April & May 2024: Monthly Performance, Trades, and Holdings
Strong performance better than FTSE All-Share, but still trailing slightly YoY
Performance Summary
YTD to end May 2024 : +4.5% vs FTSE All-Share benchmark +6.7%
CY2023: +9.7% vs +3.9% benchmark
3yr (2021-2023): +49% vs +15% benchmark
Summary for April & May
Wow, what a two months it has been. The FTSE All-Share has put in back-to-back decent 2%+ returns, and now stands at +6.7% for the year-to-date. Sentiment looks to be turning; it was in the doldrums at the start of this year, but we have had three months of positive gains, and there seems to be increasing belief that UK equities are undervalued. I was right in my March retrospective, that it looked like the upwards momentum was strong enough to continue into April and May. I am glad I deployed more of my cash pile.
This has been reinforced by a rash of takeover bids, mainly from overseas, for FTSE constituents. Unfortunately for the Boon Fund, I am still waiting for the first successful takeover of 2024, having had Direct Line Insurance (DLG) fail.
My portfolio is currently up +4.5% YTD but still trailing the FTSE All-Share at +6.7%. However, this gap is the narrowest it has been since the start of the year, as my portfolio outperformed in April and May. More commentary to come below on some of the big gainers.
My trading activity was nothing special; 2 sells, 2 buys, and 2 top-ups during the two months. More on those below too.
Looking forwards, the FTSE still trades at a valuation discount to the US market and major EU markets. However, this could be structural going forwards; there are examples of many countries that have persistent valuation gaps over years, decades.
It has been interesting to note that the FTSE increase has been quite broad-based; breadth is strong. Plus, there is still the case that if the broker forecasts are to be believed, the forward EPS growth rate is still +12.6% for the FTSE-250, and +9.1% for the FTSE-100. Not bad at all, and fully supports the +6.7% gain the FTSE All-Share so far YTD. So I continue to believe that there are still legs to the current “modest bull rally” in the FTSE over the next few months. And will be looking to deploy more of my cash pile (c20% of my portfolio).
Notable shares
System1 (SYS1) - Continues to motor higher, albeit in bursts, given its low liquidity. Now 67% up since the start of the year. The Q4 (Jan-Mar) trading update was the catalyst for the latest momentum, as it showed that the SaaS-like data services revenue still growing at a healthy rate. Furthermore, I think the growth story is even stronger now, as consultancy services start to accelerate in growth. Once clients on-board to the data platform subscription, and start trusting System1, they are likely to cross-buy consultancy services on top. Given the strong growth in client numbers over the last two years, I suspect we are going to get some really strong growth showing up in the consultancy numbers.
Management have also shown they are adept at keeping a lid on the cost base (something that went wrong with System1 in prior years), so we should also see some delightful operating margin expansion, and strong operational gearing falling to the bottom line.
I love this type of share: double digit revenue growth, strong sticky recurring revenues, and even faster EPS growth through operational gearing.
It is already trading at 30x FY Mar24 estimated earnings, so not as cheap as when I bought sub-200p. But I think FY25 and FY26 forecasts might be further raised after the next trading update (due mid-July for Q1).
I think System1 should easily trade at 550p or 600p in the next month or so, given the momentum. Furthermore, we have had 3 tech-focused institutional investors pop up as new major shareholders (Octopus, BGF, Kestrel). All small single digit stakes, and potentially looking to hoover up more shares over the next few months to get to their final positions they want in System1. This should provide some share price momentum for this thinly traded share.
Eco Animal Health (EAH) - Pleasing that the shares are now up +40% from my recent entry made in Mar24. I did a substantial writeup on EAH as well as more commentary in my March Performance Report. It has now increased to the first target price I had, c120p, which IMO now almost fully values the core Aivlosin business. However, there is still much more to go, as the current valuation still assigns zero value to the new vaccine R&D programme. Progress is being made, but of course final approvals to market are still to come, and the company themselves only guide revenues to start flowing in H2-25.
I continue to hold, but think if it does get up to 150p-160p I might bank some profits.
On The Beach Group (OTB) - the share price here continues to frustrate, despite what I thought was an excellent HY results to Mar24. On a first glance for those not familiar with the industry, the £0.6m HY PBT was pitiful compared to the £200m+ market cap. However, that is ignoring two major things.
The first is that this is a highly seasonal business, and there is night and day in margins and profits between H1 and H2. All the costs in OTB are fixed: people, technology, marketing. In fact, H1 margins are purposely suppressed, as marketing is usually done in H1 (Jan & Feb time) to drive bookings for the summer (H2). So marketing costs are recognised in H1 results, but all the revenue is recognised in H2.
The second thing is that FY results are easy to calculate, and are already in the bag. The company publishes forward looking metrics like TTV (Total Transaction/Booked Volume) as well as how much money are in client ringfenced accounts (advance payment for the holidays). This makes the job of the brokers so much easier to forecast accurate near-term EPS. After the HY results, the consensus broker forecast was affirmed, and stays around 14.5p.
As a company that is tech-based and still seeing healthy double digit growth (summer is +20% TTV year-on-year), it really shouldn’t be trading at below a 10x PE, and should be closer to 13x-15x, which would mean 185p-220p.
I believe that the current share price (136p) weakness is down to stale bulls exiting their positions, impatient with waiting for the re-rating. There was huge private investor interest in end-22 and early-23 as part of the COVID reopening trade; the Stockopedia buy rating was high during this time. So 12-18 months on, many of those might be selling out to recycle the cash into other holdings.
However, I think a wait for a few more months, either to a Trading Update in September or FY results shortly after that, will be very rewarding with the share price re-rating to the level it should be, around 185-220p. I will be topping up on any dips below 130p, but for now have a decently-sized medium position here.
List of trades
2 top-ups, 2 buys, and 2 sells
TOP-UP: Begbies Traynor (BEG) - As the share price continued to drift downwards, it hit my buy triggers, and I decided to add to my position at 107p. I won’t write much about this as I did quite a detailed analysis on Begbies Traynor right after topping up. A trading update was issued that confirmed my thesis, albeit I am now starting to have some doubts on their competitive position in the market and whether management have been too distracted with integrating new acquisitions, rather than strengthening the core capabilities and proposition to be market leading. I do not think there is value in just growing via acquisitions, as I am always sceptical about M&A in people-based businesses. I need to see strong organic growth too, as well as cost synergies. Still, my investment thesis is still mostly valid so I will continue to hold as one of my largest positions. For now.
TOP-UP: Safestay (SSTY) - Another top-up here, after they announced the launch of a new capability & revenue stream: providing management services and licensing the brand. This is exciting as there were always question marks on how Safestay could grow further, given the heavy capex required for more owner-operated hostels, especially with their cash poor balance sheet. Again, I won’t go into too much details as I did a detailed writeup on Safestay too after my top-up.
They also announced an acquisition of a new hostel (this one owner-managed) in May. So we now have a situation where they are adding 3 new hostels this year to the 16 existing. Management will have their hands full! But this should drive good double digit revenue growth over the next 12-24 months.
The attraction here boils down to two things: there looks to be a tangible pathway to a healthy ongoing growth rate, AND they are still trading way below NTAV. Rare to find a situation like this.
BUY: Gem Diamonds (GEMD) - I normally do a detailed company analysis post on what I buy, but decided not to on Gem Diamonds as I view this as a short term trade. I noticed they were discovering more large diamonds (>100 carats) in recent months. Their financial performance is asymmetrical; last year 70% of revenues came from diamonds that were larger than 10 carats. Historically, that has been closer to 80% or more.
However, recent years have been fallow years in large gems. In all of 2023, only five diamonds greater than 100 carats were found. 2022 was worse, only four. So far in the first five months of 2024, they have found six (so a yearly run-rate of 14!). Historically, the 15 years from 2008-2023 was eight on average.
Geologically, large diamonds are usually found in clusters. So it seems like potentially, they might be hitting a very fruitful area, that could completely transform their profits for FY24. Each diamond more than 100 carats sells for single-digit millions or more. This revenue falls straight to the bottom line as profit. Meaningful on a £18m market cap.
When I bought at 9.5p, the shares were priced for failure. The financial picture does make grim reading; loss-making in 2023, diamond prices in the doldrums due to synthetic diamonds, $20m of net debt, and debt needing to be refinanced by Dec24. However, I suspect the six diamonds so far will wipe out a big chunk of that debt. The market cap is currently £19m; which I think is still way undervalued. I calculations that if large diamond discoveries go back to historical norms around 8-12 a year, they should easily make £10-15m PBT (if not more) and should trade at 3-4x PE (there are other permanent risk factors here preventing this from being higher multiples). That gives a share price around 33p instead of the current 13.5p.
BUY: Personal Group (PGH) - I have a full company analysis on Personal Group to explain my rationale for buying. In short, I see several growth opportunities, and the shares are modestly rated, as many see this as just an insurance company and just an “old-school” company that does face-to-face sales. That is completely ignoring the tech side of the business, amongst other tangible growth drivers.
SOLD ALL: Surface Transforms (SCE) - Exited my position here, taking a big loss, from over 30p to 6.5p, after yet another trading update that admits they still haven’t gotten to grips with manufacturing. Furthermore, their current margins are crushed due to huge materials wastage, and they do not sound confident of a solution. This is bad news, as they are investing to ramp up production capacity. Increasing production at negative/poor gross margins is not the way to create a successful business.
Shares are now just over 1p. A deeply discounted fundraising has been done to financially rescue the business. I wait for existing management to be kicked out, and new competent ones installed, and their manufacturing process fixed, before even considering buying back in.
One of my largest losses in percentage terms. I’m glad that I rigorously adhere to position-risk sizing in my portfolio, so this was always a small position, even at purchase.
SOLD ALL: Hang Seng Tech Index ETF (HSTC) - At the end of 2023, my new year’s resolution was to stop dabbling in indexes and ETFs, as my track record was poor and my core competency are individual shares in the small and mid-cap space.
I finally got round to selling HSTC, during the recent recovery run-up in Hong Kong shares. Finally, my portfolios are now ETF and index-free.