SIF Folio May review: Drax dives but Airtel Africa keeps climbing

The UK market ended the month pretty much where it started, after a period of volatility. It’s a similar story for my rules-based SIF portfolio, despite a couple of big movers over the last fortnight.

In this month-end review, I’ll review the portfolio’s performance in May and look at two stocks that I may need to sell. I’ll also include a snapshot of the whole portfolio as it stood at market close on 1 June.

SIF trades in May

May was a fairly quiet month for trading in the portfolio, but I did make two changes – one buy and one sell.

Buy: I added Asia-focused FTSE 100 bank Standard Chartered (LON:STAN) to the portfolio on 10 May. The bank’s performance has been better than expected recently. I think this could continue. You can read my buy report here.

Sell: Floorcovering distributor Headlam (LON:HEAD) triggered my 25% stop-loss rule in May. This meant I had little choice but to sell. However, Headlam hasn’t issued a profit warning and still appears to be trading reasonably well, based on May’s AGM update. Perhaps this is a classic contrarian buying opportunity. Time will tell.

I closed SIF’s Headlam position for a loss of 29%, including the benefit of two recent dividends. You can read my sale report here.

Portfolio stocks under review

I didn’t add any shares to SIF in August 2021. This means that nine months later, I don’t have any new shares to review at the end of their minimum holding period.

As a result, I have just two stocks to review this month. Both have appeared in previous month-end reviews, but in this case much has changed since April. I think they’re worth revisiting.

• Drax (LON:DRX) - rumours that UK electricity generators could be hit by a windfall tax later this year have triggered a nasty sell off for this wood burner. Does Drax still pass my screening tests to remain in SIF?
• Airtel Africa (LON:AAF) - this African mobile operator issued a strong set of full-year results in May and has launched its mobile banking service in Nigeria.

I’ll look at each of these stocks in more detail shortly, to assess whether they pass the tests necessary to stay in the portfolio. First, here’s a quick review of the portfolio’s performance in May.

May portfolio performance

SIF has lagged behind its FTSE All-Share index benchmark so far this year, but the portfolio level-pegged the index in May:

Taking a step back, the year-to-date chart below shows how SIF has failed to recover as strongly from the March low as the wider market. I’d guess this is due to the portfolio’s lower exposure to the big FTSE 100 oil and bank stocks, which have performed well over this period.

Five months is a short time, so I’m not too concerned. In the meantime, I’m pleased to report that this virtual portfolio’s cash weighting fell slightly last month, from 33% to 31%:

To complete this performance review, here’s a snapshot of the SIF folio holdings at market close on 1 June, before any transactions that may result from this review.

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

Drax (LON:DRX)

(Buy report: 20 July 2021)

Ouch. This time one month ago, Drax was a double bagger for SIF, up more than 100%. Since the end of April, shares in this coal and wood-fired power generator have dropped 20%.

Interestingly, this has returned the stock to the level it was trading at before the invasion of Ukraine:

May’s sell-off seems to have been triggered by reports that UK electricity generators could be hit by a windfall tax later this year, similar to that being levied on North Sea oil producers.

I’m not sure how likely this is, or what the impact might be. One reason for my uncertainty is that Drax forward sells much of its output in order to provide protection from volatile wholesale prices.

Drax commented on this in its 2021 annual report, suggesting the benefit of higher power prices will be felt in 2022 and 2023:

“Our forward hedging strategy means that 2021 has not seen a significant benefit from higher power prices, but we have secured increased forward hedged prices in respect of 2022 and 2023”

It’s hard to estimate what benefit Drax has and will receive from higher power prices, because of course we don’t know how they might change over the next 18 months. I’d guess that the eventual impact of any such tax will be quite modest, but it’s impossible to be sure of this.

So far, City analysts seem to be taking a similar view to mine. Broker forecasts have not been adjusted to reflect any impact on profit in 2022 or 2023. Indeed, forecasts for next year have been upgraded over the last month:

It’s worth noting that the consensus rating seems to be falling from Buy to Hold, though. This might reflect a wider range of views among analysts than previously.

My decision: I’m a little disappointed by the outcome here, but I always knew something like this could happen. Drax’s current business model has a finite lifespan as the current subsidy regime (on which it depends heavily) is due to end in 2027.

Higher power prices have provided a short-term boost to the share price, but I don’t think there’s been any change in the fundamental outlook for this business.

Turning to my rules, Drax no longer passes all of the tests in the stock screen I use to review stocks for sale. May’s slump has seen the share price fall below its 50-day moving average, triggering a sell decision for SIF:

The end result isn’t too bad. SIF’s Drax holding should still deliver a total return of over 70%, assuming the share price stabilises this week.

Verdict: Sell

Total return: +82%

Airtel Africa (LON:AAF)

(Buy report: 8 June 2021)

I like it when a SIF company issues results shortly before the end of its minimum nine-month holding period. It means that my screen will have a fresh set of financial data to work with, rather than relying on outdated accounts.

Airtel Africa published its annual results for the year to 31 March on 11 May, so the numbers are as recent as it’s possible to get. Headline performance last year appears to have been strong:

• Revenue +20.6% to $4,714m
• Operating profit +37.2% to $1,535m
• Adjusted free cash flow +40.5% to $1,655m
• Earnings +86.5% to 16.8 cents per share
• Net debt reduced from $3.5bn to $2.9bn

Operational growth seemed encouraging, too:

• Customer numbers +8.7% to 128.4m
• Mobile data users +15%
• Mobile money users +21%

Like other big mobile operators, Airtel is monetising its assets to help fund growth and pay down debt. The group raised $284m from tower sales last year and $550m from selling minority stakes in the fast-growing Airtel Money business. Buyers of the latter included Mastercard and private equity group TPG.

Airtel is continuing to push into the banking market with the launch of its SmartCash Payment Service Bank in Nigeria. This appears to be a retail bank that will offer a range of accounts and payment services, targeting unbanked customers.

Last year’s performance looks good to me and Stockopedia’s algorithms seem to agree. Having digested the FY22 numbers, Airtel continues to score a high StockRank and Super Stock status:

Brokers remain bullish about the year ahead, although earnings growth is expected to slow this year without last year’s tailwind from profits on tower sales:

My decision: Airtel Africa continues to look reasonably priced to me, trading on a rolling P/E of 11 with a prospective yield of 3.2%. That seems reasonable to me for a business with double-digit margins and forecast earnings growth of c.20%.

Airtel Africa continues to pass my screening tests and also still qualifies as a possible buy for the portfolio – a more demanding test. This means I’ll be keeping the shares in SIF for at least one more month.

Verdict: Hold

Total return to date: +102%

As always, please let me know what you think about Drax and Airtel Africa.

I’ll be back next week on the hunt for a new stock to add to the portfolio to replace Drax, which I’ll sell after this article has been published.

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