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Private investor's diary: Bagging biotech gains

Our private investor diarist John Rosier’s portfolio’s good run continued through August, helped along by a five-bagger biotech
September 22, 2017

North Korean leader Kim Jong-un probably had the greatest impact on markets during the holiday month of August. Markets were not quite sure how to react to his continual baiting of the US and its allies. Gold was the main beneficiary of increased geopolitical tension, up 4.2 per cent to $1,338 (£990.87), its highest level since September last year. Other commodities were also strong, with copper up 6.6 per cent, closing the month at its highest price in nearly three years. Whether faster world economic growth or the sudden realisation that a lot of copper is used in electric motors is behind this move is a moot point. It looks, with demand accelerating, that it has further to go. (I’m rather regretting my sale of BlackRock World Mining (BRWM) a few months back, but at least I replaced it with Central Asia Metals (CAML) during July and August). Oil was steady, with Brent crude flat on the month at $52.19 a barrel. 

In equity markets, Russia, considered by many as looking very cheap, led the way, up 8.7 per cent. Positive returns were also recorded by the Hang Seng, +2.4 per cent, China, +2.2 per cent and the S&P 500, +0.1 per cent. The Dax was off 0.5 per cent and the Nikkei 225 was down 1.4 per cent. The UK performed relatively well, with the FTSE All-Share (TR) Index up 1.4 per cent, helped perhaps by further weakness in sterling. Sterling lost a further 2.7 per cent versus the euro and at 1.086 hit the lowest level since 2009. While it now looks rather undervalued, I wouldn’t bet against it touching parity before a meaningful rally gets underway. 

Finally, Bitcoin enjoyed a meteoric month, gaining 63.6 per cent to $4,376 at 31 August. Volatility continued with it touching $5,000 in the early days of this month, before dropping back towards $4,000. I am enjoying reading the conflicting thoughts on Bitcoin and learning about the Blockchain technology behind it. There are those that are convinced it’s a speculative bubble with little intrinsic value that will inevitably end up with many burnt fingers. On the other side are the true believers, who see it not only as a store of value but as the future of payment systems; fast, secure, cheap and accurate.  

I especially find the Blockchain technology interesting and whatever the outcome for Bitcoin and other crypto-currencies, I think Blockchain, like the internet, is something we will all take for granted in a few years’ time.  

 

JIC portfolio performance

The JIC Portfolio’s good run continued through August with it again finishing the month at a new high. It was up 2.4 per cent during August, leaving it up 21.0 per cent since 1 January and 156.9 per cent (18.1 per cent annualised) since January 2012. Over the respective time periods the FTSE All-Share (Total Return) Index returned 1.4 per cent, 8.2 per cent and 75.1 per cent (10.4 per cent annualised). 

Many of my larger positions performed well and I managed to successfully tiptoe through the minefield of profit warnings. The treatment of those that disappointed was savage, with FTSE 100 member Provident Financial (PFG) down 70 per cent on the day of its announcement. WPP (WPP) and Dixons Carphone (DC.) were down 14 per cent and 34 per cent respectively on the day they disappointed their shareholders. I remember when Dixons took over Carphone Warehouse in 2014, there were many who thought Dixons was making a mistake. Perhaps the chickens have come home to roost.  

Bioventix (BVXP) was the leader of the pack, gaining 16.3 per cent. There was no catalyst in the form of news from the biotechnology company. There was just demand for the shares in anticipation of further good news ahead, especially on its high-sensitivity troponin test for heart attacks. Recent purchase Central Asian Metals was up 14.0 per cent, helped by the buoyant copper price. Card Factory (CARD) responded well to an upbeat half-year trading update, gaining 8.5 per cent. Baillie Gifford Shin Nippon (BGS) was up a further 7.1 per cent (why oh, why did I reduce my position last December?) Templeton Emerging Markets Investment Trust (TEM) was up 6.9 per cent and India Capital Growth (IGC), 6.4 per cent. Lastly, my largest position, Conviviality (CVR), continued to make new highs, up 6.6 per cent. 

The only disappointment was AdEPT Telecom (ADT), which fell 12.1 per cent, giving up some of its recent gains. It announced what looked like a strategically sound and sensibly priced acquisition of Atomwide. I think, however, that the market was a little disappointed at director selling, especially as it was described as “to satisfy demand from one of the company’s existing institutional shareholders”. In my view, the institution should have paid up for the size, not got it at a discount. Just a minor gripe as I am still happy to have a decent holding in a company that is delivering strong cash flow returns to shareholders. 

 

Bioventix blossoms

Last month I mentioned a presentation I attended in June given by a very successful private investor, which had prompted me to think about how many holdings I carried in my portfolio. Well, I must thank that gentleman for introducing me to Bioventix back in 2014. In reaction to a trading update on Monday 5 September, it is up nearly five times since my first purchase and, having added along the way, up 200 per cent on my average buy-in price, my most recent purchase being at 1,795p in mid-July.

First, a reminder of what it does.  It develops monoclonal antibodies used in clinical diagnostics, such as blood testing. In other words, it provides the active ingredient in blood tests that detects whether whatever you are testing for is there. The antibodies created at Bioventix are generated in sheep and are of particular benefit where the target is present at low concentration and where conventional antibodies, usually from mice, have failed to produce a suitable reagent. It offers a portfolio of antibodies to customers for both commercial use and R&D purposes, for the diagnosis or monitoring of a broad range of conditions, including heart disease, cancer, fertility, thyroid function and drug abuse. 

It currently supplies antibody products and services to its core customer base of five large multinational diagnostics companies including Siemens and Philips, which supply testing machines to hospitals. The company also counts ‘second tier’ companies among its client base. It has been successful in recent years in selling to these its antibody for testing vitamin D deficiency. 

In my opinion it is an attractive investment and is without doubt the highest quality company in my portfolio. What defines quality? From a financial point of view the metrics are stunning. In its last financial year for which we have figures, ending June 2016, it achieved an operating margin of 76.2 per cent, a return on assets of 44.6 per cent and a return on capital employed of 47.2 per cent. Reported earnings per share of 68.0p converted into operating cash flow per share of 62.7p. 

Capital expenditure of just 0.41p left free cash flow of 62.3p. With the company in a net cash position the free cash flow went towards paying a 62.5p-a-share dividend, up 91 per cent on the year before. Its long-term growth record is strong, with revenue compounding at +23 per cent a year in the five years to June 2016, earnings up 31 per cent a year and the dividend up 55 per cent a year. 

In addition to its attractive financial characteristics it is operationally very strong. Its strength comes from its intellectual property in developing effective new antibodies but also though its relationship with its customers. There is a two to five-year period between delivering evaluation samples to customers and possible product launches by such customers. Once the new test is established it has a long lifetime, and given the costs involved is unlikely to be supplanted by a new entrant. 

Bioventix is paid a royalty every time its antibody is used. In short, its competitive position is protected by the effectiveness of its product, the long lead times to develop new antibodies and its relationship with its clients. Rarely have I met a company that includes a chart mapping out its product development plans for 2020-30 in its presentation pack. There is plenty of visibility in its earnings. 

Substantial growth in the next few years is anticipated from its long-awaited ‘high sensitivity’ troponin test which Siemens launched in June this year. Troponin is released into the blood when someone is having a heart attack. If, like a friend of mine, one presents at hospital with a suspected heart attack, a blood test is taken that will determine whether you are indeed having a heart attack. If you have/are you will be kept in and given appropriate treatment; if not, it’s likely, as in my friend’s case, that you will be sent home. Not only better therapeutic outcomes, but huge cost savings for the hospital. 

One last tick in the box is that Peter Harrison, founder and chief executive, has a 10 per cent stake in the company. Our interests are nicely aligned. 

Although not as cheap as when I first bought, I believe it is still attractive given its long-term prospects. I can see myself holding this stock for many years to come.  

 

Looking Ahead

The further equity markets go up the shriller the voices calling for a crash, especially in the US. As I mentioned last month, market timing is very difficult. I accept it is nearly two years since we had a correction (a 10 per cent fall), but I don’t feel the urge to raise my cash position from its current 5 per cent. That could change if the North Korean situation worsens and starts to impact on world growth and trade, but for now I will continue to focus on searching for winning stocks. 

 

 

Private investor’s diary (at end-August)

NameMarket cap (£m)% of portfolio
Conviviality Retail708.98.6
TR European Growth Trust579.77.3
Bioventix112.86.4
Baillie Gifford Shin Nippon3235.3
AdEPT Telecom PLC72.95
Biotech Growth Trust (The) 465.45
Central Asia Metals281.14.9
Avation143.44.7
Cash deposit4.6
XLMedia262.64.1
Card Factory11363.9
Lloyds Banking Group45,894.703.6
Royal Dutch Shell176,862.103.6
Templeton Em. Mkts IT21,28.93.2
India Capital Growth Fund110.33
JPMorgan European IT397.92.9
Fidelity Asian Values261.52.9
U and I Group231.82.9
Bloomsbury Publishing129.62.7
Faroe Petroleum315.32.5
Elegant Hotels Group81.32
Iomart Group339.11.9
Accrol Group Holdings127.41.9
Patisserie Holdings3651.4
Diversified Gas & Oil98.71.4
RedstoneConnect25.81.3
Satellite Solutions Worldwide50.51
Geiger Counter0.8
StatPro Group93.80.7
7Digital Group11.80.5
Fidelity Asian Values0.1