April 2020 portfolio update

The novelty of lock-down is starting to wear thin. Child1 turning the garden decking into a rainbow is growing on me though.

Adjusting to working from home, and being dragged into a crisis management team at work made for a busy and rather taxing time over the last few weeks. C'est la vie, everything seems to be calming down a little now.

I've had to review my stock market shopping list, given that there were plenty of businesses pulling down the shutters thanks to COVID-19. Even though stock markets were falling I didn't just want to pile in without some consideration as to the impact on each business, and how I felt about investing in them given what is happening.

It has proved difficult to know how to go about judging stock valuations, historical metrics are all very well, but of limited use in the current environment. If a business has no revenue for a while, in a worse case it may not even survive, I think most will, but in what condition? As I point out here, I've decided to only invest in companies that are currently making money. And that I think will be in reasonable shape this time next year. This has had the effect of shuffling a few names on the shopping list. I expect this will all change again as we adapt to our new world.

Some dividends pulled by companies in the portfolio:
AB Dynamics - plenty of cash but prudence required as car makers have taken a beating
Network International - postponed until better clarity on trading
Compass - half the business is shut so needs to preserve cash
Computacenter - permits changes to cash flow from relaxing customer payment terms

The first two are businesses on a sharp growth path so losing the small dividends proposed is of no concern. Compass may take some time to rebuild cash to a point that it can justify a dividend, they effectively have a global duopoly with Sodexo, so I'm confident they'll be a good long term investment. Computacenter's decision is particularly sensible, as helping customers stay solvent is far more useful that getting an invoice paid on time, and the update was quite positive.

Purchases this month included a top up of Sage Group, and adding a small slice of PZ Cussons.

Portfolio performance
The portfolio was up 6.6% in March, ahead of my chosen benchmark the Vanguard FTSE All Share Accumulation which was up 4.4% over the same period.

Best performers this month:
Fulcrum Utilities +64%
AB Dynamics +58%
888 Holdings +16%

Worst performers this month:
Dignity -12%
SAGA -4%
Lancashire Holdings -1%

April share purchase: SGE
A top up of Sage Group was my first April purchase. You'll find Sage in the "Software and Computer Services" sector of the FTSE, but that's where the excitement stops, they provide a range of software to help businesses manage their accounts, people and payments.

They have been moving their business to a subscription model, and were behind the curve in doing so, but seem to be rapidly getting customers across to the new model - at least before the COVID-19 shenanigans. This means that their revenues become increasingly sticky; the cost and disruption of  moving key payment and back office business systems to a different vendor gives Sage a bit of a moat, and the sort of defensive investment that I prefer.

Their revenues and profits have been increasing at around 6%-7%, dividends increasing at a rate just above that. ROCE and margins have both been comfortably into double digits for most of the last 10 years. I'm not convinced historical data is terribly useful at present, but at least they are taking money.

Management are expecting a hit to revenues, and for the second half of the year to look ugly. Businesses can be expected to hold off on contract renewals, and if there are companies succumbing to the lock-down induced economic issues, then there will be some customer churn.

April share purchase: PZC
Second purchase for the month was PZ Cussons, a consumer goods company with brands many will be familiar with - I have some in the bathroom, Carex handwash and Original Source shower gel (love a minty shower 😎). This purchase is a little contrarian as Cussons have been in the doldrums for a while. The share price has reflected the drift in the company's strategy, which has ultimately needed a volte face, and a new CEO. The previous incumbent is also suspected of being naughty - so has had some pension payments cancelled, and the new CEO has spent time at big consumer goods companies, so should know his onions.

An acquisitive strategy has been abandoned in favour of one that focuses on a smaller number of key brands. In addition the business has historically generated a decent chunk of revenue from Nigeria but continued instability in the country has led to this drying up. The demographics in Nigeria are promising, the economics, not so much.

PZ Cussons has all the hallmarks of a plodder, a company with limited growth potential - just handing excess cash back to investors (not a bad thing in my view). But it does have a number of positives, not least of which is that it's business is open, and the tills are ringing. A trading update in April stated that two of it's brands had contrasting fortunes from COVID-19, St. Tropez (fake tan product) has seen sales fall away as people presumably won't be prepping the skin ahead of summer hols, but Carex (handwash) is selling like hot cakes. Announcing that earnings were expected to come in at the lower end of guidance left the markets unperturbed. Simply having earnings and not having to explain how the company is planning to survive the next few months makes for a refreshing read.