A reasonably quiet week with the main piece of exciting news within the portfolio being that from KWS shown below. What a chunky addition that is for KWS and thankfully the market seems to love it. KWS is now up by a factor of 4x since my original purchases about 18 months ago. This will never do, I like boring, boring stocks and maybe KWS is just too exciting: oh well, such is life. Returning to the truly boring stuff, quite a few chunky ex-dividends dates have kicked in this week and pleasingly the portfolio has held up very well prior to the eventual arrival of the dividend payments and subsequent reinvestment. Note: historically I always reinvest dividends usually, but not exclusively, in the parent company and if not in the parent company then something showing positive momentum within the portfolio. Over time the contribution of reinvested dividends is simply incredibly significant in terms of total stock market returns.
Maybe this relatively quiet week and the drawing to the end of civilised temperatures as we reach the end of October has brought my hibernation tendencies out: I was probably a grizzly bear in a previous life! Anyway, that seems a reasonable excuse for me sleeping in this morning; I did not wake until 06:35 and by that time I would normally be ploughing through the water. Looks like I will be a grumpy bear with a sore head today. Enough of this and on to this week’s RNS stories for shares within the portfolio:
Monday 23/10/2017: No RNSs directly relevant to stocks within the portfolio.
Tuesday 24/10/2017: Keyword Studios: KWS: Market Cap: £798m: Two RNSs, firstly one relating to the proposed acquisition of VMC & secondly one relating to a placing to fund that proposed acquisition:
A major acquisition in North America; significantly earnings enhancing
Keywords Studios plc, the international technical services provider to the global video games industry, is pleased to announce that it has entered into a conditional agreement to acquire the entire issued share capital of VMC Consulting Corporation and Volt Canada Inc. (collectively, "VMC"), a leading provider of video game Functional Testing and Customer Support in North America (the "Acquisition"), from Volt Information Sciences, Inc. ("Volt") for a cash consideration of approximately USD $66.4 million, subject to certain working capital adjustments. The Consideration and working capital adjustments and related transaction costs are intended to be funded by a fully underwritten cash placing of approximately £75 million (before expenses) of new ordinary shares in the capital of the Company (the "Placing"), details of which have been announced by the Company separately today.
The Board believes that the Acquisition has a compelling strategic and financial rationale as it:
Keywords Studios plc, the international technical services provider to the global video games industry, announces its intention to undertake an equity placing of up to 5,750,000 new ordinary shares of 1 pence each in the capital of the Company (the "Placing Shares"), equivalent to approximately 10 per cent. of the Company's existing issued share capital (the "Placing"). The Placing, which is underwritten, is intended to raise gross proceeds of approximately £75m (before expenses) (the "Placing").
Rationale for the Placing and use of proceeds
The Placing is being undertaken to fund the Company's proposed acquisition of the entire issued share capital of VMC Consulting Corporation ("VMC"), a leading provider of Functional Testing and Customer Support in North America (the "Acquisition"), and certain of its affiliates, from Volt Information Sciences, Inc. ("Volt") for a cash consideration of approximately US $66.4m (the "Consideration"), subject to certain working capital adjustments, as separately announced by the Company today. Transaction costs and working capital expenses are estimated to be a further US $5.0m. The additional proceeds raised will be used to finance the Group's strong acquisition pipeline. The Placing will allow the Group to maintain its conservative gearing policy.
Certain Directors of the Company have indicated their intention to subscribe for Placing Shares. Further details of the Placing and any participation by such Directors will be set out in the announcement to be made on the closing of the Placing, which is expected to be made later today.
The Acquisition is expected to be completed on or around 30 October 2017, conditional upon, amongst other things, completion of the Placing.
Hold on, RNS No 3 of the day telling us that the placing has been fully taken up at 1400p which is a slight premium to yesterday’s close price and that some of the directors have also stumped up a few shillings to take part.
My View: well, where does it all end for the “King of Meccano” with yet another bolt-on acquisition and this one is certainly the largest one to date. I have gone through the numbers in the rationale for the acquisition & to my eye, I can see some claimed advantages. The target company, VMC, do have recently declining YOY revenue but that's due to exiting low margin areas of business & I am sure KWS have done their due diligence stuff and are therefore happy with this high reputation bolt-on. My slight concern with KWS is the management coping with and integrating all of these bolt on businesses. I rather visualise a KWS board meeting to have a centre table with a whole series of plates spinning on sticks and directors running around to make sure none start to stutter and stall. Not to worry, with all investments I probably spend as much time asking myself What could go wrong” as I do thinking about what may go right. Anyway, Mr Market seems to like it and I guess those presented to must have been impressed, in fact, the shares motored up almost 20% by close of trading on the Thursday.
Also, yes, yes, yes, I know it’s a placing, costs are saved etc but once again the good old faithful PI once valued in the embryo years of the now significant business is not as much as mentioned; not even as much as a “Mrs Brown feck-off”.
I do confess to becoming a touch itchy with my KWS holding and that’s even after taking out my entire original invested capital a few weeks ago ; I simply bought them at such a low price, I still have a very substantial investment in them “riding for free” and even after top slicing they are still in the top five of my % of portfolio value. Maybe I am just feeling Octoberish, who knows but for now I will hold and see what happens.
Wednesday 25/10/2017: No RNSs directly relevant to stocks within the portfolio.
Thursday 26/10/2017: Bodycote: BOY: Market Cap £1.77bn: Trading update for third quarter on the year:
Bodycote, the world's leading provider of heat treatment and specialist thermal processing services, is issuing a trading update covering the three month period from 1 July to 30 September 2017 ("the period").
Group revenue for the three months ended 30 September 2017 was GBP169.0m, 16.6% higher than the same period last year and 12.9% higher at constant currency. Organic growth(1) was 9.1% at constant currency, reflecting 9.6% growth in our Aerospace, Defence and Energy business and 8.7% growth in the Automotive & General Industrial business. The year to date organic constant currency growth was 6.2%.
The following review of the Group's markets quotes all movements on the basis of organic growth against the same period in 2016 at constant currency:
Civil aerospace revenues grew 3.0% and continued to be driven by growth in Western Europe. The recovery in the North American onshore oil & gas market began during the second quarter and continued during the period. The overall growth of our energy revenues was 24.5%. Defence revenues continued to decline in the period.
We saw continued growth of 8.3% in the car and light truck market, with strong growth in Western Europe and our emerging markets, while North American revenues were down. General industrial revenues were 11.0% higher against a weak comparable. General Industrial growth was achieved in all geographies, and was strongest in Western Europe.
Net cash as at 30 September 2017 was GBP23.8m compared to net cash of GBP17.7m at 30 June. The interim dividend of 5.3p per share will be paid on 3 November 2017, at a cost of GBP10.1m.
Summary and outlook
Bodycote's performance in the period has been in line with the Board's expectations and, accordingly, the Group's outlook for the year as a whole remains unchanged.
My View: I really like Bodycote and it has been kind to me, increasing in value by some 70% since I bought into it just over 18 months ago. I have also made further top us purchases of BOY along the journey; something I tend to do with the more compelling positions whilst the story unfolds. Today’s TU did not disappoint and I suspect that BOY will meet their year end numbers, we are in the 3rd quarter, with relative ease. Happy holder and I will continue to hold.
Thursday 26/10/2017: BBC News item about a single traveller on a Jet2 flight from Glasgow to Crete. Just an observation but what a great bit of publicity for Jet2. The way I look at it, they probably had to go to Crete anyway to collect passengers returning to the UK from Crete so no money lost in real terms. Instead, they get a well-covered BBC news report showing the splendid care given to this single passenger. As I say, great almost free PR that hits budget competition such as Ryanair & its charming Michael O’Leary right out of the park: nice one for fellow Dart (DTG) holders in my view.
Friday 25/10/2017: No RNSs directly relevant to stocks within the portfolio.
Glad I’m Not There (GINT): well a nomination for this weeks GINT presented itself at 7:00 on a Monday morning with a weasel worded Trading Update from Dialight (DIA) blandly informing the markets that “due to short-term production challenges, we now expect EBIT for the year ending 31 December 2017 to be in the range of GBP13.5m to GBP15.5m”. Now in anybodys book thats a pretty hefty profits warning when you consider that the consensus was for GBP18.2m; if we take the mid-point of DIAs wide “we don’t have a clue” new range that’s a 20% shortfall on market expectations. Now these things do happen indeed they happen occasionally to my holdings that’s the nature of investing but unless you had the consensus figure at hand, the first impression a reader may be given is “ok, they have some production challenges but they do give us an indication of what EBIT will come in at”. Nowhere in the RNS do DIA say that they will have a very serious shortfall in profits: I would have expected at least a “materially below market expectations” comment from DIA to be worded in the RNS. Sorry, DIA, simply not good enough.
Thursday also saw a rather unpleasant RNS from Lombard Risk Management (LRM), the only reason I came across this company is because it came up as a “high avoid” on the smoke & mirrors. Not one I would wish to ever own and I see on Twitter that it had been recommended by a journal tipster. That in truth is one of my major criticisms of investment journals; they are compelled to write up numerous weekly buy recommendations and I would think that over a two year period they would have suggested getting on the 50% of the shares listed on the LSE as buys.
Finally, I did tweet about a planned purchase of an AIM company that was going to be added to my Hi Yield portfolio: well the order price I set was not reached so no purchase made but that’s the way it goes! On Thursday I cancelled the limit order as there was something that I originally missed in the figures that watered down my enthusiasm; as ever, it’s all about managing risk and protecting one's capital. I truth I rarely purchase any AIM stocks just for their yield and although I am of the opinion that there are some terrific stocks on AIM if one takes the time to research them, my AIMs are much more biased to growth than safe income.
Next week: well it looks fairly quiet but maybe we will get the odd trading update maybe KWS will announce another acquisition; maybe they will go for ITV, who knows. Can you imagine the products of such a marriage? Coupled with my utter dislike for gaming, the possibility of Simon Cowell look alikes and the cast of Corrie being zapped by the press of a button on the latest KWS-ITV streamed game: maybe not a bad thought after all!
This weekend the Hatters take on the mighty Coventry City at home so it’s a relatively easy 150 mile round trip to the theatre self-deception. Whatever your plans, have a good weekend and the markets will still be there come Monday.