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Encouraging news from the week

Bioventix (LON:BVXP), the developer of high-affinity monoclonal antibodies for applications in clinical diagnostics, announced excellent interim results for the six months ending 31 December 2019. Revenue rose 21% to £5.3m and pre-tax profit was up 31% to £4.3m. The operating cash inflow was £4m boosting period end cash to £5.5m.

Bioventix isn’t facing quite as many challenges as others companies during the coronavirus lockdown. Healthcare products and services are priority products, with diagnostics among the most crucial. Management therefore expects its customers will continue to operate and Bioventix will continue to supply antibodies to them.

It’s also one of the few companies in the current climate able to commit to their dividend, with a 20% increase in the proposed interim to 36p.

Fundamental AIM for Inheritance Tax planning portfolios hold shares in Bioventix

While operating in totally different sectors, Bioventix joins Sage Group (LON:SGE) and Microsoft (US: MSFT), both Fundamental portfolio companies, as one of the more resilient companies on the stock market in the face of the current crisis.

Manufacturer of commercial floor coverings, James Halstead (LON:JHD), announced record 1st half results and, as a preferred supplier to the health service, its products continue to be in high demand.

For the 6 months ending 31 December 2019 sales rose 3.7% to £130.4m, pre-tax profit was up 2.8% to £25.2m and basic earnings per share increased 4.1% to 9.5p. The operating cash inflow of £28.4m boosted period end cash to £64.3m, just what’s needed going into the current crisis.

The group contemplated long and hard about the payment of its dividend. Approximately half their UK workforce and around 60% of former employees (who are now pensioners) are shareholders and rely on the dividend for income. Accordingly, they have decided to declare a first interim dividend of 2.125p per share, representing half of the interim dividend they would otherwise have declared. They will subsequently review the payment of a second interim dividend in August when visibility of the global economy may be clearer.

Who would have thought that flooring would have demonstrated such defensive properties. James Halstead is a long-term holding of Fundamental AIM portfolios.

Argentex Group (LON:AGFX), the provider of foreign exchange services to institutions, corporates and high net worth private individuals has kept a relatively low profile since listing in June 2019 but it continues to deliver on the significant promise. Fundamental AIM portfolios have started acquiring a satellite position in Argentex.

The latest trading update covering the 12 months to 31 March 2020 highlighted a strong performance, with revenue up over 30% to c.£29m and management confident of meeting full year profit expectations.

Somewhat surprisingly, there was no mention of material impact from the current crisis, other than continued strong performance. Non-Executive Director Henry Beckwith was an enthusiastic buyer of shares earlier in March and holds a 6.5% stake.

It appears to be almost business as usual for surgical and advanced woundcare specialist Advanced Medical Solutions Group (LON: AMS).

With £65m of cash in the bank and no debt at 31 December 2019, AMS is in robust financial condition. Furthermore, in the unlikely event that it’s needed, there is also an undrawn unsecured £80m credit facility.  AMS is committing to a final dividend for 2019 of 1.05p per share, which will cost approx. £2.25m.

AMS is another long-term core holding of Fundamental AIM portfolios.

Moneysupermarket.com (LON:MONY) reported 2% overall growth in revenue for the first quarter ending 31 March 2020 with insurance related revenue leading the way, growing 8%, while other areas saw reduced activity.

Diversified revenue streams, strong cash conversion and net cash of £30m at 31 March means the group is able to commit to the final dividend of 8.6p per share, which will cost £46m and equates to a yield of 2.93% at the current share price of 293p.

While other, previously admired, online groups like Rightmove (LON:RMV) and Auto Trader (LON:AUTO) have been found wanting in the current exceptional environment, MONY continues to deliver, although that hasn’t stopped the shares falling 30% from the July 2019 highs.

Pets at Home Group (LON: PETS), the UK’s leading pet care business issued an encouraging update for its financial year ending 26 March 2020, with full-year underlying pre-tax profit now anticipated to be slightly ahead of expectations following exceptional levels of demand, both in-store and online, in the last few weeks of the financial year as customers stocked up.

While the group carries substantial debt (net debt was £539m at 30 Oct 2019), unlike many retail businesses, its designation by the UK Government as an “essential retailer” means business continues and cash continues to flow.

PETS is also generously helping communities with £1.1m of funding to nominated pet charities, a £1m crisis fund for colleagues and discounts to NHS workers.

While revenue will clearly be impacted over the coming months, PETS is in a better position than many retailers and, as a result, the shares have held up better than most.

CMC Markets (LON:CMCX),the online derivative and stockbroking trading platform, issued a very positive update for the year ending 31 March 2020.

If, as is likely, stock markets remain volatile CMC will continue to reap the rewards, that’s assuming its clients don’t suffer too many losses!

The supportive environment and CMC’s strong balance sheet means that it will be able to commit to a dividend equivalent to 50% of profits after tax. Consensus forecasts for the March 2020 year were for a dividend payment of 14.43p per share, equivalent to a yield of 7% at the current share price, however, this might now be on the low side given the very strong final quarter.

While stock markets have tumbled, CMC shares have proven to be an excellent contrarian investment, rising 35% over the past 3 months.

To keep up to date with the coronavirus impact on these and many other companies please visit our associates Investor’s Champion


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Bear Market or Bull Market?

Despite falling on the last day of the week, stock markets (notably the US) still registered decent gains, boosted by the huge $2Trillion package of support signed off by the House of Representatives.

A manic rally during the week saw the US market climb more than 20% in 3 days, the best 3 day run since the 1930s, to enter what the Wall Street Journal termed a new bull market. We think it’s a bit early for such optimism, although with so much cheap money sloshing around the world there are suggestions the recovery could be quicker than many are currently expecting.

A new term took centre stage this week in the lexicon of company announcements with ‘Covid-19’ updates dominating the corporate headlines. Our associates Investors Champion issued daily commentary on many of these updates, which you can read from the link here.

Fundamental clients have free access to the Premium Content of the Investor’s Champion site so please let us know if you register so we can upgrade your account to premium.

Thankfully, the vast majority of our portfolio companies, have the reassurance of a net cash position and look well placed to see out the current crisis without the requirement for further equity injections. Unlike the financial crisis of 2008/09, banks are also in far better shape and happy to extend credit if required.

Companies are also set to be given considerable financial support from governments so that they can pay their staff, which should help prevent a major social collapse as well as an economic one.

Top marks this week go to consumer goods giant Unilever, which has committed to a huge package of support, and Redrow founder Steve Morgan, who has pledged £1m a week from his foundation to charities helping some of the most vulnerable sectors of society cope with coronavirus.

Companies across all sectors have been forced to cut their dividends in response to the current crisis and balance sheet strength is being tested to the extreme. Even those businesses with apparent cash reserves are drawing down on credit lines in advance of the barren period ahead.

It’s clear that, having gorged on cheap money for far too long, many businesses have little in store for rainy days, let alone the sort of biblical flood now being experienced.

Many companies take great delight in referring to their strong balance sheets, but these are often dominated by high levels of debt. Bill Gates, co-founder of Microsoft (a Fundamental portfolio company) remarked that, in the earlier years of the company he always wanted to have enough money in the bank so that even if their customers didn’t pay them for a year, Microsoft could still keep paying everyone and also continue to carry out necessary research and development. Microsoft had the luxury of gross cash of $134bn and net cash of $55bn at 31 December 2019 – the latter double its annual operating expenses, suggesting Gates’ philosophy remains to this day. If only others had adopted a similarly prudent stance.

We expect plenty of volatility over the coming weeks and months, but there could also be some excellent opportunities to buy inherently good companies at rock bottom prices.


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Dividends at risk: apply some cash flow common sense

During these testing times the dividend yield can often prove illusory. While many companies are well-placed to continue supporting their dividends, many others, burdened by high levels of debt and declining cash flow, will be struggling to support the cash payments with short term survival sadly the primary focus.

Faced with a meaningful decline in its clothing and home business, Marks & Spencer (LON:MKS) has decided to cut its final dividend to save £130m. With £4bn of net debt at 30 September 2019 and a £230m interest bill last year it looks a wise move as cash flow declines.

We would like to think that Sage Group (LON:SGE), the provider of accounting and payroll software, should continue to see the cash come in. As a precaution, it has decided to suspend its recently announced share buy-back programme in order to preserve a high level of liquidity, but we think the 3% yield is reasonably safe.

Unilever’s (LON:ULVR) defensive attributes are illustrated by the modest 14% fall in share price over the past 6 months and a resilient performance in March with the shares marginally higher. Unilever has always paid a dividend and the forecast yield of 3.7%, not to mention its fantastic portfolio of everyday products, look extremely appealing in the current low interest rate environment.

It’s a different story for many smaller companies whose earnings and cash flow might be at risk. Despite the luxury of cash in the bank, Quartix Holdings (LON:QTX) prudently announced a cut to its final and special dividend this week.

Johnson Service Group (LON:JSG) is also cutting its dividend.

EMIS Group (LON:EMIS) and Curtis Banks (LON:CBP) both appear to have the desired balance sheets and cash flow profiles to be able to continue to support their dividends. But if the crisis drags on longer than expected even their dividends could be at risk.

Dividend seekers should not be swayed by forecasts, which are rendered meaningless in the current environment, and the focus should be on real balance sheet strength, debt and cash flow. Debt is fine if the cash flow is assured, as has always been the case.

Fundamental General and AIM portfolios include many of the companies mentioned in this post.

If you are looking for high levels of income from your portfolio please speak to Chris or Stephen on 01923 713890

This is an extract of an article published by our associates Investor’s Champion here.  


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Opportunity Knocks!

Saudi Arabia’s move to swamp the world with cheap oil has sent oil prices down as much as 30%, with global equities also crashing.

As the stock market mayhem ensues, the 10-year US Treasury yield has fallen to a record low of 0.32%, ironically only adding to the appeal of good quality companies with robust balance sheets. Who in their right mind would want to lend to the US government for a meagre 0.32%!

Excellent companies, with no direct connection to the oil price, briefly saw their share prices experience significant falls. Experian (LON:EXPN), a provider of data and analytics solutions, saw its share price fall 30%, before recovering to settle down 6%. This sort of irrational behaviour is manna from heaven for long-term investors like us.

Oil and gas companies and anything related have experienced greatest weakness, with the share prices of Royal Dutch Shell (LON:RDSA) and BP (LON:BP.) down more than 25% at one point. Thankfully we don’t invest in these relics of a bygone era!

IG Group (LON:IGG), the online trading platform for equities and derivative instruments, which should be doing nicely from all the increased volatility, experienced system difficulties in the mayhem, which won’t have gone down well with clients seeking to trade the volatility.

A lower oil price will be helpful to the beleaguered airline groups, who are experiencing a sharp drop in passenger numbers because of the coronavirus, and its noticeable that shares in Easyjet (LON:EZJ) and Dart Group (LON:DTG) only suffered modest share price falls as the oil price sank.

With plenty of other priorities in the short term, notably a well-funded response to the coronavirus, in the current circumstances we fail to see how the new Chancellor can put forward a responsible Budget later this week.

As the stock market rollercoaster continues excellent buying opportunities will appear for those with available cash and who haven’t used their annual ISA allowance. Our model and bespoke portfolio services are well-positioned to benefit from this.


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Bargain hunting on AIM

In this interview with Jeremy Naylor of IG markets, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, discusses potential bargains on AIM following the market sell-off.

Companies covered in the interview include:
AB Dynamics (ABDP) – designer and manufacturer of advanced testing systems for the global automotive market.
Argentex (AGFX) – provider of foreign exchange services to SMEs and high net worth individuals.
Alpha FX (AFX) – foreign exchange and payments specialist working for corporates and institutions
Dart Group (DTG) – leisure travel (Jet.com and Jet2holidays) and distribution (Fowler Welch)
Dotdigital group (DOTD) – omnichannel marketing automation and customer engagement platform
K3 Capital Group (K3C) – leading business and company sales specialist

You can find out more about Fundamental’s AIM portfolio service, including the latest fact sheets, from the link here.

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for more than 15 years.


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Coronavirus encourages stock markets to take a breather

The indiscriminate sell-off in global equities due to the spread of the coronavirus has, not surprisingly, resulted in material weakness across Fundamental portfolios in the current quarter.

As is usual in these circumstances, the selling has been indiscriminate and even companies considered traditional safe havens have seen their share prices fall. Smaller companies as always have felt the brunt of the sell-off, as have those businesses most directly affected by the impact of the virus.

Diageo, the global drinks group and a constituent of our Ultimate Stocks portfolio, has warned how the virus is affecting its business with global sales now expected to be between £225m and £325m lower than they would have been otherwise. Though meaningful, that’s relatively small in the context of a business which generated sales of £12.8bn last year.

Apple, a long term portfolio holding, previously warned that it would fail to meet its quarterly revenue target of $63-67bn due to temporarily constrained supply of iPhones and a dramatic drop in Chinese shoppers.

Airline, hotel and leisure sectors have been hardest hit with the share prices of portfolio holdings easyJet, Dart Group, Hostelworld Group and Booking Holdings suffering material falls over the past few days. The proposed IPO on AIM of Meininger Hotels, a European hotel and hostel operator, could certainly prove challenging in the current climate.

Portfolio holding Walt Disney Co has also seen its shares slide as its theme parks in Hong Kong and Shanghai have been temporarily shut down. News that Bob Iger, its highly-regarded CEO of the past fourteen years, is also retiring sooner than expected (although he had already extended his stay) also came as a surprise.

Long term holding Microsoft is dealing with the outbreak by donating generously to the recovery efforts in China. That includes RMB 40m worth of products, services and solutions to equip frontline hospitals and medical workers, as well as providing free cloud services to mitigate the impact of the outbreak for businesses and students.

In the gloom of the stock market rout it was pleasing to see price comparison group Moneysupermarket.com report excellent results with a 9% increase in revenue and 10% increase in profits as it reaped the rewards of a diverse product offering. This business continues to display many of the characteristic we look for in an exceptional company.

At the smaller end of the scale, the share price of Ramsdens has also been particularly weak. This company has been enjoying strong growth from its foreign exchange offering which will clearly suffer in the short term as fewer people travel from UK. However, it will also be a beneficiary of the soaring gold price which has climbed to its highest level in seven years.

If there is one positive from the outbreak of the coronavirus, it is that global healthcare systems have been alerted to the need for better contamination control. It’s hardly surprising therefore, that the share price of legacy AIM portfolio holding Tristel, a specialist manufacturer of infection prevention and contamination control products, has climbed to new highs over recent weeks. While it could be a big long-term winner from greater investment in global infection prevention, the share price appears to have become a little over-heated. You can read a full commentary on Tristel’s progress from our associates Investor’s Champion here.

We remain happy with our selection of excellent companies, which will continue to generate growing profits and cash for many years to come. Contrary to what is implied by the current sell-off, they certainly haven’t all turned into bad businesses overnight.

With the US stock market having recently scaled all time highs, a pause in our opinion was long overdue and we view a correction at this point as beneficial to the long-term health of stock markets.

Equity investment should be viewed as a long-term exercise and, unless investors have a near term requirement for cash, see no reason to run for cover at the first sign of short-term difficulties.

We anticipate further weakness in global equities over the coming weeks as the coronavirus spreads inexorably around the world, as unfortunately seems likely. However, human nature is such that, when things ultimately settle down, people will be keen to get out and enjoy life once more. Where applicable, we will therefore look to buy and add to selective holdings as opportunities arise.


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AIM review of 2019 and small caps to consider for 2020

In this year-end interview with Jeremy Naylor of IG markets, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, considers the performance of AIM in 2019 and offers his thoughts for the coming year

Will AIM’s growth stocks continue to deliver in 2020 or could there be bigger returns to be made from recovery candidates?

Chris discusses several companies which made the headlines in 2019 as well as others who are struggling to attract investor’s attention.  Could the laggards of 2019 be the stars of 2020?

You can find out more about Fundamental’s AIM portfolio service, including the latest fact sheets, from the link here.

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for Inheritance Tax planning purposes for more than 15 years.


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AIM stocks rally on Conservative landslide

The Conservative election victory, supported by progress with the US/China trade negotiations, triggered a strong rally from stock markets, with the UK index of 100 leading shares up just over 1%, the UK mid-cap index surging over 3% and US stocks hitting record highs. The AIM index was up just over 2%, but who were the biggest winners on our AIM portfolios from this short term ‘Boris bounce’?

Anything associated with housebuilding, construction and infrastructure spending had a terrific day, with notable risers from our AIM portfolios  Breedon (construction materials) and Nexus Infrastructure (infrastructure services to UK housebuilders). Having struggled in the first half of the year, Nexus announced its full year results this week with a strong order book offering plenty of encouragement for the future.

Shares in Adept Technology, which provides managed IT services to over 100 councils, NHS trusts, schools and other government bodies, also rallied. The share price of this excellent business, which generates plenty of reliable recurring revenue and cash, has struggled to make much progress over the past few months. With the election out of the way and a more stable political outlook hopefully it will start to attract greater interest.

Highly rated foreign exchange brokers Alpha FX Group and Argentex will have had a busy time supporting their clients in the face of a rising pound, but their share prices barely moved today. With many predicting that the pound will continue to rise over the coming months their services should continue to be in high demand from corporate clients needing help managing foreign exchange exposures.

RWS Holdings, the intellectual property support services and localization provider, was a notable faller on the day. AIM’s 8th largest company announced excellent results this week but warned that, having previously benefited from positive exchange rate movements, currency is proving less supportive at the start of its new financial year. A resurgent pound won’t have helped sentiment in the short-term but this terrific business has weathered far greater currency storms over the past 10 years.

For further information on Fundamental’s high-performing AIM portfolios and thoughts on winners and loses from the election please contact Chris or Stephen on 01923 713890. You can download fact sheets and other information from the Publications section here

While the UK market was clearly the main focus of attention for many, a US listed company which we hold on some of our general portfolios stole the show for us and highlights the terrific investment opportunities available on overseas markets. Adobe will be well known many through its free Acrobat software which is used to read PDF documents, however, there is clearly much more to this creative and digital media software business. This US giant has delivered tremendous growth over the past 3 years and now boasts a market capitalisation of $150bn. Despite its huge size Adobe has just reported a 24% growth in like-for-like annual revenue to $11.17billion and 15% growth in earnings per share. And who says elephants can’t gallop!

Adobe is also a constituent of Investor’s Champion’s Ultimate Stocks Portfolio which you can find out more on from the link here.


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AIM, where patience brings big rewards

The share price of CVS Group (LON:CVSG), the UK’s leading veterinary services business, rose strongly this week on the back of another positive trading update. CVS has been a mainstay of Fundamental AIM portfolios for many years, although it’s tested our patience on numerous occasions.

The dynamics of the UK veterinary market have changed significantly over the past few years and a shortage of newly qualified vets, combined with the rapid consolidation of the sector, has been making life harder for CVS, the UK’s largest consolidator.

We were getting particularly concerned by CVS management’s strategy of pursuing high priced acquisitions, despite the evident challenges in the sector which needed addressing. Generally speaking Fundamental is a very cautious investor in pure ‘buy and build’ business models of the sort being run by CVS. From our perspective, there comes a point when the focus needs to be on internal matters and organic growth. However, we like the defensive attributes of this sector and the management team had done a pretty good job up to now, so we were prepared to see this through.

Other investors were clearly also worried about the state of play sending the share price down sharply to a low of 362p in January 2019 from 1140p just six months earlier.

The interim results for the six months ending 31 December 2019, announced at the end of March 2019, offered a first glimpse that things were improving, with management addressing several of the key issues which had contributed to the previous underperformance.

What encouraged us more than anything was the greater reluctance to pursue acquisitions, unless the price was right, and a greater focus on organic growth. The interim results commented on an increase in the number of in-house referrals, which would benefit the group’s referral centres like Lumbry Park, which we visited in the summer and in which they had made significant investment. The growing numbers joining CVS’ Healthy Pet Club scheme, which provides care through a monthly subscription model also looked encouraging.

Results for the year ended 30 June 2019 announced in September provided further evidence that things were continuing to improve with like-for-like sales growth of 5.2%, of which 4.3% came from the core Veterinary Practices division. Earnings before interest tax, depreciation and amortisation (EBITDA), after central office costs, rose 14.5% to £54.4m.

The group’s Healthy Pet Club had 401,000 members at the year-end, an increase of 10.8% in the year, with 133% growth in their new Healthy Horse Programme to 7,000 members. These membership schemes bind the group to its clients and their pets and lifted annual monthly based subscription revenue 19% to £45.4m.

The update this week offered more encouragement with like-for-like sales increasing 8.0% in the four months to 31 October 2019 driven by a strong performance from the core Practices Division, which has seen like-for-like sales increase 7.4%.

It’s also reassuring to note that employment costs and vet vacancy rates have remained stable and only one acquisition has been made since September 2019.

The latest update cautioned that comparatives become more challenging in the second half of the current financial year given the improved second half performance seen in the previous financial year but it all sounds a lot more promising than 12 months ago.

While the shares still remain well below previous highs, they have performed strongly over the past 10 months rising over 170% from lows.

Having assessed the holding on numerous occasions over the past 18 months, our patience and ongoing commitment has been well rewarded…..up to now.

Hopefully onwards and upwards!

To find out more about other investment opportunities on AIM, the Main Market or overseas markets, contact Chris or Stephen on 01923 713890 or email [email protected]

 


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Invest in what you know – know what you invest in

The nature of investing in AIM for Inheritance Tax planning purposes is that investors must directly hold shares in the underlying AIM companies, albeit via a broker’s nominee arrangement. The Inheritance Tax planning benefits would be lost should investment be made via a fund or investment trust arrangement where the investor simply holds shares or units in the underlying fund or investment trust.

This method of direct investment has the advantage that the investor has full knowledge of exactly which stocks he or she is holding and how each is performing. This contrasts with the typical fund arrangement where normally only the largest holdings (typically the top ten) are disclosed by the fund manager.

The portfolio approach means investors are also privy to all the transaction details and therefore have full knowledge of the manager’s actions.

The suspension of the Woodford Equity Income fund, where 300,000 investors have been prevented from accessing their cash since June, has highlighted the problems with investment in open ended funds, where fund managers, administrators, custodian’s and regulators sit between investors and their money. Furthermore, investors have little knowledge of managers trading activity and the complete picture of where performance is really coming from. Indeed, the opaque nature of fund investment appears at odds with the information age in which we live and the demand for greater transparency.

While a portfolio approach is a requirement for investment in AIM for Inheritance Tax planning purposes it can equally apply to general investment portfolios. Fundamental Asset Management’s general investment portfolios, supported by our in-depth research and a good dose of common sensehave delivered excellent performance over the past few years, benefitting from exposure to some terrific companies, both in the UK and overseas. Our clients have enjoyed success with the likes of Apple, Games Workshop, Microsoft and Nestle, to name a few.

With trading costs a fraction of what they used to be and portfolios free of the additional burden of administrators fees and other excessive costs carried by funds, it’s a great time for portfolio investors.

We would argue that it’s also far more enjoyable and reassuring to have full knowledge of one’s investments and to experience the thrill of some terrific stock selections and of course the disappointment of the occasional mistake!

To find out more about our high performing portfolios call Chris or Stephen on 01923 713890