March Weeks 3 & 4 : Inversion!

Public Service: And I thought I was bearish

Markets/Macro: OH THE INVERSION! Stonks still only go up!

March Week 3 & 4: Whoop whoop & Poop poop

Transactions: Buy #MRK Add #GRG #BATS #SRC Sell #UPGS

Updates: #CCC #FNX #SRC #SPSY #GAW

Infection, Insurrection, Inflation, Incompetence, Invasion, Inversion. 

The English GCSE is finally paying off!

Public Service:

Farmers on the brink

And I thought I was bearish - Scary stuff - complicated stuff. 

I do have a lot of exposure to food producers - my thesis (hope) is they can pass on the inflation, albeit with a lag - Go team transitory!

Cursory Market/Macro observations:

Well, as far as the markets are concerned - they certainly seem to have moved on from the war - guess it was like the coup dip on steroids! 

Stonks only ever go up (not my portfolio, but stonks at large). 

Really need to do something about this energy/materials/financials thing! 

Long live BTFD - unless you are a bond investor!

CBs have been causing quite the ruckus.
From we're not even thinking about thinking about to raising rates (25 bps probably irrelevant) but they are talking about raising interest rates reiterating that the economy is strong & can handle higher rates.

For whatever reason, even though there is confidence that the economy can handle higher rates & everything is just peachy - they didn't raise interest rates. But they do like to talk about raising rates.

The BoE was the first bank to raise interest rates & talk about raising interest rates,.... 

Mortgage rates are rising - was due for a refinance, rates have moved from before I went on holiday - quite substantially. Many homes were bought in the last two years.

....not too long later, they're wondering whether the economy can handle it.

Crypto is being used to evade sanctions - so says Madame Lagarde. I'd check the data before taking it as Gospel - she is the same person who told us that it was not the ECB's job to manage spreads.

And as for spreads, they are rising somewhat & so are yields (although from my very cursory glance), spreads have come in very recently (the yields have not). It is at times like this, I am grateful that my holdings are predominately net cash & don't have any major refinancing due imminently.

And yields - 10 year at 2.3% & the 2 year at 2.1%... 

Oh the inversion! 

Thankfully, it is the 3 month 10 yr that really matters for the music to stop. 

To me logic dictates that if one is truly a long term investor you likely don't care, but if you did it is the 5/30 or 10/30 that you should care about.

...and then the 10 year at 2.5% & the 2 year at 2.4%. While equity markets continue to rally & guidance does not - is the equity risk premium falling?

An alternative in the making? TINA to the less rhetorically agreeable TIAA?

I see the B-Dog just threw down $11bn (remember when that used to be a lot of money) on a levered bond portfolio!

I am surprised by the bond drop though - would have thought rebalancing would have provided some support. If I had to wildly speculate, I think it is because Bond volatility has bumped up some, so risk parity has to dial down the leverage. No idea if that is true - don't even know if it sounds smart!

Well enough BS - or at least that form of BS!

Portfolio Review

Another two week special had to do a bit of a catch up. 

Been travelling up North & also Barking, which is kind of like the North. 

Wetherspoons - Stellas for £3.29 / £2.69 if you are willing to slum it with a Carlsberg. They're probably giving Carling away!

Small Caps Live was a fun event - nice to meet some of you in person & put bodies & names to the floating heads & pseudonyms.

Over the two weeks, the first one was great - probably one of the best weeks I have ever had, although being a have fun staying poor kind of guy, I am sure I underperformed.

The second week was less good, which I am putting down to the strength of the previous week, because that is what helps me sleep at night!

Lessons:

On Sharepad the transactions does a lot of performance tracking - it is what I use for my tracking - any differences to actual are I am sure immaterial.

Because of BOTB, I expect I am one of few people who is down more in the last 12 months vs YTD.

And lets not even discuss where I am vs benchmark - as much as I don't care, I also do!

Note to self - 12 months is irrelevant - investment horizon is 45 years with liquidity events not on the horizon for 10 - 20 years (I hope). 

From the top of BOTB & mistakes forthwith (if you don't know the meaning, why use the word!!) to today the drawdown is 8% - therefore a last 12 months ahead of -ve 8% is a bonus!!

March Week 3:

Still not covering the risers and fallers - putting a large chunk of the good week down to BTFD.

At least no one can accuse me of talking when things are up but not when things are down - speaking of which - there were no fallers greater than 5% - Damn, it feels good to be a Gangsta!

Transactions:

UPGS - Sell

Regret to say goodbye but with the accidental reduction it became a small position. Thought quite hard about adding it in the 120/130s but couldn't bring myself to do it because of the macro / geopolitical. Then Shenzen started restrictions (very close to Guangzhou) and felt jittery. The price as it turned out went up and I had sold pretty much first thing.

SRC - Add

To be honest I had been meaning to add because of what it does for the portfolio. Also, was impressed by Forterra, but felt already have this in the sector & the international is also beneficial to the portfolio. Still umming and aaaing about Forterra.

Very small add as could not get fill and the spready was crazy. As it turns out, I should have waited until after results but c'est la vie but that vie is covered lower down in March week 4.

Updates & Results:

EMIS had an update and reminded me I was a fool to sell, but in terms of portfolio holdings, only the two during the week. Fonix mobile & Computacenter. Both rather good, at least the market thought so.

FNX

• TPV up 12% to 138m (123m) - HY Revenues up 16% to 28.6m (24.6), GP 7m up 20% from 5.8m, ADJ EBITDA/PBT/EPS/PAT 5.5m/5.2m/4.4p (actual 4.3p)/4.3m up 20% from 4.6m/4.4m/3.6p (atual 2.7p)/2.7m (FY 8.8m/8.3m/7p (actual 6p)/6m)
• Cash 6.3m / Cash flow 5.2m from Ops 5.2m, Free cash flow 4.5m (SBP) - Interim dividend 2p (up from 1.7p - impressive) in context of 20% earnings growth
• 99% revenues repeating nature, commercial team doubled & record business in November & December - multi currency reporting & refund capabilities added
• 12 new customers (BOTB effers!) + gaming clients (partnership) - active customers (>£500gp) - up 10% to 116, GP from existing customers up double digit. 
• Made strong progress ahead of initial expectations - strong momentum going into 2nd half (not as good as first), increase spend on sales/marketing/product/international
• Payments/Messaging/Managed services all grown - growing pipeline - Enterprise deals in UK & International - Pipelines are cheap / Enterprise deals very hard!
• Mobile Payments up 18% GP (83% of total PY 85%), Managed services ditto, Messaging up 42% (increased demand from existing customers & new customers) - Complementary service that reduces friction as opposed to competition with mobile payment (Apple/Google)
• Land & expand in media - client led product development & for international, greenfield - gaming/dating/transport & ticketing (v early) - no revenues from international & not coming for a while - setting up the network
• Charity is good for them - comic relief (the show was down on PY) & potentially donations to Ukraine is something that wasn't expected? - adding capabilities to campaign manager
• GM improvement driven by lower premium voice - continue into H2, stabilise in 2023. 
• Staff costs up 1.4m from 1.2m & higher professional fees - Development spend capitalised 303k (255k) - 59% of total development spend (53%) - amortised over 3 yrs - Been spending more on product - WATCH
• 2 customers more than 10% of revenue, Mobile messaging is far lower gross profit (12 vs 25%) - growth their will cannibalise margins - 10% of GP, 20% of revenue
• Also, if H2 is softer than H1 & full year effect of higher costs + additional investment will reduce margins. 
• Still 8-10m free cash, strong growth - 160m is very reasonable M/Cap - seems pretty good in the compounder stakes
• HOLD - Think it was smart to add but now position is more than full especially as new IPO - all seems to be going very well - Risks re margin compression explain why it looks  too good to be true. 

CCC

• Revenue up 23% to 6.7bn (5.4bn) 1,1bn from acquisitions NB 11% organic constant currency, Tech Sourcing up 26% to 5.3bn (4.2bn) & Services up 15% to 1.45bn (1.26bn). Adj PBT 255.6m (200m) 14m from acquisitions, Diluted EPS up 1.65 (1.26) up 27.5 & 31% respectively. Dividend up 30% in line with earnings - target 2-2.5x cover
• GM 12.9 % (down from 13.2%) & Admin expenses up 20% (less than revenue) - lower cost levels than pre-pandemic but higher than 2021 / 2020. Weak margins but % trend as they should in a good business, Cash conversion > 100% if you allow for WC benefit in 2020 & build in 21 (77m outflow). Otherwise 224m & 30m in CapEx. 200m free cash. Incredibly refreshing to see the adjustments presented upfront. Net Cash 95m (up 40m), Lease Adj 241m (up 60m). Will return cash post re-investment if no suitable acquisitions
• UK up 10% Enterprise orders & Professional services with higher margins, US 27.3%  (114% after acquisition) - now largest sourcing region 50%, Service again strong, major win & Hyperscale customers, Germany 12% similar to UK in strength - new framework agreement with largest customer. 
• France not good - lost one managed service customer - down 6% - French suck - even their food - I can make things taste nice if I pour butter, cream and cheese on top!
• Very confident sounding - say their growth is a result of deliberate actions, not just getting lucky in a bull market for what they do. 2022 yr of further progress, tough comps in H1! Momentum in digital transformation. Makes sense, HL is investing stupid amount in IT transformation/cloud. Do sound very very proud of themselves.
• Invested in business processes/automation to enhance service, 3200 employees added (20%) - Professional services booming - best gross margins ever. Ordering more in advance so higher inventory levels, sourcing revenue strong outperforming competition because of better supply chain (in line with comp I think).  Industrial back to Pre-Covid trends up 29%, Public sector up 10%. Slightly higher costs (pandemic savings) & lower margin in public sector but better efficiency. No surge demand but shift to project work
• Supply chain / early ordering / component shortages causing issues with working capital/inventory. Very high inventory with record product order backlogs is usually a good sign - inventory up by £150m to £341m (inefficient but strong balance sheets are helpful!)
• UK - Invested in sales force, lower GM but admin costs increased 4%. Quite the hit to GM - Number of customers > 1m in GP up 6% to 55 (52). Services - margins under pressure & competition - will be hard to deliver same growth
• Germany - Similar size and very similar to UK - albeit without the margin pressure - resolving problem contracts & less public sector I think - want to invest more - challenging with labour market. Big increase in sourcing order book! Services - gain market share
• France not good - again hit by the public sector, similar to UK. Managed services delayed - tendered in 2021, will hopefully come online in 2022 and benefit revenues
• NA - Pivot integration to complete in 2023 (EUGH!) at group level. Non Pivot N America intergrated into Group ERP - managed remotely (Double EUGH!! And very high inventory!!!). Growth from Hyperscale is lower margin but Pivot higher margin as not Hyperscale. Comps meaningless but still strong growth but GM is compressing. Costs didn't increase as much as revenues which is good. Services margin down - onboarding new Managed Services, lower margin in 1st yr (note to France)
• International (Other Europe) - tiny but growing strongly and margin improvement - all growth in the services segment. Spain too small for direct presence. 
• Imposed travel levy - reduce travel from Pre-Covid levels - focus on cost control. Tax charge will be higher going forwards. One offs in H2 & higher proportion from Germany/US vs UK + higher tax rates
• Feel vindicated in the battle between technicals & fundamentals, I bet on the fundamentals being correct. Didn't add or sell in Feb/March madness - was tempted to do both - Analysis paralysis with technicals?
• Either way - solid set of results and a lot to like although there is margin pressure. But they are guiding to tough comps, NA & Germany good with higher margin, but lower after tax. 
• I am surprised by the strength of the rally on these results. Nothing to dislike & solid long term hold - maybe being a little cautious as they tend to be
• A solid HOLD - might be a sell if better opportunities - not sure about the expected return given flattish earnings - revenue forecasts feel a little light though

March Week 4:

So underperformance this week following the out performance the previous week. Somero, BMY & CLX being top 5 holdings probably not helping matters but if I didn't complain last week, don't think I should complain this week - putting the movements down to noise.

Feel I can start commenting on risers/fallers now that volatility (fancy talk for down days) is dialing down.

Spectra Systems was I hope on results. 

CMCX I guess a buyback & anyone who wanted to sell is probably out. Also, volatility is good for their business.

SDI has been beaten up lately, although a cynic might think the rally had something to do with the announcement on March Week 5

Sigmaroc is down 7.1% - sadly I have to put that down to results as well.

Transactions:

GRG: 

Was too small a position so added a little and hope to be able to add on weakness. Utilise proceeds from sale of UPGS/GSK/SUPR.

BATS:

Terry Smith had his AGM which prompted me to revisit "Some Portfolio Analytics" and I thought, damn it - Would've, Should've, Could've. Then I thought better late than never. Again utilising the proceeds from GSK/UPGS/SUPR sales.

Marks Electrical:

Met the company at Small Caps Live and was thoroughly impressed - very down to earth founder/CEO, good story. A CFO that wants to understand the business and some staff appointments to propel the business forward. Founder stated that he had always been capital constrained.

I was looking for a long term quality company that could replace UPGS and really liked what I saw, although I am concerned by the new IPO and where we are in the cycle.

I actually sold it the next day (albeit that is March Week 5). I feel I was taken in & wanted to get value from the meeting. The IPO documents in my view were not consistent with the story presented. Money was taken out of the business, not least £4m in 2021, which is incidentally the amount raised, and the property has been purchased by the director at FV and now the director receives £600k rent. A cynic might question the transaction being completed immediately after the half year reporting date and disclosed as a post balance sheet event.

The CFO has received a pretty tidy sum for the IPO for 6 months work. These costs are not in the comparables or in HY.

The IPO to me reads like a lot of cash has been taken out of the business historically, there has been a cyclical peak with big dial up in marketing (discounts?) and a key asset of the business has been taken out (albeit at fair value).

When the narrative does not match the numbers, I prefer the numbers. I am very happy to be proven wrong and hope to become a shareholder if that is the case, but for now, I'd like to wait for results post lock up expirations.

In the meantime, there was definitely an urge to act following meeting and attending the meeting. Successful founders are good at sales. As I attend more presentations, remember not to be taken in and the cost to attend is a sunk cost!!

Updates & Results:

GAW

• Shortest update in the world. Maybe it is because they know how much I ramble!
• Trading in line with expectations - that is quite reassuring given the share price weakness. Dividend of 70p, ex div 1st April
• Suggests pretty solid cash generation & valuation has come in a lot - probably should be added to - it was the plan but would like further details on margin
• Add to Hold

SPSY

• Revenue up 13% to $16.6m (14.7m), ADJ EBITDA & PBT up 8 and 10% to 6.9 & 6.6m (6.4 / 6m), Adj EPS 0.12, Dividend $0.11 (up 10%)  Net cash $16m, $8m cash from Ops
• 500k shares bought back, yet the EPS has declined while profits have gone up!! And 5% of shares to be issued but diluted EPS constant
• 2nd phase sensor development & counterfeit detection capability, new customer for K-Cups & TruBrand, new note disinfection system patented & request for price & polymer substrates vertical integration (and print trial)
• 2024-26 $50m in sensor contracts - would be very susbtantial increase in revenues albeit at lower margin I understand
• Trubrand - new stationary company & also trial with another tobacco company. Also looking at testing of milk products
• K-Cups - one new customer - 20% bigger in volume than existing - get to $1m in revneues in 2022 (high margin) without incremental administrative cost
• Lottery / software authentication - steady as it goes, new contract in US & Canada + renewal in US - hope to get more in Canada
• Consistent on the short term & long term opportunities - innovate to become a bigger company - does sound incredibly promising if delivered - easy to test whether mgt do what they say
• Still get the too good to be true feeling given dividend yield & growth outlook - revenues in decline (although guiding to reverse) & inventory impairment (20% of inventory) - no details
• HOLD - Need to read Annual Report as announcement insufficient (NEGATIVE!!) - Might be one where patience rewarded or punished - for now it is being tested!!!

SRC

• Revenue 272m, ADJ EBITDA 49m, PBT 26.8m, EPS 5.4p - comps not meaningful due to acquisition - 84.8 at HY - call it 400m FY 22 - assuming no growth. Net Debt ~90m (manageable given FY Nordkalk)
• Need to get pretty far to get to the actual - LOSS of 2m (note they only state the company) - 29m in Adj - 22m related to acquistion - 2.7m Share Option!
• European platform established & integrating, Belgium - operational efficiencies & new ERP in Wales - Greenbloc launch available across PPG & Marshalls partnership
• Volumes across group in line or ahead of 2020 (no shit!) - Nordkalk Residential/Industrial, Benelux/Poland infrastructure demand, UK progressive improvement
• Outlook - talk about scale & sufficent cash generation - namely would expect dilution to be a thing of the past & net debt to start coming down ex acquistions - if those things don't happen then might need to reach conclusion that shareholders finance Adj EBITDA
• Supply chain - energy prices (hedging & contractual passthrough), general costs passthrough & efficiency measures, haulage invested in capacity
• Strong to stable demand for products across all regions - very messy in reporting & not one region is "clean" - part of strategy but certainly pushing up close to (if not at) too difficult!
• Outlook - a little different from the top line - some delays & a strike with important Finnish customer - continuing cost inflation (same mitigation).
• Expanded in South England with Johnstone / confident in outlook (green initiatives), higher sales through platform & make more efficient - blah blah blah (but directors have been buying)
• Net Debt 164m (300m available) - floating rate - 670m EV on 50m EBITDA (heavily adjusted!!) - 7m free cash (before acquistions), albeit this is heavier CapEx
• Carbon reduction in Greenbloc is pretty impressive - cement free & renewable energy generation on facilities (presumably can be expanded to other sites)
• TBF - Channel Islands clean & first acquisition - best margins and still showing growth & lower CapEx requirements
• Lots of goodwill / lots of intangibles, quite a bit of complexity vs FORT / IBST - a lot more diversified into Europe but then all the dramas to go with Europe employment law - PKF auditors - probably a little on the small side given M/Cap & additional fees - dare say they will be easy going with adjustments/valuations
• Struggling with this one - too many moving parts given the sector - acquisition led - think the brick & housebuilders are offering very good value compared to this one
• Hold to Sell - tax benefit from selling now - very different to what I first bought with the monster acquisition but better on why bought (more of it & geographic diversification) - acquisition is messing up the quality and therefore comparability

And Finally,

One way out of left field, but I understand we are to take a great deal of pride in how united NATO is today. Unlike the times I am old enough to remember when Donald Trump was an isolationist far right wingnut for telling Germany that reliance on Russian gas was a problem.

Glad to see everyone singing Cum by Ya, but what happens if in a few months time politicians are losing elections because of high oil prices & Europe says, US we are struggling with energy costs because you sanctioned Russia.

What if the EU thinks, if we join in with Russia, we have industrial technology / improved military & nuclear power / resources / Geography - we'd have all the things America has (other than the drive, dynamism, capitalism & common language) - wasn't the whole point of the EU to have a large block capable of competing with America.

As much as foreign policy can be all holier than thou, is the desire to look after your own interests first the raison d'etre for foreign policy?

And on that cheery note,

Adieu