Stock Picks | Boon's Fund Recap – June To August 2023 - Just About Hangin' In There!

2nd Sep '23 by Boon

27 comments 3120 reads

2023 YTD Performance +0.5% vs -0.4% benchmark

2022 Performance +12.0% vs -3.4%

2021 Performance +21.6% vs +14.6%

See all the previous BBB Monthly Recaps here.

Preamble from a UK Staycation

I started out with the ambition to publish commentary on the Boon Fund monthly; however, given increased time commitments, this latest update is covering 3 months – June till Aug. That is likely going to be the frequency going forwards, every 2-3 months.

I found some time to write in the last few days on a staycation road-trip around the UK – Peak District, Snowdonia, and Pembrokeshire. It was encouraging to see tourism alive and well. Restaurants were packed, beer gardens were full, and tourist sites thronged with visitors. However, hotel room rates signalled that not everything was fully booked out, and indeed the properties we visited, they were not at full capacity every night during this peak period.

As I paid £40 for two courses at gastropubs next to fields of cows, I worry about inflation, whether my capital will be eroded, and if I’m able to generate inflation-plus returns. At +0.5% gain YTD, I am definitely not. I am lucky that I am still of working age, and thus my income (hopefully) at least keeps up with inflation, even if the Boon Fund does not. Equity is always seen as an inflation hedge; surely as prices go up, companies make more money, profits rise commensurately, and therefore share prices soon too? But so far over 2022 and 2023, this hasn’t been the case, at least for UK equities.

Performance YTD

After spending most of the first half slightly behind the benchmark (FTSE All-Share), the Boon Fund is now in positive territory (+0.5%) when compared to the benchmark (-0.4%). However, this is scant consolation, as it is behind compared to easy access savings (3-5% annualised so far in 2023). It has also failed to keep up with inflation.

I have made the decision to take out a good chunk of my Stocks & Shares ISA money, and stick it into a 1-year fixed rate ISA savings instead, generating 5% instead. I look at my watchlist, and the current opportunities, and I don’t think I’ll be able to go fully invested in the next few months. So better to earn something on the cash balance, than nothing (as is the case with IG ISA’s).…

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Boon

6th Sep '23

Indeed, it has been hard to pick stocks!

And if you look at the breadth metric, its consistently been below 50% in most indices. I'm hoping this means there are a bunch of really underpriced gems hiding in the wider sell-off, to pick up for good prices in the next few months.

I see that On Beach group (LON:OTB) have now announced a date for the upcoming trading update! Still quite bullish on them. Everything I know about the industry screams they will be coming out with a good update.

Ashmore (LON:ASHM) - I think the market might be waking up to this now. Results came out today. Disappointing of course in terms of results, lots of jam-tomorrow outlook.

However, it is telling that the share initially opened up like 4-5% down, but rapidly recovered to 3-5% up, and ended the day around 1-2% up. So there are also some other investors out there that have used today as a good buying opportunity.

(I hold both shares above)

Rusty2

OTB that's what I thought before the last update.

bsharman

7th Sep '23

Really appreciate you spending the time to write these Boon. I thought the Costain (LON:COST) results were very positive - they would be cheap at over £1 per share. What are your thoughts on the Direct Line Insurance (LON:DLG) announcement today? (I hold both as well as PayPoint (LON:PAY) and Time Finance (LON:TIME))

I think On Beach group (LON:OTB) made the 2023 faux-pas of aggressively loading up on fixed costs in service of future revenue growth, and not adequately guiding the market on what they were doing. Lots of headcount added, plus big discretionary brand marketing spending.

(I hold)

I was a bit more lukewarm on Costain (LON:COST) results. It didn't clearly show a good increase in higher-margin consultancy activity, and their bread and butter construction business has seen a bit of weakness in forward order books, etc. Not catastrophic, but this means revenue growth in those areas in 2024, 2025 might be flat/low-digits. Which means growth will fully depend on the consultancy business from next year onwards.

But buying Costain is not about buying growth - it is about buying the mis-pricing currently on offer, as you mention, they are cheap. The pricing so far has been indicating a high chance of going bust or losing lots of revenue and profits. But they have proved otherwise - a business in health and delivering.

At this price, I don't see why a larger construction company doesn't acquire Costain for cheap. The net cash on the balance sheet, £130m, they're holding it because they need to prove to their lenders, clients that they have the funds to remediate any issues if they occur. If a large construction group acquires them for say 50% premium than the current SP, they'll pay c£250m for the business, but can pocket that £130m, and acquire Costain for only £120m net.

I am hoping that is what the largest shareholder, ASGC Construction, ends up doing.
(I hold)

On Direct Line Insurance (LON:DLG) haven't had a chance today to read through both announcements. But on the surface, looks like two of the main issues have been solved or making good progress - the risk of discounted equity fundraising from the low solvency ratio, as well as the recovery of their motor insurance division.

May also be a sitting duck now for an acquisition - less conglomerat-y and focused, so might attract a strategic suiter (say from Asia or USA who do the same thing) for geographic expansion? Or even a UK player to consolidate the market. Plenty of operational cost savings to be had from combining players in the market to build a stable of brands.

13th Sep '23

Had a read through today's On Beach group (LON:OTB) trading update, and had mixed reactions. Initial thoughts, before I digest it more fully this weekend:

Summer passenger numbers of +11% looks disappointing. Clearly not as high as I think most other industry participants (looking at Jet2, Easyjet Holidays, TUI, etc) are getting. Clearly not a big "winner" here.
But the current tracking of Winter at +26% passengers is interesting. The type of people who go on winter package holidays, those are typically long-haul (to get to warm destinations) as well as more affluent (those that can afford two holidays abroad a year). If so, this confirms the strategy of OTB being able to crack the more luxury, and more long-haul segment. Where there is much less competition, and higher margins per booking. They confirm this in the TU; +70% long haul and +30% Premium 5*
Good to see marketing cost as a percentage of sales go down. All the more pleasing despite what I see was a big marketing spend, especially brand marketing, at the start of the year. I think they have a big strategic decision to make here going forwards; keep up the growth in brand spending (and hope it delivers multiple of ROI going forwards), or hold it steady and let it drop to 30-35% of revenue, thereby generating huge operational leverage in operating margin and profits.
Overall disappointed that EBITDA came in just at market expectations. Was expecting a beat at least. It looks like maybe fixed costs were still growing at a good clip as they front-loaded more employees, etc. But I really do want them to see control of more fixed costs, so they get more operational leverage as their top line grows.
Still so, so cheap on a PE ratio. Given the strong winter23 growth now forecasted, and potentially continued summer24 growth, this should really be at like 9-11x next year's EPS (15p) and so I'm hoping the share price gets up to 150p-200p in short order.
My view is that the industry overall is now more optimistic about winter (Oct-Feb) than it was a few months ago. With good wage increases filtering through, and what has been a lousy summer, the off-season (Oct-Nov) is looking like it'll do very well. Still too early to call the deep winter (Dec-Feb) yet. There is still weakness in pricing in Dec-Feb, both hotels and flights. However, this might bode well for OTB if they're able to get access to cheaper flights and hotels inventory and package up more deals (as they allude to in the TU).

StrawberryDreams

22nd Sep '23

Thanks foryour update.You alongside somebody's comments on one of the Paul & Graham's pieces brought Zytronic to my attention.I have no specialist knowledge in the sector, but given their NTAV and their recent streak of bad luck decided to give it a punt.

Also a deepvalue investor fund apparently (purely gossip - just from a comment on the Zytronic board there), who used to produce a newsletter on ADFVN, Henry Spain used the opportunity to build a 8% position.So will be interesting to see how it plays out.I'm hoping at least back up to the £1.50 range at least over time and can't believe that 20 years plus of IP isn't worth anything profitable or potentially profitable to anyone anymore.But better not to hope too much, but surely it's worth a possible shot.One distinct positive difference with say a Purplebricks is did they ever make a GAAP profit?I did buy some and recommend some years ago when they were the hot issue and expanding or planning to to the US, but never followed them since really.

23rd Sep '23

I haven't yet jumped in myself to buying Zytronic (LON:ZYT) but think there is no rush; H2 update will be bad, no doubt about it. Given the long lead times to revenues hitting the P&L, if H2 was looking rosy we would have seen more positive outlook guiding from the company.

I've personally got a below 75p price target, and was actually waiting for a bout of market weakness to pick up sub-65p. But it looks like its moved in the other direction now to 85p; oh well.

The key question still in my mind, since I'm not an expert in this area, is whether their IP is still competitive and relevant?

illiswilgig

24th Sep '23

Been meaning to thank you Boon for these thoughtful and insightful updates. So Thank You! Really useful to read in slow time and mull over.

Re: Zytronic (LON:ZYT) I still hold. Clearly selling was the smart move but my investment horizon's move like geological ages and even then I can't predict the future.

The price was starting to look very attractive with regard to NAV. Like you I was holding out for a slightly lower price before adding. Might have missed this opportunity - but there might be another one.

Is the product competitive?

Yes. That's a key question. Though there are two products to consider here. ZYT's touch product that then gets designed into an OEM product - such as an ATM, vending machine or Gaming table. It takes upto 2 years for ZYT's product to be designed into the OEM product and only then will ZYT find out if the order flow will be better or worse than expected. They only get 4-6 weeks order visibility once the OEM product is shipping. Short term order volatility has more to do with the competitiveness of the OEM product than of ZYT's?

The OEM product lifecycle can be very different between sectors - say ATM and gaming tables. ATM product design cycles apparently come around every 5-10years where as a gaming table product life can be much shorter - a year or two?

Margins on the ATM type business are typically lower - but order volatility will be lower, whereas game table margins will be much higher - if the product sells well. Which is totally unpredictable for ZYT?

Which I think may also be linked to where ZYT is currently competitive in the market. It did not have the right technology available to bid the last ATM design cycle. It does have attractive technology for gaming tables now, but that business has been even more volatile because of the events of the last 3 years.

Which probably means that ZYT are not particularly competitive at the lower margine, higher volume ATM type business. There are lower price suppliers - but with lower quality, reliability, performance products. Where physical abuse (from users and environment) performance and reliability are key factors - ZYT are likely very competitive. Basically higher end bespoke markets. Lower volume and much higher margin business. But much more volatile.

My concern is to look towards what ZYT are designing now for their future products and compare with where the industry is going particularly for financial, medical, industrial, vending and info/advertising. In the meantime maybe they will win big with a gaming customr. Maybe not. In the medium term to escape the volatility they need to widen their customer base and move up the food chain to a complete screen and controller system for longer product cycles. They know this and are working on it - but its easier said than done?

Hope this helps! Other views are very welcome?

I think there is a good probability that they will succeed in developing competitive higher end products for the next cycle. But there can't be any guarantee - too many variables? The current discount to NAV gives some defence against the downside with the upside currently in for free?

What I call a: heads you win, tails you don't lose (much)!

Its the kind of opportunity I am always searching for. I still have concerns and I already have a decent sized holding - and after being bashed violently over the last couple of years - keen to have as much downside protection as I can get before buying more,

cheers

Mark

BnB

Mark, I wish you all the best with this opportunity but I remain bewildered why you wouldn’t just buy a great company with a leading IP and come back in 10 years.

No need to answer as you’ve laid out some of your MO in the previous reply. Many ways to skin a cat and all that.

But as a serial business owner with decades of striving to be the best in my field, it beats me why investors wouldn’t take the short cut that the market and its liquidity provides to owning the very best in class.

Hello BnB - great points as usual.

but I remain bewildered why you wouldn’t just buy a great company with a leading IP and come back in 10 years.

Ah. That's easy. I do it........... for fun!

I hope that helps to ease your bewilderment? Maybe not :-)

As a serial business owner/part-owner/manager I've spent decades striving to be the best in my field. I now enjoy the process of striving to find similarly well run businesses with leading IP where I can invest. At the moment I don't want to leave them alone for 10 years, I enjoy being alongside them on that journey whether its success, failure or more usually something in between, If and when I stop enjoying it I will adjust my process. That's not hard to do.

cheers

Mark
PS - With regard to Zytronic (LON:ZYT). What makes you think that I am not looking for a great company with leading IP? According to my research it is a well run and managed company, very well invested in its facilities and processes with leading IP in its market niche. It's clearly not 'great' right now. There is a large market opportunity - but that is no guarantee of success. Many will try but few will succeed. For me the jury is out at the moment and I am watching closely. I have yet to discover whether it is Digital Research or Microsoft......? But I am enjoying the journey.

Then the pleasure you get is similar to mine. I enjoy sharing the journey with my various blue chip company holdings - you can still do that even if there’s no intention to sell for 10 years. But I can see that winning “against the odds” would be more satisfying than just enjoying Microsoft’s 200% gain in the last 5 years.

However MSFT has delivered the satisfaction of making great returns out of a company that has been “too expensive” to buy since a decade ago! It’s a different balancing act, this time between price/value/moat instead of prosperity/irrelevance.

The best of success to you :-)

29th Sep '23

Thank you for this long comment! I found it really interesting to read your thoughts on Zytronic (LON:ZYT) .

Order pipeline definitely looks strong, and if management are right about "2 year from initial talks to production" we should start to see the post-COVID discussions start to drop into revenues soon.

30th Sep '23

As I won't be posting another BBB Fund post for another few months (moving to a quarterly cadence), I thought I'd give some quick updates.

My YTD performance hasn't really moved since Aug22, at +0.2% YTD, which is frustrating. But still better than AIM100, and thereabouts to the FTSE All-Share.

In September, I had done the following trades:

Sold out of McBride (LON:MCB) - there was a decent update out, and the company is making useful progress. However, for me the net debt is still too high, and while they've been able to push through higher volumes and higher prices recently, can they continue this? They'll need to do so if they want to get more comfortable within the banking covenants (holiday expiring next Sep24). SP can double if they can thread the needle and do a "soft landing" over the next 12 months, but for me too much risk. I've banked my profits here.

Topped up Time Finance (LON:TIME) - good set of results, and clear momentum in their strategy. Happy to top up at the current prices, because I see this easily at 35-40p in six months time, a useful 40% gain.

Topped up Phoenix group (LON:PHNX) - picked up more shares before the results, which was steady and predictable progress. Never going to blow the lights out in terms of racy growth, but they throw off good amounts of cashflow. A juicy 10% yield, a Lord Lee recommendation for income portfolios, and hopefully soon they can get the M&A going again and acquire more distressed closed books for good valuations. Now one of my top holdings, c10% of my portfolio. Share price has drifted downwards (even accounting for ex-div), so it is now at a cheaper price than I bought in at!

20th Oct '23

Quick update on two new buys:

New Buy of Mountview Estates P.L.C. (LON:MTVW) - this share has been on a radar to pick up at a cheap valuation. That is now, sub-10000p. They have a niche in property, buying up properties with complicated "lifetime" leases for a depressed price, and then when those leases expire (person dies), selling and capturing the reversion value to normal price. Properties are accounted for at-cost, and typically properties that they sell get 2x-2.5x the book value. However, the picture is mixed because they keep adding new properties to the portfolio.

I conservatively value at 1.7x the book value, which gives me closer to 17000p fair value, compared to the 10000p it currently trades at. Meanwhile, it generates enough cash to pay out dividends (ordinary+special) of c 7.5% yearly, which is still higher than what you get in a savings account.

Over a 12 month period, I think it has a strong chance to trade within a range and easily reach 12000p, so a very strong prospect of 20% capital gains + 7.5% dividend easily within the first 12 months. But I intend to hold longer, or until more of the intrinsic value is crystallised.

New Buy of Vanguard FTSE 250 UCITS ETF GBP Dis (LON:VMIG) - the FTSE250 is trading at too tantalising a valuation all round (P/E, P/B, Div, Breadth, EPS growth, etc) that I've taken an initial 5% portfolio weighting, and will drip-average to 10% over the next week. I've never gone passive in the UK with an ETF (only outside the UK), but right now none of the FTSE250 shares on my watchlist are buy-worthy or top-up-worthy, so FTSE250 index is the best way.

-----

I'm in the process of selling down one of my small-cap positions, but won't disclose as the liquidity is not very good and so selfishly, will sell out first and then update.

8th Dec '23

Quick Update on Nov buys, and current performance. No full writeup until year end, when I'll do a full-year 2023 review.

Current performance of the Boon Fund is +5% YTD (as of 8th Dec), representing a very good Nov and Dec. Could have been better... if only I'd held on to Costain (LON:COST) and McBride (LON:MCB) instead of selling!

November activity:

New Buy of System1 (LON:SYS1) - this was a prior holding for me, and having kept this share on my watchlist, I recognised that it seems like their new strategy was working. This was proven right with their latest update - client growth and sales growth of data kept rising, at super high margins, while they kept a very tight control of fixed costs. This resulted in a huge increase in PBT. Shares have now risen strongly, but my view is that the product still has legs for further client growth. And all this is now strong operational leverage to profits.

Sold all of Costain (LON:COST) - I was spooked by rapidly cooling growth of the infrastructure and commercial construction activity and sentiment across the industry in Sep to Nov. Also their recent loss of some future contracts (HS2 etc) didn't help. Furthermore, the shares had already had a good run up, and balancing out the risks vs reward, I felt that there was little upside left for risks. I was wrong - it has continued to run up in price, despite the lack of positive or negative news. My view still holds; think it is more risk than reward now, but perhaps my view of fair price to sell was too low.

12th Dec '23

Thanks for the update Boon and looking forward to reading your end of year review. Just a quick point about Costain (LON:COST) - I thought that the Hs2 work which has been cancelled was not in the order book/estimates ?

It wasn't in their Order Book yet, you're right. But Costain (LON:COST) order book was already struggling to grow; was 2.7 at Jun22, 2.8bn at Dec22, and 2.5bn at Jun23. I've got a suspicion that they're struggling to fill it, and without HS2 now, I think the risk is that the next update we see closer to 2.0bn instead of 2.5bn, and the market starts to wonder if the future (yr2-4) of revenues are in jeopardy.

It seems certain that FY Dec23 revenues will come in predictably, but I think there's a bit of a risk to the FY Dec24 forecasts, and definitely the FY25 is starting to look shaky.

Ofc - if they keep growing their consulting arm, these order books don't really matter.

Boon's Fund Recap – June to August 2023 - just about hangin' in there!

Preamble from a UK Staycation

Performance YTD

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Boon

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