Stock Picks | Boon's Fund Recap – September 2022

8th Oct '22 by Boon

25 comments 2936 reads

See all the previous BBB Monthly Recaps here.

Sep Performance –1.3% vs FTSE All-Share benchmark –6.1%

YTD Performance +0% vs FTSE All-Share benchmark –10.6%

(Part Time) Fund Manager’s Report

I had planned to take more positions in September, but ended up disposing of one holding completely, taking a new position, and topping up two. Not for a lack of opportunity; there were plenty of buy triggers that were set off. However, upon re-evaluating those shares, there were usually good reasons why they had declined below my buy prices, and I ended up resetting those triggers to a lower price.

In addition, cash is now yielding a decent return. One year cash fixes are now yielding 4%+. I am seriously contemplating moving some of my Stocks & Shares ISA back to cash, and for my SIPP taking on some direct Gilts exposure.

On the other hand, my tracking of the FTSE and AIM indices indicate that we are getting some interesting valuation levels, from a P/B, dividend yield, and P/E perspective. Although the latter I am most sceptical about, as I expect overall forecast EPS to decline as we get closer to year end and companies finally belatedly provide profit warnings. As we all know, analysts are always shutting the barn door after the horse has bolted.

The other screaming buy signal, is the fact that several of my companies (Begbies Traynor (LON:BEG) , Appreciate (LON:APP) , Spaceandpeople (LON:SAL) , Medica (LON:MGP) , and others) came out with good results or trading statements in September, yet the share prices have barely budged. It seems like investor sentiment is so bearish that even the bright flame of good results cannot survive this black hole of gloominess. This is when you know that there are bargains to be had, to be able to pick up really good companies at bargain valuations; where it is only a matter of when, not if, the share price goes higher.

We have now had a good few months of tightening financial conditions; interest rates have gone up and flushed through the system, QT has started, inflation has been eating away at consumer budgets, consumer sentiment is at an all-time low, and the post-COVID bounce-back momentum has probably waned. Parts of the system are now going to start undergoing stress; Gilts…

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Boon

10th Oct '22

The old adage "what is cheap can always get cheaper" rings true; so far we haven't had a "catastrophe" yet, the singular shocking event that will mark this time period. 2000 had some big names blow up, and same with 2008. So far in 2022? Nothing. Even LDIs will be forgotten in a decade or two.

It seems like we have a lot of overlap in our portfolios! How many shares in total do you hold? And what's your view on ITV?

I am kicking myself on Intercede (LON:IGP) as I had a buy trigger at 37p, but the lowest the ask ever went down to was around 39p. I am very annoyed when this happens - but on the other hand, I have had plenty of times when I had stuck to my guns, and avoided buying at the wrong price. Anyhoo.... buying and selling discipline is the key to investing success in my mind.

I will digest the acquisition news when I have time over the next week. But am very surprised by the 40%+ rise in the share price today. I reckon it is indicative of many AIM shares being very oversold, that an OK trading statement and an acquisition can prompt such a price re-rating.

abtan

11th Oct '22

Hi Boon

Thanks for the write-up.

At the moment I'm a big fan of "Companies with huge cash piles" and 3 come to mind:

Jarvis Securities (LON:JIM)
Wise (LON:WISE)
Hargreaves Lansdown (LON:HL.)

I own all, though Jarvis Securities (LON:JIM) is currently top of my list as it has a huge cash pile and no interest is being paid out on cash balances (so far.)

There's reputational risk given recent events with the FCA, but from everything I've researched this should have limited impact on cash balances (the risk being that punters get scared and transfer funds out).

By my reckoning the Jarvis Securities (LON:JIM) dividend yield should currently be at least 10%. I imagine it will actually be higher next year.

Wise (LON:WISE) have already alluded to their increased interest income this year and have indicated that they plan to use this to lower transaction costs for their clients. I remain a big fan and have a decent sized holding.

Hargreaves Lansdown (LON:HL.) also has excellent (and constantly growing) cash balances, but the shares are not as cheap as Jarvis Securities (LON:JIM) 's. I believe there's an update next week when hopefully things will be a little clearer.

---

I also considered Tenancy Deposits cash piles for Belvoir (LON:BLV) and Foxtons (LON:FOXT) (I hold both.)

The former have confirmed that they don't seek to generate income on client deposits; the latter noted in their annual report an additional £1m per 1% increase in interest rates.

It's unclear if this is vs the Bank of England base rate, or commercial rates. Either way that should generate an additional £2m-£3m in annualised income for Foxtons (LON:FOXT) , which is decent when compared with the £9m operating profit generated in FY21 and the c£18m OP I'm hoping for this year.

Cheers

jonno

12th Oct '22

I am revisiting Harworth (LON:HWG) at the moment. Trading at around 100p, the shares look extremely oversold. Last report NAV was around 224p, although this will have come down somewhat. I see Palace Capital (LON:PCA) said in today's update that they expected their NAV to fall by less than 7%. Not a direct comparison given the types of property held by both, but perhaps some indication.

May well add, but funds are limited as I tend to stay more or less fully invested.

Follow up post to follow. Thoughts?

Incidentally Harworth (LON:HWG) are doing an inaugural presentation on the investor meets company website on 21 October.

All the best

17th Oct '22

There is press speculation that Carolyn McCall, CEO of ITV (LON:ITV) is contemplating a sale of ITV Studios as she is 'hacked off' with the derisory market rating of the company. As a long term holder of ITV (LON:ITV) I share her view. A suggested sale price of £3 billion has been muted. This is not far shy of the company's enterprise value and supports my view that the company is trading well below its intrinsic value. Were the sale of ITV (LON:ITV) Studios to go ahead, I would expect a contested bidding process.

I am not sure that selling the company's 'crown jewels' is the way to go, I suppose it depends on the price and how the disposal, were it to happen is structured. I take comfort that Carolyn McCall is very capable and much more astute than me

I shall await developments, if any.

19th Oct '22

Finally - it looks like some sum-of-the-parts realisation of value is about to come to fruition! Either an actual carving out, or investors realising the value of jewels like ITV Studios.

I wonder if ITV (LON:ITV) might spin out ITV Studios by listing it. Don't know the technical term for it - but sell a portion, say 20-30% to outside investors, keep a majority, but list it on a stock exchange. Thereby it becomes publicly traded and has a public valuation?

Either way there is much value in ITV. Especially as the latest Barclaycard report for September has the opinion that UK consumers are seeking "insperiences", which is basically sitting on the couch, watching TV, and eating store-bought popcorn. Viewership should go up for ITV, and ITV Studios should see more business from the streaming services.

24th Oct '22

Shocking analysis from EY-Parthenon via the FT, about the record number of profit warnings in Q3 this year. Goes to show that it is a minefield out there at the moment, and one should only hold shares they have a strong conviction in.

Excerpts:

companies issued 86 profit warnings in the third quarter of 2022, up from 51 in the same quarter last year and the highest in that three-month period since 2008.

More than half of the profit warnings issued in the quarter were caused by rising costs, while a quarter related to labour shortages.

Consumer-facing sectors such as retail and hospitality have been among the hardest hit, accounting for over half of all warnings in the third quarter.

EY said that there was now a “danger zone” of 28 listed companies that have issued three consecutive profit warnings in the past year, compared with 18 at the end of the second quarter. It said that on average, one in five companies delist within a year of their third warning, mostly due to insolvency.

Companies to have issued profit warnings in recent weeks include Royal Mail, Saga, Shell, Boohoo, Next and Character Group.

The highest number of warnings in the third quarter was in 2001 when 133 were issued.

Analysts at Berenberg said last week that the S&P 500, Stoxx 600 and FTSE 350 were in net-downgrade territory for the first time since 2020.

6th Nov '22

Just a quick note that I was planning to write an Oct monthly recap this weekend, but feeling a bit under the weather and also had some more pressing stuff to do. So this will have to wait to (hopefully) next weekend to get onto Stocko!

BenHazz

7th Nov '22

Boon,

Just a quick note to say I really appreciate your input on the site and have recently started to closely follow your Boon fund updates. Keep up the good work, some great macro perspective too!

Ben

11th Nov '22

Thank you for the warm words! I do struggle to find the time to juggle these writeups along with usual work, life, family, admin, travels - but knowing that it is being read and appreciated is encouragement for me to keep going!

I hope that you feel better soon. Given that inflation appears to have 'stabilised' in the US, I have been pondering whether now is a good time to add to Harworth (LON:HWG), which is held in two of the family portfolios I run. Decisions, decisions!

Just to add that your regular postings are much appreciated.

13th Nov '22

Hi Jonno! Feeling much better, and going to be taking a stab later today to getting a new article for Oct22 up. Thank you for your kind words!

Regarding Harworth (LON:HWG) while US interest rate expectations are a factor, I'd say the more important factor is the direction of travel for the UK property industry (commercial and residential). Harworth's main business is to prep land, adding value to it, and then selling off parcels to developers. Right now I can't see sales volumes of land parcels being strong for the next year. Many developers have decent sized landbanks, and with their own slowing sales, are going to slow down starting new developments, and thus have less need to replenish landbanks. So that's the first; HWG sales will slow and stagnate.

The second is their tangible value. This is linked in interest rates. I'm not sure we can assume the UK rates will follow the US rates. This is evident when you look at the GBPUSD exchange rate - it jumped to 1.18 from 1.13/1.14 (?). This suggests that a big part of the market thinks UK rates will be higher than US rates going forwards, making the pound more attractive. Or maybe the markets are getting ahead of themselves about Hunt's budget next week. Who knows.

My view is that we're going to start to see the property market in the UK struggle over the next 6-12 months. Declining prices, paralysis in transactions (both end properties and land sales). Sure, this might be priced in already. But for me the best time to buy is when there is a shock or turmoil - the actual "blood on the streets". We'll get to that at some point. There will be an over leveraged developer or some forced liquidations at some point. Maybe minor, maybe major. But that, for me, will cause all the sector shares to drop in tandem, offering a good discount to TNAV, and a good entry point into Harworth. So its remaining on my watchlist for now.

And I have on my to-do list to go through the housebuilders to see which to add to my watchlist. I'd be looking for those that have low LTV (like Harworth) and thus can withstand valuation writedowns, and a prolonged lull in sales volume. And then a good discount to TNAV.

One sector that might be immune or worthy of investing now is student properties. Empiric Student Property (LON:ESP) comes to mind, one that I have held before, and would love to get back in again. Due to the big boom in student numbers coming in this year, and also landlords pulling out of student market (recent legislation changes on evictions, etc), there's a huge shortage of student beds nationally. Will only get worse with the weak pound making UK education more attractive next autumn onwards. ESP guiding almost a guaranteed +5% rents next year, I think that's low. They tend to be conservative in their outlooks, so I'd say maybe +10% is achievable. Trading at a good discount to TNAV already. However, I'd say that operationally they seem to have too much fat, as they are only able to generate low dividend yields. In a market where property valuations are not increasing, I'd be looking for at least 6-8% dividend yields for property REITs at the moment. Because otherwise I'd rather just get a risk-free 4-5% on my cash.

14th Nov '22

Just wanted to update - I didn't manage to find this last weekend either, so since we're already halfway through November... I'm going to do a double-month update (Oct & Nov) in early December. This one I definitely promise to get out!

October overall performance was +0.7%, but that paled in comparison to the FTSE All-Share benchmark going up +2.9%.

I added two new positions to the fund - LPA (LON:LPA) and Metro Bank (LON:MTRO) and topped up Time Finance (LON:TIME) . I sold down some of £XSPS but still hold some.

November performance has been amazing, driven by Appreciate (LON:APP) , ITV (LON:ITV) , and Metro Bank (LON:MTRO) . Extra pleasing was that these were some of my mid-sized positions!

I'm gobsmacked by some of the huge swings in the market. It looks like it is still a casino in terms of emotion being a greater presence than rationality. I am tempted to take profits in the next week or two to bake in a decent performance for this year.

15th Nov '22

Morning Boon

Glad you are feeling better.

Many thanks for your analysis, very cogent. I shall watch and wait regarding £HWG. I look forward to your next update. In the meantime I shall have a look at Empiric Student Property (LON:ESP) and its peer group.

Surprisingly resilient performance by ITV (LON:ITV) of late in a turbulent market. Maybe caused by 'shorts' being closed? I took a little profit yesterday having added at 64p but retain a reasonable position; dividend yet come.

17th Nov '22

I'm still undecided on ITV (LON:ITV) . As you say, its had a good run. I chalk it down to M&A talk about ITV Studios, as well as investors thinking they will have a World Cup bonanza Q4.

In other news, Entertainment One Studios is being sold at the moment, and that will provide a nice reference price point for the value of ITV Studios.

Medium term, I am bullish on ITV's TV operations in the UK. BBC is going through some big cost cuts and therefore their production quality and quality of licensed content will suffer. There was the Channel 4 threat of being sold to someone who would invest heavily to compete against ITV. But it looks like the government have shelved plans to sell; and I can see it continue to be a weak, toothless channel for the next few years. Overall, a golden opportunity for ITV to grab more of the linear TV market share in the UK. Albeit, a declining share.

Rusty2

18th Nov '22

Hello Boo , £YU. I sold all mine also but the price cap only goes until April now unless the Govt. extend it. In April there could lots of companies switching?

Yes November has been good so far, lets hope it continues until the New Year.

I think the government has confirmed the cap will be removed from April onwards for businesses. So yes, there is now bound to be a big amount of pent-up switching demand. But I don't think I will be going back into Yu (LON:YU.)

I have on my personal to-do list to refresh my analysis on Yu with a view to buy back in...

22nd Dec '22

I have taken the plunge and added to Harworth (LON:HWG) at 103p this morning. It was already held in two of the family portfolios, so topped up. Still underwater and it, like other decent property related stocks are completely unloved. It may of course get cheaper, but failing Armageddon I think that most of the misery is in the price. There is also the possibility of a bid. We shall see.

I have also bought a small holding in LXi REIT (LON:LXI) Again nobody wants it. It currently yields 5.5% or thereabouts, but has the benefit of inflation indexation and very long leases. Has fallen to a 20% discount to NAV. Directors have recently bought over £650,000 of shares at around the current price. The benefits of the recent merger with Secure Income Reit are to come. Admittedly inflation is currently running well above the present yield, but it will come down.

Buy something of value when nobody wants it.! I may of course be wrong, but time will tell.

Here is to a better New Year.

Happy Christmas

4th Jan '23

Sorry, just spotted this message! I still have to get the hang of how to get notifications on Stocko, when there is a new comment on my posts or comments...

You have been brave when I haven't - my Harworth (LON:HWG) buy trigger price at 120p stares me in the face every day, when I look at my Stocko notifications queue!

I do believe that any share property or land related is getting way too cheap. But we haven't seen the capitulation yet and the steep, steep decline in prices. Will land get to -30% down? Probably not. But when the YoY price decline rate is like -15% at the darkest hour, the market extrapolates and a -40%, -50% is assumed, and shares will get marked down to that -40%, -50% of peak valuation.

Blackstone with its REIT has been in the news. The forced sales are coming; we haven't seen even the start of the pricing rollercoaster ride yet.

5th Jan '23

With regard to Harworth (LON:HWG) it may well get cheaper at which point I suspect I will turn off the screen or add a few more. I have no idea when things will start to improve, the news is unremittingly gloomy, although could off course get worse, China and Taiwan come to mind, but failing this I think the bottom can't be too far away. 'No one rings a bell' as they say.

In a couple of years I think that buying Harworth (LON:HWG) at 103p will be seen as a positive. I also think that it is a likely bid candidate. However I am more than aware that I know that I don't know.

I continue to watch Chapel Down (OFEX:CDGP) and look forward to your next write up.

Keep well and Good luck for the New Year

Boon's Fund Recap – September 2022

(Part Time) Fund Manager’s Report

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Boon

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