Magic Hat portfolio: RM in, MRW out

Time for me to do some swapping in the Magic Hat portfolio.

Over 1 month, the portfolio is up 0.48%, compared to the comparative index that I chose of MCX (FTSE 350); although the ASX (FTSE All-Share) would have been a better choice in hindsight. I am actually quite pleased with this performance, as two shares in the portfolio – MJW (Majestic Wine) and MRW (Morrisons) – issued trading statements that saw their share prices decline substantially.

Furthermore, Stockopedia highlighted both companies as Earnings Downgrades, so I was determined to give one or the other the chop.

MRW is on a cheaper valuation, but MJW has better growth prospects. Supermarkets seems to be going down the road of Mutually Assured Destruction at the moment. MRW reported on 13 March that turnover was down 2%, like-for-like sales were down 2.8%, and underlying PBT was down 13%. MRW’s share price seems to be reacting in much the same way as TSCO (Tesco) did at the beginning of 2012. TSCO actually beat the indices over a 1-year period, assuming you bought after the crash, of course. The recovery was erratic, and timing would have been key.

MJW disappointed the market with its trading statement that it issued on 20 March. It expects to announce that PBT will be broadly in line (which is likely to be code for “slightly worse”) than the previous year. Like-foe-like was up 2.8%, but sales are expected to be flat for the year as a whole. MJW is currently on a PE of 15.8, which is not unreasonable, and it does have room to grow. “Furthermore, as part of our longer term growth strategy to increase the store footprint to over 300 and expand our e-commerce operations, the Board has decided to invest in the necessary infrastructure enhancements to underpin our future growth plans.”

In the portfolio I sold MRW at a price of 204.8p, for a loss of 28.4%. It’s a reminder that “safe” or “cheap” doesn’t necessarily mean you will make money. As I say, MRW could now go on to beat the Footsie, and undergo a valuation correction.

There’s a few companies in Stockopedia’s Greenblatt screen that caught my attention and I though was worthy of mention.

FLYB (Flybe) is at the top of the Greenblatt rankings, with a ROC of 114% and an EY (Earnings Yield) of 62.1%. I own shares in this. The calculations look a bit skew-whiff to me, though. I think Stockopedia is basing its calcs on what it thinks is TTM. Those figures look wrong to me, and are totally out of line with full-year reports, and projected reports. It’s a little difficult to tell. Digital Look estimates around a £30m AVERAGE PBT over the next 2 years. It net interest is say 2m, that gives an estimated EBIT of £32m. If I take Stockopedia’s EV of £400.8m as a given, then the EY is more like 8% (=32/400) – way below their calculation of 62.1%.

The Magic Hat portfolio already has an airline in it, so I’ll pass on FLYB. FLYB issued a trading update on 4 April: “The Group performed in line with management expectations … Despite a 4% capacity
reduction in Flybe’s UK scheduled airline in Q4 2013/14 … passenger volumes grew 6% year-on-year to 1.6m, with load factors increasing by 6ppt to 70%. ” The market reacted enthusiastically to the results, which is a good sign.

Another share that looked interesting is NPT (Netplay TV), which provides “interactive casino services to customers in the United Kingdom”. They operate, and you can watch and play live every night on Channel 5. NPT passed the Earnings Surprise screen, which caught my attention. Its trading update on 9 Jan was upbeat: “33% increase in total net revenue … Mobile and tablet net revenue increased 121% on prior year now accounting for 30% of total net revenue”. The market reacted well to the news.

NPT has an earnings yield of 8.6%, which isn’t great; but they do earn fantastic returns on capital, and a lot of growth is expected. As ever, gambling is still the subject of much government tinkering. It seems that governments will NEVER settle whether these internet companies should be legal or illegal, and how much tax they should pay. The big uncertainties surrounding NPT are:
1. the new POC (Point Of Consumption) tax. This means that the company will have to pay tax based on where the punter is, rather than the company’s tax domicile. Big chunks of profit could be taken out NPT as a result
2. there may be a ban or restrictions on advertising the kind of sites that NPT offers.

Digital Look also shows that directors did some heavy offloading of shares in Sep 2013.

The fact that there are
many uncertainties, heavy director selling, and a valuation that isn’t compelling puts me off, though, and I think it’s better not to risk money on it. NPT reports its finals tomorrow, so I’ll guess we’ll see if I was right, or not, to omit it from the portfolio. You should note that I do actually have a small position in NPT in my own portfolio, though.

So that leaves me with what I did actually add to the Magic Hat portfolio: RM. “RM plc is a United Kingdom-based company engaged in the provision of products and services to the United Kingdom and international education markets. It operates in four segments: Education Technology, Managed Services, Education Resources and Education Software. Education Technology, includes information technology (IT) hardware, network, Internet services and related installation and support.”

RM has a ROC of 94.2%. Its EY is 17.0%, which is nice. It has a stock rank of 100 (Value 91, Quality 99, Momentum 99), which is nice to see. RM is “restructuring” its Education Tech division, which will have a big negative impact on the forthcoming results, although should result in improved margins thereafter. RM has an EV/EBITDA of 4.05, which is undoubtedly less than half of the market. Stockopedia puts the market median EV/EBITDA at 27.0. The last time I checked, which was admittedly some time ago, the figure was around 8. That figure has likely increased since then, but I sincerely doubt it is as high as 27. I generally look at shares at over about £100m, so maybe Stockopedia is getting the high figure by including many micro-sized companies. I wouldn’t take a figure of 27.0 to be representative of the pool of investments most people are likely to consider.

RM as a PV50 of 6.6% (Price vs 50dma), which should mean that the share price isn’t over-extended. RM issued an IMS on 19 March, which was reasonably non-descript: trading was in-line with expectations, the restructuring of the Education Technology division was going according to plan, and the cash position went from £39.4m to £60.7m. The market reacted to well to the news, sending the share price up 2.74%, on a day that the ASX actually went down 0.41%.

So overall, RM looks like a good bet, and was added to the Magic Hat portfolio at 154.75p. I do own shares in RM.

Happy and prosperous investing to you all.

Update 08-Apr-2014 : NPT released their final year results today (8 April). They showed a 31% increase in net revenue and 32% in adjusted EPS. Despite this increase and a positive outlook (“I am confident that we will continue to improve performance year on year), shares traded down 8% at 9am. The potential impact of the POC seems to be weighing heavily on the minds of investors. CantEatValue has posted on The Motley Fool with an estimate of the impact.

Update 09-Apr-2014 El1te Trader posted on his blog, quantifying the likely effect of the POC. He sees good value at current levels (17.8p), but he doesn’t like the chart technicals, and notes that Henderson Global remain sellers of the stock.

About mcturra2000

Computer programmer living in Scotland.
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