November Week 4: What does the Hawk say?

Hawk goes Brr, BOJO goes Vrrr;

Risers: #NRR

Fallers: #UPGS #BOTB #SDI #BVXP #IHC #SRC #CLX #SPSY #FNX #DUKE #FCAP #AAZ #IGP #TATE

Updates from: #CWK #IGP #CLX #NRR

Public Service:

Howard Marks - Winds of Change

As I have said, I don't want to get into politics on this blog (other than sarcastically) so I am very thankful to Howard Marks. He also did it far more eloquently and intelligently than I could have done.

The capitalist system is evaluating the primacy of the profit motive - perhaps political systems will benefit from evaluating the primacy of the power motive.

On the subject of change as a constant and as an investor, I think it was Jeff Bezos who said & I paraphrase: "Everyone asks what is going to be different in 10 years, not enough people focus on what will be the same"

Anyway, I recommend reading the Memo - I enjoyed it & as for the future, we most certainly will see.

Cursory Macro/Market Observations

So the risk on feel of the market continued over the course of the week - FTSE 100 was an outperformer benefitting from the Oil/Mining/Financials exposure as we were all set for the reflation trade as bong yields rallied. In the US, Monster Tech is doing a lot of the heavy lifting from what I can see & if/when that breaks (everything breaks eventually no?), I don't think it will be pretty for index investors.

 

Over 1500 holdings & 10 of them represent 20% & 30% in electronics/software/internet content.

On the other hand, it is up 18% since I sold it in March 21 & my portfolio is down 3.6% since that date so take anything I say with a pinch of embitterment! Incidentally in March, dragon tech was a lot more prevalent.

As per last week - it has been a tough year I think for many people, at least as far as the mark to market is concerned, unless you were an index investor. I think the top 20% of my portfolio has had a higher business return than their market returns.

I understand all of this this was a function of the reappointment of Chairman Jerome Powell - the man who brought us BRRRRRR. 

It is remarkable what passes for hawkish these days, but in these strange times, the Hawk says BRR

What does BOJO say?

Vroom vroom vroom & Peppa (which is apparently one of the first words infants say - I wouldn't know)

Our esteemed fearless leader gave a speech to the CBI which was ridiculed by the media. The fact that the media only showed the gaffes & nothing more led me to watch the whole speech, which was not quite the car crash portrayed. 

Guess one of the reasons value/contrarian investing works is low expectations! 

I am usually happy to criticise the civil service (any public/quasi public sector department really), but I think it is unreasonable to expect them to come up with Peppa Pig. Anyway, I digress.
Forgive me 😅

And then it was Friday and the market was like OMICRON!

The stock market took a bath, government bonds rallied & the VIX spiked which I expect prompted a dial down of leverage. Basically, everything that happened until Thursday reversed

Market participants opened up their CoVid playbooks. 

At risk CoVid sectors (Tourism, Oil) took a bath while the stay at home trade didn't. I don't think the stay at home favourites of 2020 can deliver the same levels of growth (higher base/lower adoption)

We know very little about this variant (I know nigh on nothing) but looking at some reactions, I wonder if the markets fell because the virus is really dangerous, or is the virus perceived as really dangerous because markets fell?

In terms of outlook, ex the CoVid dramas - markets are expensive & there is a hideous amount of leverage in the system, which in the event of increasing volatility will result in liquidations.

Not sure we are at / will get to a sell what you can - Correlation of 1, March 2020 scenario.

A lot of people have made a lot of money & are very scared that those gains will disappear & struggling to balance that with FOMO.

I personally was better positioned for a March 2020 type event at the time than I am today.

What does the chart say? 

I have absolutely no idea but from what little I think I know about technical analysis:

Big bodies indicate a change in sentiment, big wicks indicate change/break of the trend - if anything is accompanied by volume - take it more seriously & the FTSE 100 did not look pretty.

I do believe Monday is looking like an inside day, which indicates indecision? Understandable, given we know nothing and it is month end.

Portfolio Review

As you can see by the extension of columns for the fallers & the result it was not a good week for me - if anything Friday actually rescued my relative performance. 

I assure you, that is the complete list of greater than 5%, at least based on Sharepad data.

On the day itself, I was down 1.3% vs 3.5% for ASX/FTSE 100.

Biggest losers on the day for me were FNX, FCAP, UPGS, CLX & NRR - would put it down to fear/liquidity - FCAP & NRR correlated to CoVid & Market risk.

Indeed for FCAP & FNX - the move on the week was the same as the move on Friday (per Sharepad)

I am actually going to complete an exercise going through my shares - doesn't mean there will be any action on it, but I do want to know what risks I am exposed to with each holding & in the context of the overall portfolio & given that whether weightings are appropriate. 

I did a similar exercise in Feb/March 2020 & took some losses for things that were in the eye of the storm - boy was I wrong about Balance Sheet risk mattering one IOTA (I know Greek too!)

Cash is at 20% rising mainly because the stock value is declining!

Newsflow was limited but on the whole I considered it neutral to positive although the market doesn't always agree with what I think. UPGS was reduced & Tate & Lyle was added.

Lessons:

None really, although I have been thinking about growth IPOs - not a lesson but just how ridiculous it is to be on the other side of the IPO (like I am!)

Transactions

Reduce UPGS

• In part my sale was function of not being able to handle the volatility, in part selling the shares I bought pre-results and in part my view that this business is facing a lot of challenges which could be a short term headwind & with the liquidity considerations was not comfortable with the size of the holding.
• As it turns out, I intended to sell one third but ended up selling slightly more than half (fat finger) which was fortuitous - at least so far as Friday was concerned.

Add TATE

• I was planning on adding to this holding & decided to purchase before it went ex-dividend.
• I understand this is stupid but as I am sure my writings and returns have demonstrated, I am stupid!

Portfolio Risers > 5%

New River REIT up 13.91%

• Quite a rally & would have been even stronger had it not been for the dramas that were Friday - Interim results were very well received - a welcome change after my recent run, but I was too early with my 1st purchase!
• NAV 131p (down 13%) 3.1% reduction in portfolio valuation 11p from Hawthorne disposal - no debt maturity until 2028, LTV down to 40% , Hawthorn disposal of 225m to repay debt.
• Recent disposals at premium to March valuation (35%), renewals above ERV, interim dividend 4p - funds from operations 15.5m/5.1p - Valuation down 3.1% LFL - yield estimate reductions & lower ERVs - 9% & 6% previous halves - ex work out, there was a tiny LFL increase - Transaction levels increasing, Retail parks (23%) are in demand
• Retail - Rent collection at 89% YTD - CVAs from last year - tenants replaced, focus on convenience/essential retail (Boots/Homebase/Superdrug/Costa) - Mid-market fashion & department stores are most vulnerable - (Frasers/SDRY/TED Shareholders may disagree) 
• 1700 leases, 800 tenants - top 10 = 20% - value retail is biggest exposure (they offer lower rents - tenant list supports)
• Regeneration assets - primarily adding residential / additional functionality - again - no matter what dies, the land/assets still have some value in other uses
• Go forward lose 7.5m from Hawthorne + 3.5m from interest - 12m UFFO - 4p - dividend just above 3.2p give or take
• NAV 402m - 302m Post work out assuming nil value to this - 260m M/Cap - potential increase in assets through change of use - 15.5m UFFO
• Yield supported, Balance Sheet risk low - uncertain about NAV changes but with 20% discount to conservative NAV (Zero for workout) - think it is manageable - Share premium conversion so distributable reserves - Interesting what this says about REITs issuing at premium to NAV?
• With disposals/regeneration - think they can deliver total accounting return of 10% (but roughly 7-8% is from income) - Capital uplift potential limited - but lots of headroom - even at 100p NAV- got space - 10-20m UFFO on 300m
• HOLD - Maybe ADD if I sell PHP but likely PHP sale will  be used in SHED placing!

Portfolio Fallers > 5%

Lots of fallers but only two had any News (or RNS news at least) Calnex & Intercede.

CLX -14.60%

• Excellent results I thought - guess some people wanted more, which combined with Friday & illiquidity did not make for a good week.
• Strong levels of trading in 1st half & trend expected to continue in 2nd half - brought forward planned investment to increase operational capability in line with order growth - confident in benefitting from underlying growth in telecoms market
• Revenues £9.2m (up 20% - 7.7m) vs 18m in FY 2021 - PBT & Underlying EBITDA did not match the increase in revenue - hihger amortisation & higher admin expenses - GM relatively stable - 1.5m increase in revenue absorbed by 1m increase in staff costs & higher amortisation
• Return to pre-Covid spending patterns - all regions except China, H1 strong trading continued into H2 - Call spoke to 6-12 weeks of visibility - CEO in experience - lots of orders does not always mean new trend - feels more comfortable saying it is a trend - Revenue expected to grow further on H1 based on strong order book & pipeline
• America & ROW showing strong growth & headcount added in those areas - 19 staff added now 113 people, expect more hiring next year - very mindful of semi-conductor challenges but no issues to date.
• Sentinel - benefitting from secondary market of time distribution within data centres & ORAN - new entrants & additional - think ORAN is opening Radio Access Network - which if I understand correctly is like forcing BT to offer their cables to other providers & forced to make it work with non BT products
• At moment market opportunity as a result of 5g / connected devices - where there is a high need for accuracy for time across the pipes/parts of infrastructure - spend on testing & value from it
• I really like this company so I tried to look at it in a negative light (conscious that previous times, I have been almost excitable, so I want to focus on the negatives: 
• Profits/cash not moving in line with revenues - step change in cost - would not expect it to continue.
• Amortisation - 5 year period (which does seem excessive given the technology/upgrades) & free cash is going in the wrong direction - basically company is trading at 50x free cash - which is generous to say the least with R&D ahead of amortisation
• Cash generation is just not there at the moment as majority of Op Cashflow is going into R&D investment (fair for a growth company - can I evaluate the R&D - NOPE!) & higher tax rates as well (impacting EPS growth)
• IP balances quite low - call can’t protect IP - competitive advantage lies in being fast with innovation - hence the capitalised R&D - still not convinced by the amortisation period - showing amortisation in U/l EBITDA but R&D investment consistently ahead of amortisation
• Mgt come across very well (although not sure if it is a "strong" CFO or a jobber CFO) but a little concerned that there is focus on innovation/sales/engineering without due regard to cash flow - also confused about the tax rates forecast vs timing of R&D tax credit.
• HOLD

IGP -5.2%

• Again, I thought the results were decent here but given the valuation associated I can understand why the market was expecting more.
• For those that struggle with the sector / circle of competence, I recommend the Investor Meet Company call - they certainly tried their best to explain in simpler terms what they do & why this tiny company has the clients it has & why they have had them for so long.
• Revenues up 2% (9% CC) to 4.9m - last 5yrs 11% CAGR, Op Ex up 3% to 4.6m - EPS 0.9p - lower finance costs & convertibles converted up 12.5% - 100k improvement in profit 0.5m - Cash balance 8.5m up 0.5m (0.9m increase is R&D tax credit is believed) - Connect partner program resulted in 8 new customers in period
• 4 MyId deployments, OpEx broadly controlled, FD retiring - Cautiously optimistic based on H1 (hard to predict timing) - PKI core market sticky & incremental. FIDO expands market but lower level tech - +ve medium & long term given structural drivers
• MyIdv12 released FIDO2 certified authentication & authorisation service for remote multi-factor authentication - Phase 2 scalability & accelerate revenue growth/ Head of Corp Development - Acquisitions - HMMM 
• FIDO & PKI solutions - can mix & match - take market share - passwords alone not enough  -FIDO2 certification opens addressable market - product & geography - MyId unified global solution 
• FIDO busy in consumer space but they are enterprise - enterprise some completition coming in but have reputation & tech/device agnostic, PKI is very complex so limited (reputation in PKI assists)
• Majority of new business coming from channels - renewals don't result in extra revenue - if they have bespoke requirements, there can be some servicing
• 48m (40m Cash adjusted) on 1m profits - lots of operating leverage but the gross margin is coming down 98% (PY H1: 99.6, PY: 97.9%) - expensive even with the operating leverage & outside circle of competence.
• Seems/feels a steady profitable business with some upside optionality which could be very strong. From an ethics perspective, I am not sure how I feel about the surveillance/ID cards/Vaccine pass side for governments but I guess they are providing the security - any oppression arising is not their doing.
• HOLD - if it was larger, I'd reduce but it isn't - Valuation & Circle of competence but do feel there is something good here.

FCAP -5.41% & FNX -6.15% - Friday is what I am putting this down to. FCAP I was thinking was an Add but the share price & the business is very sensitive to market conditions.

Add to Hold & Hold

UPGS -17.9% - there was some pretty high volume selling on this earlier in the week & I myself have had my reservations about the environment as opposed to the business. One thing I would say is that management have not assumed things are going to normalise in making their estimates.

Given the fat finger sale, this is between Hold & Add.

IHC -10.9% - I guess similar to me, other people have reservations following the director sales & how the valuation has moved.

Rump left - minded to sell - SOLD 29 November 2021

SDI -10.7% - No idea, it does have quite a lot of volatility & it was a CoVid testing beneficiary in the previous year. Positive newsflow & think results will be well received but expensive on valuation

Valuation puts it between Hold & Reduce.

BVXP -9.09% - I am guessing the selling pressure continues from the results announcement (I reduced myself). CoVid crowding is not great for the business. 

Hold - drifting & may reach attractive levels with lack of momentum.

SRC -8.65% - Another one that has been drifting on no news which is a little disconcerting but they seem back to the price at which they issued at most recently. I'd expect a positive trading update given some of the comparable companies & Revenues to Q3.

Add to Hold - Not keen on the economic sensitivity but it does a lot for portfolio composition.

BOTB -7.53%, SPSY -6.45%, DUKE -5.71%, AAZ -5.26% & Tate -5.10%

I would put all of those down to noise. Duke probably does have some exposure to Macro/CoVid as does Tate & Lyle. I am sure part of the reason Tate fell was that I bought it (but it also went ex-dividend). I think income funds are selling Tate.

I think Duke is looking interesting but with the position size & results, it is a HOLD.

BOTB, anger/liquidity considerations aside, would probably be an ADD.

All others are HOLD.

Additional Updates & Results

So after all the verbiage, there was one more company that reported results - Cranswick. 

The results were actually well received but then the next day Jefferies decided to downgrade them & the downgrade was not well received. Basically, it had an interesting trip to nowhere.

Jefferies are already on my naughty list because of Games Workshop.

No idea what the research said & I am not sure why they downgraded it but I am sure they have very good reasons. Director sale would be another good reason I guess.

Cranswick

• LFL Revenue growth 6.4% to 993m, ADJ EPS up 11.5% to £1.03, Op Profit 69m (up 12%) Margin 7% up 30bps (5%). 41m CAPEX. Dividend up 7% to 20p ROCE 17.8%, Net Debt 18.6m (easy)
• Poultry growth with enhanced capacity, Breaded poultry in 2023 31m facility, expansion in convenience/non-meat - 2 bolt on acqn.  
• Cost inflation managed & recovered - unprecedented labour/supply chain challenges, customer service maintained - 180m invested over 5 years - Outlook unchanged, Solid platform to continue long term development
• 83m Cash from Ops, 100m pre Working Capital & 40m CapEx & 25-35m to come - Would suggest anything in H2 should flow to free cash ~100m
• International down offset by elevated demand in retail - international particularly in Q2 (makes sense - Q1 was 9% ahead)
• LFL 25% ahead of 2 years - strong growth in poultry, convenience, gourmet, Fresh Pork & export down - Volumes up 4% vs Revenues up 6% - Lower Covid costs & higher sales offsetting Pork/China contribution (China Pork prices softer) & cost pressures across a number of categories, particularly wage inflation
• Fresh pork (27% of revenue) down 5.2% - Intl down 11.2% - Pork prices lower in Q2 vs Q1 where they increased - no timeline on license reinstatement in Norwich for China - Intl up 11% on 2 yr
• Convenience (39% of revenue) - up 4.9% LFL - Cooked meats (more home consumption/quality/convenient) further growth, Continental products (Cured meats? &Olives) ditto - several retail business wins & sole supply for premium retail & platters products
• Gourmet Products (Sausage, Bacon & Pastry - 15% of revenue) - up 4.5% - Sausage down (exception BBQ last year), Bacon up due to food service & more premium offset Joints
• Polutry (19% of revenue) - up 35.5% (fresh & cooked) - impressive - avg volumes up 20% 1.3m (1.4m capacity) - invest in portioning/deboning (value add). Cooked poultry exceptionally strong - recovery in food service retail
• CapEx - strong interest in breaded poultry so increased investment/capacity by 20% (6m), expanding slicing in cooked poultry - remaining investment in automation/efficiency/sustainability
• Very clean results/Business very easy to understand & very clearly reported, low risk (ex Pig Fever) & boring - progressing well and reasonable valuation & reading the results is mouth watering!
• HOLD - Nothing changes with the 20 year sleep easy portfolio

And Finally

What does the Fox Say?

Taking inspiration from John Hughman & Investability newsletters, a song that probably shouldn't exist, but it does.

Adieu