Voyager RNS Log at January 2019
As ever, although I may get keen about a stock, what I put into print here is purely me sharing my rambling thought process and NOT INVESTMENT ADVICE to either buy or sell a particular stock.
The key to the colouring of text within these notes:
Text in normal black: just my thoughts.
Text in blue italics: direct lifts or copy & paste from the RNS issues by the business.
Text in green: loosely, the investment principles that I feel comfortable with.
Red is a disclaimer in that what I write is NOT investment advice.
My strategy at the moment in these less certain times:
Any regular readers will know that part of my trading culture enables me to take a small loss without the slightest regret or “oh what might have been” feeling. The same applies to taking a profit; I am very rarely going to sell at the top so I simply don’t waste mental energy by thinking “if I had only sold earlier”. I simply add the proceeds of a sales to the cash pile and wait for the next opportunity. Does that make me a trader rather than an investor? Well in truth, I rather think that the majority of private investors are traders its just that the periodicity of trading may vary from a month to several years depending on performance of the stock.
As before a quick refresh in terms of what was for the last couple of years, an almost weekly Voyager Log looking in some detail at RNSs relevant to Voyager holdings. Due to the sustained profit taking, I have implemented in my plan in 2018 the portfolio became greatly reduced both in terms of holdings and indeed the financial exposure for each retained investment in the portfolio: most have been cut back significantly. So, with that in mind, there has been little to write about.
A Few Thoughts On The Current State Of The Markets In The UK:
As ever, I don’t have a clue of where the markets are heading and I like to at least have some degree of an edge to be near fully invested. Here I am meaning that companies that meet my investment criteria are showing some positive momentum; there isn’t much wisdom with investing in an apparent high-quality business if its share price is continually drifting south. It’s far far better, in my opinion, to wait until the moving averages/momentum are at least supporting your fundamental analysis. The only thing I know for certain is that almost more than ever we are in a time of a limited number of attractive stocks that are displaying reasonable momentum and this is where I am trading rather than long term investing with any new purchases. For example, two fairly recent purchases are:
Greggs: GRG who issued a very positive TU in January; this stock is already nicely into profit with the shares breaking to a new high. Even so, it’s about capital protection and a trailing stop-loss should at least retain some profits should the shares fall back.
Softcat: SCT. This is a re-entry into a share where I took profits at a very much higher price, 847p back in August. SCT issued a “materially ahead of expectations” trading update for H2. The stock had fallen by about 33% from its August peak and is now finding some sign of momentum. Again, I will be operating a tight stop-loss on this stock.
Overall, it’s reassuring that my strategy of moving to around a 60% cash position in early summer has protected my capital position. At the same time the signs are that the Voyager will have made positive progress for yet another financial year: ok, not the same thumping numbers as the last few financial years, but progress nevertheless. As ever, two thing to note about my philosophy regarding investment returns: firstly the minimum period for measuring portfolio performance is three financial years and secondly, I don’t measure based on a calendar year; I simply keep everything together based on tax year/financial year.
Now, onto a few RNSs for consideration:
Monday 14/01/2019: XP Power: XPP: Mkt Cap £395m: Trading Update RNS
The Company had a good finish to 2018, with trading for the full year being in line with the Board's expectations.
All regions and sectors recorded revenue growth in 2018. Our industrial, healthcare and technology markets reported healthy demand across the year and in the fourth quarter but the impact of the widely reported weakness in the semiconductor manufacturing equipment sector meant that both total order intake and revenues in the fourth quarter were lower than that achieved in the third quarter.
Order intake in the fourth quarter of 2018 was £45.1 million, 4% lower than the fourth quarter of 2017 on a reported basis or 6% lower in constant currency. This has resulted in order intake for the twelve months ended 31 December 2018 of £198.4 million, an increase of 8% over 2017 on a reported basis, or 12% in constant currency. On a like-for-like basis excluding the acquisitions of Comdel in September 2017 and Glassman in May 2018, reported order intake for 2018 was £180.2 million, up 1% on 2017.
Revenue in the fourth quarter of 2018 was £48.9 million, 14% ahead of the comparative period on a reported basis, or 12% in constant currency. Revenue for the twelve months ended 31 December 2018 was £194.8 million, an increase of 17% year-on-year, or 21% in constant currency. On a like for like basis excluding acquisitions reported revenue for 2018 was £172.8 million up 7% on 2017.
The Group acquired Glassman in May 2018 for a cash consideration of US$44.5 million. The trading performance of Glassman was in line with the Board's pre-acquisition expectations, with orders and revenues for the seven months of £7.3 million. Integration of the Glassman business into XP Power is proceeding as planned and our sales team is already finding new opportunities for these high power/high voltage products.
Net debt at 31 December 2018 was £52.5 million, compared with £10.1 million at 31 December 2017.
While we are not immune from macroeconomic conditions we are encouraged by our ongoing new design wins and healthy order book. On this basis and with the benefit of the Glassman acquisition, we expect further revenue growth in financial year 2019
My View: I am nowhere as enthusiastic about XPP as I was in the first half of 2018 however, that feeling has to be balanced against the rather hefty fall in the rating of the stock since the summer. Also looking at the quarterly numbers and stripping out the contributions from Comdel & Glassman, I am not sure I agree with their statement regarding a good finish to 2018. Using my fag packet calculation, it rather looks like the core pre-acquisition business has really slowed down and the sweet spot that covered mid-2016 to mid-2018 may well have passed. I have not reproduced my fag packet calculation here; they are very scruffy and done on the back of a till receipt (no fag packet as I don’t smoke) but my estimates and reasoning are shown below:
I rather get the feel from the TU that the slow down seen in Q4 2018 will extend at least into Q1 2019 and then maybe a gradual recovery in the next three quarters. In my fag packet scribbling, I have also allowed for an 8-10% year on year increase for Comdel & Glassman. Now my figures are to be taken as assumptions as that is all they are but they lead me to have the feel that XPP will maybe not have a profits warning as such but will come in for FY 2019 at the lower end of expectations. Over recent months I have been selling down my XPP and taking albeit reduced profits; in all honesty, I could have managed this one a touch better and listened to what the share price chart was telling me. My holding in XPP is now well under 1% of my portfolio for what I see as a very well managed business that has just possibly drifted from its sweet spot of growth: such things happen with a growth stock and whilst it does not make XPP a poor investment, it’s not one that I feel totally comfortable with at the moment. I will keep a very close watch on each quarters TU to assess progress to see how things progress in 2019.
Tuesday 15/01/2019: Games Workshop: GAW: Mkt Cap £1b: RNS Half Year Report
We are pleased to once again, report record sales and profit levels in the period. Sales and profit growth continue across our retail and trade channels, and our online channel continues to be in line with last year. As we move to complete a series of major investment projects, our gross margin and stock levels are not currently where we'd like them to be. We're looking forward to our new Nottingham factory and ERP projects completing, allowing us to fully optimise our Nottingham site. From there, we'll begin to upgrade our warehousing capacity in both Memphis and Nottingham. These further investments will help us maintain our current volumes, increase efficiencies, and give us good scope for sales growth in the future.
December trading continued in line with the sales performance in the first half.
During the period our return on capital declined from 119% at November 2017 to 96% at November 2018. This was driven by the increase in investment in capacity and in working capital, offset by an increase in operating profit before royalties receivable.
My View: although I have highlighted the drop in margin (gross margin falling from 72% to 67%) and also the drop in ROCE, the respective numbers as they stand are still staggering in terms of screaming a quality business which is in a very sweet spot. We have an ROCE of 96% (my fag packet check confirms that rough level) and an EBIT margin above 30%. Note: I much prefer to work on operating margin or EBIT margin rather than gross margin. The inventories entry of £22.4m in the balance sheet is one to watch as this has markedly increased for £16.3m in 2017 H1 & £11.2m in 2016 H1. In the notes, it’s reassuring that management does say that they wish to improve margins. Whilst the results did not exactly excite the market they look decent enough to my eye. I am happy to continue to hold but due to my lack of empathy for the products I do question how long this sweet spot will last
Wednesday 16/01/2019: Somero: SOM: Mkt Cap: £180m: Trading Update and a second RNS regarding the Purchase of Line Dragon
As a result of the strong H2 performance, the Board now expects 2018 revenues will be moderately ahead of market expectations and the Company's previously stated 5-Year Plan objective of $90.0m, while EBITDA will also be moderately ahead of market expectations of $29.0m driven by the volume increase and effective management of operating costs. In addition, the Board expects net cash at 31 December 2018 will be more significantly ahead of market expectations of $25.0m. As such, the Board intends to maintain the Company's dividend policy, announced on 14 March 2018, consisting of a regular dividend payment equal to 50% of adjusted net income for the calendar year and a supplemental dividend equal to 50% of excess net cash over the year-end target of $15.0m.
Following record results in 2018, the Board is confident in the Company's ability to deliver another year of profitable growth in 2019. The underlying market conditions in our North American and European markets remain buoyant, and the Board sees meaningful growth opportunities in China and our other territories, alongside growth opportunities from new products.
My View: whilst the term used is moderately ahead, it is significantly better than at least to my mind, what Mr Market feared; indeed the price drift almost suggested that the market rather expected a profits warning. Other good news within the RNS was that SOM is making good progress with SkyScreed25 targeted at the structural high rise market; this could be rather transformational in the next level of growth for SOM. The relatively small acquisition also looks a sensible addition to SOM.
I have been writing about SOM every since I commenced the Stockwhittler site and indeed it is my longest serving share within the Voyager having made a significant initial purchased at 110p in 2014. As the number of stocks in the Voyager is a touch low and that may be a feature for some time to come, let’s do a touch more drilling in depth as to why I have held SOM in such high regard for so long. The table below from SharePad will no doubt help me illustrate:
The majority of stocks I hold within the Voyager are attractive in terms of:
High EBIT Margin
High ROCE (lease adjusted)
Attractive CROCI: as average CROCI over a three years period: As CROCI involves Free Cash Flow which can vary from year to year, I find it smoothes the CROCI and offers a more realistic feel of events.
My first investment in SOM, which was identified via screening/filtering based upon certain criteria. At that time in 2014, SOM had an EBIT Margin of 15% rising to 21%, ROCE rising from 27 to 42%, CROCI moving from 14 to 26% and a dividend well covered by free cash flow. At the time of my original purchase, the PE (not my most favoured measure) was around 11 and today even after such a splendid five years, still sits on a very undemanding PE of again around 11: i.e. no significant rerating has been applied to the stock by Mr Market.
The share price did possibly get a touch overheated during early 2018 and I did take some profit at the time but used much of that profit to repurchase shares at a lower price, 290p, as Mr Market worried about the cyclical nature of the business particularly during that wobbling final quarter of 2018. During the whole period of my investment in SOM, it has served my some very generous dividends, which have been reinvested, over the years. Overall, I am very happy to continue to hold this high-quality business that still sits on a very attractive valuation:
PE 11.4, EBIT Margin 30.1%, ROCE 52.8%, CROCI 36.5%, FCF Conversion 102%.
Thursday 17/01/2019: Portmeirion: PMP: Mkt Cap £116m: RNS Trading Update
Portmeirion Group, the manufacturer and worldwide distributor of high quality homewares under the Portmeirion, Spode, Royal Worcester, Pimpernel and Wax Lyrical brands, is delighted to announce that it expects to report record revenue for the year ended 31 December 2018 of at least £89.2 million. This is ahead of market expectations and is driven by strong growth across our key markets including the UK, US and South Korea.
This represents an increase of 5.2% over the previous year and is the tenth consecutive year in which we have achieved record sales. At a constant US dollar exchange rate, our total Group revenue increase would have been nearer 6.8%.
Our home fragrance business (acquired in 2016), continued to thrive, growing more than 11% year on year. In addition, our ongoing focus on the Group's own online sales yielded 20% growth over 2017.
As a result of the growth across the business, we are pleased to announce that we also expect profit before taxation for the year to 31 December 2018 to be ahead of market expectations.
We expect to announce the Group's preliminary results for the year ended 31 December 2018 on Thursday 21 March 2019.
Dick Steele, Non-executive Chairman, said:
"We are delighted to complete our tenth consecutive year of record sales. Our strategy of geographical diversification backed by product development and our portfolio of leading homeware brands continues to drive our business forward strongly. We will continue to invest in growing our business and look forward with confidence to 2019.
My View: this positive trading update had been predicted by quite a few months within this Voyager log and as I was confident of my estimates I took the opportunity to purchase further stock as PMP drifted to 900p in December 2018. Note: PMP is a stock I have held for some time with an initial purchase back in 2016 at 650p before exiting on a profits warning in July 2015 @ 865p. I reentered PMP back in January 2018 following another highly positive trading update and have made further purchases since. Its nearest similar business is probably Churchill China, CHH, another quality business that trades on an appreciably higher rating than PMP: a comparison of CHH & PMP is given below:
Note: CHH issued a very similar trading update on 07/01/2019, “operating performance will be ahead of current market estimates”, & gradually over the following 9 trading days its share price appreciated by 40%; maybe the market will take note of PMP in a similar fashion. I rather expect to see the small number of brokers that cover PMP to revise their forecasts for 2019 up a touch shortly.
Tuesday 22/01/2019: IG Design Group: IGR: Mkt Cap £462m: Q3 Trading Update RNS.
Strong Christmas trading with earnings per share1 on track for substantial year-on-year growth
The Group continued to deliver a strong performance with reported revenues for the nine months to 31 December 2018 up 36%, with like-for-like sales up 9%2. The Group has seen growth in reported revenue and profit across all regions, with non-UK based customer revenues now accounting for over 70% of the Group.
The integration of Impact Innovations ("Impact"), acquired in August 2018, is progressing ahead of expectations and on schedule to deliver the anticipated US$5 million of annual synergies by the end of FY21. The US manufacturing operations are now fully consolidated and the proposed sale of the Midway site, as announced at the Group's interim results on 27 November 2018, has now been completed ahead of schedule with gross proceeds of $7 million.
The Board is pleased to confirm that the Group's full year performance remains on track to deliver diluted earnings per share1 in line with current market expectations, with year-on-year growth expected to be in excess of 20%. We continue to see strong cash conversion across the Group and expect average leverage3 for FY19 to follow the progress made in recent years and be below 1.3 times.
Looking forward to the year ahead, we have a strong committed order book and pipeline of contracts in negotiation, with a number already secured for FY20. Our UK based Not for Resale bags business continues to grow ahead of expectations with the order book now consisting of over 30 million bags, including having won a number of contracts with new retail brands. In addition, we have already secured new business in everyday cards in the UK, renewed card contracts in Australia and have concluded new licensing deals including Disney's Frozen 2 and Toy Story 4 in the UK and Australia.
Paul Fineman, Chief Executive said:
"The performance of the Group throughout this period has been strong with all regions growing both revenue and profit, underpinning significant year on year growth. The acquisition of Impact has delivered everything we expected with the integration ahead of schedule and planned synergies remain on track.
"Continued delivery against our strategy means we confidently enter FY20 with good overall momentum, across our diversified Group including further benefits from the integration of the Impact acquisition in the US."
My View: I feel that the RNS is somewhat understating the progress IGR is making against market expectations and I expect revenue to come in considerably higher than the forecast of £414.6m. If you back calculate the revenue for IGR in its pre acquisition mode at Q3 in their last reporting year you arrive at a figure of about £247m revenue. They tell us that as a post-acquisition business they are ahead on this by some 36% implying that revenue for Q3 in 2019 is in the order of £336m. The trusty fag packet has been in use and I reckon that if the pre-acquisition business (the business pre Biscay in Jan 2018, & Impact at end Aug 2018) which in itself is LFL ahead by 9%, ticks over in Q4 delivering say a further £86m revenue, then adding this to the already “in the bag” income from post-acquisition so far up to Q3, then you have a minimum revenue of about £420m assuming NO FURTHER revenue in Q4 from Biscay & Impact; but of course there will be further income from both Biscay & Impact in Q4 and I have estimated a very conservative addition of £18m discrete in Q4 giving a total for acquisitions for the year of £85m. So, my fag packet revenue for the year ending March 2019 becomes £355m from legacy IGR + £85m from the acquisitions; say £440m. So to my mind, IGR should deliver a very attractive revenue number at year-end along with that nicely increasing operating margin outlined at the interims. I would expect forecasts for 2019 to increase in the coming weeks and I don't really think that Mr Market has really woken up as yet to the post acquisition business of IGR . Needless to say, I am very happy to continue to hold.
Note: in order to derive my fag packet estimates, I have trawled through recent (3 years) trading updates, half-year reports and full year reports. As ever, not a recommendation or a suggestion that a reader of this log should purchase IGR; just simply me sharing my thoughts.
For those who like numbers, my fag packet calculation:
My Two-penneth on CAKE: So, there we seem to have a profits warning on a share that is currently suspended from the time of its initial profits warning back in October & the end finally declared late Tuesday afternoon 22/01/19; can't recall having seen a scenario many times before. As I have written before in this log, I did not feel comfortable with the balance of the implied customer numbers and my experience/research of their outlets and sold my entire holding back in September 2018 at fortunately a decent profit. Note: we all suffer the occasional profits warning but with a fraud case like this, it’s almost impossible for any private investor to detect and lets remind ourselves that despite thousands of manipulated/false entries on the companies ledger over several years, nothing was detected by the auditors signing off the accounts: what chance does the PI have! Also, in my time working with any FD, I can’t say it was commonplace for the FD to make lots of journal entries. I strongly suspect that a fair number of people were involved with this fraud; maybe the whole story will come out at a later date.
About 20 years ago I had a total wipe out with an ofex listed company, partly my fault for not assessing risk; so, been there myself and felt the pain. Nevertheless these nasty events can come along and bite the investor but thankfully fraud on this scale is rather rare.
As ever, although an investor will not be right every time, if something feels “not quite right”, it’s always best to head for the exit and protect your capital. In this case, I just thought sales might not be that clever but had absolutely no idea regarding the fraud. I have said it before and I will say it again, I was a touch lucky with CAKE but there again, actually going along and having a look at the end product in action is most definitely worthwhile in certain circumstances. I have “gone along and had a look” within my competence level, on many occasions and feel it has really aided my decision making. A few examples where visits to outlets has aided my decision making either in a positive or negative way are: +ve ones: GRG, SMWH, JDW, JD., DTG; +ve then later a little -ve FUL; -ve for CAKE, HFD & CPR (some years back in the case of CPR). All fairly easy places to take a look and form an opinion.
Well, that’s it for this issue of the Voyager RNS Log. I am taking most of February out and going to India to miss a little of the winter so I am not exactly sure when the next log will be produced.
As ever, good luck with your investing and remember, the more you study and learn from your mistakes during your investing career, the luckier you tend to become.