SIF Folio March review - Should I keep Airtel Africa and Vertu Motors?

March was a more positive month in the markets, if not the real world. Both the FTSE All-Share index and my SIF portfolio ended the month in the black, although SIF is still down slightly on a year-to-date view.

Mr Market’s more positive stance seems to suggest that the impact of inflation, interest rates, energy costs and sanctions against Russia may be less than feared. I’m not sure I share this view, but my SIF screen continues to find new opportunities and I’m continuing to invest.

In this review I’ll look at the SIF’s performance in March. I’ll also look at shares bought during the month and two possible sales.

SIF trades in March

I was pleased to be able to add four new shares to SIF during the month. This has increased the number of stocks in the portfolio to 17, out of a target maximum of 20.

The new stocks were:

• Macfarlane (LON:MACF) - this packaging group scores well for quality and momentum and didn’t look too expensive to me, despite a run up over the last 12 months.
• Wilmington (LON:WIL) - after a long period of transition, this training and data provider may be poised to deliver.
• South32 (LON:S32) - this mining group has been reporting near-record margins. I fear a cyclical high, but the stats (and StockRanks) appear to argue otherwise.
• Photo-me International (LON:PHTM) - this photo booth operator has proved a canny survivor and is now diversifying. Owner-CEO Serge Crasnianski loaded up on cheap stock during the pandemic. I think he was probably right to do so.

You can read my buy reports on each of these stocks by clicking on the links above. All four have now been added to SIF and to my personal holdings.

Portfolio stocks under review

The SIF folio is a model portfolio that I’ve run using a rules-based strategy since April 2016. (Watch out for an annual report later this month.)

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:

• Airtel Africa (LON:AAF) - This African mobile network operator has performed well for SIF, but does it pass my tests for a continued hold?
• Vertu Motors (LON:VTU) - car dealership profits are expected to fall back to more normal levels this year. Are the shares up with events?

I’ll look at each of these stocks in more detail in a moment. First, here’s a quick review of the portfolio’s performance in March.

March performance update

SIF lagged the market in January and February. March saw a slight improvement, with SIF matching the performance of its benchmark index during the month:

This performance left SIF down by around 4% at the end of the first quarter, compared to a breakeven performance for the index.

The unusual addition of four new shares during the period meant that new purchases outweighed sales in March. This reduced the portfolio’s cash weighting from 36% to 31%.

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 February's review.

Airtel Africa (LON:AAF)

(Buy report: 8 June 2021)

African mobile network and payments operator Airtel Africa has performed well for SIF and was also promoted to the FTSE 100 in February.

The company’s Q3 results showed that revenue rose by 21.7% to $3,492m during the nine months to 31 December. Operating profit for the period climbed 43% to $1,146m, backed by a matching improvement in operating cash flow.

Airtel’s customer base is said to have expanded by 5.8% to 125.8m during the period, with mobile money customers up 20%. In my view, these numbers highlight the remaining growth potential in Africa; a far cry from mature European mobile markets.

Profitability remains highly impressive, in my view.

However, Airtel Africa’s share price has been shaken in recent weeks after private equity group Warburg Pincus and Singapore Telecom both trimmed their holdings. Collectively they sold 3.1% (£165m) of the stock, at 140p per share, a small discount to the market price at the time.

It’s not uncommon for institutional backers to gradually take profits after a successful flotation, but I guess this could be a sign that these heavyweights think the share price is up with events.

My decision: Airtel Africa shares have risen by more than 80% since I added the stock to SIF. Gains on this scale often mean that a share no longer passes my screening tests, but that’s not the case here. Airtel Africa’s earnings and momentum have kept pace with its share price.

The stock still qualifies for my holding screen, and indeed my more stringent buying screen.

Airtel Africa is currently rated as a Super Stock by the Stocko algorithms. I don’t disagree at the moment. The shares pass all my tests and will stay in SIF for at least one more month.

Verdict: Hold

Total return to date: 86%

Vertu Motors (LON:VTU)

(Buy report: 22 June 2021)

The boom in demand for new cars coincided with a squeeze on chip supplies as the pandemic eased. Car dealership groups reported record profits, even as volumes struggled.

AIM-listed Vertu Motors was no exception. The group, which claims to be the fifth largest dealership group in the UK, is expected to report a net profit of £59m for the year ended 28 February. That’s more than twice any previous year, according to Stockopedia data.

Broker forecasts suggest Vertu’s profits will halve this year as business conditions return to something like normal.

Anecdotally, I’ve heard that dealerships are starting to get more stock, and are once again advertising on local radio.

Vertu Motors’ latest trading update makes no bones about the return to normal. The company says that the exceptional conditions seen in 2021/22 are “unlikely to recur”. Profits for the 22/23 financial year are likely to be “some way below FY22”, although still ahead of periods prior to FY22.

Costs are also creeping up. Management refers to payroll, energy, investment in digitalisation and online marketing.

In fairness, Vertu Motors still looks reasonably valued to me even on the basis of a 50% drop in profits.

The balance sheet is backed by freehold property and the group reported a net cash position at the end of August 2021. I expect similar in the full-year accounts.

I don’t see much to dislike here, except the perennial risk of management over-optimism.

My decision: Should I continue holding Vertu Motors in SIF? I’ve run the stock through the screen I use to test whether I can continue to hold the stock. To my surprise, the shares pass all but one of my tests

The consensus forecast for falling earnings means the stock doesn’t generate a PEG ratio.

As a result, I have no choice but to sell Vertu from SIF. I don’t know if the timing of this decision will be exactly right, but I do feel that risk factors are stacking up against car dealers after such a strong run.

In any case, Vertu will leave SIF with a satisfactory nine-month profit of around 40%, including dividends.

Verdict: Sell

Total return: 40%

What next?

I’ll make the Vertu disposal 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 seem to have gained a strong following over the last year.

Next week, I’ll be back looking for new stocks to add to the SIF portfolio.

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