November 2024: Performance, Trades, and Commentary on Holdings
Sold two shares a bit early, but a takeover offer and other positive moves means one of the best months so far this year. DLG, MTVW, CAV, LPA, EAH, OTB.
Performance Summary of The Boon Fund
Month of Nov24 : +3.6% vs +2.1% (FTSE All-Share Benchmark)
Performance so far in 2024 and 2021-2023
With only one more month to go in 2024, I am very pleased by how the year has turned out so far. My target returns is 5-10% outperformance, so I am just about achieving it this year at +4.3%.
Direct Line ($DLG.L) has been a key driver of returns this month at +42% with a new takeover offer from Aviva. But other large holdings such as Nichols ($NICL.L) (+13%) and On The Beach ($OTB.L) (+12%) did well for me too. More commentary on all three below.
The main drag has been Ashmore $ASHM.L (-17%) which fell back after the US elections, as the investor sentiment towards Emerging Markets fizzled and we are back to a US-centric attitude amongst investors. The mooted trade Trump trade tariffs are causing EMs to have a wobble.
November has been a selling month for me, with no buys. As a result, my cash position is now at 22%, and soon to be much higher, now that Direct Line (>10% of portfolio) is sooner or later going to be liquidated.
I’ve had plenty of shares trip my buy price triggers, so they’re currently on the backlog to be looked at in-depth for a potential buy. I aim to add them before mid-Dec and before all the “2025 top shares lists” are published; if one of those shares are unlucky to be on several lists, the price will shoot up.
Bubbles never pop when everyone is shouting about it
Recently, there have been more and more voices shouting that the US market has been overvalued. Yes, we can all see the stats clear as day - valuations are like in the top 2 percentile, and historical data suggests that 2/3/5 year returns from this point on are usually very disappointing.
All this points of course to conclusions that we are in a big bubble, that will pop anytime.
I do not buy into that, at least for the next few months. Why? For three main reasons.
Shoe-shiners have not yet quit their jobs to do full time trading. In every other major bubble, you had the most unlikeliest investors go and quit their jobs, to do trading full time, because they believed they had skill in the rising market. No such articles are being written yet in the newspapers. And this is in an era where we have super-click-baity-sensational-headlines. Sure, some reports exist on Reddit and TikTok at the moment. But many of them are fake, just influencers trying to get more followers. The moment Bloomberg or the FT starts to write these stories, is when I think we are seeing the last Euphoria stage.
The pool of bagholders is now infinitely bigger than in any other bubble. All bubbles require unsophisticated bagholders, and the bubble bursts when the pool of bagholders are exhausted. Typically, these are unsophisticated retail investors. The pool of retail investors, for the US market, has grown exponentially since the 2000 tech bubble. Back then, that bubble was caused by easy access to online trading accounts. However, this was limited to USA retail investors. In 1999, it was still not that easy for unsophisticated UK, European, International retail investors to trade US shares. Fast forward to today, and literally every country in the world has easy access to trading apps that allow one-click purchase of US shares. At low or zero cost, no barriers. In a simplistic illustration, the possible universe of retail investors has grown from 281m (US population, 2000) to 8000m (global population, 2024). 28x bagholder pool size in 2024 vs 2000. This bubble will reach epic, record breaking proportions before it bursts.
Trump spin. He does PR very well. The machine will be at full speed in the months after his inauguration, with positive stories on how America is going to be amazing again with his new policies and government. Negative things will be blamed to the Biden administration, in this honeymoon phase. This will further fuel the stock market euphoria. People invest when they are bullish on the outlook for the country, for the economy.
Are we at high valuations? Yes. Have records been broken? Some. Are we in the realms of fantasy valuations that have never ever been seen? Not quite I think. But the fuel is there for it, as I don’t think we have exhausted the pool of bagholders yet.
The downside, of course, is that UK-focused retail investors might finally capitulate and increase their exposure to US shares, in this bagholder example above. This will cause the FTSE to fall or stagnate, even when the US market is in euphoria gains. Might be a tricky next few months to get positive performance in the UK!
I continue to be sanguine about a bubble bursting, at least for the next few months. I’m hoping I’m not proven wrong…!
Portfolio News & My Views
» Mountview #MTVW $MTVW.L - HY Results
Frustrating. The company is just treading water at the moment. Revenues went down, which is not explained at all. At least admin costs have held steady YoY. Finance costs went up substantially, due to SONIA rises and also gross debt rising +17% YoY.
Reading between the lines:
Big amount of property purchases in H1. So backs up the story that there is plenty of opportunity here. Albeit whether they are buying smartly… that is what investors are really worried about with Mountview, and resulting in the SP weakness.
The NAV rising by a paltry +1.7% YoY is a reflection of this. Not more than the House Price index has risen. You would expect there to be a much bigger increase, given that Assured Tenancy properties sold during the period would result in a huge valuation uplift. Maybe not that many were vacated and sold in the period?
Dividend held. Again, this would disappoint investors, who were looking for a progressive dividend policy or another special dividend.
Leverage (gross debt to NAV) increased from 15% to 16.8% YoY. I’m sanguine here, it is still very low gearing. If they are able to buy property smartly, why not. And using more debt should result in better profit growth in the future.
Explicit mention of looking after employees. Wonder if this is a veiled profit warning for next year, that admin costs will skyrocket. Interest rate costs should moderate though, so maybe the two will offset a bit?
Overall, the dividend yield (5.7%) is pretty tasty, given falling interest rates. Trading at a record discount to NAV. Since 2016, the share price has gone as high as a 35% premium to NAV. In the last three years, the highest premium to NAV has only been 30%. At 9000p, if this ever recovers to 30% premium to NAV (13416p) that would be a 49% capital gain.
I continue to hold here for now, but am frustrated about the lack of progress and clarity. However, I think the NAV backing, historic high discount, and chunky dividend currently means it can’t go any lower. But then again, it might just languish here and not go up.
» Cavendish Financial #CAV $CAV.L - HY results
Results were decently good, given the weak IPO environment and paralysis in activity in the months before the October Budget. While the adjusted PBT was £1.8m, this did exclude £1.6m of share based payments. Been trying to figure out if this cost is related to 2023 bonuses, which were set high to retain staff following the merger, but will not be repeated this year. But couldn’t find the details.
Nevertheless, the company has been making good operational progress and in-line with one of my hypothesis: reduction of the employee comp ratio. This is the single most important line to better profitability.
The employee comp ratio was 83% last HY - 83% of revenues were paid out as compensation to employees. Super high. This was a one-off to help retain staff following the merger, and also because of depressed deal volume last year.
This improved to 68.2% in H2-23, and now 64% in H1-24. I believe, looking at historical trends, it has scope to be as low as 60% to 62%, especially when deal volume picks up. 2% extra movement here drives at £1m+ extra to the PBT line, so is fairly significant.
The bear case? The number of public listed companies keep shrinking, so less retainer and other fees to go around. Plus there is still nothing structurally attractive for companies to choose to list in the UK vs elsewhere. So will IPO volumes pick up in 2025? Uncertain.
For now, at least the company is profitable / break-even (depending on your profit metric) and has a decent cash pile of £17m, which is almost half the market cap. I think there is a risk, with subdued trading, that the SP (10p currently) continues to drift down to 8-9p but I can’t see it going lower than that.
In a realistic recovery scenario, I think 1.8p EPS is possible, and in that scenario there would be an expectation of further recovery and growth in the years ahead, so a 13x PE is plausible, giving a target price of 23.4p. Which is more than double the current 10p share price.
So on balance, I think there is more upside than downside here, and continue to hold. I am tempted to top up, but the shares are quite illiquid and I am pretty maxed out based on my liquidity rules at the moment.
» LPA Group #LPA $LPA.L - Trading Update
Disappointing trading update here, as I was expecting a positive statement about their rail revenues in their Lighting division, which was the key problem area over the last 2-3 years.
That division is heavily dependent on new trains being built, as LPA supply the lighting (and other electrical) components for them. Several of the contracts they have in the order book has been delayed 1-3 years, as those train manufacturers delayed start of production.
However, my research over the last 2-3 months have shown that one big contract, the Piccadilly Line trains manufactured by Siemens, has commenced production. LPA, I’m fairly sure based on my research, is supplying the lighting for these trains. Then there was another big order green-lighted, for more Elizabeth Line trains to be built by Alstom. Again, LPA supplied the components for the original batch of trains, so it stands to reason they would too for this follow-on order.
However, the trading update had no mention at all of improving prospects in the rail/lighting division.
On other metrics, the order book continues to trend downwards. Now £25m, from £28m at Mar24 and £31.6m at Sep23. Order intake at £9.3m in H2 is less than the £12.2m revenues, so they are not getting enough new orders to replenish. This is not good for next year’s revenues.
However, the complicating factor is that the business has pivoted to more maintenance and smaller orders, so the order book and order intake numbers are less useful. In addition, the aviation part of the business is growing, and if it continues to do well, could be the driver for growth and a substantial re-rating of the share price.
There is no danger here of the company going bust. At the current subdued revenues, they are still profitable; H2 was £0.4m PBT, H1 was -£0.4m, so break-even for the year. There is operational gearing here, as I suspect they have factory staff at the moment at below capacity, so when orders do flow in, there won’t be a commensurate increase in wage costs.
Overall, I am frustrated by the lack of details in this trading update. I have gone back and double-checked my research on the various rail projects that I think LPA have in their order book, and they are either all now in production (ie Piccadilly Line) or coming up soon in the next year (Elizabeth, OBB, etc).
NTAV was 66p at Mar24 by my calculations, and that excludes the pension surplus of a few million that could be sold. The shares are currently (57p) trading at a -14% discount. I continue to hold, as think the asset backing and break-even state provides a floor to the share price. A modest recovery when rail projects start to flow into revenue, as well as continued increasing aviation revenues, could cause a re-rating to 110-150p from the current 57p. And that’s why I am invested here.
Portfolio Trades
SELL: Eco Animal Health #EAH $EAH.L
Sold out of my entire position, as the trading update in October had an outlook statement that had a dreaded H2 weighting, and caveat of China sales recovery to hit the outlook. In a second profit upgrade, the share price plunge could be steep, given the earnings would trend closer to £0 and questions about going into a loss-making state. The business would then be haemorrhaging their cash reserves to pay for the R&D programme, instead of being funded out of existing profits. So I sold out, thinking there was a strong chance of another profit warning.
However, after selling out, the HY results were released and did not contain a profit warning. And their outlook on China is for an improved H2, although I’m still sceptical on this given that pork pricing in China has gone below last year’s H2 levels. When pork prices are low, pig farmers have less incentive to use Aivlosin to stave off infections and make their pigs fatter, as there is less margin to play with in a low price environment.
It was a sell too early though; the price has now rebounded about 10%. Still on my watchlist, as I think there is still a big hidden value from their R&D programme (end-2025 onwards launch) as well as potential recovery in the China pork market sometime.
SELL: On the Beach #OTB $OTB.L
This is a very short note, as I can’t say much more given that I have started working for the company. I sold out the day before I joined, as I want to keep my portfolio liquid and not locked into trading blackout periods. Also, in another way, I now have a new exposure to the financial performance of the company, so didn’t want to double up my exposure with shares in The Boon Fund.
Kicking myself as the shares have really rallied since results are out - was c168p when I sold, now 220p+. Looking back at my notes, I had set a fair value price above 205p to sell (but this was before the results, so not including any new information). Still, I came out with a 30% gain in just 1.5 years of holding, which is still a good result in my books. But it could have been +70%! Fate & Luck.