October Week 4 - This blog is now "Metablog"

The Good, The Bad & The Ugly: Monster Tech & Monster Taxes;

Transactions - REIT special #SUPR #BBOX #NRR #DX.

Updates from: #REAT, #PHP, #DUKE, #BMY, #GSK, #BNZL, #SHED

Quite a week for announcements for global index investors (of which I am one, not that we would care fortunately we are in pretty safe albeit expensive hands) & also futurologists.

Back in the real world, I had a decent week, which would have been substantially better without Jefferies opening their big mouths!

Public Service

Seeing is believing?

As we descend into virtual reality, I share an article that suggests real reality is not all that real.

The desire to predict isn't (just) because we want to be smarter than everyone else - apparently it is critical.

Cursory Macro/Market Observations

So we had Monster tech reporting results, and unlike the last quarter, this was a lot less blow out.

I think Mr Market (seems a lovely fellow) owes a great deal to Microsoft & Alphabet.

I am happy that Microsoft is now the largest company in the world.

In addition, we had the UK greet us with a budget - without wanting to get political, I think I read 1984 & Animal Farm at inopportune times. The stated desire to cut taxes & reduce the role of the state seems a bit contradictory to what I saw, but I am sure they know what they are doing.

I found this an interesting article with respect to taxation:

Stupid Tax

Aswath Damodaran talking about the mooted billionaire tax - interesting that it favours inherited wealth over created wealth - I think some politicians have inherited wealth?

The bond market continues to exhibit some interesting gyrations which I expect is causing some worries to people.

Monster Tech - The Good, The Bad & The Ugly

I appreciate these companies are evil monopolies charging a toll road on the world but I strongly recommend reading about their cloud & marketplace businesses - this offering has enabled business creation & innovation - which in turn has created a lot of jobs & wealth (and Squid Game!).

I sold Google & Amazon in the run up to results (will almost certainly buy them back at some stage) because I was expecting some pretty major challenges at Amazon (I was right) and thought YouTube would be hurt by the Apple privacy (a la Facebook) - boy was I wrong (there was some impact but not enough to make a difference!).

If I had my time again, I would have sold Facebook before Snap reported and held onto Google (hell if I had my time again and some of other people's too I think), I would have bought all these companies when they first listed.

The more I read the results of these companies, the more I feel they serve as remarkable businesses with an investment fund on the side and bullet proof balance sheets.

With all this evangelising, I will add that these are companies where multiples have expanded while growth rates are slowing (and these levels cannot be sustained), unless the world is a lot bigger (or other companies a lot smaller).

The Good (Microsoft & Alphabet)

I don't think people would have been celebrating October with quite the same zeal had it not been for Microsoft & Alphabet (and Tesla - No Comment!).

Alphabet informed us of the benefits of a number of investments made in making the company an AI first company and the value they add to their customers (not us) is quite remarkable.

They are also remarkably profitable, with operating margins moving from a lowly 24% to 32%.

Last time Monster Tech reported, I talked about YouTube revenues versus FTSE 100 turnover - so in an effort to shock and amaze, YouTube Music & Premium have 50m subscribers (the UK population is roughly 68m) - if you annualise Q3 Revenue - they are around 28.8bn run rate (growth 40%), Netflix 2021 forecast is 29.7bn (with rather pedestrian mid teen growth)

As for Microsoft, Mr Nadella informed us that "Technology is deflationary force in inflationary economy"

The growth rates are incredible - More Personal Computing the slowest growing (and smallest business) grew 12% (impacted by supply chain dramas as this is where the hardware lives) - 12bn in revenues!

Low Code/No Code - Microsoft are on it, Metaverse - Yep, Disrupting the recruitment industry - LinkedIn, Cybersecurity - they are working on it.

SAP moving customers to the cloud - use Microsoft, want an industry cloud - use Mircrosoft - and I expect nobody gets fired for using Microsoft.

The scale of this business & how entrenched it is in the world is mind boggling and the ability to use that installed base to grow other services is a very moaty moat, or as we Brits may suggest: 

Moaty McMoatface!

The Bad (Apple & Amazon)

I don't pay much attention to Apple results (I don't like the product) and any exposure I have is indirect via Uncles Warren and Larry but I see the attraction - a high margin services business (an unregulated toll road), a heap of other initiatives to increase the value of the ecosystem, the stickiest customers in the world. 

Alas all of that and the best run supply chain in the world was not able to handle the supply chain issues (demand issues) - I think there are worse places to put your money..

Amazon - still growing but looks like a great big chunk of their business is going ex-growth - from 20/30% to 10-15% - Q4 guidance - 130-140bn Net Sales (4-12% up on Q4 2020), Operating Income 0-3bn - And they have made some huge investments (which would be incredibly problematic if it has indeed gone ex-growth). At least they will no longer be at capacity constraints! 

Inflation: Cost pressures 1bn in inflationary pressures and guiding 4bn in additional costs here for Q4.

 

Fortunately, there is AWS - Where would this (and many other businesses be without AWS), not least Microsoft & Google who could not come up with it themselves!

I was surprised how benign the market reaction was to this - think market is giving credit for we have seen this from Amazon before, new CEO kitchen sinking (or Sandbagging as our transatlantic friends might say. 

Very different to 2014 - when the credit was warranted (with hindsight) and not given.

The Ugly (Facebook & Meta)

Facebook changed its name to Meta and informs us that it is going to be Metaverse first - insert your own conspiracies into why they changed their name now - I can offer conspiracy theories which question why some people want Facebook to be censored, but only in ways that ensure the plebian class don't have to make their own decisions about what is truth and false.

Apart from being evil this is a pretty spectacular business:

Revenues up 20% quarter on quarter & 25% year on year, 80% gross margin & 145% cash conversion, 60bn Net cash & 50bn in buybacks (which are in excess of stock compensation).

That said, any suggestions that this is capital light business I think need to be kicked into the Metaverse - they are going to spend a sh1t ton (fancy talk for a cr4p load) on building the metaverse.

A poor quarter impacted by the iOS changes - ad effectiveness - not sure if that is a one & done - uncertain on guidance - business is maturing and looks like they are going to spend some 100bn building the MetaVerse - not dissimilar to when Google was losing out to facebook & throwing money away?

I held onto my shares because it was too late - I think there is negative sentiment on this one and clearly Meta is stupid. I am inclined to back the Gentleman - 1bn on Instagram was stupid & 7bn on WhatsApp was stupid - so stupid they have led the company to antitrust dramas.

Will be a tough hold in the short term I think - and will take a long time capitulating on the tolerance for extra CapEx that may or may not work (people got fed up of Amazon before)

I think the metaverse / VR are going to be huge (not sure when, but eventually) and Virtual/Augmented Reality will (do) have far more application in the industrial / enterprise metaverse. One thing maybe a little unique to Facebook is Oculus - if they can combine the hardware & software - it might create something Applesque.

I am sure there will be many companies that will take a share of the market - I'd say Facebook is a reasonable bet to dominate the market (as is the rest of Monster Tech).

As a VC said, I don't want companies that are going to take 1% of a large market, I want companies that are going to have anti-trust issues.

Portfolio Review

As I say, this would have been a pretty solid week had it not been for Games Workshop getting an earnings & price target downgrade.

If I cared enough, I would check the data on the risers - would have thought Bloomsbury Publishing should be in the top contributors given it is a top 3 holding.

Tritax Big Box Real Estate exited the portfolio, with proceeds recycled into Supermarket Income & New River.

DX Group was a new addition to the portfolio - I don't expect it will stay in there very long.

Lessons:

I have been thinking a lot about my add in UPGS and whether I am daring the market to whack my portfolio!

Guess we will find out tomorrow!

Transactions

Sell Tritax Big Box REIT 

• As much as I get the idea of hold/run winners, I sold this on ground that can only be described as "What am I doing holding onto this" - it is not like this is a high return capital light business that can compound without incremental capital.
• At the time of sale, it’s a 3.5% dividend - trading at 2 year fwd expected book value - seems to be getting quite the spike right now - which is either a tip or alternatively irrational behaviour pre ex-dividend
• I think the assets are incredibly unique/special - however - it has 188p book value & they think it is at 7% increase +12% increase in dividend - 3% - does not meet target yield for REITs - unlikely to meet capital return requirements - or more accurately has already met capital return requirements
• Think it is benefitting from the e-commerce growth & real estate inflation hedge - may well be true but that only is true if you buy at or near book value
• EVERYTHING HERE IS RELEVANT TO PHP

Add New River REIT 

• Recycle 40% of proceeds from BBOX sale
• Assuming I am correct on the recovery and new dividend & revised balance sheet - dividend should be safe & NAV recovery
• Specifically, think they are likely to be on valuation upcycle as sentiment improves and people realise that maybe retail is not quite as dead as before - budget & rates relief should help their tenants.

Add Supermarket Income REIT 

• Participating in the placing at 115p - again representing roughly 40% of the BBOX proceeds (albeit the funds were committed ahead of the BBOX sale)
• I am not sure how comfortable I am with this and the NIYs versus dividend targets, but in the world of overvalued inflation linked Real Estate Trusts, this is my preferred play.

New DX Group

• Bought as a short term trade - probably a function of the devil making work for idle cash.
• This is an ex-holding which I had sold because of  it is a low margin capital intensive business with little moat (at the industry level - I see so many different HGVs with all kinds of different logos which suggests limited barriers to entry).
• Since then has had upgrades and most recently materially ahead and pulled back a fair way - presumably on the delayed audit results - not their fault GT are incompetent and this pullback has been on low volume (to my untrained eye)
• Since then has had upgrades and most recently materially ahead and pulled back a fair way - presumably on the delayed audit results - not their fault GT are incompetent - fall on low volume
• HOLD - Short Term - probably trailing stop based on price action post results.

Portfolio Risers > 5%

CLX up 17.1%

• Not feeling as bad about what I thought was a rash add (probably could have bought 2/3p cheaper, although probably wouldn't have acted given director sale.
• Expect the strength of the rally is a function of illiquidity or alternatively people appreciating the strength of the update, which I thought was very very strong and well ahead of what management had guided at finals.

MSFT up 7.26%

• Very well received results and rightly so - MICDROP!
• HOLD - Valuation is a concern but deserved.

GSK up 6.18%

• Quarterly results again well received - personally I didn't think they were that great, but this really is not one of my favourite holdings and I don't particularly enjoy (find it interesting) reading the results
• Guidance upgraded - EPS will be negative 2 - negative 4%. 
• Covid solutions seem to have rescued it - Vaccines severely disrupted & behind - low single digit in Consumer Health & Pharma
• Q3 2.6bn Cash from Operations & 1.2bn free cash - heavily adjusted results - because a complex business in complex restructuring doing complex things
• I am not able to assess the pipeline - don't think these results show a business that is exactly firing, although there is some upside from CoVid solutions.
• Outside circle of competence & not a favourite holding - even among the "bond proxy" - may argue the altered business does not meet the "bond proxy" definition/criteria (my own requirements of bond proxy)
• A negative 2-4% causes a 7% rally - guess that is the benefit of holding companies that are considered basket cases
• Hold, but Sell - Sell but not right now I think is my conclusion

BMY up 5.85%

• Interim results published in the week and they made far more pleasant reading than Glaxo
• Results are outstanding but soft comparatives & bringing forward of demand (No details on the trading in 2 months since) - to that end, these results are not ones to be carried away by.
• Revenue +29% to £100.7m - Adjusted PBT +220% to £12.9m; PBT +265% to £11.1m - Adj diluted EPS +210% to 12.82p; diluted EPS +263% to 10.41p - 1.8m exceptionals - acquisition intangibles & legal/restructuring 
• Interim div +5% -1.34p - Diluted EPS is the correct measure! Net cash 43m - down slightly (14m dividend) Net cash 43m - 21m cash generation 173% conversion, 8.8m spent on acquisitions, TOtal Capex 10.6m  - Diluted EPS is the correct measure! 
• Consumer - Growth 29% 62.9m (48.6m), PBT up in excess of 200% 8.4m (vs 2.6m), Organic 24% 5.2m & Zeus acquisition 2.7m Revenue, 0.4m PBT
• Adult Trade - 23.9m (18.8m) up 27%, PBT up 23% 1.3m (1.1m), Childrens' trade up 31% to 39m (29.8), PBT up 5.4m to 7.1m (1.7m)
• Non Consumer -  Growth 27% to 37.7m (29.7m), PBT up 220% to 4.6m (1.4m), Organic 21%, PBT 211% - Red Globe acquisition 1.7m, 0.4m PBT
• Academic & professional up 32% to 26.4m (20m) & PBT up 121% 3.9m (1.8m), Print Sales up 34% on Prior Year - Digital Revenues 8m (5.6m) up 44% & 2.8m Profit (1.2m) - BDR 15m & 5m PBT on track, targets next 5 years 50% growth & 30% margin 
• Using existing content, acquired & partnerships - 56% increase in customer numbers & 90% client retention (impressive) - one new product & 5 new modules. Special Interest 11.3m up 18% (9.6m) - profit 0.7m (-0.3m in PY)
• Winner of Nobel prize for Literature, Saraj J Mass, Harry Potter (still & new one coming) & some academic awards too - demand across the board - print & digital - International getting bigger -  BDR is an international business (Far more interesting reading than GSK)
• Significantly increased order quantities, various print sources/flexibility to manage (were most likely reduced last year so soft comps too - it was on outlook for H2 that improvement started!)
• 3.2m for RGP adds to the academic/professional offering (Biz Mgt, Study, Psychology (prefer focus on drama/creative I think - less replicable), Head of Zeus (add to consumer) 7m, 0.4m subject to a Netflix Show with GoT people (could be big for the book if done)
• Saraj J Mass, Harry Potter + a few history/cooking stuff, BDR Drama online collection with Theatre Communications (drama publisher), acquired ArtsFilms content (streaming drama specialist stuff), RGP digital products & content to expand collection - Partnership with Spotify (also interesting)
• Benefitted from early ordering by not delaying releases - less reliant on Xmas for Consumer titles (competitive apparently) - confident strategy bear fruit despite supply issues, no impact on digital - 26% of sales
• Confident of achieving expectations 193.4m & 19m Revenue & PBT - if they get anywhere close to their historic H1/H2 split this will be a mammoth beat - but could actually be carnage if there are returns (and I think that is a genuine risk - Retailer de-stocking).
• Balance of probabilities & the tone, I think management may well surprise to the upside.
• Overall - not changed - becoming a higher margin business, diversified business (Non-Consumer, International) - Consumer less predictable & eventually will mature, maybe the margin expansion story is not becoming apparent because the consumer business continues to perform strongly (and better than expected)
• HOLD - I would add but already full sized

SHED up 5.29%

• A solid trading trading update, well received & think benefitted from a reversal of pullback in earlier weeks
• 99.3% occupancy, 99% rent collection - moving to premium list - 91 properties
• 15 Rental events, 1.6m rent roll increase - 11 new, 3 reset & 1 open market increases in rent 18% (open market) - Impressive! Inflation for all the things we order?
• 5.5% to 6.2% NIY on pipeline / committed transactions - which is not bad going and why I am happier holding this one vs WHR & BBOX
• HOLD
  

SDI up 8.15% & NRR up 5.84%

• No idea - nothing to do with me!

Portfolio Fallers > 5%

REAT  down 12.2%

• A very poorly received update and rightly I would suggest given the sequential fall from H1 to H2
• 100k short on revenue estimates - 7.7m (up 77%) LFL 20% - equivalent short on EBITDA 725-775k vs 850k forecast - adjusted - 50% LFL growth, 180% total - 567k Net cash
• Missed forecasts but with the contract wins & larger business think there is potential - in terms of finding the shit, this is it - why did margins not meet, although they guided in interim to lower work in summer.
• I note that in the contract announcement last week, it was a little concerning that they did not comment on trading - HMMM!!
• A wonderful reminder of not messing with microcaps / maintaining investment discipline.
• SELL (maybe HOLD)  Carry it as a reminder of avoiding MicroCaps!

GAW down 8.66%

• Jefferies have reduced their target price and earnings estimates on the back of rising freight costs & FX headwinds (fair enough) and also growing discontent among the customer base.
• In my view, the FX freight is a short term thing & vertical integration has proven to be a strength in this regard.
• The fan discontent is in my view a bigger risk and I have been concerned that maybe Games Workshop have been too aggressive in monetising their customers and their IP, although the numbers suggest their fans like it.
• At the same time, deeply loyal customers care (Apple I think had protests because they changed a product) and marketing cases have been written about "New Coke" but I think this is a risk and I worry that in trying to grow their fan base, they alienate the hardcore incumbents (kind of like Offspring & Americana)
• Management themselves (most recently) have said sales are ahead which does not reconcile with a boycott
• When I added, I accepted that this would drive my end of year return - I thought that would happen in December, but to reappoint a phrase - my portfolio is what happens while I am busy making other plans.
• HOLD (I think most people who like it are pretty full sized & at least I struggle to buy back past sales (I did with GAW) which creates technical issues - I am full sized myself)

AAZ down 6.75%

• Whatever

IHC down 6.12%

• Think this got marked down on the back of director sales in the back end of the week.
• The sales themselves were not large in the context of the overall holding, but clustered selling is a little disconcerting - covering a one off expense and do not intend to sell anymore imminently.
• I am very torn on this - I would be a seller because of the position size & valuation - I don't think it is an Add at current levels and it is too small to top slice, so has to be sold outright.
• That said, technically it looks very strong & think it has many of the signs of a compounder.
• Effectively, it boils down to running winners versus taking profits and the director sale is probably the best reason I have to take profits.
• Hold - if in doubt, do nothing

Additional Updates & Results

Majority of the updates have been covered but we had short trading updates from Computacentre, Bunzl, Duke & Primary Health Properties.

CCC

• I was pretty pleased with this update and substantiated part of my purchase thesis - the market disagreed but as I say, Mr Market seems like a lovely fellow.
• Indeed, before the market opened, I noted - Very strong update - Well done Vivek - Good call
• Q3 marginally above expectations, combined with Q4 forecast - very comfortable with market expectations - Record Revenue, Profit, EPS
• Backlogs at record level in Services & Technology - underlying demand, over ordering & supply constraints - product supply shortages not as bad as some had predicted
• Waiting on components & whatnot to complete - higher inventory & timing of revenue recognition - would be even stronger were it not for this
• Pretty spectacular update for one that does not explicitly upgrade expectations - they have done historically in December (and might do so again). 
• Add to Hold - if there are any wobbles especially - at the risk of being overly optimistic - may get to £1.60 in EPS and commentary doesn't suggest that there will be a big fall off in 2022.

BNZL

• 2 months to end Sept I expect - Revenue up 8% (13% CC) - acquisitions 4% & extra trading days 6% - LFL 2.5% - Operating margin as expected - CoVid product deflation
• Base business up 12% (underlying) - broad growth - product inflation particularly in North America, COVID top 10 products down 9.4% - Underlying 10% higher than 2019 
• 2021 Margins slightly above historic levels - will return to historic in 2022 - a little growth given strong performance versus 2020 on underlying (previous flat) - good growth vs 2019
• Integro acquisition - distributor of agricultural supplies to commercial growers in Eastern US - 17m in Revenues - complimentary to existing agriculture business in NA
• HOLD - Did want to add but think at current levels it is getting a bit tricky to add (would have, should have, could have on when RELX was) - note one watchlist is similar to BNZL could be strong fit for LISA - 20 year do nothing holding
• Note - Not adding the drama was a feeling on interim results that maybe the CoVid specials masked a lot more challenges - was wrong on that view, but not adding was IMV right decisions based on information at the time.

DUKE

• 4.2m follow on investment - buy & build Irish Recruitment Sector - total exposure 13m - Buying Vantage Resources
• 13.5% cash yield starting Q421 (Calendar Year?) - 30% equity retained - 420k increase to quarterly revenue (all going well) - 2.9m in Q1 21 so a decent increase in quarterly revenue.
• Recruiters are booming - which should hopefully help with the participation element - All going well!
• Nothing has changed from previous conclusions - interesting in context of competing with PE/Growth Captial - After tax 10% cost is probably cheaper than PE will expect
• HOLD

PHP

• A pretty nothing update re refinancing - extends maturity 7 years, reduces financing costs by 5m per year - paying 24m upfront for the pleasure - which doesn't seem much of a saving!
• SUPR also were paying a lot in various arrangement fees in stead of just getting sensible financing
• Sell to Hold - same reason as BBOX, probably on steroids!

And Finally

I see a certain Jack Dorsey - CEO of Square (which has a larger Market Capitalisation than all UK listed banks other than HSBC) decided to join the hyperinflation bandwagon.

I would suggest Hyperinflation is always & everywhere a political phenomenon and I am not sure we are quite there (yet).

I expect the best hedges against hyperinflation are land (so you can grow produce your own food/goods) and guns (to defend your land) over Bitcoin (for example) or ShibaInu - I'd be interested to see that billionaire dude try and sell any of his ShibaInu (in size) - Not that I am at all bitter!

In the meantime, why do all hyperinflation comparisons reference The Weimar Republic & Zimbabwe.

Hungary & Austria might benefit from marketing services of Twitter, CEO Jack Dorsey.

Adieu