November Week 1: HOT AIR

Blah Blah Blah: Central Banks, COP26 & Of course Me;

Risers/Fallers/Transactions - #UPGS #SDI

Updates from: #SHED #TATE #TPFG

COP 26 - the week to save the planet, or was it half time - I forget exactly & central banks speaking to the market.

A good week - stonks only go up after all (seem to be pausing for breath maybe pre Santa) and for my portfolio, which was much needed. The week thus far has deflated my portfolio, if not my ego.

I saw a couple of people analyse their mistakes with Best of the Best on their blogs - guess it makes me a bit evil and I am sorry for it - but I am glad I am not alone. I am however a drama queen (or King)! It prompted me to look at the attribution - think it has cost around 5% of the portfolio & from peak closer to 10%.

More on this in the year end review, but I tend to have one or two clangers most years & removing these would do a great deal for the portfolio especially as these clangers compound. For those that are interested, 2020 was LoopUp.

Without these, 2020 & 2021 would have been solid years (by my standards). 

Then again, if I am using hindsight, I probably shouldn't settle for "solid".

Public Service

BOE LOLZ

A bit of entertainment this week - the unreliable boyfriend causing dramas for the macrofunds. 

Oopsie!

Cursory Macro/Market Observations

An unabashed positive week for the markets (unless you are an emerging market / China credit investor) in which case you are having a tough few weeks - I expect we will be hearing more about this in the coming weeks.

The market seems much like COP 26, full of Hot Air - this is some melt up we are witnessing.

Value is cheap relative to growth - I am not sure how cheap value is relative to value, unless earnings are far ahead of where I'd expect them to be.

But we had a very solid earnings season, companies are adapting to the environment and conditions are buoyant and easy - why shouldn't things go up - it is the path of least resistance after all.

Central Banks added a bit of fuel to the market by continuing to be dovish hawks - Bank of England in particular got some criticism because other people were wrong - nature of the industry - losses are invariably a result of market conditions whereas profits are individual genius.

No interest rate rise (yet), a little bit of tapering (which is flexible - yay, someone will save us if there is a drawdown) and market is pricing in too much hiking because inflation is transitory, just less transitory than before.

Central Banks are trapped - inflation is a problem but to stop it they would induce a recession in an environment where disposable incomes are likely to come under pressure (National Insurance, Energy) - my largest single item % increase in H1 2021 incidentally was council tax - I look forward to a lower increase in 2022 but I don't have much faith!

I expect they hope that there will be some easing in the bottlenecks & the lack of stimulus/higher taxes will cool things down and they will be bailed out. There will be lots of fun and games though because there will be some interesting changes in 2022 just because. 

As much as I'd like higher interest rates, I also fear them!

Fear does lead nicely into the assured destruction of the only planet we have (unless Elon Musk can deliver us) unless we reduce the amount of Hot Air.

Again with 1984 - but of my world do our esteemed global leaders like a bit of "Doublespeak". 

Flying from the G20 in Rome to discuss climate to COP26 from Glasgow to discuss climate

Oil, OPEC & USA/Joe Biden - We need more oil (from you!)

Rishi Sunak vs UK PLC - publish your plans to get to Net Zero by 2023. I expect the only way Her Majesty's government will give us any details before the end of 2023 is if they have to publish a manifesto.

Methane emissions need to be cut - I saw they served a low emission Beef Burger (30% less emissions - less beef & some route veggies in there). As someone who was born Hindu, I know many who will support the reduction in beef consumption - I on the other hand take the view that the cows from Scotland are likely to be Christian.

If I was them, I would either eat a beef burger or not (I certainly would not be interested in that atrocity).

Portfolio Review

Last week was decent & would have been good (by my standards) without the Games Workshop 4% earnings downgrade. No such issues this week - trading updates in the week delivering the goods - I would like to attribute at least some of that to good stock picking.

A buoyant market mean there were no real detractors.

I am also very happy to say that there were no transactions.

Lessons:

A less about lessons actually - in general about rigidity versus style drift.

UPGS - the market barely reacted at the open (and likely overreacted by the end of the week), but I don't trade on the day of the announcement on the back of the BOTB dramas and also position size.

The specific rule needs to be adapted to don't add to profit warnings on the announcement (especially early in the day).

As for rigidity / not a trader - if there are good opportunities, I don't think there is any harm in taking advantage of them - because of my risk tolerance - such trades even with a quick 10-15% do very little for the overall portfolio, but every little helps.

That said, it does feel a little capitulation / market dynamics / hindsight driven so as with everything, it is about balance between opportunism & consistent (Not Rigid) style.

Transactions

NONE

Portfolio Risers > 5%

UPGS up 29.7%

• This must be the largest rise I have seen a company get (recently at least) for delivering results in line & reassuring the market that it continues to trade in line - Sellers Remorse I imagine & I hope Games Workshop will have a similar story.
• Full Year Results:
• Revenue up 18% to 136m from 115m (123m in 2020), Intl 43.5m (up 4.4%), Online 20.6m (up 23%). U/L EBITDA 13.3m (up 28%), PBT 11.2m (up 36%), U/L EPS 10.6p (up 34%), PBT 9.5m (up 13.7%), Dividend up 27% to 5p - 1.4m in exceptionals is fair enough
• Current trading in line - growth expected in 22 despite challenges of shipping availability and cost - Don’t anticipate shipping challenges to abate until after Chinese New Year (forecasts based on that)- think they are beneficiaries of more time at home, Petra to launch Spring 2022 post refresh in Germany
• International - Germany up 26.6%, in general Europe impacted by more lockdowns compared to UK. 2020 fell 14%, 7m. 2021 43.4m, 20 41.6m, 19 48m
• Supermarkets - Up 32% to 37m - say they are still under represented in the sector - call talked about Tesco coming in to visit. 2020 was an increase of 8m (40%) - 2021 27m, 2020 28.1m, 2019 20m
• Online 20.6m up 23%, down from 53% in half year (down 2.7% vs H2 Prior year - suffered from stock availability/supply chain - expect to continue - would have been stronger otherwise. 2020 47% increase 5.3m. 2021 20.6m, 2020 16.7m, 2019 11.4m
• Discounters up 15% to 51.5m - benefitted from reopening in H2. Down 19.9m in 2020 - 30%. 2021 51.5m, 2020 44.7m, 2019 64.6m
• GM impacted - down 1.2% - higher shipping/transport costs & general inflation, partially offset by FOB for 45% of the business & GBP strengthening - also expect impact of online being smaller element of sales mix in H2 - GM remain under pressure, Op Margin benefits from Salter Op Leverage. Op Expenses current year 4% higher than prior year 
• Balance sheet - working capital outflow - 5m in stock - Salter & Trade receivables up 8m - 43.5% - higher debtor days/sales at end of year - I will give them this in that Q4 2020 would have been soft & more Supermarkets & reduced online, 
• Increase in receivables offset by increase in payables - 1.8m from Salter - CapEx a lot higher than last year - normalising working capital - seems to get to roughly 10m in Op Cash flow & current year CapEx should not be repeated - Past due receivables have doubled - 98% of credit balances are insured it is said, 25% due from one customer - impairment provisions are down slightly on prior year even though receivables are up
• Salter - seems a very well thought through acquisition - do like the communication in how they described it - 27m intangibles & 10m in Goodwill - balance sheet is intangible heavy with higher net debt
• Current trading in line - growth expected in 22 despite challenges of shipping availability and cost - Don’t anticipate shipping challenges to abate until after Chinese New Year (forecasts based on that)- think they are beneficiaries of more time at home, Petra to launch Spring 2022 post refresh in Germany
• My Thoughts
• Forecasts for 6% growth in current year, which would suggest they do very little with the Salter brand other than acquire it & also Petra upside - moving into brands & the growth on that side of the business supports higher quality revenues & therefore higher multiple.
• A very talented management team but it was repeated that they have done this with extremely challenging conditions & they expect those to continue - GM under pressure is clearest sign of this
• Positives are quality of management team, anticipated easing of supply chain challenges, growth in the supermarkets/online channels, Salter International & Petra + some margin benefit from Petra
• Interesting thing on the call (and they seem very bullish) - They deal with complexity & their way of doing things - a sign that the apparent quality does not show up - it is a shitty process that they do well - quality comes in operational processes as opposed to financial metrics
• Management commentary (retailers are struggling to get stock in) and no improvement in conditions provide confidence in short term forecasts. Rerated considerably and idea of "cheap" relies on forecasts being beaten - certainly not beyond the realms of possibility with benefits of operating leverage from Sales/Salter/Petra + growth of smaller brands
• They sell a cyclical product and the cycle has been pretty good - the one year numbers are very impressive but the two year numbers are less so - and in a business where efficiency is everything anything that slows that down will hurt margins (demonstrated in working capital build)
• I think we have been in an environment where people have been running around trying to get hold of supply (and these guys delivered) - will Supermarkets be as tolerant of price rises as things ease up
• Very strong recovery on the back of this update & in general we are in a world where the business is about 10% bigger than 2019 whereas gross margins are similar, yet the share price has doubled. Much better quality business & management have earned trust. Maybe some upside to the forecasts depending on how trading goes in the current year. Management call was very bullish and I am encouraged by the fact that when reducing their personal holdings, they sold to their own children.
• Hold to Reduce - I like owning this company despite a misgivings about environment. Position size is correct (maybe a little high after the strong rally post results) but only because of misgivings that have been proven to be wrong previously.

SDI up 13.8%

• A very short trading update for the half year that was well received - Sellers Remorse?
• Very strong H1 (they are not kidding!) - Revenues up 40%+ organic + Monmouth/Uniform Engineering - 24.7m (14.1mPY, 11.7mPPY)
• Atik - exceptional orders - orders much lower for H2 22 (guided) - performance strong - Revenue ahead at 45m (was 42m) - H2 revenue 20m (vs 21m in PY & 24m in PPY)
• PBT modestly above - 9.2m (forecasts 8.8m) - no acquisitions - have been active - 30m available for acquisitions
• HOLD - Happy with position size - Valuation is where it should be + a bit probably in light of risks to 2023 - note the slowdown in H2 vs previous years - quite bizarre but likely a function of acquisition timing 

DUKE up 9.76%, DX Group up 9.48%, Arcontech up 8.37% and Fonix up 5.65%

• I will have to put all these down to general market buoyancy / 1st week of the month as people put fresh money to work.
• Arcontech is out of investment criteria but it is an end industry I understand a lot better than Ixico for example and it is remarkably profitable if it can grow.
• Courtesy to say, I sold DX. on Monday 8th November for a 10% profit - that was what it was intended to do. Results themselves were OK / in line with what I thought but not a company I particularly want to own.
• 
  

Portfolio Fallers > 5%

REAT  down 5.06%

• I guess the update from the previous week continues to be poorly received.
• SELL (maybe HOLD)  Carry it as a reminder of avoiding MicroCaps!

Additional Updates & Results

Other than UPGS & SDI, there were updates from Tate & Lyle (I encourage people to take a look), Urban Logistics with some more property purchases and TPFG proving that not all my holdings will rally 30% on an in line update.

SHED

• 29m in acquisitions - NIY 6.7%, 3 assets  -2 income producing, one forward funding - 132m Capital deployed since June 5.8% NIY - 400m pipeline - Some of the deals sound a little too good in the context of what others are achieving
• Modular housebuilder, Yorkshire West - 8.35m, 6.44%, 11 yr, Stanley Black&Decker, Durham - 8.65m NIY 8.2%, Vacant West South East - 12m including refurb, target 5.8% NIY
• HOLD

TPFG

• A quarterly trading update in advance of Mello Monday which was nice of them and all seems to be going in line.
• Update
• Revenue up 126% to 17.9m (7.9m) - LFL 10.6m (up 34%), Mgt Service Fees up 72% to 11.3m (6.6m) - LFL 29% to 8.5m
• Net Debt 3m - 10m cash generation in 9 months & 2.6m in 3 months - trading in line with expectations
• Network income - 30% LFL to 84m & 84% total - 120m (65m) - 73k properties managed (58k) & 46 new territories sold by Ewe (was 37 at Half Year) (PY: 6)
• Sales agreed pipeline 28m (June 29.5m, March 31.5m) - slowing down & will continue to slow but say that it continues to be replenished - stamp duty end presumably would have caused a steep drop, and that is not there
• Strategic initiatives continue to drive growth going forward beyond buoyant market - market would benefit from more properties to let or sell
• My Thoughts
• Director has sold 1m shares but that is very in keeping with the pattern of past director sales and was guided.
• The results were very much in contrast to what Purplebricks reported and they have changed the self-employed model and that might benefit recruitment for EweMove
• Ex housing market collapse (in which scenario) some 70% of their revenues are resilient lettings based & with the financial services & EweMove, there should be growth in a stable environment
• At Mello, again CFO said certain they will get to 12p in dividend for current year
• HOLD to ADD - Would be a buyer but already more than full sized given M/Cap & illiquidity - see how things react to the director sale.

TATE

• Results themselves were very messy because of the discontinued operations but that is where the opportunity lies in my view - I think the "pro-forma" business in the context of the return of cash is deserving a of a much higher multiple given the material improvements in the financial quality & asset base of the business.
• Revenue up 19% to 656m (592m), Adj PBT up 20% to 85m (78m) - Food & Bev Soln +19%  to 578m (New Products up 48%) Op Profit 83m, Sucralose up 17% to 78m Op Profit 31m, Adj Diluted EPS 14.4p up 25%. Int Dividend 9p, Net Debt 400m, Free cash 127m (down 67m - 54m increase in working capital), Sale of Primary Products in Q1 2022
• In home robust, out of home continues to recover - challenges with supply chain, CoVid restrictions, cost inflation & changing demand patterns - benefit from increased awareness of healthy diet
• FBS - Volumes up 9%, double digit organic growth in all regions, Asia/ME/Africa/LatAm particularly strong, 3% from acquisitions - New Products up 48% (14% of revenues) - sugar reduction demand. Profits up 9% - product mix & reinvestment in growth. European Primary Products mean actual 2% higher at 83m
• Sucralose - Volumes up 23%, Revenues up 17%, Profit up 34% to 31m, Adj PBT yp 20%, EPS up 25% - volume offset by customer mix & pricing pressure
• 26m in cost inflation - energy, labour, consumables & transport - mitigated to 2m - 10m in pricing, 14m in productivity - pricing to play a greater role in cost mitigation - Q4 22, annual contract renewal. 65m in exceptional costs - 41m for business separation & 13m associated asset impairments.
• Outlook - Remaining business - revenue growth in mid single digit & 50-100bps margin improvement per year - F&BS - continued progress, Sucralose profit ahead of prior year - high single digit increase in Adj PBT - 160-180m Full Year CapEx vs 67m done in Half Year
• ADD - Expect to add in SIPP using available cash & dividends from Bioventix - Given the defensive nature of the business, rock solid balance sheet & valuation in the context of the changed business, I would suggest this should and can be a much larger holding

And Finally

With all the hot air and my classless verbiage, I introduce Susie Dent, who managed to drop another BOMB with her word of the day on the day COP26 commenced.

Word of the day is ‘Bloviation’ (19th century): Empty rhetoric and a good deal of blah

Some of her words of the day are remarkably on point - especially for us finance folk!

Adieu