Portfolio Update (17/08/19)

AU Portfolio

News

HiTech Group Australia Limited (ASX:HIT) announced its full year results on Monday. Revenue was up 15% to $30.3 million and net profit after tax (NPAT) rose 13% to $2.6 million. The balance sheet remains strong with $5.9 million in cash and no debt (no change during the year) after paying $3 million of dividends equating to 8 cents per share fully franked. A final 4 cents fully franked dividend was declared in line with last year. The outlook for the business remains positive in light of continued secular technology trends. At a share price of $1.11, HIT trades on a 10% grossed up dividend yield and this is the fifth consecutive year in which the company has delivered record revenue and profit. I stupidly decided not to buy HIT when it was trading at about 10 cents a few years ago. Today, with the shares priced at more than ten times those levels I am a content holder.

Southern Cross Electrical Engineer Ltd (ASX:SXE) announced over $35 million of contracts awards on Tuesday. Since May over $90 million of new work has been revealed in three separate market releases. Given the company expects to report over $400 million in revenue in 2019, the quantum of these wins is not unusual. Hopefully it is the type of work that causes management to deem these orders noteworthy, rather than this being an exercise in market PR prompted by SXE's subdued price.

On Wednesday United Overseas Australia Limited (ASX:UOS) declared that profit after tax and non-controlling interests is expected to be $49 million for the first half of 2019, up $6 million on last year.

On Thursday RXP Services Ltd (ASX:RXP) announced its full year results for 2019. It did not submit a clean set of figures which combined with general market pessimism probably caused the stock to open lower. In particular, there was a large impairment charge and losses from the soon to be discontinued Hong Kong operation. Overall, I thought the report showed that the business continues to make progress and the company declared fully franked dividends totalling 3 cents including a 0.5 cent special dividend (versus a 55 cents share price) so am happy to continue holding.

Academies Australasia Group Ltd (ASX:AKG) and Fiducian Group Ltd (ASX:FID) also reported on Thursday. The AKG results came in ahead of guidance issued in July with cash flow particularly strong and the company declared a 2.37 cent fully franked final dividend, up from 1 cent last year. FID's results were typically solid with all key metrics trending up and funds under administration, advice and management finishing the year 10% higher at $7.4 billion setting the company up for further success in 2020.

On Friday Advance Nanotek Ltd (ASX:ANO) submitted its 2019 financial results. Profit before tax was $3.4 million, $0.7 million lower than May's $4.1 million guidance. Hopefully the explanation for this shortfall will be included in the Managing Directors' report to be released next week. The share price closed a whopping 29% lower. An investor presentation released after trading included impressive revenue guidance for 2020 of $30 million, 145% ahead of this year which itself was 86% above 2018. The business enjoys high operating leverage so I expect this to translate into an even greater rise in profit before tax as was the case this year (up 200%). Overall, the thesis remains in tact and I think that yesterday's sell-off reflects the make-up of the share register above anything else.

Trades

I sold my Over The Wire Holdings Ltd (ASX:OTW) shares after its results came in below my expectations.

Holdings

ACF - 3.59%
AKG - 4.90%
ANO - 3.40%
ASH - 4.62%
CWL - 3.76%
EAS - 3.70%
EZL - 3.78%
FID - 4.10%
GAP - 3.97%
HIT - 4.16%
ICS - 3.80%
JYC - 3.67%
KME - 7.88%
LBL - 5.38%
LYL - 4.96%
RXP - 4.90%
SSG - 4.52%
SXE - 4.61%
UCW - 4.29%
UOS - 4.49%
WEB - 4.59%

Cash - 6.90%

UK Portfolio

News

On Tuesday direct carrier billing company Bango plc (LON:BGO) announced a partnership with Spotify. Bango's technology will enable users to add a Spotify subscription to their mobile phone bill. Competitor Boku Inc (LON:BOKU) already has a similar relationship with Spotify. Bango shares closed up 11.4% for the day.

Trades

I sold Andrews Sykes Group plc (LON:ASY) in order to buy ECSC Group PLC (LON:ECSC). 99 year old chairman, Jacques-Gaston Murray, and his family own about 90% of ASY. This is a little more than is comfortable because it means that minority shareholders have no say in company affairs. For example, the family could decide to take the business private if they so wished. Andrew Sykes sells and hires out heating and air conditioning equipment and is a high returning, well run and steadily growing business. Its performance is dependent on the weather and so earnings can be bumpy and their visibility is limited. The stock trades on 18 times last year's record profits which is historically high and so it was my least favourite holding in the UK Portfolio.

ECSC provides cyber security services to UK companies. It listed in 2016 raising £5 million at 167 pence, more the double the current share price. Some of the IPO funds were used to open a Security Operation Centre in Brisbane to complement its UK based facilities enabling ECSC to offer its clients 24/7 monitoring and response. The company has two main business segments, consultancy and managed services. Typically clients initially engage ECSC to provide consulting services to test IT systems and this often leads to multiyear managed service contracts. Over the past 20 years ECSC has developed bespoke systems and software for monitoring computer networks and its managed services offer a cost effective solution to most companies for which it does not make sense to invest in internal capabilities. As the costs of running a Security Operation Centre are substantial but relatively fixed, ECSC's managed services division suffered a drop in gross margins when the Brisbane location opened but are now improving with revenue from each new client largely falling to the bottom line. ECSC has historically grown revenue at 20% per year (entirely organically) and is forecasting breakeven earnings before interest, tax, depreciation and amortisation (EBITDA) this year. Cash is tight and a small capital raise may be required to reach profitability. However, it is not in the interests of CEO, founder and major shareholder, Ian Mann, to allow much dilution. With a market capitalisation of £6 million, ECSC looks like a steal to me.

Holdings

AFM - 4.77%
AVON - 5.54%
BKS - 5.67%
BGO - 5.02%
CCT - 4.57%
CRL - 12.31%
D4T4 - 5.72%
ECSC - 4.64%
EYE - 4.75%
JDG - 5.31%
MGNS - 4.93%
OXB - 4.43%
RFX - 5.22%
SDI - 4.66%
VTC - 4.26%
WINK - 4.52%
WJG - 4.53%
XPP - 5.53%

Cash - 3.63%

Comments

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