Diary of a Private Investor

Two keepers and the one that got away

Happy Friday everyone!

Without wishing to tempt fate while there are still a few hours trading to go before markets close but this week looks set to deliver my largest portfolio gain of the year so far. Sometimes market exuberance can be a wonderful thing so long as one is able to find a chair once the music stops. This week, there has been some excellent news from two of my holdings; Bioventix (BVXP) and Impax Asset Management (IPX) and a takeover approach for Waterman (WTM), a share that I have held twice previously but sadly not at this juncture.

Bioventix (BVXP)
I believe BVXP employ only 14 people and have just 5m shares in issue and yet, they are currently valued at around £100m following news this week that Siemens have launched their Troponin test in Europe. BVXP provide a key antibody for this test and receive a royalty on every test which of course, is the basis of the company’s business model.

The timing of the Siemens test launch is important because in June the company will lose a revenue stream from a legacy antibody and for a while now the company have stated that the revenue from the Siemens test will at least replace this lost revenue. One of my risk factors for BVXP was that the Siemens test launch would be delayed beyond 2017 but a European launch in May is excellent news and in my view, it significantly derisks the investment case here. A US launch is now likely to follow in 2018.

There are lots of things to like about Bioventix which incidentally, remains my largest holding despite a significant top slice at the beginning of Q2:

  • An operating margin of around 80%
  • No debt
  • Strong cash generation
  • Predictable, long-term revenues
  • Return on Equity of 54% and Return on Capital Employed of 62%
  • A forecast 2017 dividend of 3% with the possibility of special dividends

What’s not to like? Well, the shares are illiquid, so any hint of bad news could see a sharp dip. They are on a current PER of 21 and a forward PER of 25, so not cheap and if there is a market sell-off, the baby can easily get thrown out with the bath water. Also, given the growth rating afforded to BVXP, there is a chance that 2017 earnings will be quite flat when compared to 2016 (there should be significant EPS growth in 2018 when the Siemens test also launches in the US and European revenues have ramped up) which might lead to a share price dip when 2017 results are announced.

These factors aside, I struggle to find negatives with BVXP as a long-term holding. They have a fantastic, simple business model, a huge competitive moat and therefore, it should be a cash cow for many years to come. Yes, the share price can fall due to short-term sentiment and the illiquidity of the shares can exaggerate those falls but the quality of the underlying business means that the share price should recover quite quickly, as it has always done in the past. It’s a keeper for me.

Impax Asset Management (IPX)
Another “keeper” is IPX who issued their interim results this week, the highlights being:

  • 27% increase in Assets Under Management (AuM)
  • Revenues increased from £9.4m to £13.9m
  • Earnings per share (EPS) increased from 1.35p to 2.11p
  • A 40% increase in the interim dividend

Generally speaking, asset management companies are cyclical and subject to nasty downturns when markets decline because they have the double whammy of cash outflows alongside reduced PER ratings. As such, they are not normally shares that I would regard as “keepers” – i.e. very long-term holdings. However, IPX are one of the few asset managers to specialise in sustainability and renewable energy. They are developing a global footprint and my own view is that they are well positioned to weather storms created by market fluctuations. If private investors and fund managers want exposure to this sector, IPX is one of the few asset managers who can provide the appropriate offering. It’s that competitive moat again, essential for a keeper share in my portfolio.

Waterman (WTM)
Firstly, let me say that I am delighted for all those private investors who were holding WTM shares when the recommended takeover offer from CTI Engineering was announced this week at something like an 80% share price premium – nice one folks! There was an excellent article by Ben Hobson on Stockopedia analysing the recent history of WTM in relation to the StockRank metrics. This article pretty much explains why I wasn’t holding WTM shares at the point of takeover, even though I have briefly held them twice previously. I had concluded that they might be a value trap – low margins combined with macro/sector risk and performance that might be on the wane. Yes, they maintained a healthy dividend but how sustainable would that be? In this situation, WTM had become a value play and the problem with this is that value can take many months or even years before it is outed. The market in 2017 has been all about growth and I simply didn’t have the confidence nor the conviction to continue holding WTM shares. So, well done to those who took the contrary view but it wasn’t for me.

And so, in a year that I continue to believe will be a takeover bonanza for UK companies, I am still waiting for my first one. Anecdotally, what I have noticed so far is that the value plays are being picked off, companies such as Netplay TV and Waterman which were cheap rather than the more expensive, higher quality companies that make up the majority of my portfolio. With the pound rising in recent weeks, perhaps the takeover offers for these companies will not arrive, which is fine by me so long as my quality holdings continue to perform.

Happy investing folks!
Simon (Twitter – @BrilliantLeader)

 

Disclosure – At the time of writing I own shares in BVXP and IPX  

 

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