing updates or results over the course of the week - kind of like the last week of July - maybe it is not a conspiracy but just that it is a month after a quarter end.

Either way, conspiracies don't matter (can't keep blaming the Central Banks), Gameface does!

Monster Tech with a negative sales print - there will be a shock to rival Lehman Brothers & Evergrande combined.

Adieu