SIF Folio February review: Should I persist with Beximco and Secure Trust?

February turned out to be a difficult and uncertain month. From an investment perspective my rules-based SIF folio was quite active, adding three new stocks during the period. My hope is that this reflects a broader rotation in the market towards value stocks and cyclical sectors that have been out of favour.

We shall see. In the meantime, this review of the month will cover recent portfolio activity and stocks that have reached the end of their default holding period.

SIF trades in February

Improving momentum for unloved big cap value stocks meant that my SIF buying screen provided some interesting new choices during the month. I added three new shares to SIF in February – the same high rate of portfolio additions as in January.

The new stocks were:

• British American Tobacco (LON:BATS) - this choice flagged up some ESG concerns among subscribers. My write-up (and reader comments) are here.
• Shell (LON:SHEL) - the oil and gas giant is riding high once more. Can it continue? I reviewed Shell here.
• Beazley (LON:BEZ) - specialist insurers are reporting stronger market conditions after a difficult few years. I think Beazley could be poised for a decent run of growth.

These stocks have skewed the portfolio’s average market cap higher and boosted its dividend yield. My hope is that they’ll also help to offset flagging earnings growth elsewhere.

Portfolio stocks under review

For the benefit of newer subscribers, the SIF folio is a virtual portfolio that’s run using a rules-based trading strategy. It’s outperformed the market by around 50% since its launch in April 2016.

All stocks have a default holding period of nine months, after which they’re reviewed to see if they still pass my screening tests. This month there are two stocks that have been in the portfolio nine months or more:

• Beximco Pharmaceuticals (LON:BXP) - this Bangladeshi has a quirky dual listing but has performed well over the last two years
• Secure Trust Bank (LON:STB) - a specialist lender with a mixed track record on the stock market. Interestingly, former shareholder Arbuthnot Banking (LON:ARBB) recently completed the sale of a major holding in Secure Trust.

SIF Folio: February performance update

After outperforming the market by almost 15% in 2021, SIF has got off to a much weaker start in 2022. For the second month running, the portfolio lagged the FTSE All-Share index in February, although not by much:

A mix of additions and disposals means that the portfolio’s cash weighting is broadly unchanged since last month:

Finally, here’s a snapshot of all the SIF folio holdings, before any transactions that may result from today’s review.

You can see what’s changed since last month by looking back at January’s review.

Beximco Pharmaceuticals (LON:BXP)

(Buy report: 4 May 2021)

Beximco Pharmaceuticals is a £420m group that’s based in Bangladesh. It produces a wide range of generic medicines and also carries out contract manufacturing.Beximco claims to be active in more than 50 countries, including both western and emerging markets.

This stock has required some patience, but has delivered big returns for long-term investors (or short-term traders with good timing):

Trading during the half year to 31 December appears to have been strong. Net sales rose by 17.8% to Bangladesh Taka 16,968.9m (£146.7m). After-tax profit climbed 40.7% to BDT 3,131.9m (£27.1m).

The company says it launched 20 new products during the half year, including two generic versions of Covid-19 antivirals and a muscle relaxant drug. Beximco also distributed 8m doses of the AstraZeneca vaccine in Bangladesh, where it’s the exclusive supplier.

Looking ahead, there seems to be some inconsistency between broker forecasts and management commentary for the year ending 30 June 2022.

Stockopedia’s consensus forecasts suggest that earnings per share (in Taka) are expected to fall this year.

This seems to be at odds with the company’s strong H1 growth and with MD Nazmul Hassan’s confident statement that “we will maintain our strong growth trajectory for the year”.

Beximco fails my screening tests due to a forecast reduction in the dividend, which I’d guess is linked to the forecast drop in earnings.

I don’t think I’d sell Beximco from SIF due to the forecast earnings/dividend drop. However, the shares also fail two of my momentum tests:

This is more decisive, as it’s an objective measure that I can’t interfere with.

My decision: I’m going to sell Beximco Pharmaceutical shares from SIF and my personal holdings. Although my personal view on this business remains positive, this is a case where I’m just following the rules.

Subject to market movements between writing this article and making the trade, SIF’s holding in Beximco should have generated a total return of around 10%, including a 3.5% contribution from dividends.

Verdict: Sell

Total return: 10%

Secure Trust Bank (LON:STB)

(Buy report: 12 May 2021)

This specialist bank is primarily a business lender. It uses fixed-rate savings to gather deposits (cheap funding!) from retail customers.

The bank’s latest trading update reported record levels of new lending in real estate finance, vehicle finance and retail finance (point-of-sale customer credit). Overall, total new business lending rose by 27.9% to £471.1m compared to Q3, and was 51.5% higher than Q4 2020.

Even if we factor in some element of pandemic recovery, these figures suggest to me that the group’s recently updated target of achieving 15% compound annual lending growth “over the medium term” may be realistic.

This business seems to enjoy above-average profitability, too. Secure Trust’s net interest margin appears to hover just above 6%, while return on equity has averaged low double-digits in recent years and is expected to improve slightly from this level:

Source: Secure Trust Bank 2021 half-year results

Of course, the big unknown here is how the UK economy will perform in 2022, against a backdrop of rising inflation and more normal trading conditions. Analysts covering Secure Trust seem to expect a fall in 2022 earnings after last year’s strong recovery:

For these reasons, Secure Trust does not pass all of the screening tests I use to decide whether to continue holding the stock. Both failures relate to the outlook for earnings growth:

My decision: Secure Trust Bank no longer passes all of my tests, so I’ve no choice but to sell the stock from the portfolio. Looking further ahead, broker forecasts I’ve seen suggest earnings will return to growth in 2023. On a medium-term view, I’d guess that selling now might be self-defeating.

For SIF purposes, however, it’s a straightforward decision. The performance of this stock since May last year has been acceptable enough, delivering a total return of around 12% – just below the long-term average of 13% for completed SIF trades.

Verdict: Sell

Total return: +12.3%

What next?

I’ll make both of these trades after this article has been published, selling the shares from the SIF virtual fund and my own personal holdings.

As always, I’d be interested in your views on these two companies, both of which are slightly out of the mainstream in the UK market.

Next week, I’ll be back looking for a new stock to add to the portfolio. My hope is that the recent market volatility will have freshened up the results of my buying screen, providing some interesting new opportunities.

Disclosure: At the time of publication, Roland owned all the shares listed in the SIF portfolio.