March 2021 portfolio update

I'm sure things are more bonkers than they used to be. March saw bond yields leap like a salmon, a boat the size a planet get stuck in the Suez canal, and a hedge fund was caught with it's pants down. European countries decided they didn't trust the Astrazeneca vaccine, but the EU got grumpy at the prospect of it being exported from their territories...

March markets were choppy as slow progress with vaccinations in Europe gave pause for thought and fixed income did their best to upset the equities apple cart. Lots of the growth stocks that have been propelling the US markets started getting sold off, with investors moving into areas likely to benefit more from economies reopening. I have no idea how this is going to pan out, so I'm ignoring macro economics and focussing on investing in (hopefully) sound businesses with good prospects.

There were plenty of updates from businesses in the portfolio this month, on the whole pretty positive. The portfolio has managed to correct it's course from last month and head north thankfully. Even turning in a performance ahead of the benchmark, which I found a little surprising. Being stuffed full of economically sensitive businesses, UK indices have been rapidly ascending on the back of re-opening hopes and expectations. Most of my investments are more defensively positioned so when the market shoots up, they are likely to get left behind. I'd like to think that they are a quality bunch, so hopefully that helps. Another sale this month as I prune some of the dead wood - Next Energy Solar waving goodbye. Additions included a top up of Somero after a positive end of year report and adding Anglo Pacific - a mining royalties business who are repositioning themselves to capitalise on demand for electric vehicle battery metals. 

Portfolio performance
The portfolio was up +5.5% in March, ahead of my chosen benchmark (Vanguard FTSE All Share Accumulation) which was up +4.5% over the same period.

Best performers this month:
888 Holdings +33%

Dignity +29%

Nichols +20%

Worst performers this month:
Abcam -18%

Saga -10%

Keystone Positive Change -6%

March sale: NESF

I invested in two solar infrastructure investment trusts in 2019, Foresight solar and Next Energy solar. I gave a write up of my concerns with one of these, Next Energy Solar Fund, here. Both suffer from the same issues in my opinion. The reason for investing was to have some low volatility equities and a steady dividend stream. However, I believe the link to wholesale power pricing continues to drag down the share prices. Diversification into batteries will help Foresight, as the revenue from these is not dependent on those wholesale prices. Including private partnerships such as the one NESF has entered into with AB inBev might help too. I am unconvinced. I no longer believe them to be an attractive investment and is really a bet on the direction of the price of the commodity, which I believe is becoming available in increasing supply at ever lower prices. NESF sold at a loss of -13%.

March purchase 1: APF

Anglo Pacific Group provides financing to mining projects, in return it takes a proportion of revenues as royalties. It can also take a slice of the output of the mining as a return (streaming) as an alternative to royalties. It has 8 investments currently productive with another 7 in pre-production. It invests in projects located in sensible sounding places such as Canada and Australia. It is mostly an investment for income, with a sizeable 6% dividend on offer at the moment. 

It popped up on the radar when they bought a large chunk of a cobalt stream in Canada. They are repositioning the business away from fossil fuels and towards commodities required for batteries. The intention being that renewable energy and electric vehicles will drive the demand for such commodities. They still have investments in coal, their major investment is linked to a land purchase, output from which is anticipated to drop significantly in the next year or two as production moves outside the area purchased.

Commodities are clearly extremely cyclical but the attempted move into battery metals should mitigate that for a while. And if there is a post-pandemic economic surge which drives commodity demand, then they should have a tailwind. Revenues and profits have been heading upwards over recent years, and they have been generating plenty of cash - covering the dividend with free cash flow 2.9x last year.

The business isn't directly exposed to the operational risks of the mining companies in which they are invested but clearly they are completely dependent on commodity prices to make money. And should their investments have operational issues, then the royalties dry up too. 

...I have to admit to enjoying researching this one, as it was completely out of left-field...fingers crossed...

March purchase 2: SOM

I topped up Somero Enterprises following a decent end of year report. I've owned these since June 2019, when they announced poor trading following difficulties managing construction sites during a period of very heavy rainfall. Since then they have recovered nicely and put in a very creditable performance in what must have been tough conditions during 2020. They appear to be coming out of the year strongly and showing intent to invest in the business - as well as distributing lots of cash via dividends and buybacks. I expect in the next year or two that they should benefit from the continued growth of ecommerce, and the need for warehousing. They may also get a tailwind from Biden's spending plans. The continued impressive performance and potential for further growth over the next year or two encouraged me to buy a few more shares.

Updates from the portfolio (in order of appearance):

Craneware (CRW)

Interim results reported revenues up by 6% and PBT up 3%, cash is up from $45m to $50m, and the dividend was increased by 4%. Solid but unspectacular numbers on the face of it, but having to work with heath-care back office systems over the past year can't have been easy. On the operational front new orders were ahead of the prior year, and there was better visibility of future revenues. I'm happy to hold for the time being.

Nichols (NICL)

The preliminary results from Nichols outlined that soft drinks were not the place to be in 2020: revenues down 19%, operating PBT down 80%...when the out of home business was shut for large chunks of the year it's no great surprise. There were brighter spots though, they maintained their clean balance sheet with no borrowings and have increased cash to £47m (not bad given revenues of £118m). It's a solid business, family owned, and capital light, and I expect them to recover to a pre-pandemic state, but maybe not quickly.

Abcam (ABC)

Interims showed quite a lot to like but Abcam has a high price tag so any glitches lead to the share price getting punished. Reported revenues up 6.7%, with currencies adding a couple of percent, margins up, but profits and cashflow were down. Various improvements in quality led to increased product satisfaction rates. They provided a cautious outlook statement and it remains expensive, promising plenty of growth, hopefully it will deliver. One to tuck away.

Foresight Solar Fund (FSFL)

The main takeaways for me from the annual results from FSFL was it's NAV per share drop by 7.7%, the blame assigned to lower power prices. It also noted a reduction in the discount rate used to generate the NAV, which has the effect of increasing the NAV, or in this case, cushioning the fall. It invested in 4 subsidy free solar assets, and it's had diversification into batteries approved. Since the NAV is tied to power pricing over which the company has no control, and this appears to have a downward trend, it is likely to continue to drag down the share price. Unconvinced.

Tritax Big Box (BBOX)

A nice strong set of results posted by BBOX. Unsurprising since they provide the sort of warehousing that is in high demand as part of a business' distribution infrastructure - and rather key for ecommerce. All key numbers were going up, with the exception of the dividend somewhat strangely, since they took in more money and expect to get all rent payments for 2020. 37% of the rent roll is up for review in 2021 so income should increase as a result. The integration of db Symmetry, acquired in 2019 seems to have worked, and the Aberdeen Standard investment in the Tritax management company is intriguing, as they also have a logistics property Trust: ASLI...

Somero Enterprises (SOM)

Final results from Somero were a positive surprise, as they have been all year: revenue down 1%, costs up around 3% leading to net profits being off by 11% but cashflow up 62% . Lots to like - mainly just keeping the business running during the year, expanding two facilities, introducing new products, good management of working capital leading to large pile of cash. Going forwards, I like promises of investment in sales & support staff, and reviewing cash thresholds for investor returns in order to invest more in the business. Net result of their current cash pile is dividends and buybacks. Pleased with the results so bought some more.

Computacenter (CCC)

Computacenter upgraded earnings expectations a few times over the past year, and were an unsurprising beneficiary of lockdowns forcing life online. Their final results demonstrated this with lots of positive figures, revenues +8%, PBT +46%, cash from ops +19%, and a nice fat dividend. CCC always seem to issue conservative and cautious guidance, which I rather like. Despite the positives there were difficulties in Germany and the US and acquisitions remain to be fully integrated. If the big US tech stocks roll over, the CCC share price will likely take a hit, which could make for an opportunity to buy a few more shares.

Dignity (DTY)

Revenues up 4%, but PBT ended up at a loss of -£19.6m after a £44m gain last year, cash generated down a smidge. No CEO or Finance director - amusingly the web page for the board has two blank spaces, just to remind everyone that they are missing. No dividends likely any time soon. All this at a time that deaths are up 14%. About the only bright spot in the announcement was that debt had been reduce a little. No wonder their major shareholder wants to replace the chair. The bad news appeared to be priced in, and the prospects of fresh blood at the top had the share price moving north. Will hold as long as the current upward momentum continues.

888 Holdings (888)

The price of 888 has been skipping merrily uphill since lockdown. Mr Market anticipated that with everyone stuck indoors they might indulge in a bit of a flutter. He was right. Revenues up 52%, net cash position doubled, cash flow more than 2x, with all segments contributing well, adjusted EPS up 103%, basic EPS up...hang on...down by -73%? Apparently Bingo wasn't doing quite so well which led to an impairment of the goodwill & intangibles of $80m. Someone find whoever did the shopping and take away their credit cards. Apart from the write-down, lots to like here, including a bumper dividend. A presentation post-results indicated that continued US expansion is targeted which sounds promising too.

Hargreaves Lansdown (HL.)

Short but sweet trading up date from HL - trading volumes are up, resulting in PBT expected to come in "...modestly above the top end of analyst expectations.".

Blackbird (BIRD)

Lots of good stuff from Blackbird, nothing out of leftfield with most of the partnerships and operational progress well communicated in advance. Revenues up 45%, a nice chunk of future revenue contracted for the next 3 years, costs up a little but overall cast burn reduced. Gave the impression of solid progress.

Compass (CPG)

Pre-close trading update from Compass - must be one of the most traumatic years in the history of the company since half of the business was shut down for most of 2020. Horrific revenue numbers reflect that - expecting to be down getting on for -30%. Margins improved which indicates that they are managing the business. One to tuck away whilst vaccines are distributed and we await the reopening of the economy.

Impact Healthcare (IHR)

Final results from IHR were nice and steady, just what they should be from this sort of investment. NAV per share up 2.6%, rent roll and property valuation up over 30%, and a 2% proposed increase in the 2021 dividend. All rent was collected in 2020 and rent cover for the year end was 1.8x. Just have to hope for a market sell off so I can find an excuse to buy more.

Eleco (ELCO)

Final results were pretty solid - revenues flat, PBT up 12%, free cash flow up 36% and net cash increased to £6.2m from £1.1m a year ago, and a small dividend was reintroduced. Holding the revenue flat throughout 2020 seems impressive, the increase in profit is likely a one off result of cost cutting during the pandemic. A refreshed strategy was announced too (although it looks like a fairly generic brief to me). Of more interest was the 4% revenue increase in the first 2 months of the year.

AG Barr (BAG)

AG Barr final results showed the impact of social distancing, much like Nichols and Compass. Revenues down -11%, PBT down -30%, and net cash increasing 26%. Like the other two, it awaits the lifting of the social distancing measures across the UK, and it probably will take some time for the business to recover. That said they expect to restart dividends this year, so the board presumably have confidence in balance sheet going forward.