Portfolio Update (24/08/2019)

AU Portfolio

News

On Monday Gale Pacific Limited (ASX:GAP) reported largely flat year on year numbers as expected following July's subdued trading update. Volatile resin prices, tariffs, drought and weak economic conditions all influenced the results. I believe management is improving the company through a combined strategy of product rationalisation, geographic expansion and investment in manufacturing efficiency and research and development. It is proving to be a slow process but I think this is partly due to bad luck with external conditions and the inherent difficulty in turning around such a complex business. The stock price implies no uplift in performance is forthcoming and so I will continue holding in the absence of a better idea.

LaserBond Limited (ASX:LBL) and Euroz Limited (ASX:EZL) released its FY 2019 results on Tuesday. I covered the LaserBond result for Ethical Equities. Euroz had already announced unaudited figures in July and so the weak performance compared to last year and breakeven statutory profit after tax (cash profit was $9.5 million) came as no surprise. I hold Euroz because it gives me exposure to Western Australia (and so the stock's risk/return profile is uncorrelated to the majority of my portfolio), it pays lots of dividends, has a strong balance sheet, trades on a low multiple of average through the cycle earnings and is steadily growing funds under management.

Wednesday saw ICSGlobal Ltd (ASX:ICS) and Easton Investments Ltd (ASX:EAS) release results after market close. Both sets of figures showed profit and revenue improvement along with increased full year dividends. EAS slightly disappointed given advisor numbers fell in the second half of the year but were still well up on FY 2018. This volatility was the result of regulatory changes and so I am not concerned that this part of the business has gone into reverse. Aside from that key metrics were up, debt was down and the outlook is positive. The only potential sticking point with ICS was the substantial investment in IT reported under investing cash flows which came in about $100k higher than depreciation. Hopefully, this leads to improved profit in FY 2020 as promised by management.

On Thursday Webjet Limited (ASX:WEB) announced its results which I covered for Ethical Equities.

Kip McGrath Education Centres Limited (ASX:KME) reported on Friday. The company continues to grow strongly and I'm comfortable with KME being the largest position in the AU Portfolio. Watch out for Claude's in depth coverage of the results on Ethical Equities.

Trades

I bought Citadel Group Ltd (ASX:CGL) after its sell down. I didn't think its results were too bad given they were impacted by May's federal election (Q4 is typically CGL's busiest quarter). Margins declined due to a change in mix towards SaaS revenue and because of the aforementioned miss combined with the fixed cost nature of the business. In particular the Citadel-IX product currently generates a gross margin of 30% to 40% which is set to improve with scale. Just as well then that management is forecasting an increase in users to 200,000 at the end of FY 2020 from 27,000 today. Software revenue increased from $27.8 million to $34.2 million and the plan is to begin selling overseas. I reckon CGL is trading on a forward price-to-earnings multiple in the mid to high teens although there is plenty of uncertainty in my profit forecast.

Holdings

ACF - 3.38%
AKG - 4.88%
ANO - 3.66%
ASH - 4.29%
CGL - 5.13%
CWL - 3.66%
EAS - 3.85%
EZL - 3.81%
FID - 4.07%
GAP - 3.74%
HIT - 4.23%
ICS - 4.80%
JYC - 3.36%
KME - 7.86%
LBL - 6.00%
LYL - 4.82%
RXP - 4.87%
SSG - 4.72%
SXE - 4.33%
UCW - 4.10%
UOS - 4.32%
WEB - 4.53%

Cash - 1.61%

UK Portfolio

News

Data management company D4t4 Solutions PLC (LON:D4T4) provided an update on Thursday rolling out the old "second half weighting" guidance. This usually means a downgrade is coming and the smart trade is probably to sell. I'm not going to do that because I like the long-term prospects of the company and think the stock is reasonably priced on a historical earnings multiple of 16.

Character Group plc (LON:CCT) crashed 19% yesterday after reports that toy giant Hasbro has bought Peppa Pig owner Entertainment One for £3.3 billion. CCT currently makes and sells Peppa Pig toys for Entertainment One and the brand accounts for a substantial part of CCT's sales.

Trades

None

Holdings

AFM - 4.72%
AVON - 6.00%
BKS - 5.87%
BGO - 4.96%
CCT - 3.69%
CRL - 11.69%
D4T4 - 5.82%
ECSC - 4.75%
EYE - 4.75%
JDG - 5.44%
MGNS - 5.10%
OXB - 4.32%
RFX - 5.27%
SDI - 4.71%
VTC - 4.35%
WINK - 4.46%
WJG - 4.42%
XPP - 5.71%

Cash - 3.96%