SIF Folio: What can I learn from Wilmington? (+ International update)

I hope your portfolios have all benefited from the post-election bounce we’ve seen in the market. My main personal portfolio has done relatively well, thanks to exposure to unloved UK-focused sectors such as banking, insurance, commercial property and utilities. 

Interesting, the Stock in Focus (SIF) fantasy fund I run here at Stockopedia did not enjoy quite such a strong bounce on Friday. But some of my small cap picks - such as Medica (NHS contractor) and Michelmersh Brick Holdings - enjoyed decent gains on Monday.

I guess this reflects the more limited liquidity and trading volumes of these stocks. As often happens, it looks as though savvy small-cap investors could have bought early on Friday, before institutional buying started to move prices.

What’s new: This week I’m going to be taking a closer look at Wilmington, an education and networking business. This stock has appeared in my screening results recently, but is otherwise unknown to me. However, I note that small cap specialist Premier Miton has recently taken a 9.4% stake. So I’m interested to learn more.

Before I do that, I want to complete an overdue task I promised to do in November.

International SIF portfolio update

If you’ve followed my efforts to extend the SIF screen-based stock selection model to international markets, you’ll know that it’s fared badly.

November marked the portfolio’s 2nd anniversary, so I promised to review the strategy and decide whether to continue, modify or scrap it.

Having thought things through, I’ve decided to discontinue this strategy and to stop updating this portfolio. There are two main reasons for this.

Dire performance: Over the two-year period in which the International SIF folio has been in existence, it’s fallen by 22% and massively underperformed the FTSE Eurofirst 300 index which I chose as a benchmark:

I appreciate that two years is a fairly short time in the stock market. But I’m just not convinced that I’m pursuing an effective strategy.

Too abstract: I like the quantitative process of using a screen to select stocks. And it’s worked relatively well for my main UK SIF folio. But in the UK, I’m familiar with the stock market, most of the companies and the wider domestic context in which they operate.

In contrast, my international picks were mostly ‘blind’. Aside from a quick look at the Stockopedia data, I really didn’t know anything much about them. I wasn’t familiar with the stock markets or domestic economies in which they operated.

I’ve come to the conclusion that this abstract approach isn’t an effective way for me to invest. Ultimately I don’t feel I’m getting much out of this process, nor am I providing much value to subscribers.

I’m going to cut my losses here and be thankful that this was only ever a virtual portfolio. Unlike with my UK SIF, I’ve never invested any cash in any of my international picks.

Final thoughts: What I’ve learned from this is that I prefer to know something about the companies in which I’m investing. It’s intellectually more satisfying and I believe it adds value, when applied within a quantitative framework.

Here’s a closing snapshot of the International SIF, for anyone that’s interested:

Diversion over. Let’s get back to the UK market and look at a new stock.

Wilmington (LON: WIL)

This £212m educational and training services business has not featured in the SCVR since 2014. At the time, Paul commented that it looked fully priced and heavily indebted.

What’s changed since then? The Stockopedia stats suggest that net debt has remained broadly unchanged, but that profits have risen significantly, albeit inconsistently.

The group now appears to enjoy a mid-teens operating margin and ROCE, plus decent cash generation. A new CEO joined in July, so we may also expect a renewed focus on sustainable growth.

Stockopedia rates the shares highly, with a StockRank of 91 and High Flyer status. 

I reckon it could be a good time to take a closer look at this business, which provides training and education services in the Healthcare, Risk & Compliance and ‘Professional’ sectors.

Potential value

Wilmington’s ValueRank of 49 suggests the stock is fully priced. But the component breakdown suggests to me that there could be some value here:

If we invert the price/free cash flow ratio of 13.2, we get a free cash flow yield of 7.6%. That’s enough to cover the dividend twice, which seems promising to me. I’m also tempted by the earnings yield (EBIT/EV) of 6.9%.

One of Paul’s criticisms in 2014 was that Wilmington’s earnings feature a lot of adjusting items. That’s still true today. The latest annual figures include £6.5m of adjusting items, versus statutory operating profit of £16.9m. 

Personally, I don’t think any of these costs are truly exceptional for an acquisitive professional services/software group. I’d include them all in my calculation of profits. Fortunately, Stockopedia’s algorithms use statutory operating profit, which does include all costs. So I don’t need to recalculate my screening results.

One final note regarding value. Wilmingotn’s balance sheet has few tangible assets and lots of goodwill. It looks weak, but this is not unusual for a people/services business and is not necessarily a problem. I’ve no serious concerns on this count.

Quality - above average?

Wilmington scores much more highly in terms of quality. It’s not hard to see why. The group performs well in a number of key areas:

These factors suggest to me that this is a consistently profitable and cash generative business, with a stable or improving outlook. 

The only thing that concerns me slightly is how inconsistent the firm’s profitability has been in recent years:

An attractive average can often mask a less appealing trend.

I’m willing to give management the benefit of the doubt here, seeing as debt levels have remained stable through this period and the overall profit trend appears to be improving. 

Momentum - poised for gains?

The final ingredient I need to see for a profitable fixed-term investment (my SIF holdings are held for nine months before being reviewed).

Wilmington scores fairly highly in this regard:

From price momentum factors, we can see that the share price performance has been strong, satisfying key technical analysis requirements. Here’s how this looks on the chart:

Broker consensus forecasts (earnings estimates) have been less consistent. A weak set of results last year appears to have triggered cuts to analysts’ forecasts:

However, forecasts seem to have stabilised over the last few months. Analysts expect a substantial rise in earnings for the current year, followed my more modest growth in 2020/21. Based on this assumption, I think the shares look reasonably priced, on about 13 times forecast earnings.

Perhaps business confidence will improve now that the political situation has been resolved? I don’t know.

My verdict

Wilmington appears to have some attractive characteristics, such as double-digit margins and decent cash generation. As far as I can tell, performance seems to be improving at the moment.

The shares aren’t without risk, but they pass my screening tests, so I’m going to add the shares to the SIF folio this week. I’ll also add them to my own mirror portfolio, after this article has been published.

This is my last article in 2019. I’d like to thank you all for reading and commenting so generously this year and wish you all the best for Christmas and the New Year. 

See you on the other side!

Disclosure: At the time of publication, Roland owned shares in Michelmersh Brick Holdings and Medica.