Q1 2014 Portfolio Review


A new feature on the site will be quarterly updates, which will be the first article released after the end of every quarter (i.e. early April, early July, early October and early January). These portfolio reviews will provide short updates on news that has been released during the quarter for each stock in the portfolio, plus provide further reasoning for shares that have had their rating changed. The FTSE 100 is relatively flat year-to-date, down around 1% at 6696 with AIM experiencing similar movement. The London IPO market continued its strong run from the back end of last year with Just Eat (LSE:JE) proving that investor appetite for new companies remains, even though the fundamentals don't justify anywhere near the rating - Just Eat is valued at £1.64 billion, yet made less than £15m in underlying pre-tax profits in their last financial year. A variety of new stocks have been added to the site portfolio during H1 to take advantage of newly identified opportunities.

Rating Changes

There have been a total of eleven rating changes during the period, 9 of which closed out profitably, two that did not.

The most disappointing company performance during the period came from Mobile Streams (LSE:MOS), an app store developer with a South American focus. Prior to the year-end, the company was trading on a very set of valuation metrics due to concerns about the situation in Argentina, its largest market. A very large intra-day drop in the Argentine Peso (in mid-January) initially led to a sharp sell off in the share price that was later recovered. The reason for the Peso drop was because the Argentine government announced their intentions to stop buying up Peso in the open market in order to protect their dollar reserves. That removed a large amount of buying pressure, and saw the Peso slide from around 11 pesos per £, to around 13. That prompted a profit warning very shortly after. Recently released interim results don't really reflect the further Peso depreciation, so unfortunately their Argentine operations are likely to be trading at substantially reduced profits in the near future, and their cash pile is likely to erode away. Such a fundamental change in the outlook for Mobile Streams meant that taking it off a buy rating was important, and indeed, the share price now lies at 22.25p. Taking notice of major exchange rate fluctuations in a company's main markets is clearly important, and investors should react as quickly as possible.

A similar story played out at Ferrum Crescent (LSE:FCR) where the investment dynamic changed in one single RNS. The agreement between Ferrum and AAI was amended after a drop in the South African Rand, which led to the one-off cash payment being staggered. That removed the share price catalyst and created uncertainty, thus it was moved from a Buy tag to No Rating. The rand does now look to be forming a more positive path after years of depreciation, but it is still early days.

Another theme for the quarter was to offload the two Chinese stocks: Camkids Group (LSE:CAMK) and Naibu Global (LSE:NBU). These are two companies that have not come close to living up to expectations, despite the fact that they paid a healthy dividend and that was a major departure from past Chinese stocks listed on AIM. However, I maintain my view that the main reason for listing was to allow investors in China to realise cash overseas, or for some other cash exchange mechanism. Specific to Naibu Global, I remain concerned about the costs of the new factory, which seem particularly high at £30m, and this could be used as an excuse to not grow the dividend as rapidly as many investors would expect. The market remains unconvinced by Naibu, so I took advantage to move them off the Buy tag on a tip by Investors Chronicle, which saw the shares spike. Similarly with Camkids, I removed them at just shy of 90p over fears that pre-IPO investors would sell out and depress the share price. Indeed, that has been the case with the share price sliding from ~90p to 62p in the last few days. Another set of lock-ins are to expire in March 2015 - given how aggressively the pre-IPO investors have been selling the stock, there is no longer a compelling case for holding Camkids.

Kodal Minerals (LSE:KOD) and Petro Matad (LSE:MATD) were two companies that I opened sell positions on as I believed they were fundamentally overvalued, with the rises caused by hot money that would soon exit the stock. That turned out to be the case in both, and Kodal Minerals has continued to fall rapidly even after I moved it to No Rating, standing at just 0.63p. The downside on Kodal has now been much diminished, but there is not a case to buy the stock. Petro Matad experienced a minor spike post the move to No Rating, but remains a company to avoid for investors seeking long positions.

The third sell rating was CarpetRight (LSE:CPR), which has served up two profit warnings since the initial sell tag, yet whose share price is now substantially higher than at the initial review price. The valuation is simply unjustifiable, but it probably helped by illiquidity, background buyers supporting the share price, and shorters closing out their positions because they have waited long enough and haven't made a profit. On that basis, I moved Carpetright off of sell very soon after their last profit warning, but also to make room for other long opportunities. It is a case that I will probably re-visit in the future, but the share price has now passed through most of the upward resistance that I presented. For that reason, there is no rush to re-instate the sell case.

The case for a speculative rise over at Oilex (LSE:OEX) panned out as expected with the shares rising to well over 5p during the period. However, the plan was always to take profits pre-drill as ultimately anything can go wrong during the drill phase, so it is the highest risk time to hold an oil and gas company. The Indian explorer announced a surprise share placing shortly after moving it off of Buy, and that hit the shares down by around 20%, but more importantly it hit sentiment and capped further speculative rises. The drill bit has now started to turn at Cambay 77-H, and whilst there has been a slight operational problem, the result will outline the future for Oilex. During the drill, it's simply too high risk, even given the relatively high chance of success.

On the other hand, the site's trade of Ophir Energy (LSE:OPHR) could have panned out better. After hammering out the 300p support, the company confirmed reports of the sale of a stake in their Tanzanian assets for around $1.26bn, versus the current market cap of £1.432bn. The company also has high-impact assets elsewhere in Africa, so there is certainly increased potential for a takeover given that plans for LNG are advancing. However, disappointing drill results in Tanzania and Gabon led to the shares dropping from around 330p to 242p now. Ophir was moved from Buy to No Rating after the Tanzanian drill because the Gabon drill had a very low chance of success (15%). Whilst the valuation of Ophir looks attractive, the technical outlook is uncertain.

One of the final two companies is Mirada (LSE:MIRA), another South America focused technology company. Mirada is not affected by the Argentine depreciation since it was astute enough to request dollar payments. The company experienced a strong run during Q1 after a successful placing at a fair level bolstered investor confidence, which was followed up by a series of share tips. This buying pressure caused a substantial technical breakout that I referred to in the article. Whilst the investment case is strong should Mirada win the large contract, that is not a given, so taking profits makes sense at this stage.

Recruiting company Harvey Nash (LSE:HVN) has been one of the most consistent performers for the portfolio, with a steady yet strong share price increase of 60% since the original review. The company was moved from Buy during the period, simply because of the strong share price run. They currently trade on a forward PER of 13.9, which is still lower than the peer group, but much of the upside has been priced in now. Recruiting firms shouldn't demand particularly high ratings in the long-run.

Portfolio Companies

The portfolio remains well diversified with companies operating in the following sectors:
- Forestry & Paper [AEG]
- Food Producers [FIF]
- Support Services [DRV, NWT, SPSY]
- Technology, Hardware & Equipment [AMO, MWE]
- Alternative Energy [CAP]
- Oil & Gas [BLVN, LGO, XEL]
- Home Construction & Household Goods [TW]
- Real Estate Investment & Services [THG]
- Mining [BMN]
- Software & Computer Services [PEN]
- Travel & Leisure [NPT]

The situation in Ukraine and Russia has impacted the wider markets during the quarter, although perhaps not to the extent that could have been expected. Largely, European and American indexes remain buoyant. However, one company in the portfolio, Active Energy Group (LSE:AEG), has undisputedly been impacted by the crisis, albeit not directly. Active Energy predominantly operates in Ukraine although is seeking to broaden its operations overseas, potentially into Italy. The crisis in Ukraine has been escalated by Vladimir Putin's decision to enter Crimea on weak grounds, and then station troops outside the East border between Ukraine and Russia. That has heightened tensions and led to a sell off of both Ukrainian and Russian stocks across the board. Whilst Putin has repeatedly commented that he doesn't intend to enter Ukraine further, sentiment is low. AEGs operations are in the south of the country near Yuzhny and Odessa, so they are quite distant from the Eastern border. There has been no disruption to operations to date, which is positive, but the share price slipped during the period, notably after the review. I shall look to double up the initial half stake should the share price slip further.

Assuming no further deterioration in conditions, there probably will have been two resultant impacts. Winning further contracts are likely to be more difficult, which is a negative. However, there has been a short-term benefit. The Ukrainian currency (Hryvnia = UAH) has depreciated rapidly from around 0.12 UAH:USD to 0.085. That has meant that wood is significantly cheaper for Active Energy and given that contracts are in Dollars, their margin is boosted. AEG is being valued by the market at £11.6m, which could well prove to be low once the market is informed of the level of margins. Revenues this year will certainly be hundreds of percent higher than last year, so that should spark market interest. Any improvement in the Ukraine situation, or announcements to diversify into other countries could spark a major step-change in valuation, but that could take a while. For now, the illiquidity of AEG should cap downside.

Alternative Energy company Clean Air Power (LSE:CAP) also looks to have been affected by the crisis, once again indirectly. One of CAPs biggest target markets is Russia, so the deterioration in conditions there could potentially lead to decreased short-term growth possibilities. That said, they don't currently have any operations there, so the sharp drop in the share price doesn't look justifiable. I have noticed large similar sizes sales going through recently, so it could well be a case that a material shareholder is reducing their stake. The share price does have support around the current level, and it remains that large future contracts would be the driver of any share price upside.

The oil and gas companies in the portfolio endured a torrid time in Q1 with all three now resting below their 2014 entry prices, and their review averages. With respect of Bowleven (LSE:BLVN) and Xcite Energy (LSE:XEL), this was down to a combination of factors. Slow operational progress at both companies and sector weakness were two of these. The third was weakness at a third company, Gulf Keystone Petroleum. Gulf Keystone, Xcite Energy and Bowleven all have a very similar investor base, thus if one of the trio is hit, the impacts feed down directly to the other two. Sentiment tends to move in tandem. In light of the respective share price declines, I doubled up holding (and half-holding) in the two companies as I see this as short-term weakness. Fundamentally, the assets are still in place and the share prices have started to form support. Ultimately, these two are high-risk propositions, but with increased newsflow expected in Bowleven over the next few months, there is plenty of potential for a share price recovery back towards the ~40p average. That could feed down through Xcite Energy, where I also expect operational progress. Xcite may be hindered by the Scottish Independence vote given that it operates in the North Sea, but as it stands, the weight is probably towards Scotland not becoming independent. I have put a limit sell on Xcite at 95p, just above the average due to the poor performance.

The third company, Leni Gas & Oil (LSE:LGO) has been unsuccessful in its litigation proceedings, and the judgement handed down by the court is highly disappointing given the concrete nature of the verdict. The best scenario for investors would see Leni pay out the cash to Mediterranean Oil & Gas through cashflows, and slow down the impending drill schedule if necessary. Analysing and paying back costs of such court cases does take time though, and that plays into the hands of Leni. The upcoming drill schedule is likely to spur interest in the stock given the possibility of much higher flow rates.

Food producer Finsbury Food Group (LSE:FIF) looks to be starting to make progress in its share price, on the back of large institutional buying. The shares are marginally below the review price although results for H1 confirm that progress is being made. Wheat and sugar prices have risen quite quickly recently, which hasn't helped with margin pressures, but only to levels experienced last year. Cocoa prices have also remained strong, although they are potentially starting to see some signs of weakness, which would be good for Finsbury. Broker forecasts for 2014 are for 6.30p in EPS, which means that at ~58p, the shares are trading on less than 10x market estimates. That seems low, even though revenue growth has stalled. A PER of between 11 and 13 would seem fairer. Adding that Finsbury is susceptible to a takeover at current levels, and it makes sense to continue to hold the stock, whilst tracking the prices of the key ingredients above. Increased investment should help Finsbury form a robust platform to build upon in the future.

As shown in the chart on the right, South African miner, Bushveld Minerals (LSE:BMN) has had a volatile start to the year. I doubled up the portfolio holding of Bushveld right at the low at 4.10p, to bring the average down to 4.78p. The company has released good news during the period with an increased iron resource just shy of 1 billion tonnes. Progress continues to be good, and the news pipeline remains strong. From a charting perspective, there looks to be possible further downside towards 4.75p, but the medium-term picture is going to be completely determined by the direction of the symmetrical triangle break. The market valuation is likely to mean that the break will be to the upside, and given that it would probably lead to a break of the 200-day MA, there would be clear sky towards 8p.

Investors have become concerned about a new financing agreement with Darwin, who carry an 'avoid' sign on their back, but this new financing arrangement seems innovative and gives no incentive for Darwin to short Bushveld's shares. Fortune Mojapelo has commented, "The structure is a significant departure from the ones Darwin has done in the past and empowers BMN significantly allowing us scope to raise more than £2.85m as the BMN share price rises. Significantly there is no incentive in this structure for Darwin to short BMN stock - they stand to benefit from a share price appreciation (through fees set as a percentage of sale proceeds) along with us."

Two new technology companies were added to the portfolio at the end of the period: Pennant International (LSE:PEN) and Spectra Systems Corp (LSE:SPSY). Both of these companies have compelling investment cases with Pennant simply trading on a low set of valuation metrics, and Spectra offering a mixture of blue sky upside and an established client base. Both companies look to hold attractive further upside both fundamentally and technically. In particular, Spectra's current level is backed up by cash, and with announcements on their Aeris technology expected in the near future, I would expect traction to start to be gained. Spectra looks like an extremely rare and exciting opportunity in the current market.

The two older technology companies are Amino Technologies (LSE:AMO) and MTI Wireless Edge (LSE:MWE). Shares in both have started well in 2014, particularly MWE whose share price is up a substantial 78% on the review, which was released near the start of the year. The technical position looks strong, and the financials came in strong, as expected. Nonetheless, I will probably seek an exit point in MWE over the course of the quarter-ended H1. The market has certainly woken up to that asset undervaluation. There hasn't been any major news from Amino Technologies, although the hiring of a global sales vice-president bodes well. The shares continue to trade on a comfortingly low cash-adjusted valuation. Support Services firms Newmark Security (LSE:NWT) and Driver Group (LSE:DRV) continue to be deep value plays with Newmark being severely undervalued by the market (as a result of past one-off impairment charges), and a lack of interest in Driver. Over the period, I doubled up the portfolio stake in Driver at 101p as I fully expect another strong year of growth. There is strong potential for Driver to beat market expectations. The market should wake up to Newmark at the next set of results.

Property companies Taylor Wimpey (LSE:TW) and Terrace Hill (LSE:THG) also remain low risk options with attractive upside. Wimpey's technical outlook remains positive, and with the underlying outlook for house prices still encouraging, there is likely to be further share price appreciation towards the 135p price target. Wimpey's results in February highlighted a return to net cash, outlined cash returns to shareholders that will take place over the next few years, and put the company on a PER of 17.6. That may look pricey, but looking forward, 2014 EPS is expected to come in at 9.83p and at 12.66p in 2015. Those correspond to forward looking PERs of 12 and 9.3 respectively. Terrace Hill is suffering from a lack of investor interest currently, but it is a relatively new addition to the portfolio.

To cap off the quarterly report, NetPlay TV (LSE:NPT) will be announcing final results on Tuesday. The figures should be excellent, but the company's rating is currently under review given that the Point of Consumption tax is still set to come into place later in the year. The tax is on gross revenues thus is likely to have a sizeable impact going forward. For that reason, further price strength may be sold into.

With a new tax year upon the markets, there could be temporary price strength as investors look to take advantage of their new ISA limits. Results season continues through April and May and should shine light on further opportunities moving forward. I remain confident that (aside from any unpredictable events occurring) the markets will remain resilient. Overvaluation undoubtedly remains in the market, and I expect single stock sell-offs over the next few months for those that disappoint, but I don't expect that to lead to any wider market sell-off. Underlying economic progress is good and ultimately that is likely to prevent sharp falls in UK market indices.

3 comments:

  1. A great addition to the site. Please archive these later for future reading!

    CraigJ

    ReplyDelete
  2. Concur with your thoughts on Camkids and Naibu Global. From sheer uncertainty i no longer think it is worth investing in either. I am really surprised that Simon Thompson from the IC went ahead and tipped both.

    ReplyDelete