SIF Folio: Another win for Miton but what’s gone wrong at Bilby?

It’s nearly the end of March, so this week I want to carry out my regular review of stocks that have been in the SIF folio for nine months or more.

I don’t normally comment on newsflow from portfolio companies during their time in the portfolio, but I do want to make an exception for building services group Bilby (LON:BILB), which has been a complete car crash of an investment so far.

Stocks for review

In June last year, I only added one stock to the SIF folio, small-cap asset manager Miton (LON:MGR). This well-regarded firm is now the portfolio’s oldest holding, and the only one that satisfies my minimum holding period of nine months.

As a result, I need to check whether these shares still pass all of my screening tests. If not, then the stock may have to be sold this week.

Miton (LON:MGR)

Original coverage 05/06/2018

It’s worth noting that this is Miton’s second stint in the SIF fund. The first ended profitably with a 46% total return. The stock is showing a more modest profit this time round, but even that’s a relief after some big losses recently.

Miton’s 2018 results appear to have given investors the injection of confidence needed to buy a few more shares. The share price rose by more than 10% on the day and has maintained that gain so far.

Big inflows: It’s not hard to see why Miton’s results were well received. While big cap asset managers like Standard Life Aberdeen are suffering hefty net outflows, investors are still queuing up to deposit cash with Miton. Assets under management rose by 14% to £4,376m last year, despite a £466m negative return from the group’s investments.

Short-term dips like this are inevitable for an asset manager. You cannot deliver absolute positive returns in all circumstances. Although percentage of Miton funds in the first or second quartile for performance fell from 87% to 81% last year, I remain confident that the group’s long-term results are likely to be above average.

Miton’s business performance has certainly been strong. The group’s operating margin rose from 22.2% to 24.3% last year. Return on equity rose from 8.3% to 11.6%.

Risks? The credibility of investment boss and small-cap specialist Gervais Williams plays a big part in the appeal of this business. Although this means that there’s a degree of key person risk, Mr Williams has a shareholding of nearly 9%, so his interests should be well-aligned with those of shareholders.

A more near-term risk may be that stock market volatility will affect the profitability of the business. This is a characteristic of all fund managers. Ultimately, most need neutral or positive market conditions in order to deliver strong results.

As a long-term investment, I would continue to hold Miton. Stockopedia’s algorithms share this view, with a StockRank of 93 and Super Stock status.

However, the SIF’s focus is on shorter periods means that my screening rules include a number of momentum and growth measures. These need to remain positive to justify a continued hold.

Does Miton still pass my tests? Sadly not:

At the heart of the problem is that earnings per share are expected to fall by about 12% to 4.1p per share this year:

(I’ve used the company’s adjusted eps figure of 4.7p per share for 2018)

Although a return to growth is pencilled in for 2020, this year’s dip means that Miton now fails three of my screening tests:

My decision: I have no choice but to sell Miton from the SIF fund this week. Happily, the boost provided by the firm’s recent results has left the SIF’s holding in the black. A positive return of 8% or so in nine months is no disaster, given the sell off we saw at the end of last year.

Verdict: Sell
Total return: +8.1pc

Bilby - an accident waiting to happen?

Original coverage: 07/08/2019

It all looked so promising! When I added building services contractor Bilby to the SIF folio in August 2018, the company had delivered four years of strong revenue growth and appeared to be converting this into much-improved profits.

Fast-forward to today, and the SIF holding is showing a 78% loss. What’s gone wrong?

This firm  specialises in gas, electrical and building services for social housing landlords in London and the south east. Although it had grown by acquisition, this process appeared to be working well.

Shortly after I bought the stock, things started to unravel.

Sept-18 - Founder share sale: The first clue that my timing was out was when founders Phil and Leigh Copolo sold their 31.3% holding in the firm and left the business. I should have been more suspicious, but in reality there wasn’t much I could have done. I have a policy of not selling stocks early and the shares were placed with institutions who seemed happy to buy, albeit at a discount.

Interestingly, it looks like one of the institutions who bought Mr Copolo’s shares was Miton, whose declared holding rose from 15.1% to 19.8% in the days after Mr Copolo’s share sale.

Dec-18 - Profit warning #1: Worse was to come. The shares crashed again in December when Bilby’s interim results showed a 16% fall in underlying pre-tax profit and issued a profit warning. According to management, a decision to terminate a contract with the Ministry of Defence is to blame, along with various other contract delays.

Mar-19 - Profit warning #2: A trading update at the start of March contained another profit warning. The same problems are blamed again, but it now appears that Bilby firm P&R has not made a clean break with the MoD and may be facing “dispute and resolution proceedings”. Other contract delays cited in December continue.

Underlying EBITDA for the year to 30 June is expected to be £2m-£3m, compared to £6.3m last year.

My view: Bilby appears to be suffering from the classic service sector problem of bad contracts and slim margins. It’s something we’ve seen many times in recent years, both with big caps and small caps.

The stock is now highly illiquid, with a market cap of just £11m. I suspect that’s one reason why the shares continue to fall on a daily basis - there may be a big seller who is struggling to ditch their shares.

Interestingly, Bilby’s house broker doesn’t seem to have cut its forecasts for the current year following March’s profit warning:

I’m not sure how credible these forecasts now are. Based on this guidance, the stock trades on just 2.2 times 2019 forecast earnings. Clearly the market doesn’t expect Bilby to deliver, and I have to say that I agree.

In this case, my policy of sitting tight has cost me dearly. I don’t hold out much hope of recovering my losses before my rules force me to sell, but I’m going to stick to the plan for now.

However, when I review the SIF fund’s performance during its third year next month, I may make some changes to my rules to try and avoid investing in such fragile businesses in the future.

As always, your comments on Bilby or Miton (or anything else) would be much appreciated.

Disclosure: At the time of writing, Roland owned shares in Miton and Bilby.