Good looking interim results to 31st January 2016 from Utilitywise (UTW) the independent utility cost management consultancy today. These showed revenues up 36%, diluted earnings up by 21% and the dividend by 29% which is ahead of the 21% or so growth that is currently forecast by the consensus. They have swung from cash to around £10m of debt, but separately they did announce another positive renegotiation of terms with an existing supplier which they say will give rise to a cash inflow of £2.25m by the year end, which may help to bring the debt back down again somewhat. This will be important to watch as some have questioned the cash flow on this one in the past and this together with other similar agreements with suppliers should help to address these concerns. Plus they highlighted the acquisition of t-mac technologies which occurred in the second half of 2015 and the cash of £6.4m was spent on this. Eliminating this from the movement between the two periods isolates the trading flows which overall equated to a £5.4m outflow of cash. The cash was apparently in line with their expectations and the second half is they say supposed to be a stronger cash period for them.
They also highlighted future secured revenues being up by 5% to £24.7m at the period end and up to £26.6m at the 31st March 2017. Total customer numbers were also up by 33% to just over 29,000. They also continued to expand their headcount to fill their new offices with Energy consultants increased by 39% to 625 (H1 2015: 449) and 630 since the period end. This large increase in the headcount might help to explain some of the big increase in turnover.
Aside from the numbers they also announced a board shake up with the existing CEO (and founder I think) stepping up to be Executive Chairman with a planned recruitment of a new CEO. They also added some other operational director appointments.
It all reads quite well and they finished by saying "We are confident about the future prospects of the business. The productivity measures in our Enterprise division, with a lower attrition rate in the second half, will see an improved second half performance against the first half. Overall we remain on track to deliver revenue and EBITDA margins in line with market expectations." So the shares have responded well this morning being up by nearly 5% to around 190p at the time of writing. Assuming no changes to forecasts on the in line outlook this leaves them on a rating of 10x with a 3.2% yield for the year to July 2017, which may fall to around 8x with a 4% yield if they hit forecasts for next year too. This seems attractive given the growth they seem to be producing but the market has be distrustful of this one in the past and therefore may still be wary of re-rating it. This is especially so at they commented that the net accrued revenue balance increased from £18.7m to £34.9m.
Thus the shares seem to be at an interesting juncture as they approach strong resistance at around 200p (see chart at the end). This could well mean the shares continue to track sideways from here if the market remains sceptical. It may however be worth watching to see if the 200p level can be convincingly breached, in which case a breakout might presage a re-rating on the back of improving sentiment towards the Company and their continued delivery, despite the markets scepticism. As ever I guess time will tell on this one.
This was the third quarterly re-screening since the portfolio was started and I have to say it was one of the hardest so far. Firstly I had to fight typical behavioural biases as I was tempted to apply some valuation constraints and thereby take some profits in some of the big risers. However, since I have not done this up to now and the behavioural bias I'm trying to avoid is selling winners too soon, I resisted the temptation again this time, although perhaps I will apply them with a full re-screening at the annual stage. Any way the other reason I avoided this was that using the 80 threshold on the Scores also suggested a rather excessive 6 sales, 2 of which seemed reasonable, 2 which seemed 50 / 50 and 2 which didn't seem to make that much sense. Thus for this quarter I went with 75 as the cut off which meant the 2 sales that seemed reasonable to me went ahead which I'll discuss in the next section.
This question could apply to the market I guess given the recent market sell off. It could also apply to a Utilitywise (UTW), a Company which features in the Compound Income Scores Portfolio and which I have personally traded successfully a couple of times this year. They reported an update on payment terms with another of their major suppliers and an AGM today.
After the strong recovery in October, November proved to be a bit more lack lustre with a small positive total return for the FTSE All Share of 0.57%. The Mid 250 led the way again, as it often does, with a 1.9% total return while FTSE 100 delivered a more modest 0.33% as the miners fell again after a strong bounce in October and the likes of Standard Chartered and Rolls Royce fell heavily on the back of corporate developments. Finally the Small Cap indices fell and produced a -0.33% total return.
With September having come and gone I'm sure investors will be glad to see the back of it as nearly all UK indices fell on the month. FTSE 100 again led the way down with its heavy weightings in commodity related stocks and produced a -2.86% total return while the All Share produce -2.73%. This reflected modest outperformance by mid and small cap names, but most of those also produced negative returns, with only the FTSE Fledgling index producing a positive return on the month with a total return of +0.12%.
For the Quarter it was a similar pattern with FTSE leading the way down with a -6.13% total return down to the Fledgling Index being the best performer again but that was still a -1.65% total return.
Market Timing Indicators
When I last looked at these at the end of August there were mixed signals from these moving average based indicators, with large cap indices indicating sell / cash, while mid and small cap indices were still above their 10 month moving averages and therefore in buy / invested territory.
After September's fall across the board all the indicators have now turned negative to suggest sell / cash although the small cap and Mid cap indices are only 1.1% and 1.6% below their moving averages. So a rally in October could turn those positive again whereas another fall would obviously leave them more in bearish territory. In contrast the large cap indices seem to be firmly into a bear trend as they are 6.3% to 7.4% below their moving averages, so it will take a big rally in October to turn these around in the short term.
So these trend following indicators are now suggesting a cautious approach may be best for now as the trend in the market may have turned negative now. I say may as these have given a number of negative signals which have then been rapidly reversed as the market traded sideways, but the recent sell off has been more decisive and may therefore mark a turn. However as we have passed St Ledgers day and we are approaching a seasonally stronger period I guess time will tell.
Mechanical Compound Income Scores Portfolio
Regular readers will know that this is a portfolio that I set up back in April this year based on top decile stocks in the Compound Income Scores. The portfolio which is skewed towards mid and small cap / AIM stocks has benefited from this in previous months and September saw a continuation of this trend. As a result the portfolio delivered a positive total return of +1.78% compared to the -2.73% for the FTSE All Share mentioned earlier, representing another 4.51% of outperformance this month.
This reflect the markedly different make up of the portfolio compared to the index and leaves it with a total return of
+8.24% since inception in April 2015, which compares with -8.05% from the All Share for outperformance of 16.28%.
Interestingly the annually re-balanced portfolio which has remained untouched since the start has produced +8.63% in the six months or so since inception reflecting the large commonality in stocks so far and slightly less in the way of frictional transaction costs.
However I'm not getting carried away with the success so far as, given the different make up of the portfolio, performance is likely to be volatile in both directions and it just so happens it has been in a positive direction so far. At least it is encouraging that the Scores have so far been able to identify attractive stocks even in a difficult market.
Talking of attractive stocks 14 of the 20 holdings were up this month despite the market falls and the big winners were Utilitywise (UTW) which bounced back by 24% from the previous months sell off. While the illiquid Maintel (MAI) rose by 13% from the bottom of its recent trading range to the top on the back of some decent results. Others that also benefited from good results were EMIS the healthcare software group (+11.3%) and IG Group (IGG) the spread betting / stock broking firm (+5.4%). While the big winners in the quarter were Alliance Pharma (APH), Finsbury Foods (FIF) and Rank (RANK)
On the downside Diploma (DPLM) -8.3% and A.G. Barr (BAG) -6.8% fell on the back of lack lustre updates in September. While Renishaw (RSW) -7.8% continued to drift off from an expensive rating post results earlier in the quarter. These names were also the biggest fallers over the quarter too.
Summary & Conclusion
So a tricky September has left markets and headline indices looking damaged with trends potentially broken to the downside for now with the often difficult month of October still to come. It will be interesting to see if investors regain some confidence and come back in for so bargains to produce a traditional year end rally or if the markets are sending an early warning sign of economic trouble on the horizon - China slow down, US rate rise etc.
However as ever it remains a market of stocks and it is always possible to find some attractive stocks and make some money, but like King Canute this may not be possible if the tide has really changed. Any way that's all I have time for now, good luck with your investing in these difficult times. I'll do the quarterly re-screen of the portfolio today as planned and report back later with the changes.