Weekly Commentary 19/04/21: Bittersweet distractors

brendan church pKeF6Tt3c08 unsplash
Is value vs momentum the best way to think about companies on the stock market?

The price of copper is +33% in the last 6 months and +17% since the start of the year, signalling that industrial production is recovering. Industrial metals like copper and aluminium have lagged oil but done much better than gold, down -9% in the last 6 months to $1735 per ounce. Rhodium at $25,500 remains at its elevated levels – +129% in the last 6 months and +76% since the start of the year – which has helped platinum miners like Sylvania, because is included in their Platinum Group Metal (PGM) basket.

Market commentators have been observing that factors “value” vs “momentum” are likely to coincide, which only rarely happens. In a recovery, by definition, beaten up stocks on low valuations will convalesce and recover. At which point, value and momentum converge. We saw this in the aftermath of the financial crisis, with distressed equities like banks and Detroit car companies recovering strongly in from March 2009 onwards. It didn’t last long though. More recently it has been common to observe that the quality factor has done exceedingly well, whereas the value factor has, until the last 6 months, underperformed.

This quant approach of giving different stocks factors like value and momentum originally came from Principal Component Analysis, and has also been applied to weather forecasting. Now that it has become so widely adopted I’m wondering how useful it is to divide the stock market this way.

Perhaps this is similar to dividing music up into genres? Jazz vs techno vs rock vs classical. In my experience listeners rarely stick to one genre; they select songs on associations, moods, memories. A song is not appreciated because of its genre, it’s appreciated for its internal cohesion, the way expectation is fulfilled… or subverted. And some songs are covered from their original genre to then work as a dance track, a classical version or guitar or jazz. Over the last 6 months I’ve become obsessed with two versions of the same song: the Radiohead song Reckoner. There’s Robert Glasper’s piano jazz version and Maribou States’ Electronic Dance version.

There are many others: Gnarls Barkely covered it, and there’s this hour long (yes, hour long) Ellen Alien techno version which has scenes from Berlin’s Templehoff airport/public park. But I think the first two (Robert Glasper vs Maribou State’s) are such a contrast, they are as different as value and momentum. How is it possible for a song still to work as it switches so completely to a different genre? There must be something to the underlying structure of the music, rather than the genre it sits in.

So perhaps thinking about stocks in factors of value and momentum is a distraction? I certainly don’t feel that my process fits anything like this, once I’ve used SharePad to summarise the financial ratios, I tend to focus on management’s voluntary disclosure. What is the story that they are telling? Are there contradictions? Are they highlighting the trade offs? How does what they say compare to the numbers that they report? Are they evasive and trying to say as little as possible? How has the story changed over the years? Sharepad is an excellent filtering tool, but there is still room for human judgement.

This has worked well for me with Impax Asset Mgt which I cover below. More controversially it’s also the reason that I invested in, and still own Burford; whatever else you might think of them, the Burford management can certainly tell a good story.

Below also look at Volex, again where management are trying to tell a story about increasing margins, vertical integration of manufacturing and assembly, as well as exciting areas like EVs. I originally bought The Mission for its turnaround potential after management got carried away with too many ill-judged debt-funded acquisitions, but I no longer view it this way. And finally Novacyt where the investment case has disappointed, but management may yet be able to rebuild.

Volex Trading Update

This Nat Rothschild chaired cable manufacturer with a year end on 4 April 2021 put out a trading update. The shares have a long heritage going back to 1892, but recently have enjoyed a renaissance as its products are being used in Electric Vehicles (EVs), which accounted for $52m of revenue, +187% compared to the previous year. Richard flagged the company here in July 2020.

The statement said that group revenue should be at least $440m (+12% from last year’s $391m) while underlying operating profit is expected to be at least $41m (+30% from last years $31.6m). In the RNS management say this is ahead of the most recently guided range, but I couldn’t verify previous guidance because they haven’t said when they said what. The share price reaction (down slightly) suggests that the statement is “in line”.

The FT’s Alphaville site has this fun EV bubble spreadsheet. They calculate that at the market peak in January this year there was £1.7 trillion of EV market cap, though this has now fallen by around 35% (though still over $1 trillion of market cap). They’ve probably missed a few because neither Ilika (which doubled in the last week of December 2020) nor Volex are included in their spreadsheet.

Recent acquisition On 12 Nov last year Volex announced that they’d acquired Turkish De-Ka Elektroteknik Sanayi ve Ticaret Anonim Şirketi (DE-KA for short) for a total consideration of €62m (initial cash consideration of €37m, and €15m deferred cash and €9.8m in Volex shares). The price works out roughly 1.4x historic revenues for DE-KA, which makes power cords for the European white goods market. In last week’s RNS they say that DE-KA’s sales and profits are currently significantly ahead of the previous year and the business continues to enjoy very strong demand.

Supplying cables for datacenters and EVs is an exciting area. White goods power cords are less sexy. Often strategy is about deciding what you are going to focus on, and turning down activities that are non core. Even if DE-KA proves a well-timed acquisition and trading is ahead of expectations, I’d guess that is because their products have become more competitive due to the weak Turkish Lira? Or perhaps I don’t understand the strategy; Richard said last July that by manufacturing the power cord itself, Volex believes it will be more efficient. By identifying itself as an “integrator” (cable assembly and power cords) management believe that they can increase margins. In 2015 Volex earned just 2% profit margins, so clearly there was room to improve.

Ownership Nat Rothschild, the Executive Chairman, owns 25%. He had been building his stake since 2008, but joined the company in 2015. Since then the shares initially halved hitting a low in mid-2016 of 30p, before ten bagging. Ruffer own 9.7%, Quaero Capital 5.6%, Premier Miton 3.9%, Herald Inv Mgt 3.9%.

Valuation Sales are forecast to grow strongly to €622m FY to March 2023, and EPS is forecast to be 30c end for the same year, implying a PER of 16x. Historically profitability had been trending down but this has now reversed in the most recent two years.

Opinion As noted, the shares have done well since mid-2016: +1000%. One concern is the price of copper, which is up +33% in the last 6 months, which the company uses in many of its products. Luceco, which specialises in LED lighting components had a warning a couple of years ago over the input costs, but that turned out to be fantastic buying opportunity. Well done to investors who timed their buy with this one, but I’d need to have more confidence in the story to chase it higher.


This PCR testing company put out a profit warning on the afternoon of Friday 9th, after I’d already “gone to print”. The shares gapped down by around 40% in the response. Novacyt has consistently ranked in the top ten SharePad searches all of last week, so many people seem to want to take a view. We’re still waiting for the FY December results, but I wrote up the half year results here.

Before April’s profit warning, they had already put out a trading update in January saying that FY revenue was €312m of which €239m was in H2, as the company’s PCR testing became more widely adopted. Now in April they have announced that they are in contract dispute with their major customer, the UK’s Department of Health and Social Care (DHSC) and this would have material impact on last year’s Q4 revenues. This contract was announced in September 2021, and had two phases. It sounds like the dispute concerns the first phase of the contract, so it seems likely that the second phase has been cancelled. The second phase of the contract would have allowed for the provision of up to 700 additional PCR instruments, related kits and support services, as well as additional COVID-19 products from the company’s portfolio where required. Anticipation of the second phase was likely supporting the share price back in January when it reached 1200p per share.

In April’s RNS, Novacyt said revenue for Q1 2021 should be €83m. Approximately half of this was driven by sales to the DHSC. The other half of Q1 revenue was international sales and private sector testing operations. It sounds like the €83m is not a good indicator for the rest of the year, because their Q1 sales may be sufficient to support the NHS roll out plans for the remainder of 2021.

The Company’s cash position on 31 December 2020 was €101 million (£91.8 million) vs a market cap of £289m. However, if the company is warning that Q4 revenues are in doubt, then that would imply that they may also have to pay back some of the cash on the balance sheet.

Broker forecast SP Angel, the company’s broker, put out a note largely repeating the company’s RNS, but not updating their forecast. In Q1 the company launched a couple of new products i) mobile processing labs (for private sector testing) and ii) SNPsig® portfolio (detection of COVID-19 variants). The company was intending to launch antibody tests (to detect if someone has previously been infected and therefore may be immune from further infection). There was no mention of antibody tests in the April announcement.

Opinion I can see why there’s lots of interest in this stock, but I think that this is too speculative for most people. I would warn against thinking the shares are good value just because they’ve fallen over 60% since their January peak. We don’t know the nature of the dispute with the DHSC, for instance if the efficacy of the product has been questioned. Last year some markets (France and India) demanded two-gene tests, rather than Novacyt’s single gene approach. Does the fact that Novacyt needed to introduce a new product to detect variants imply that the old product couldn’t do this? If the cash was 50% of market cap, then I think that this might make sense on a risk / reward basis, but I’d suggest this is “too hard” unless you have special insight. FY results will be out soon and allowing management to try to rebuild the investment case.

Impax Q2 AUM update

This specialist fund manager focussed on “sustainability” has reached £30bn of Assets Under Management (AUM) in its Q2 update (September year end). This is up from below £2bn AUM in 2011. It’s been a phenomenal success story, and the shares are up 19x in the last 10 years. Even if investors feel that the price is a bit rich at almost 900p, I think that it is worth writing about as a case study in success.

History Impax was founded in 1996 by Ian Simm (the current Chief Exec) with the idea of investing in sustainable economy and environmental technology. The first fund was launched in 1999 with just €8m. A couple of years later, the fund manager reversed into Kern River (ironically an oil company with unviable oil fields in Louisiana and California) that had previously listed on Aim, valuing Impax at a market cap of less than £5m. Following the TMT bubble bursting the share price struggled for the next couple of years, and it was possible to buy Impax shares at below 5p a share in the second half of 2003. Though Impax continued to make progress launching their first own label fund in 2002 and a private equity fund in 2005, revenue was only £7m FY 2007. Incidentally, the ability of SharePad to go back a couple of decades and study highly successful multi baggers in their early years is invaluable. I am hoping it will help me spot the next Impax. Then in 2007 BNP P invested and agreed to distribute Impax funds through their network. The French bank is currently Impax’s largest shareholder with a 13.7% holding.

I was impressed when I met Ian Simm in 2011 with the share price trading around 50p. I worked at Seymour Pierce, and one of our corporate brokers thought we might try and persuade them to switch broker (which didn’t happen). Over the last few years the business has gone from strength to strength, the economics of fund management are wonderful when you’re seeing inflows. In 2018 Impax acquired a US fund manager Pax World Management, which gave them additional distribution in the US.

Historically the environmental investing sector was sensitive to both Government subsidies and also the oil price, because a low oil price following the financial crisis undermined the prospects for renewable power. I’m lucky that I didn’t sell when the WTI oil price went negative last year. It’s an interesting secondary effect of the virus that 2020 has been a fantastic year for environmental investing; Tesla increasing in value, but also hydrogen stocks like ITM, Ceres Power and Powerhouse Energy that use unrecycled plastics. This is clearly a trend which Impax has benefitted from too.

Q2 Update AUM reached £30bn (or £29.999 if you’re being really pedantic) in March, up from £25.2bn Dec 2020. Of the £4.8bn increase, 83% was net inflows, and the rest was market movements. AUM have doubled from March 2020 year.

Valuation £30bn of AUM implies a Market Cap/AUM of 3.9%. Historically Jeremy was not a fan, because the company looked cheap on Market Cap/AUM basis, but expensive on a PE ratio. This was because of the low operating margins compared to peers. I’ve updated a table Jeremy created a couple of years ago, using the SharePad feature downloading live prices.

I think what Jeremy was missing was that management had a good story; his ratios gave a view that was too static, and didn’t take into account that Impax AUM would be much higher in a couple of years’ time.

The valuation anomaly has corrected, but not in the way that Jeremy was expecting. The company now looks in line with peers on a 3.9% Market Cap/AUM basis, and even more expensive on a PE ratio! That 60.7x is the historic PER ratio, Impax’s PER falls to 21x 2023F.

I think that you can make a good argument that “track record” is the only barrier to entry in fund management. Impax have been investing this way for 20 years, and have built up a track record and reputation that would be hard to replicate if you were starting today.

Opinion Fund managers enjoy wonderful economies of scale, though most hit an upper limit. It seems that even “star” fund managers like John Paulson and Neil Woodford can manage billions, but not tens of billions. This applies to quant funds too; Jim Simmons Renaissance and David Harding’s Winton have struggled with problems created by their own size. The trade-off between returns and size are hard to manage, because fund managers tend to be rewarded as a percentage of their AUM.

That said, Blackrock has $9 trillion and 150 ESG funds. I’m hoping that Impax is bigger than any individual manager, and hence the AUM doesn’t become an anchor on growth. I own shares I bought in April 2016 when their AUM update showed inflows for the first 3 months +16% to £3.5bn. So it’s nice to have a twenty bagger, they’re not all like that and again (like Wey Education last week) my position sizing was too small. I also make the opposite position sizing mistake; I really don’t recommend buying a craft beer bar from some unscrupulous Norwegians 6 months before a pandemic.

The Mission FY Dec 2020

This marketing company had a torrid H1 with revenue down -26% y-o-y. H2 2020 vs H2 2019 was an improvement, with revenue down -22% to £32m, and the company made a £200K PBT in H2. On a FY basis revenue was down 24% to £81m and reported LBT was -£2.1m. Fortunately the company’s balance sheet is much stronger than a few years ago, and net bank debt (which excludes deferred consideration for acquisitions of £8.1m) was £1.2m. I would calculate net debt as £9.3m, particularly as £7.8m of those obligations are due in less than 12 months.

The well-regarded Finance Director Peter Fitzwilliam is stepping down after 11 years. Someone once told me that marketing firms needed a strong Finance Director, because invariably Chief Execs and Chairmen of marketing firms believe their own hype, and they need a strong finance head to make sure that someone has a grip on reality.

Cashflows Although the business was loss making in the FY, cash from operating activities was £10m, helped by £7.7m decrease in receivables. Last year payables were deferred including £6m of VAT, PAYE and National Insurance, but they have all now been repaid (PAYE and NI last year, VAT Q1 this year).

Outlook Q1 is on track with Group’s expectations – though unhelpfully management don’t say what their expectations are. Most companies are able to say what expectations are, so if a Board can’t communicate to investors all it shows is that they have less visibility and are less in control of their business than other management teams. The company did reiterate its 14% margin target by 2022. The cliché “cautiously optimistic” is also used in the Chairman’s statement.

Opinion Marketing budgets tend to be slashed when a downturn comes, but it looks like we are now in a recovery stage. I’m happy to hold on to this stock; given that profits have fallen. my “multiple expansion” hypothesis has happened, and SharePad shows the PE Ratio as 87x but only because the earnings are suppressed. In the past the shares traded on between 5-10x PER, and the 2022F PER is 10x, so the valuation is undemanding. Hopefully management can tell a better story and drive a re-rating.

Bruce Packard


The author owns shares in Impax AM and The Mission Group