Category Archives: Portfolio

A tunnel in a deep mine

New stock: Why I’ve added Highland Gold Mining Ltd to my portfolio

A tunnel in a deep mineDisclosure: Roland owns shares of Highland Gold Mining, Kingfisher and Millennium & Copthorne Hotels.

I’ve been on something of a spending spree recently, adding three new stocks to the portfolio so far in May.

You can see all the details on my portfolio page, but in short the companies are B&Q owner Kingfisher, FTSE 250 group Millennium & Copthorne Hotels and Russian gold miner Highland Gold Mining Ltd (LON:HGM).

I’ve thought long and hard about whether to invest in gold. I’m not a gold bug, but the market for gold now seems fairly stable. On that premise, a number of cash generative and low-cost gold producers have started to show up in my value screens.

Highland Gold Mining has emerged as the winner from a short list of three:

  • Centamin
  • Pan African Resources
  • Highland Gold Mining

Centamin: I ruled out Centamin because of its ongoing legal problems in Egypt. The biggest worry is that a case challenging the validity of its mining licence will go against the firm. I also feel that on 17 times forecast earnings and 1.7 times book value, Centamin stock is quite fully valued at the moment.

Pan African Resources: I’v nothing against this South African/Zimbabwe-based miner, but free cash flow has lagged behind earnings over the last few years. Plus I find PAF’s RNS announcements unnecessarily confusing and difficult to read. I also have concerns about the ongoing labour relations problems afflicting South African miners. These are justified, in my opinion, but nevertheless are a deterrent from an investment perspective.

Why Highland Gold?

Having ruled out Centamin and Pan African Resources, I decided to go with Russia-focused Highland Gold Mining. This is something of an oligarch stock, with backers including Roman Abramovich and former Sibneft president Eugene Shvidler.

The company was founded in 2002 “for the purpose of acquiring, consolidating and developing a portfolio of quality gold mining projects in the Russian Federation”. It’s been reasonably successful. In common with most Russian miners, costs are low by industry standards. Cash generation is strong and the firm pays generous dividends.

One downside of HGM’s ownership profile is that the free float is only 50%. But Highland Gold has traded continuously on AIM for 14 years. It has a far better trading record than many more freely-held commodity stocks. I’m also reassured by the presence of Canada’s Barrick Gold on the shareholder register. Barrick has a 20% stake in HGM, which would seem likely to give it the casting vote in the event of any corporate action.

The stock looks affordable to me

I’ve not carried out an in-depth analysis of the quality of Highland Gold’s mines or reserves. Such a task is outside my competence and would take more time than I have available. So I based my decision to buy on key performance measures and valuation metrics.

  • Spot gold price 12/05/17: $1,228/oz
  • 2016 all-in sustaining cost AISC: $652/oz
  • P/B: 0.8
  • Trailing P/E: 12.2
  • Trailing P/FCF: 7.5
  • Earnings yield (Op. profit/EV): 11%
  • Net debt to net profit: 4.3x
  • 2017 forecast P/E: 10.8
  • 2017 forecast yield: 6.5%

In my view, these are all attractive values, with the possible exception of the net debt. However, net borrowing fell from $231m to $205m last year. The group’s cash generation leads me to expect further reductions this year. I don’t think this level of gearing is likely to cause a problem.

My overall view is that HGM looks good value at current levels. The yield is attractive and the group’s low mining costs should help to ensure a reliable stream of free cash flow, regardless of the price of gold. On that basis, I recently added Highland Gold Mining to my value portfolio.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Shanghai skyline

New stock: A stay at Millennium & Copthorne Hotels plc could prove profitable

Shanghai skyline

Disclosure: Roland owns shares of Millennium & Copthorne Hotels and Hargreaves Services.

In this post I’m going to look at one of two new stocks I’ve recently added to my value portfolio. A second post will follow, covering the second addition.

Buying stocks which trade at big discounts to their tangible net asset value is often riskier than Ben Graham devotees (of whom I am one) would have you believe.

Although it’s worked out well for me with Hargreaves Services, the liquid and heavily-analysed nature of modern markets means that mid-cap or larger stocks rarely trade at big discounts without good reason.

Notwithstanding this risk, I’ve recently added FTSE 250 hotel group Millennium & Copthorne Hotels (LON:MLC) to my portfolio. This luxury hotel group was founded as CDL Hotels International in 1989, as a subsidiary of the Singapore-based Hong Leong group.

Today, MLC is controlled by City Developments Ltd (SES:C09), a Singapore-based property group with a market cap of £5.4bn.

I think it’s fair to say that the whole enterprise is essentially a family business: both MLC and City Developments were founded by members of the Kwek family, which runs the Singapore-based Hong Leong group.

Why buy?

The opportunity on which I’ve based my purchase is that at 450p, Millennium & Copthorne currently trades at a 54% discount to its tangible book value of 989p per share. That’s despite having a strong balance sheet and an improving outlook.

MLC’s shares have historically traded at a discount of around 20% to book value (e.g. in 2015, book value was c.700p and the share price was about 580p). This suggests to me that the current discount is exceptional and should narrow as and when the firm’s profits recover. My calculations suggest that a return to a 20% discount to NAV would imply 50% upside from a share price of 450p.

Although trading has been disappointing over the last year, I don’t see this as a reason to write down the value of a large portfolio of upmarket hotels in prime city locations across the world.

In the short term, the current valuation doesn’t seem excessive. I’m also reassured by the group’s low level of gearing:

  • 2017 forecast yield of 1.8%
  • 2017 forecast P/E of 15.7
  • Net debt of £710m, versus fixed assets of £4.3bn.

One other point in favour is that analysts’ forecasts have recently been upgraded for both 2017 and 2018. This graph from Stockopedia shows the recent improvement in City sentiment:

MLC Broker forecast trend May 2017

MLC broker forecast trend May 2017 (source: Stockopedia)

What could go wrong?

As far as I can see, there are four main risks:

1. A bid is unlikely: MLC’s majority-owned structure means that a bid  from an external buyer is very unlikely. In last year’s third-quarter update, management reiterated its commitment to a long-term ownership strategy: “The Group has a long term perspective and considers asset ownership as key to its strategy.”

2. No shortcuts: This commitment to asset ownership also means that MLC is unlikely to turbocharge its returns in the way that its FTSE 100 peer InterContinental Hotels has done. InterContinental’s franchise/management model makes it hugely profitable, but net fixed assets have shrunk from £2.2bn in 2012 to just £857m at the end of 2016.

My reading of MLC’s Asian owners is that they are shrewd and share my view that over the long term, the value of prime real estate in major cities is only ever likely to rise. They won’t exchange this advantage for shorter-term profits.

3. Valued by yield, not assets: Points 1 and 2 could mean that the market only values MLC by its dividend yield. As this is already low, at about 1.8%, the shares could stagnate until the company lifts the payout.

4. Not very profitable? MLC’s business will continue to struggle in an indifferent global market. In my view, this is a short-term risk that’s unlikely to be a longer-term problem. Improved management, currency shifts and other cyclical factors should mean that profits reflect the quality of the assets.

Points one through four are all valid risks that could limit the profitability of my investment. But in my view, none of them imply any particular downside risk. Even if the shares don’t go up, the risk of a long-term decline seems low to me.

On that basis I’ve added Millennium & Copthorne Hotels to my portfolio. I see this as a safe long-term buy with decent upside potential from asset backing and improvements to profits.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A picture of a CPU

Is Murgitroyd Group plc poised for a recovery?

Disclosure: Roland owns shares of Murgitroyd Group.

A short post to introduce one of the latest additions to my value portfolio.

Murgitroyd Group (LON:MUR) is a £36m firm specialising in “intellectual property advisory services”.

The main part of the business seems to be providing patent attorney services and the group operates throughout Europe. It’s also active in the US, where it’s targeting longer-term growth by selling European patent services to US companies.

Murgitroyd’s share price fell by about 25% in one day in January, after the company warned investors that first-half profits would be below expectations. Full-year profit guidance was also cut. I am generally a believer of the adage that profit warnings often come in threes, so I’d normally have stayed away a little longer.

However, last week’s third-quarter trading statement was much stronger than expected, advising investors that:

“The Board also confirms that the underlying trading result for the third quarter was much improved on the first half performance and ahead of revised internal forecasts for the period.”

A further trading update is expected in June 2017. Arguably I should have waited until then to consider a buy. But I’ve been tempted by the company’s strong balance sheet and value credentials.

I’d also argue that this sector is only likely to expand over the coming years, providing attractive growth and consolidation opportunities for a mid-sized player such as Murgitroyd.

Why I bought

Here’s a short summary of Murgitroyd’s financial attractions:

  • 10-year average eps growth rate of 4.6%
  • 10-year average dividend growth rate of 6.2%
  • Earnings per share convert consistently to free cash flow — around 72% cash conversion since 2011
  • Free cash flow consistently covers the dividend, usually by a large margin
  • Debt free with net cash of £1.1m, which is a significant amount relative to TTM net profit of £2.7m
  • 5-year average ROCE of 16%
  • Forecast P/E of 13, falling to a P/E of 12 for 2018
  • 4% dividend yield

This appears to be a consistently profitable and cash generative business, with a moderate valuation and stable long-term growth.

Another point worth noting is that founder Ian Murgitroyd remains chairman of the group, with a 26.8% shareholding. Edward Murgitroyd, who I assume is his son, has a 4.3% stake and heads up the group’s US presence in his role as vice chairman. This family ownership ought to ensure that the focus remain’s on sustainable long-term growth and that acquisitions are proportionate and carefully considered. I hope.

In any case, I’ve bought some Murgitroyd shares and await the trading update in June and the firm’s full-year results in September with keen anticipation.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Morrisons Newport IoW

Portfolio changes: MRW, AAL, BLT & BP

Disclosure: Roland owns shares of Anglo American, BHP Billiton and BP.

Robert Louis Stevenson said in 1878 that “To travel hopefully is a better thing than to arrive”. This is often true in life but also in the stock market, where it translates into “buy the rumour, sell the fact”.

I’ve been agonising about what to do with my holdings in Wm Morrison, Anglo American, BHP Billiton and BP this year. After travelling hopefully last year, they seem — to varying extents — to have arrived back at something approaching business as usual.

After much thought, I’ve made the following changes:

  • Sold: Wm Morrison Supermarkets (MRW.L);
  • Reduced: Anglo American (AAL.L) & BHP Billiton (BLT.L);
  • Hold: BP (BP.L).

Here’s a summary of the thinking behind each of these decisions.

Wm Morrison Supermarkets

The firm’s 2016/17 results were pretty decent and showed continued progress. ROCE rose to about 7% and the group’s operating margin increased from 1.9% to 2.9%.

But the shares are no longer anomalously cheap, in my view:

  • PE10 = 13
  • Trailing P/E = 21.3
  • Trailing yield = 2.4%
  • P/TB = 1.55

A second factor is that the firm’s free cash flow fell from £854m to £670m last year. I commented in my 2016 review that free cash flow would have to fall back towards profits eventually. That this is now happening suggests to me that the extraordinary gains from squeezing working capital and improving stock management are now slowing.

The group’s results seem to confirm this:

  • £1bn cost savings achieved. Further productivity and cost savings to come
  • Good progress with medium-term cash flow targets: achieved over £900m of £1bn working capital, and almost £900m of £1.1bn disposals

My investment in Wm Morrison was (as ever) made too early, but has delivered a satisfactory result nonetheless:

  • Capital gain: 36%
  • Dividend return: 16%
  • Annualised total return after costs: 19%

Anglo American & BHP Billiton

FTSE 100 miners BHP Billiton and Anglo American still look relatively cheap to me:

  • BHP Billiton
    • PE10 = 9.0
    • 2017 forecast P/E = 10.5
    • 2017 forecast yield  = 5.7%
    • Trailing P/FCF = 11.5
  • Anglo American
    • PE10 = 6
    • 2017 forecast P/E = 6.2
    • 2017 forecast yield = 3.2%
    • Trailing P/FCF = 6.6

I’m conscious that these forecasts are heavily subject to currency risk, commodity price risk, and — and in Anglo’s case — political risk in South Africa. But I think that there’s the potential for further gains, for example from oil (BHP) and copper (AAL).

Overall, I think there’s still value on offer. But I also feel that the upside risks no longer outweigh the downside risks so decisively as they did a year ago. So I’ve halved my position in both stocks.


Should I sell BP? Is a full recovery already in the price?

After some thought, I’ve concluded that the oil market recovery remains at a relatively early stage and that BP’s valuation reflects this:

  • PE10 = 9.0
  • 2017 forecast P/E = 15, falling to a P/E of 12 in 2018
  • Forecast yield of 7%
  • The devaluation of the pound means that my dividend yield on cost is currently 9.6%!

To a large extent, the price of oil is still too low to encourage fresh investment. On balance, I think this situation is unsustainable and that prices are likely to rise further at some point in the future. The current stumbling block is the backlog of inventories, which in the US at least, remain high.

However, I’ve noted recently that financial commentators have started to suggest that there is no foreseeable reason for oil prices to rise. This kind of complacent speculative gloom may be a sign that the tipping point towards a rebalancing could be closer than we think. Remember when $100 oil was the new normal?

Another positive is that BP recently announced plans to target a much lower cash breakeven price of $35-40 per barrel by 2021. That’s a significant reduction from the c.$60/bbl it needs at the moment. Even a measure of success towards this target could unleash a significant level of free cash flow.

I have left my position untouched for now, and continue to hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

View from front of ship

Braemar Shipping Services plc: profit warning and dividend cut. What next?

View from front of ship Mattoso

Disclosure: Roland owns shares of Braemar Shipping Services and Lamprell.

23/01/2017: Braemar Shipping Services plc (LON:BMS) shares fell by 16% today after the group announced a profit warning and dividend cut.

It wasn’t the best start to the week, but in some ways it wasn’t a big surprise.

Dividend cut: Braemar’s 8% forecast yield was always likely to be cut, given the lack of earnings cover and weak underlying market conditions. Today’s update advised investors that the final payout will be cut by 70% to 5p, giving a total payout for the year of 14p (2015/16: 26p).

Assuming that next year’s interim payout is cut proportionally, then shareholders are looking at a 2017/18 dividend of about 7.7p. That’s a yield of about 3.1% at current prices, which seems about right to me.

Profit warning: The group’s shipbroking and oil and gas exposure was always a risk. As it turns out, shipbroking performed well last year and is on track to meet full-year expectations. The culprit behind the profit warning was the group’s Technical division, which has heavy exposure to the oil and gas market, where conditions have worsened “further than the board originally expected”.

Helpfully, Braemar provided precise guidance on revised profit expectations for the year ending 29 February:

… underlying operating profit before interest, acquisition related costs and tax for the year ended 28 February 2017 is now expected to be within the range of £3.0 million to £3.5 million.  This excludes a one off gain before tax from disposal of its interest in The Baltic Exchange of £1.7 million and one off costs associated with restructuring of approximately £2.7 million.

I’m not entirely sure how to map this onto broker consensus (prior to today) of adjusted post-tax earnings of £6.58m, but it’s clearly a decent-sized miss.

Back in October, the firm expected a stronger result in H2. It’s disappointing this hasn’t materialised. Given that management is experienced, this suggests that earnings visibility is poor. I guess this may continue for a little longer yet.

The much-flagged recovery in the oil price will take a while to translate into increased activity levels for service providers. How long appears uncertain. I wouldn’t be surprised to see more updates in the vein of today’s from both Lamprell and Braemar.

So what does the future hold?

The good news in today’ statement was that Braemar expects to end the year with net cash of £1.7m and an unused debt facility of £30m. Clearly the group’s balance sheet remains in good health and the business has generated cash this year. Albeit with some risk the debt facility may come into use this year.

Restructuring activity has intensified and annualised cost savings of £6m are expected this year. That’s quite significant for a company that reported full-year earnings of £6.8m last year.

My view that the company is a good quality business with attractive medium-term potential hasn’t changed. As I suspected, I bought too soon at 329p, but I’ve no intention of selling. I may average down at some point, although I haven’t done so yet.

As with Lamprell, I’d expect to see some signs of progress during the second half of 2017. For now, I’m sitting tight and doing nothing.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.