Boon's Fund Recap – March to May 2023 - 3 month bumper edition!

2023 YTD Performance +0.4% vs -0.2% benchmark

2022 Performance +12.0% vs -3.4%

2021 Performance +21.6% vs +14.6%

See all the previous BBB Monthly Recaps here.

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What a three months it has been

I have endeavoured to do a write-up monthly, but life and work has been busy over the last few months, so I have not had the spare time for either the Boon Fund, nor this regular write-up. In fact, I’ve got a month-old backlog of RNS announcements and news to process through!

However, I have also found that without making headspace to look at my portfolio from a birds-eye view, I think my portfolio performance has meandered in the last 3 months.

Despite my lack of time, my performance has been okay YTD – beating the index by 0.6 percentage points. But my aim is a yearly beat of 7-10 percentage points, and I’m now more than 40% through the year already, so there is much to gain ground in the next 8 months.

In the 3 month time period between March and May, I have made 5 buys, and 2 sells. The markets had thrown up some good bargains during that time, and I took advantage of weakness in a few shares I have been tracking to start new positions (more below in the section detailing my trades). I now have the lowest cash position I’ve held since I started writing about the Boon Fund in 2021. This is not me being bullish on where I think the overall market will go; I had bought because those companies were at what I thought was a great share price to buy.

On an absolute basis, a 0.4% gain in 5 months is just not good enough either, compared to inflation, or even putting the money into a one-year fix (4% was available at the start of the year). I read a recent blog post that argued we’re entering a multi-year period of sideway market; and it certainly feels that way at the moment. This should be the best period for active, bottoms-up stock-pickers like me. I still have high conviction in my methods and process; but I need to find the time to execute them, otherwise I might as well invest in an index ETF.

Macro Thoughts

Inflation: Not surprised that the market keeps being surprised how stubborn inflation is. Wasn’t it all supposed to come crashing down about now back to 2%, and the BoE, Feds, etc can stop hiking? That was the narrative, but it looks like there is now gradual acceptance that rates are going to keep going up, and might have to stay higher for longer. This, obviously, isn’t good for overall share index strength. A quick look at PE ratios across the FTSE indexes indicate that we’re probably still too high; just barely back to 2018 PE ratios, but with interest rates multiple times higher, I am expecting them to fall. For example, the FTSE100 is showing as 18.5x PE on Stocko, but early 2019 levels were 15-17x. Yet, interest rates and gilts are approaching 5%. Something has to give, and I think it would be share valuations, not interest rates.

Commercial property: Worrying snippets of transactions of >50% discount to previous valuation. That is equity wipe-out levels, and potentially haircuts to debt holders. When that starts to happen, credit for commercial properties will completely freeze up. I worry about the ripple effect of this, especially on banks. I have, therefore, exited my long position in Invesco STOXX Europe 600 Optimised Banks ETF Acc (LON:X7PP) . Still holding Metro Bank Holdings (LON:MTRO) as on a single-name basis, it doesn’t have much commercial property exposure, and I still think is way undervalued, and able to get to 175p-200p within the next 6 months.

Growth Tech: I’m still on the sidelines watching the likes of ASOS (LON:ASC) , Boohoo (LON:BOO) , THG (LON:THG) , Deliveroo (LON:ROO) , Ocado (LON:OCDO) and so on. All of them are saying the right things about focusing on profitability and practising better cost control. But words are cheap, and organisational culture change is difficult. Employees at those companies signed up for the excitement of growth work, and many of them have never had to do the “hard efficiency grind” that mature companies have always had to do. Culture change takes time, and I fear for ASOS the most, it has the least time left given the cash burn and debt pile. You have to ask yourself – despite the huge fall in valuations, bargain Price-to-Sale ratios, and lots of growth PE and late stage VC money still floating around to be deployed, why haven’t we seen many firm bids yet? Maybe they are too messy, too complex to fix. And better to wait and see which one is successful, or pick up cheaply from administration. I am resisting temptation to buy these names, for now. But monitoring closely for signs of progress.

Travel: I have had strong conviction since the start of the year that travel companies would be printing money this year; that positive trading momentum has continued, with good announcements from the sector over the last few months. The peak summer season now looks in the bag to be a blockbuster. I had resisted taking on positions here, given that I work in the travel sector and am already hugely financially exposed (salary, as well as equity). I had a small position in Safestay (LON:SSTY) – which just announced very positive noises about trading, and I think it is still very undervalued (more on that in a section below). I then decided to take a position in On Beach group (LON:OTB) as I see them building a market-leading position in package holidays, and see them able to gain more and more market share over the next few years. The valuation was bombed out, in line with other “tech” shares, but where they are different is that they have a proven, high (well, decent) margin business that has demonstrated profitability. Recently, they took a knock based on their disappointing HY results – but I think the second half of the year will show their true profitability engine, based on the blockbuster summer of travel we are about to see. More on that in a section below too.

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Performance Summary

The BBB ISA

The BBB SIPP

Detailed holdings in comments.

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Trades in March to May

Buy & Sell All - Invesco STOXX Europe 600 Optimised Banks ETF Acc (LON:X7PP) – I bought this when the SVB meltdown happened, thinking that European banks are solid and would survive. By and large, they did, except CS which was on a path to failure anyways, even without SVB. The European banking sector is solid; but I have now decided to exit, as I possess no special knowledge about this sector, and I worry about the looming wave of Commercial Property loan difficulties.

BUY - Direct Line Insurance (LON:DLG) – This company has gone through an embarrassing crisis in the past year. Out of all the insurers, it was hit hardest by losses in the motor insurance industry, as well as home insurance. They screwed up in terms of forecasting the ballooning of claim costs, and therefore were too slow to raise premiums. New management is now in, and the business of underwriting, actuarial science, and premium pricing is not rocket science, so I see them recovering in the next 6-12 months. They have a decent regulatory capital buffer, and a strong solid brand in the market. They will also benefit from many smaller insurance players exiting the market. Might even be a bid target, for another insurance company looking to expand their share of the market.

SELL Partial - Chapel Down (OFEX:CDGP) – Sold around 35p, when I thought that all the good news is now potentially baked in. I still love this share – think it is a good long-term hold, with nicely rising margins and profits as their “inventories” grow, mature, and are sold over the next few years. Also, the fact that Michael Dell, one of the biggest shareholders, thinks there is enough potential here to finally take a board seat and spend some of his precious time here. Or maybe he just wants an excuse to drink wine during working hours. However, I thought the price was full, and I was right – it has dropped back down to the c30p mark. If it gets any lower I am tempted to top-up to a bigger stake again.

BUY - Surface Transforms (LON:SCE) – This jam tomorrow coming is now coming good, the next few months will show operating profitability. Lots of jaded investors here and repeated delays and fundraisings meant the share price was depressed, despite now all the risk almost gone. They have figured out how to build a factory to produce at scale. And they also have contracts in the pipeline with multiple customers. The long-term play here is that as more new cars produced are EVs, they are much heavier than ICE cars and therefore there is more of a need for ceramic brakes (which are more effective) to meet safety requirements. Surface Transforms will be probably get bought out by one of the big motor parts manufacturers, but the valuation now is way too low for what is a high-tech company in a fast growing sector, that should be able to command fat margins.

BUY - On Beach group (LON:OTB) – As mentioned in my first section, I am very bullish on the travel industry prospects, at least for the key summer season. I think On The Beach will at some point in July or August be reporting a profit upgrade announcement, once those forward sales turn into actualised revenues. I believe this that this a decently high margin business, that they have a platform that is able to grab more and more market share, and that package holidays will be more in demand, as holidaymakers still want to travel, but need to seek value given constrained household budgets. An overseas holiday is so ingrained in the British middle-class psyche that Brighton will just not do (and it is more expensive than a holiday in Spain!). This really should be trading at like 12-15x PE on FY24 broker forecasts IMO, which implies more than a doubling of the share price is possible.

BUY - Ashmore (LON:ASHM) – As the saying goes, fund managers make money in good and bad times. The last few years has been challenging for emerging market specialists such as Ashmore, which means we’re somewhat at the bottom of the cycle for EM fund managers. Yet, I can still get a 7% dividend yield (granted, not fully covered by earnings), a very strong cash positive balance sheet, and a very strong brand in the market. It is also still very much owner-owned and owner-operated, which is a business I love as it lets me sleep soundly at night. Especially for financial services firms, where too often the professional managers are in it just for their short-term bonuses. I do not know whether EM will be back in fashion with investors anytime soon. But for me, things can’t worse than they are. And if/when a recovery comes, EPS potential growth is 60%-100%, which should translate nicely to share price growth too. In the meantime, I’ll get to collect 7%+ dividends, which seem secure given the track record.

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Companies on my radar

These are some of the companies which I looked at in the last three months; these are some of my thoughts.

I had decided to buy PayPoint (LON:PAY) one evening, only for them to release a positive trading update the next day that sent their share price shooting up. I don’t have time to digest RNS fully on weekday mornings since I work a regular job, so it is now on my to-do list to refresh my analysis. But I really like this business, as they have a dominant moat in the convenience store sector with their tech platform, that will be the middlemen for all the tech transformations in the upcoming years in the convenience sector. They are already high margin, high recurring revenue business, and have just added Appreciate, which I think they got for quite a decent price. So I was surprised to see that their share price had drifted downwards over the weeks, and was poised to buy. Oh well, one day too late!

Superdry (LON:SDRY) is one I looked at again recently, after their fundraising. Having analysed their brand and their new strategy, I think they are in big trouble and running out of time. There is not enough being done to their brand or product to make it relevant again in the world of mid/average fashion, to enable them to squeeze more full-priced, high-margin sales volume. I salute the founder who has put A LOT of his own money into this recently, both in the fundraising (£3.4m) and also buying in the open market (£1m+). I just don’t think they will be able to grow the top-line revenue in the next 12-24 months, and if they can’t, then the debt becomes a real issue, as interest rates rise. And then there are the onerous leases hanging as a millstone around their necks too. I don’t think this will be the last time that Dunkerton will have to pony up cash in a fundraising, so I wait patiently to see signs their new strategy is actually working, and also for a lower entry point, and also for a more secure balance sheet.

Costain (LON:COST) had a bit of a set back this week, as they walked away from a future big potential contract (the A66 motorway). I think the market hasn’t read between the lines – it won’t hit this year’s revenue, their trading is still in line with expectations. And this is actually going to help their financial metrics; they likely walked away because the work was too low margin. Costain has been quietly building up their consultancy part of their business, which is much higher margin work. With most of their work in infrastructure and non-cyclical construction projects, I’m happy to hold at a sub-5x PE valuation and where the market cap is almost completely made up of Net Cash. I can see them being bought at a premium by a strategic industry buyer, who can then take the net cash position to offset against the buying price whilst still offering a big premium to get the shareholder backing. The share price is now below the price which I would normally top up, but I am now maxed out in my SIPP as well as on my position sizing for Costain. (I hold)

PRS Reit (LON:PRSR) is one I am monitoring closely to buy, having tracked it for a while. Just looking for a good entry point on share price weakness. Residential rents are a function of two things – affordability (ie linked to wages and employment) and supply/demand. On the former, we are seeing entrenched salary increases across the board – hence why the BoE is worried about sticky inflation. Also, employment continues to be high. On the latter, supply continues to shrink, as more BTL landlords exit. I think we are going to have structural tailwinds for rent increases of 5-10% for the next few years. Their leverage here is low, and there is scope to add more properties in the coming years. The big unknown risk is government regulation – always whispers of rent controls, or even tighter regulations on landlords. With these REITs, you usually want to be patient and wait for them to trade at a cyclical low discount to NTAV. Therefore, you get both the discount-closing gain, as well as any organic gain over time in NTAV.

Oxford Biodynamics (LON:OBD) released their HY results and an update. Both good and ugly things. The ugly is that they are going to run out of cash, and a fundraising is all but inevitable. On the surface, no surprise - blue sky pharma share, burning cash like crazy, and promising big revenues but the actual revenues were tiny in the HY. I've been heavily burnt on this share, I think I'm down about 70-80%. It makes up an insignificant portion of my portfolio now. But it is interesting because their first product, Episwitch CiRT, is now gaining hockey-stick sales growth. 

• First 100 took 9 months
• Second 100 took 4.5 months
• Third 100 took only 3 months
• By later this year, we should easily see like 1200+ sales a year run-rate, which at $2500 avg would be $3m+ gross sales.

Only 20 oncologists currently prescribing. At the above 1200+ sales run-rate, that is probably only 50-100 oncologists. A quick google search suggests there are 13,000+ active total oncologists in the USA. Granted, not all will be in the field that the CIRT tests are used for, but you get the picture that there is a huge target addressable market to tap.

They also have another test in the pipeline for later this year, prostate cancer. But commercial revenues will probably only come in late 2024, IMO.

And, the most interesting thing about this blue sky company, is that their last fundraising was done at a 30-40% PREMIUM to the then share price. Can they pull it off again?

So an interesting situation I will be watching with interest. This one was an error in my investment approach, I never go for blue sky, pre-revenue. So I am definitely not going to consider putting more money here, even if its a screaming buy, because it is just not my strategy.