Bursting with Rock 'n' Rose energy

In the UK, the FTSE All-Share (Total Return) Index gained 2.3 per cent. It was just beaten by the FTSE 250 mid-cap, which was up 2.5 per cent, but further down the size bands performance, in contrast to January, was not so good; the FTSE Small Cap Index was up just 0.9 per cent and the Alternative Investment Market (Aim) All-Share was off -1.1 per cent. Brexit political shenanigans continue, and at this stage it is difficult to determine what the eventual outcome will be, although a no-deal Brexit looks to be off the table.  

Apart from the Aim All-Share, the only other notable red marks were from the Indian Sensex, -1.1 per cent, Russia Trading System, -2.3 per cent, and gold, -0.8 per cent. India no doubt was hit by the military skirmishes with Pakistan. As for gold, it again failed to break out above $1,380 per ounce (oz), which seems to have been a ceiling for the past five years – who needs it when all is right with the World? For now, at least!

Performance

It was a good February for the JIC Portfolio. It was up 3.3 per cent, making 9.4 per cent for the first two months of the year. Over the same period, the FTSE All-Share (Total Return) Index was up 2.3 per cent and 6.6 per cent. Over the longer term, since inceptionin January 2012 the JIC Portfolio is up 169.2 per cent (14.8 per cent annualised) compared with 76.6 per cent (8.3 per cent annualised) for the All-Share.

Some big moves, especially from two recent additions to the portfolio. RockRose Energy (RRE), bought in January and subsequently added to in mid February, was up 23.5 per cent, and Altitude (ALT), again bought in January and added to in February, gained 22.2 per cent. The only news from Altitude during the month was that chief executive Nichole Stella had bought shares. I think there was growing appreciation of the potential from its purchase of AI Mastermind.

RockRose Energy released an important update on 12 February; it said that the production life of the Ross & Blake fields in which it has a 30.82 per cent interest had been extended from 2024 to 2029, and that its 2P reserves at 1 January had been increased by 9.4m barrels of oil equivalent (mmboe) to 35.9mmboe – an increase of 36 per cent. The shares moved nicely on that, gaining 26 per cent before being suspended on 25 February at 815p a share. More on that later.

Long-term favourite Bioventix (BVXP), my largest position, gained 15.2 per cent on no news. Kettle control maker Strix Group (KETL)  was up 11.8 per cent following a positive update, and Lloyds Banking Group (LLOY) gained 10 per cent, helped on by solid 2018 results and the announcement of a new share buyback program.

Little to report on the negative front. The rollercoaster that is the Taptica (TAP) share price had another drop, falling 24.1 per cent to 152p. The rally to 257p on 5 February was with hindsight a selling opportunity, which clearly some people grabbed. I may be a fool for hanging on to this one, but I keep going back to the free cash flow and valuation. 

Serica Energy (SQZ) gave up some of its recent gains, falling 12.0 per cent. I am not unduly concerned and think that as it releases news throughout 2019, the market will again appreciate just how cheap this stock is. The current buy case is not dependent on it, but like RockRose there should be potential for news on field life extension and increased reserves.

Statpro’s Revolution performance measurement system, which takes into account position size, shows that Bioventix added +0.9 per cent to performance in February, RockRose +0.8 per cent, and Altitude and Strix +0.5 per cent each. Taptica cost -0.7 per cent and Serica -0.5 per cent.

Recent activity

Apart from adding to Altitude on 1 February at 86.5p and RockRose on 13 February at 715p, I twice added to Duke Royalty (DUKE) on 1 and 4 February at 40.2p and 42.0p, respectively. Duke announced the acquisition of smaller competitor Capital Step Holdings, which increased Duke’s core investments from five to 11 and provided further diversification across new investment sectors, including telecommunications, media and recruitment. The acquisition was funded by an initial £10m cash consideration and the assumption of £11.65m debt. It is expected to be immediately accretive to Duke’s shareholders in terms of cash flow per share. Later in the month it announced a new royalty agreement, further diversifying its exposure. On current forecasts, the shares are on a prospective March 2019 dividend yield of 6.7 per cent and March 2020 of 8.1 per cent. With each new agreement, the shares, in my view, become less risky as its income flow is diversified across different companies, sectors and geographical regions. Thus far I am flat on my average purchase price, but I expect my patience to be rewarded by an eventual rerating of the shares. In the meantime, I am picking up a nice yield.

On the last day of the month I added to Diversified Gas & Oil (DGOC) following its 2018 results. Again, a very attractive dividend yield with current forecasts of a December 2019 yield of 9.1 per cent. Clearly, the market is sceptical of the company’s strategy. I’m up 40 per cent on my average in-price and am sticking with it.

I added a new holding to the portfolio: Scientific Digital Imaging (SDI). SDI designs and manufactures scientific and technology products for use in the life science, healthcare, astronomy and consumer manufacturing markets. It is pursuing a ‘buy and build’ strategy. Ultimately, I am backing the management to add shareholder value through sensibly priced acquisitions. The latest example was the acquisition of Graticules last month. SDI paid £3.4m free of cash and debt, which represented 1.8 times 2018 sales and 5.8 times earnings before interest, tax, depreciation and amortisation (Ebitda). Graticules, based in Tonbridge, applies chemical etchings and micro patterns to glass, film and metal foil, serving, amongst others, the microscopy, metrology and defence markets. Graticules fits SDI’s model of buying companies that are niche players with decent growth prospects, good cash flow and a direct relationship with its customers. FinnCap expects the deal to be 6.0 per cent accretive in the year ending April 2020. It has the smallest market capitalisation of any of my holdings at just £40m, but the management has big ambitions for the company, and I expect it to be a lot larger in a few years’ time.

To fund all these purchases, I grasped the nettle with Superdry (SDRY). I went through the portfolio asking whether I would buy the stock now if I didn’t already own it. In Superdry’s case I struggled to say yes. Sure, the valuation looked cheap, but the lightbulb moment came when I was walking along the beach in Estepona and saw a man of my age in a Superdry T-shirt; I worry that current management might struggle to re-invigorate the brand. Cutting the position was my third-largest monetary loss since inception of the JIC Portfolio seven years ago. There is, of course, a risk that I have bailed out at the bottom, but I think I will do better from SDI in the coming year. I also sold Taylor Wimpey (TW.), which I had bought opportunistically during December’s rout, booking a quick 20 per cent profit. I also sold the two tiny residual subscription share positions in Geiger Counter and Fidelity Asian Values.

Outlook

The definition of 'outlook' in Jason Zweig’s entertaining The Devil’s Financial Dictionary, is “a session at the Ouija board by financial pundits; like all Wall Street forecasts, an outlook is an aftercast, based not on what is likely to happen but rather on what has been happening”. Wary of falling into that trap, I can’t help feeling that the outlook remains quite positive. On a global basis, a pick-up in economic growth would be welcome and, in the UK, as I have mentioned in my last two monthly articles, equity valuations look cheap. In my opinion, all that is needed for a sharp rally is the removal of the current uncertainty surrounding Brexit. In that situation, I also expect sterling to rally, possibly to 1.3 versus the euro in the short term. The biggest beneficiaries would be the more UK-dependent small and mid-cap stocks, although given current valuations I think FTSE 100 members would also participate. When I write my next monthly review, we will either have left the EU on 29 March or there will be some sort of extension to Article 50. Exciting times!

John Rosier’s portfolio (at 28 Feb 2019)