March 2024: Monthly Performance & Holdings
Treading water, still struggling to break-out in terms of performance
Performance Summary
YTD to end Mar 2024 : -1.3% vs FTSE All-Share benchmark +2.5%
CY2023: +9.7% vs +3.9% benchmark
3yr (2021-2023): +49% vs +15% benchmark
Summary for March
March was a disappointing month for the Boon Fund. While it was a positive month with a small gain (+0.3%) it failed to match the overall FTSE All-Share roaring performance of rising over +3%. So at the quarter way mark for the year, I find myself now 3.8% adrift from the benchmark, with lots of work to do to get myself back to parity and beyond. Still, there’s nine months left to go, and if I know my portfolio style, it is that it tends to have explosive growth in a few months of the year that makes up the majority of the gains.
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Meanwhile, the US Markets keep powering on. Breadth (DMA200) in the S&P500 is around 80%, which is the highest its been since early 2021. What started as just a few tech shares powering the rally, has now lifted all boats. In the UK markets, breadth is a bit lower, at 65% for the FTSE100 and FTSE250. Still impressive, and indicative of further market momentum for a bit longer. AIM100, however, is still struggling to gain momentum, with breadth of 35%.
While on valuation metrics, none of the UK indexes scream good value at the moment, I have to acknowledge that the emotional side of investing is a big component of price movements. It looks like, given the breadth indicator as well as general optimism of a soft landing, we might see shares power up further for a while longer. I’m therefore going to selectively deploy more of my cash in April.
I’ve had a few buy price alerts triggered at the end of March, so there is plenty of optionality for me to deploy more funds in April. Personal Group (PGH), XP Factory (XPF), IG Group (IGG), Airtel Africa (AAF), and Begbies Traynor (BEG) all triggering my buy targets recently.
Notable shares
Direct Line Group (DLG) - one of the key drivers for this month’s underperformance. The takeover bid from Ageas has fizzled out, and the drop in the share price was a main contributor to my underperformance in March. I still hold conviction that this insurer should still be closer to 300p rather than sub-200p. But it will now take longer for the value to realise, through the organic route of improving trading. Everything here is fixable, nothing requires rocket science.
In the ideal scenario, this takeover attempt has put DLG on the radar and we get another interested party making an offer.
Time Finance (TIME) - Predictably, another profit upgrade with their Q3 update. I’ve lost track of how many it is in a row, but they clearly have momentum. I wrote a long article about their growth flywheel. A few days ago, they announced an increase in their wholesale funding, which will allow them to continue this flywheel.
There looks to be a persistent seller in the background that is holding back the shares. I expect to see an explosion upwards, maybe a leg to 45p or 50p, in April or May.
The downside case? Praying that their growth isn’t due to a relaxation of their underwriting standards, and we see a tsunami of bad debt in the year or two to come. They started their aggressive loan growth in 2022, so the next set of bad debt numbers will be interesting, to see if the early vintages of this growth is problematic.
Spectra Systems (SPSY) - no surprises here in their FY23 annual results. Steady performance. The big sensor contract with their main central bank client will only start to deliver in FY24, FY25. Brokers have already pencilled in massive jump in EPS from 13.9c in FY23 to 20c in FY25! And that’s only conservatively counting the firm contracts, not any of the additional opportunities. The big one, of course, is polymer bank notes.
The FY results went into more detail about their acquisition of stamp producer, Cartor, during the year. They now have a near end-to-end capability, to produce polymer bank notes. They called out the key competitor they are looking to disrupt: De La Rue (DLAR). What am I looking forward to in 2024? Announcements of trials/engagement with more central banks. This will be a slow burn opportunity, as going from trial to full production with banknote printing is an incredibly slow process, probably will take years. However, the revenues could be transformative and very sticky, so it’ll be worth paying up for Spectra once there are clear signs that their polymer note offering has traction.
Overall, I keep holding. Low risk: getting 4% plus dividends to wait, very good revenue visibility, strong growth in FY24 and FY25 in the bag, and a potentially transformative new product line.
Phoenix Group (PHNX) - strong full year results that illustrate how cash generative this group is. The dividend of 10%+ was one of the safest in the FTSE, given the high revenue visibility this company has. The market has not loved this share in 2023, but with the recent surge post-results, it looks like it might break out of its treading-water pattern. I maintain that a fair value for this is based on a dividend yield of around 7.5%, which at FY24 forecasts is a share price of over 700p.
The key risks? I think one of their main business lines, buy-out of DB pension schemes, is getting quite hot in terms of the competition out there. But more companies will be looking to offload their DB schemes given higher valuations due to rising interest rates. So there should be enough volume growth to go around.
IG Group (IGG) - triggered my buy price recently, and I think I might add this as a new position in April. The valuation metrics are good, the cashflow here is strong. They have a good brand and franchise.
Financial markets are also at a cyclical low in terms of volatility, hurting activity. So I expect future periods to mean revert and thus deliver higher trading volumes for IG. Meanwhile, they make good progress in growing their USA business, a well as diversifying into more investment products to de-risk the business. They are also currently executing a huge buyback, c10% of their shares! With more to come in the years ahead I suspect, given their good cash generation.
Comptoir Group (COM) - this was a new position in January. I have been toying to add to my position. There has been no news flow from the business since then, but my analysis of high frequency metrics indicate that they are doing decently well.
There is a secular consumer trend of more interest in Lebanese, and in general Middle Eastern, cuisine. So while the overall restaurant trade is treading water and struggling, Comptoir is poised to do better than most. I have faith that the new management are building something interesting here, that could be a nice growth roll-out. The current SP is pricing this as a bust, when in fact I think it is probably surviving just fine at the moment, with rollout growth potential.
List of trades
Just one for this month!
BUY: Eco Animal Health (EAH) - I have been tracking this company for a while, and decided to buy in as the current valuation does not make any sense to me. They have a cash cow product at the moment, Aivlosin, that is selling well globally. Except in China, where a struggling pig farming sector has dampened demand in what was their largest market in past years. Now, only 25% of revenues are in China, so it is now de-risked. However, there are emerging signs of recovery in the China market for later this year. Futures are indicating a recovery in lean hog pricing. Herd sizes started to be reduced in 2023, and this lagged impact should start to manifest in 2024 in terms of less oversupply, therefore supporting a rise in pricing, and allow pig farmers more margin to buy Aivlosin. So there is a very credible case that we could see a revenue growth driver in the second half of 2024, and all of 2025. My calculations show that revenues could increase 30-40% from FY Mar24 levels, with a China sales recovery.
In addition, they also have a potential gamechanger in their back pocket, which is the development of vaccines that they have been working on for years. They have invested lots of R&D into it (some £40m+) with delays, and still have not reached the point of approvals and go-to-market yet. The earliest commercial revenues is slated for the first half of 2025, and requires another £10m+ investment to get it over the line. This is self-funded at the moment, with no risk to the balance sheet of EAH. When you consider that the market cap is currently at just over £60m, and if you believe that the R&D sunk into the vaccines has been spent well, you can see that the market is not really valuing any of that “intangible” asset they have built up.
Lets say I write down the vaccines value to zero, and just focus on the Aivlosin business. I had estimated in my in-depth analysis on Eco Animal Health that a China revenue recovery could add +3.4p EPS, and stripping out the R&D investments charged to the P&L adds another +4.4p. So a normalised EPS could be around 10p a year. As a pharmaceutical company with a strong monopoly in their market (Aivlosin), they should easily trade at 12x+ PE, which gives a fair price of 120p+. Much higher than the current 80-90p range.
Hence why I have decided to take a medium sized position here. I only need one of two potential growth drivers (China or vaccines) to be positive in the next 6 months for Eco Animal Health to reward handsomely, maybe even double.
Forgotten to say I love your style of commentary
Boon just be careful of infringing copyright my son has just come up against it using random pictures in his content