April 2019 Portfolio Update

30th Apr '19 by Damian Cannon

10 comments 3812 reads

Once again I've enjoyed a quiet month with regard to the markets and have done little apart from watch the dividends roll in - thanks XP Power! It's not that I've been putting my feet up though. No, real life has more than occupied my time and that's no bad thing. I did, however, enjoy reading this recent piece on AIM investing (Staying Safe on The Planet Aim) which echoes very much my own approach. The only part which I don't do well is putting together a few basic calculations to validate my thinking when a new RNS comes out. This clearly works for the author (https://twitter.com/dosh100) though as his regular tweets demonstrate.

Purchases

None.

Things I thought about buying (but didn't)

None.

Sales

None.

Things I thought about selling (but didn't)

None.

Announcements

AdEPT Technology Group: Decent FY trading update here with sales and EBITDA rising in-line with market expectations. Debt should also come in slightly lower than forecast with the dividend rising more than expected to 9.8p. Given that this is a "buy and build" business it's pleasing to read that recent acquisitions appear to be both performing and integrating well. With Ian Fishwick moving to the chairman seat it sounds as though the pace of acquisition is likely to be maintained. Given that the shares are on a forecast P/E below 11, and yielding almost 3%, I'd say that they're looking good value right now. (Update)

Ramsdens Holdings: An in-line FY trading update which implies earnings growth of circa 8%. Usefully they've seen growth across all four of the main income streams (Foreign Currency, Pawnbroking, Jewellery and Precious Metals) which suggests a certain level of resilience in the business. With the acquisition of 18 stores and 5 loan books from Instant Cash Loans last month it seems reasonable to assume that next year should see some decent growth at the top and bottom line. With shares currently on a P/E of ~10 and yielding almost 4% they seem more than fairly priced. (Update)

Watkin Jones: Yet another in-line HY trading update with forecast growth of 2-3% somewhat more muted than last year. On the flip-side the business cleverly de-risks earnings by forward selling their student accommodation developments; this ensures that they're not over exposed to future economic conditions and don't have too much cash tied up with work…

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john652

1st May '19

Hi Damien,

Thankyou for publishing this, very interesting and makes me think an excellent discipline to write up a stock summary each month. I read the rsn’s and watch all the comments here and check the numbers etc etc but I don’t physically write down my thoughts (as opposed to the raw numbers) which may be good for addressing my confirmation bias, I try and look for the bad before the good but the process of writing might bring out a more structured view. I think I’ll try this.

Would you be able to put the £ sign in front of the ticker so we can see all the stocks in your list?

Do you have sell rules/thought process for thing thinking of, and actually selling ?

J

Damian Cannon

Hi John,

You've pretty much nailed why I'm doing this. I used to skim RNSs and check a few numbers and all that but my reasons for trading used to get lost in time. In fact I think that my brain actively mis-remembered why I'd traded at all! So just over a year ago I decided that I would document everything in near real-time to give me a fixed record that couldn't be denied.

As a result I've become much more systematic in my investing and if my thoughts have helped anyone else then that's great.

On the selling front I'm mainly driven by company news. If there's a profit warning then I generally sell immediately - unless it's a timing issue where revenue has been temporarily deferred rather than an issue with the business. I may also sell if the P/E has been inflated far beyond what I see to be fair value but that's quite rare. I did use stop-losses for a while but they didn't seem to add much value so they've fallen by the wayside.

Damian

2nd May '19

Thanks Damien,

I keep a trading diary, as recommended in many books which has helped a great deal, monthly summary is the next step I’ll try. One of the benefits of this forum is real examples of trading approaches, there are so many excellent books but nothing beats a real life summary, so please keep up the monthly blogs.

I have tried system stops over the years and now only use them when opening a position, for small caps they just don’t work for me as I think too much volatility, after 20 years working with exchanges and trading firms, too much risk of algo manipulation, then add Market maker activity and, well, not for me.

J

mojomogoz

Interesting. Thanks.

I overlap with none of your gainers but 3 of your losers...I hope it is not a sign that I am a bad version of DC ;)

Fingers crossed! I happen to hold Burford Capital (LON:BUR) in some size and found your recent comments insightful. The problem, of course, is that we could all be suffering from confirmation bias. So it's useful to read something as negative as the Canaccord note just to get a different perspective.

Damian

Michael Tee

25th May '19

Hi Damian,
I met you at the end of Mello. We walked to the tube together. Didn't realise you were Damian Cannon at the time. Have been reading your reports for some time. I have been looking at K3C. I was alerted to it as there have been 2 institutional buys recently, it's on a PE of 10, div of 8 and the metrics according to Stockopedia are amazing: Return on Capital 98.9% Return on Equity 87.6% Operating Margin 44.3%.
I opened a small position in the hope that the delayed contracts start to complete.

Would appreciate your opinion.

Michael

26th May '19

Hi Michael,

It was great to meet you at Mello - it's a super event. On the £K3C front you've pretty much outlined my thoughts as to the potential value here if they can get some of the larger contracts over the line. I imagine that there will be end of year trading update in mid-June where we'll find out for sure. Before then I don't see anything in the public domain to tell us more and I don't know whether they'll do it or not. So I'm not looking to add to my position until the newsflow turns positive.

Damian

28th May '19

Thanks Damian, let's see what the June update brings.

Michael

29th May '19

I've copied this £K3C chat over from small cap report....

Based on policy and current mgt EBITDA expectations £4.5-5m (compares to bumper £7.5m in 2018 and EBITDA is very close to pre-tax for this capital light cash on balance sheet co) then dividend will be nearly cut in half and the stock will be on a 20x current earnings.

Its hard to know how the market takes this. My guess is that there is some upside to the £4.5-5m EBITDA by end of May just from ongoing business below the supersized corporate finance stuff. Mgt style seems to be to lowball IMO rather than account for the future hopefully. Below the big corporate finance transactions they are transacting with more and bigger clients in general...operating well and growing....

That hints to me that £4.5-5m could be known non-contingent fee income over April and May (recognised over term of contract not when paid at beginning of contract) with no assumptions on contingent fee income for those two months. That would mean adding approx 30-40% on top of their assumed non-contingent fee income over this two month period (1/6th of year so guessestimate this could be extra £250-500k depending on business mix). My hunch (and its totally that) is that they will not have assumed anything but the absolutely most visible non-contingent fee at most.

In addition, conservative forecasting could mean that they have not forecast any new business in that 2 month window...if that's the case there could be up to an extra £1m in fee income.

My impression from contact is of a business that is confident and working well and is doing better than last year in terms of volume of clients (just not the very big fish high £££ finishes) but tends to work with a cautious even pessimistic outlook as a way to be prudent in it business management. This is a hunch by me and 2019 results when they come will be the proof point. On balance, I think its likely that they included a run rate level of non-contingent fee income in their expectations for last 2 months but that this had a safety haircut applied to it...guess the figure and call it 30-50%.

Conclusion from the above. There's a high probability IMO that they lowballed their EBITDA by about £500k. Completing a whopper is a straight c.£500k onto EBITDA too. In 2018 they had approx £6.6m of contingent fees from the whoppers so they are losing a lot of that (I don't think its all but it is a majority).

Some K3C watchers are looking at the company website where they report completed deals for a clue as to whether whoppers have been landed. I think its is unlikely they would post them there (even with deal size blanked) as it would be material information and would need a RNS. I suspect we are in the dark until early June update as to whether they landed any whoppers.

Stocko estimates are too high based on what the company is guiding. I started this with what I believe current p/e and dividend is based on what they say. My discussion then explains why it will be a bit better but uncertain how much better. So, what's going to happen with share price?...

This is interesting. I have bought a half position as this is a high quality business long term. However, there's a real uncertainty gap that needs to be filled with some current facts (not as the company is not being straight but just a combo of conditions and the expectations in market or at least what is on stocko). For there to be upside surge on the share price when they update for the year end then I believe K3C needs to have landed (ie closed the transactions) 2-3 whoppers in April and May. Possible but not something that can be bet on.

To hold the current price and have high expectations not shattered (with the really the guidance they have already given but not in the forecast numbers from market/stock!!) they need to have landed a biggie and/or had a surge in non-contingent fees.

No whoppers landed and there's probably downside in the price. If I'm wrong about company conservatism above then the downside could be sharp and we see a price spike below 100p. That will be a helluva buying opp IMO.

Note, Its possible that they decide to 'signal confidence' and use some cash on balance sheet to bolster 2019 dividend. That too will probably support price.

Umm, I hope this isn't the 3rd copy of this comment below but the others don't seem to show. Excuse me if there's repetition going on that that I can't see. Just trying to be consistent. Here goes...

Well, for the sake of thoroughness I realised I should check the trading update from last year. Doh! ...

It blows my conjecture out of the water in that for FY18 the appeared to have provided guidance that does contain assumptions about how non-contingent fees will be earned at least and probably also contingent.

In that case the guidance from management is good and current expectations are well ahead of what they have guided! Needs big transactions to close to make a big difference!

April 2019 Portfolio Update

Purchases

Things I thought about buying (but didn't)

Sales

Things I thought about selling (but didn't)

Announcements

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Damian Cannon

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