I thought I'd share a quick back of the envelope calculation I've done this morning on Jarvis Securities (JIM) which subscribers will know was bought for the Compound Income Scores Portfolio last April at around 94p as it Scored well and I saw it as benefiting from a pick up in trading by private investors that we were seeing at the time on the back of the market volatility.
The news today was the announcement by Equiniti of the disposal of their Share Dealing arm to Interactive Investors for £48.5m. Based on that Corporate sale price and the stated EBITDA of £3.3m for 2020 that equates to a 14.7x EV/EBITDA multiple and a 22.75% EBITDA margin on the stated turnover of £14.5m.
Looking at Jarvis they are forecast to have similar turnover of around £13-£14m for 2020 . I suspect these estimates may be on the low side as there don't seem to have been much in the way of upgrades since their last positive update. We won't have long to wait to find out though as I believe their final results for 2020 are due to be reported in the next week or so.
Digging further into Jarvis's numbers they are on an Enterprise value (EV) of about £97m or roughly twice what Equiniti has just been sold for in a corporate transaction which can sometimes be a good guide to valuation for similar businesses, which Jarvis is in this case. It does however earn EBITDA margins of roughly twice those indicated as being earned by Equiniti which I think should justify the EV being twice that achieved for the Equiniti business.
So the bottom line is that this leaves Jarvis looking perhaps fairly / fully valued on this basis but I'll await the results with interest in the near future to see if they can be current forecasts and hear what they might have to say about current trading and the sustainability or otherwise of the boom condition they have enjoyed in the last 12 months. The conventional wisdom seems to be that the trading boom will tail off or normalize in the year ahead.
Thus Jarvis may not be the bargain it was just over a year ago, but still looks reasonable value on around 17-18x with a yield of nearly 5% as they have raised the dividend by around 70% this year on the back of their successful trading. While on the chart at the top it appears that they are towards the top of their recent range and trend channel so it will also be interesting to see if this provides resistance or if they manage to break out of this range on the back of the results - one to watch out for this month for sure.
Update as at 11/3/21 post results announcement.
These were largely as forecasts suggested although turnover & eps were modestly ahead at £13.3m v £13.2m and 12.7p v 12.4p respectively, while the dividend had been announced previously. These figures did represent 43% growth or thereabouts on the previous year reflecting the boom conditions for share trading firms last year.
Encouragingly in the brief Chairman's statement he said the following: "I expect our trade volumes to continue at higher levels than we experienced in 2020 and the years leading up to that. I also see no signs of organic growth slowing as we move into 2021 with a healthy pipeline of potential new outsourcing contracts. Client numbers and cash under administration continue to increase, we are seeing profitable growth in international settlement and our relationship with Primary Bid."
This suggests to me that the 8% growth in earnings to 13.7p that are currently forecast should be achievable if growth does settle back and this would be more in line with the growth seen in 2019. While the dividend is forecast to rise by a similar amount to 12p. At the current price this morning of around 250p this leaves it on around 18x with a 4.8% yield. The yield is around the middle of the range of yields (roughly 3.5% to 6%) it has traded on in the past while the PE rating has peaked out at around 20x in the past. So that leaves it looking fairly / fully valued I'd say unless Mr. Market wants to move it on towards its peak rating of the past or even re-rate it beyond that towards the ratings it ascribes to the likes of AJ Bell and Hargreaves Lansdowne, but I wouldn't count on that.
I've just listened to an interesting podcast on an Investment Trust that I mentioned briefly in passing back in October when the UK was looking unloved and particularly cheap on a historic basis. Fortunately I also bought a few for myself at the end of September at a devilishly good price of 666p and it has done OK since then and the discount has narrowed too which is an added bonus.
The trust concerned is Temple Bar which had a pretty poor run under its previous manager who had to retire hurt, but the new managers have a good reputation as value managers and have some interesting insights on that and the current growth / quality versus value debate, including some interesting comments on M&S, Royal Mail and Microsoft along the way.
You can find the Podcast here and I hope you might find it interesting if you are looking for a way to play a resurgence in Value.
February proved to be a positive month for the UK market as investors and residents of the UK generally gained some hope and expectation that the successful and rapid roll out of the vaccines might bring forward the day when our lives and the economy might get back to some sort of normality. This is shown in the table on the site which can be accessed here as is the out performance by the CI Portfolio for the second month running. This leaves it 3.6% ahead of the FTSE All Share in the year to date and builds on the excellent relative performance shown in the last three and five years and since inception back in April 2015, as shown in the Chart above, which are more meaningful periods of time to look at rather than one month or year to date figures. This also shows that the portfolio has now made it back to an all time high value.
The performance so far this year comes as a pleasant surprise as market moves have in the main been a bit discombobulating as many poor and struggling Companies have soared in price while some quality names have been under pressure. This however is explained in part by the rush of liquidity provided by central banks finding its way into markets, especially it seems in the US, with the likes of Gamestop soaring thanks to Reddit forums and Robin Hood traders buying up call options and creating a short squeeze. More broadly it can be rationalised as reflecting hopes for a return to normality being discounted as the vaccine roll out seems to be going well. Thus plays on reflation, re-opening and recovery from Covid effects are being bought as the natural winners of that process and the lock down winners and more defensive / quality / growth plays being sold off in return as part of this rotation.
This month there were four potential sale candidates that came up based on where their Scores were aside from a couple that I gave the benefit of the doubt to. One of these was Moneysupermarket (MONY) which had results and saw downgrades as a result which led to a decline in the Score as the shares rallied against this background. The outlook statement was quite cautious, but I guess maybe the market is giving them the benefit of the doubt and perhaps perceives them as a potential beneficiary of re-opening and a consequent pick up in Money & Travel comparisons which they flagged. As ever time will tell on this but in the end I decided to go with the Scores and sell it along with another stock which I had waited for results this month which also seemed underwhelming. Since that was a stock I didn't have a strong feel for and there was no improvement in the Score this month, I let that one go through too.
Two more sale candidates that I found more tricky were decent steady businesses which one would might want to hold for their longer term compounding attributes. One of these was Watkins Jones (WJG), which as it is a property developer, some may not view as a quality operation. It does however operate with a capital light model in the main in some growth areas like student accommodation and build to rent and has a decent pipeline of work. As a result it has some attractive looking operating characteristics and should be fairly steady. Again I had waited for results and a subsequent management presentation. These were well received and the price did well despite some subsequent downgrades. While the webinar I watched did highlight a bit of a potential dip in their development pipeline after they had put things on hold post the first lock down. Again I think the market might be prepared to look through this so I wouldn't put you off holding it for the long term. Despite that, given the price move and the effects of the downgrades on the Score I decided to let that one go as well.
The second quality long term compounder that came up as a sell was Unilever (ULVR) after their results were not that well received and they also saw some downgrades which leaves them with a fairly pedestrian growth outlook in the short term. It was also no doubt sold off aggressively as part of the reflation / re-opening trades of selling the winners and buying the low quality losers / recovery plays discussed earlier. This had however left the shares looking very over sold in the short term (as shown by the OB/OS indicator in the Scores sheet) and I suspect might leave the possibility of some mean reversion in the short term if the recent market weakness should be extended or resume. Beyond that I guess it will remain fairly unloved in the short term so I'll review it again next month although personally I'd be more inclined to hold it for the long term as a classic quality compounder.
Against those sales three purchases were made for the portfolio this month. One of these was a specialist operational property REIT as a straight swap for the property type exposure forgone by selling Watkins Jones. A second one was a well run family lending business which operates in some specialist niches which should be a beneficiary of the re-opening and thus plays into that trend against the similar recovery prospects that Moneysupermarket may offer. It did however have a better Score as it offered better value and momentum and it is a business that I know well and hold myself, so I was happy to add that one.
Finally somewhat more controversially perhaps Games Workshop (GAW) made a belated return to the portfolio having been sold early (and badly as it turned out) in the pandemic when the score had deteriorated on downgrades and I was worried about operational gearing to the downside as they had shut all their operations at that time. Now with the shares at more than twice the price when it was sold it feels very uncomfortable to be buying it back up here, especially as it could be seen as a beneficiary of lock down and therefore vulnerable to a reversal of sentiment and fortunes thereafter perhaps? Nevertheless I followed the Scores as it now looks more reasonable value having come back in price from peaks above £100 despite some chunky upgrades. I also believe there should be another trading update this month in which they may still produce some forecast beating results, so it will be interesting to see if the market is more enthusiastic about those this time around if that should come to pass or if they end up disappointing this time around.
Subscribers can see details of these trades and some journal comments too plus the rest of the portfolio. If you are not familiar with the Scores and would like to know more about them and how to gain access, I put up a presentation on the site recently to try and explain the background to them in as clear a way as possible & how you can access them - you can find that here if that is of any interest.
Summary & Conclusion
So a better month for markets and another month of out performance for the Compound Income portfolio despite a dash for trash and recovery plays and a move away from quality / growth and lock down winners. Despite some of the moves (like Gamestop in the US) seeming pretty confusing and inexplicable, in the main the broader moves seem more understandable in the context of hopes for a recovery on the back of central bank & government money supporting the economy and the vaccine roll out and a subsequent re-opening unleashing pent up demand etc. - hopefully!
This also meant something of a switch from growth to value names depending on how you define those, although it remains to be seen if that has run it course now or if it has further to run. Valuations in the US continue to lead to some concerns about these bubble like moves in some stocks and things like Bit coin and especially at a time when inflation fears and bond yields are rising which may impact on valuations if these rates go too far up. For now these moves don't seem to be getting out of hand just yet. So I'll sign off for now but leave you with a couple of tunes that seem to my mind to sum up recent market activity and those that might be getting involved at this stage.