Investment Matters

Profit reporting season synopsis: your portfolio

Profit reporting season for us was satisfactory at the company level.  By and large, most companies did as we expected, or in fact, surpassed our expectations. That, however, did not equate to instant gratification, with the share prices of a number of our investments responding either benignly or poorly, regardless of the result.

It’s hard to exactly put a finger on why this is, as a general statement.  Our best guess is that capital is not active now except where it can sell (liquidity worries are high at funds who are at risk of a run of cash requests) which means that quality can be more hurt in the short term, and if something looks like it might be a multiyear investment story, funds are not interested. It’s hard to find any winners in the short term!

Therefore the best you can do is fall back on the businesses themselves and ask the question, are they improving or growing in value?

In this regard reporting season was highlighted by 3 businesses (in particular) for us:

1.  Paragon: Whilst Paragon had a poor result (reported earnings, and share price decline) the business grew its core operations at >8% p.a.  This speaks to real strength, and shows that when it comes through the period of integration and high costs, profits will rise markedly.  It’s a good business and will be better for this period of consolidation.

2.  CML Group:  CML delivered a great result with earnings per share up +97%! and dividends up +33%. Most importantly however the business is well positioned to benefit from tougher general credit conditions (grow share) and does not have the same credit/default risk that a SME lender has. It is a better business today than in 2018.

3.  Paladin:  Paladin owns a Tier 1 low-cost uranium mine that is currently not operating, due to the bear market in uranium prices (post-Fukushima).  The company has been busy planning how to lower the operating costs fo this globally significant asset, and now sees a path to a cost per pound similar to the current market price. This is a remarkable achievement and sets the business up well as uranium recovers (it will, the market is becoming increasingly short) from its current price (about cost break even for this asset) to a point where the board determines a sufficient return can be made from restarting production.

Through our post-reporting season travels and interactions we would also put Healius, QBE, Emeco, Here, There & Everywhere, Aveo, Southern Cross Media, TZL, Moreton Resources, Northern Silica and Threat Protect in the category of businesses that are better this year (better decisions, better managed, more efficient, better opportunities) than the prior year.  It has been my experience that provided you are in businesses that you can see are getting better and are not overpaying for them, you will end up doing well from them financially in the medium term.

Today the portfolio trades on a PE of 9.1x, and a 4% expected dividend yield. It has 24.6% cash and is ready to roll when opportunities present.

coloured

- Dennison Hambling