Quality at a Reasonable Price

[simoan]

Bit bored this afternoon so thought I’d look for some near misses to see if there’s anything of interest. I found the following that pass 13 of the QARP screen rules. Notes as follows:

1. Dunelm (DNLM) - Misses out on EBIT Margin: Average = 12.2%.
2. Wilmington (WIL) - Only just misses out on EBIT Margin: Average = 14.2%, TTM = 19.3%
3. Ultimate Products (ULTP) - Misses out on EBIT Margin: Average = 8.7%, TTM = 10.3%
4. Kainos (KNOS) - Just misses out on valuation: Earnings Yld = 4.4%, FCF Yld = 4.6%
5. Next (NXT) - Misses out on dividend history after stopping payment during Covid (FY21). Otherwise OK.
6. Serica Energy (SQZ) - MIsses out on dividend history. Only paying since FY19.
7. Elixirr International (ELIX) - MIsses out on dividend history. Only paying since FY20.
8. AJ Bell (AJB) - Misses out on EPS growth forecast for FY25. Current year EPS growth = 6.2%
9. James Halstead (JHD) - Misses out on EPS growth forecast. Very anaemic.
10. City of London Investment (CLIG) - Misses out on EPS growth estimate for FY25. Current year EPS growth = 22.8%
11. M Winkworth (WINK) - Misses out on EPS growth estimate for FY24.
12. IG Group (IGG) - Misses out on poor EPS -> FCF conversion.
13. CMC Markets (CMCX) - Misses out on Interest Cover. It has net cash though! A data anomaly because EBIT negative at interims 9/23?
14. Paypoint (PAY) - Misses out on Interest Cover. It has net cash though! A data anomaly.
15. Domino’s Pizza (DOM) - Just misses out on Net Debt/EBITDA = 2.4x

FWIW I currently own 5 of the above - Next, IG Group, CMC Markets, Ultimate Products and CLIG.

Anyone got any thoughts on any of these? Of most interest to me is Wilmington as it looks like there maybe EBIT margin expansion worthy of further investigation. Could just as easily be a one-off though. Not a company I’ve looked at before and yet I know someone that works for them!

[88V8]

Bit bored this afternoon so thought I’d look for some near misses to see if there’s anything of interest. I found the following that pass 13 of the QARP screen rules. Notes as follows:

10. City of London Investment (CLIG) - Misses out on EPS growth estimate for FY25. Current year EPS growth = 22.8%
14. Paypoint (PAY) - Misses out on Interest Cover. It has net cash though! A data anomaly.

FWIW I currently own 5 of the above - Next, IG Group, CMC Markets, Ultimate Products and CLIG.

Anyone got any thoughts on any of these?

I've held CLIG for years, good divi payer which is what matters to me, although their SP has sagged.
And Paypoint, used to hold but since I sold them the SP is down about 45%.

I sometimes wonder if Dod has a point when he talks about the importance of 'company culture'. Not something that one can easily analyse. Do you run this screen periodically on your existing holdings to determine whether they still merit their place?

V8

[simoan]

Bit bored this afternoon so thought I’d look for some near misses to see if there’s anything of interest. I found the following that pass 13 of the QARP screen rules. Notes as follows:

10. City of London Investment (CLIG) - Misses out on EPS growth estimate for FY25. Current year EPS growth = 22.8%
14. Paypoint (PAY) - Misses out on Interest Cover. It has net cash though! A data anomaly.

FWIW I currently own 5 of the above - Next, IG Group, CMC Markets, Ultimate Products and CLIG.

Anyone got any thoughts on any of these?

I've held CLIG for years, good divi payer which is what matters to me, although their SP has sagged.
And Paypoint, used to hold but since I sold them the SP is down about 45%.

I sometimes wonder if Dod has a point when he talks about the importance of 'company culture'. Not something that one can easily analyse. Do you run this screen periodically on your existing holdings to determine whether they still merit their place?

V8

I bought CLIG a couple of times last month. It’s not a big holding but it punches above its weight with dividends. It’s really a play on the large discounts to NAV of the Investment Trusts it holds reverting at some point. As things go, I quite like reversion to the mean as a driver of profit and share price increases. Paypoint I’ve never looked at because the business model just does not interest me. I don’t run this screen very often tbh. It’s irrelevant whether something I already hold fails to pass through the screen as that is not a good reason to sell on its own. The screen is only intended for finding potential new investments.

As for “company culture”, I find it a quaint idea. Certainly quality company management is extremely important and that’s something I always bear in mind, it’s certainly one of the most attractive features of Next and Games Workshop, for instance. But from my experience, company culture most often changes when the management changes, and so I’m always nervous when such a transition happens. However, it can sometimes be a very positive thing.

[monabri]

Anyone got any thoughts on any of these? Of most interest to me is Wilmington as it looks like there maybe EBIT margin expansion worthy of further investigation. Could just as easily be a one-off though. Not a company I’ve looked at before and yet I know someone that works for them!

Not one I've come across. Initial thoughts are .."looks good" based on what looks to be significant improvements in ROE & ROCE ...to the point where I would ask "what changed - about mid 2020? (not knowing the background...suspect a sale of assets? ).

Debt free.

I note 3 directors were selling -

02 Oct 23 Sell UK£87,603 Guy Millward Qty 27,206 UK£3.22 [CFO]
02 Oct 23 Sell UK£474,119 Mark Milner Qty 147,242 UK£3.22 [CEO]
02 Oct 23 Sell UK£169,330 Richard Shamsi Qty 52,587 UK£3.22 [Role?]

Next results, H1, 19th Feb 2024.

[simoan]

Anyone got any thoughts on any of these? Of most interest to me is Wilmington as it looks like there maybe EBIT margin expansion worthy of further investigation. Could just as easily be a one-off though. Not a company I’ve looked at before and yet I know someone that works for them!

Not one I've come across. Initial thoughts are .."looks good" based on what looks to be significant improvements in ROE & ROCE ...to the point where I would ask "what changed - about mid 2020? (not knowing the background...suspect a sale of assets? ).

Debt free.

I note 3 directors were selling -

02 Oct 23 Sell UK£87,603 Guy Millward Qty 27,206 UK£3.22 [CFO]
02 Oct 23 Sell UK£474,119 Mark Milner Qty 147,242 UK£3.22 [CEO]
02 Oct 23 Sell UK£169,330 Richard Shamsi Qty 52,587 UK£3.22 [Role?]

Next results, H1, 19th Feb 2024.

Not much bothered by the director saless tbh as they were only to cover tax costs when exercising options. They kept the rest of the shares. If you refuse to invest on the basis that such share sales are bad, you’ll end up with a very small pool of possible investments! A quick glance tells me Wilmington is very cash generative and that it may have made an acquisition or two that improved profitability; or it could be some financial anomaly resulting from Covid in FY20 although it has a June year end. I’m out all day tomorrow but plan on taking a look at Wilmington at the end of the week. If there’s anything interesting I’ll post something.

[doug2500]

I've never heard of Wilmington either but at first glance I quite like it.

[Dod101]

I've held CLIG for years, good divi payer which is what matters to me, although their SP has sagged.
And Paypoint, used to hold but since I sold them the SP is down about 45%.

I sometimes wonder if Dod has a point when he talks about the importance of 'company culture'. Not something that one can easily analyse. Do you run this screen periodically on your existing holdings to determine whether they still merit their place?

V8

I bought CLIG a couple of times last month. It’s not a big holding but it punches above its weight with dividends. It’s really a play on the large discounts to NAV of the Investment Trusts it holds reverting at some point. As things go, I quite like reversion to the mean as a driver of profit and share price increases. Paypoint I’ve never looked at because the business model just does not interest me. I don’t run this screen very often tbh. It’s irrelevant whether something I already hold fails to pass through the screen as that is not a good reason to sell on its own. The screen is only intended for finding potential new investments.

As for “company culture”, I find it a quaint idea. Certainly quality company management is extremely important and that’s something I always bear in mind, it’s certainly one of the most attractive features of Next and Games Workshop, for instance. But from my experience, company culture most often changes when the management changes, and so I’m always nervous when such a transition happens. However, it can sometimes be a very positive thing.

I think the point is that company culture tends to be deep seated and tends not to change much simply because new Directors or senior staff tend not to change all at once and so they recruit new directors who are more or less ‘one of us’, thus preserving the same culture. I think it is tremendously important.

I must say that I gained when one company suddenly changed its culture. When Lord Weinstock retired from GEC he left a pile of cash and a very conservative culture. George Simpson took over and his background suggested that he would be a go getter. I bought GEC shares on that basis and of course Simpson changed the old company beyond all recognition, selling off lots of it and plugging in to technology. I was fortunate enough to sell most of my what became Marconi shares before they crashed and did well out of it. So culture can work both ways but it is very important to recognise it.

Dod

[simoan]

I've never heard of Wilmington either but at first glance I quite like it.

I downloaded the Annual report last night and started reading it. What they do is so deadly dull I couldn’t stay awake. They provide data services and training for governance, regulation and compliance (GRC) and have 8,000 customers. I like dull businesses especially where there’s no customer concentration and they are highly profitable and cash generative. I need to read back through RNSes for the past year or so tomorrow to figure out what had been happening, but it does seem that the company has refocused recently in GRC and improved margins.

[simoan]

A disposal by Wilmington announced this am: https://www.londonstockexchange.com/new ... n/16313065

Looks like it may be a MBO.
All the best, Si

[doug2500]

I downloaded the Annual report last night and started reading it. What they do is so deadly dull I couldn’t stay awake. They provide data services and training for governance, regulation and compliance (GRC) and have 8,000 customers. I like dull businesses especially where there’s no customer concentration and they are highly profitable and cash generative. I need to read back through RNSes for the past year or so tomorrow to figure out what had been happening, but it does seem that the company has refocused recently in GRC and improved margins.

So did I!

I think to summarise the last few years - concentrate on core businesses, sell non core, pay off debt with proceeds, turn into a net cash business, produce loads of cash because we amortize so much software & intangibles.

They may acquire until they have debt again but as long as it's not too much and is paid off through cashflows that's okay. Their last acquisition wasn't cheap though, even though they say they turn down loads on valuation. It was probably okay but just IMO.

Quite a large and flashy report for the mcap I thought, but maybe that goes with a full listing?

[simoan]

I think to summarise the last few years - concentrate on core businesses, sell non core, pay off debt with proceeds, turn into a net cash business, produce loads of cash because we amortize so much software & intangibles.

They may acquire until they have debt again but as long as it's not too much and is paid off through cashflows that's okay. Their last acquisition wasn't cheap though, even though they say they turn down loads on valuation. It was probably okay but just IMO.

Quite a large and flashy report for the mcap I thought, but maybe that goes with a full listing?

That's a good summary by the looks of it. I've not had time to delve much deeper yet but a quick look at the Stockopedia Report told me there was quite a bit going on over the past five years with no sign of the steady progression in numbers I'd normally look for in a quality company. This is what you see when a company has been making acquisitions and disposals over a period of time. I also take your point about the glossy Annual Report; quite different to my gold standard - Games Workshop

Thanks for your thoughts.
All the best, Si

[doug2500]

You would like BVXP. Until quite recently I was on the register and got a hard copy of the report. It looked like it was just printed in the office in B & W and stapled together. Not a picture in sight.

I still hold, just in nominee accounts.

[simoan]

You would like BVXP. Until quite recently I was on the register and got a hard copy of the report. It looked like it was just printed in the office in B & W and stapled together. Not a picture in sight.

I still hold, just in nominee accounts.

I'm a long term BVXP holder. Only held in a nominee account though. The more recent on-line AR's have actually been quite flashy, certainly in comparison to Games Workshop! Glad to hear they're not wasting shareholder funds on the physical version

[simoan]

Just for full disclosure, I have just taken a first nibble at Wilmington. I will wait for the Interim results on 19th Feb before making any further decisions. However, I have seen enough already to like what I see and open a position. The company has been listed since 1995 but there is clearly a viable looking transformation happening under relatively new senior management, who all have relevant experience of developing data and information based businesses. The Chairman (Martin Morgan) and CEO (Mark Milner) are ex Daily Mail & General Trust and have been on board since mid-2018 and mid-2019, respectively.

FWIW I like data businesses with proprietary data on digital platforms. Such companies will gain from use of AI, not be made irrelevant by it. It's one of the most interesting aspects and areas of growth for Bloomsbury Publishing in which I have a holding, although everyone tends to concentrates on the book publishing side. Similarly, with companies like RELX and LSEG. In that respect, Wilmington looks mispriced.

All the best, Si

[simoan]

Quick update. Following last weeks FY23 results Unilever no longer passes the QARP screen. The 5year average ROCE has dropped below 20% (but is still an excellent 18.7%) and the net debt has just breached the 2x EBITDA level (still not a problem though).

[simoan]

Just on the off chance anyone is still reading this thread... Moneysupermarket. com (MONY) released FY23 results and Wilmington (WIL) HY24 results on Monday.

Both sets of results were OK but largely unremarkable. MONY still passes the QARP screen and looks good - 7% FCF and Earning yields with 5.2% FY24 dividend yield. I may add to my existing position on any price weakness in the next few weeks. In the case of WIL, the results were a little bit confusing due to a number of adjustments caused by the state of flux the company is in with some lower margin parts of the business being held for sale and part year contributions from recently acquired businesses. However, margins looked good (EBIT margin for continuing businesses was 16%), commentary and outlook was positive, and the interim dividend was increased 11%. So, a lot to like.

All the best, Si

[doug2500]

I'm a bit worried WIL won't make full year revenues, and so profit. They've a lot to do in H2, and if they sell the healthcare division soon, less businesses to achieve it with. The acquisitions may make it up but it's far from clear to me.

I was poised to top up on reassuring results but as it stands I decided to hold for now. If they achieve the FY numbers, or become cheaper in the interim, I would pull the trigger then. Probably. Obviously by then it may be more expensive....

On ROCE you may be interested in this:

https://knowledge.sharescope.co.uk/2024 ... rformance/

[simoan]

I'm a bit worried WIL won't make full year revenues, and so profit. They've a lot to do in H2, and if they sell the healthcare division soon, less businesses to achieve it with. The acquisitions may make it up but it's far from clear to me.

I was poised to top up on reassuring results but as it stands I decided to hold for now. If they achieve the FY numbers, or become cheaper in the interim, I would pull the trigger then. Probably. Obviously by then it may be more expensive....

On ROCE you may be interested in this:

https://knowledge.sharescope.co.uk/2024 ... rformance/

I think revenue is usually H2 weighted as that seems to be when they bill the majority of their US customers, so I'm not unduly concerned, although the picture isn't that clear due to the ongoing program of acquisitions and disposals. Like you, I was ready to increase my position but held off until there is a little more clarity.

As for the Phil Oakley article, I have read similar arguments before. ROCE is not a panacea but I find his idea to exclude goodwill quite ridiculous. I don't like companies with lots of goodwill, so for me, it's a good thing to exclude it from the ROCE calculation. And as if to illustrate my point very well, look at the list of companies he finds with low ROCE but high ROOCE ("Return On Operating Capital Employed"). Dreadful! the lot of them. Terry Smith would laugh in his face...

Of course, you shouldn't use ROCE on it's own, and it's only really applicable to certain sectors and types of companies anyway. I always look at the trend as a declining ROCE is a sure sign of a company with bad management or a business where profits are being spread thinner across the asset base. You could just as easily use ROE but I like that even less as it greatly enhances companies with lots of debt. Again, I don't like companies with high debt.

All the best, Si

[kempiejon]

Just on the off chance anyone is still reading this thread... Moneysupermarket. com (MONY) released FY23 results and Wilmington (WIL) HY24 results on Monday.

Both sets of results were OK but largely unremarkable. MONY still passes the QARP screen and looks good - 7% FCF and Earning yields with 5.2% FY24 dividend yield. I may add to my existing position on any price weakness in the next few weeks. In the case of WIL, the results were a little bit confusing due to a number of adjustments caused by the state of flux the company is in with some lower margin parts of the business being held for sale and part year contributions from recently acquired businesses. However, margins looked good (EBIT margin for continuing businesses was 16%), commentary and outlook was positive, and the interim dividend was increased 11%. So, a lot to like.

All the best, Si

Simoan, I'll chirp in to give you some support. I've help MONY for ages. They looked excellent money when I bought them, then the increasing dividend seemed a good reason to hold on as they steadily gained value. Been in the doldrums for quite a while, if they're good on quality metrics I'll have a look. They've not done much good with their price for about 5 years, is it time for rerating now, I'll have a shuftie.

[simoan]

Simoan, I'll chirp in to give you some support. I've help MONY for ages. They looked excellent money when I bought them, then the increasing dividend seemed a good reason to hold on as they steadily gained value. Been in the doldrums for quite a while, if they're good on quality metrics I'll have a look. They've not done much good with their price for about 5 years, is it time for rerating now, I'll have a shuftie.

I only bought my holding between April and July 2022 when the company appeared on another screen I run that looks for quality companies near their 52 week low. That’s up about 38% not including dividends. The analyst estimates are for earnings of 17p for this year which would be a 25% increase over last. I’d like to think if they achieve that the share price might follow. Time will tell…