A year of two halves?

The FTSE 100 is up +10% since the start of the year, currently at 7,120. The best performing stock in the FTSE 100 in H1 was Royal Mail +72%, followed by Entain +61% and Ashtead +57%. The worst was Fresnillo -29%, the Mexican-based silver miner. This was followed by food retailers: Tesco -24%, Just Eat -19% and Ocado -13%.

Nasdaq is up +11.5%, slightly underperforming the S&P500 which is up +13.6% since the first of January. Remarkably, given the slower pace of vaccinations the German DAX is also up +13.6% and the French CAC40 is up +19.4%.

A bitcoin is worth $34,264 +16.5% since the start of the year. That’s well below the cryptocurrency’s $63K high, achieved in mid-April of this year.

A good performance

I’m up +26% since the start of the year, having not traded at all. I’m probably fooling myself, but what I’m trying to do with my investing process could be compared to a professional football player. 95% of the time the player receives the football, looks up, assesses the situation and decides to pass the ball sideways to a colleague. That is, take no risk. It looks so ordinary, a hungover Sunday league pub team player could make the same pass.

Then 5% of the time, the player looks, assesses the runs being made off the ball and brilliantly dissects the opposition defence with a cultured through ball curving, and perfectly weighted for the running team mate who has unlocked the off-side trap. It looks beautifully simple and obvious. Like buying Games Workshop 10 years ago. Alternatively the speculative through-ball is easily intercepted, the team loses possession and the player looks rather foolish – I’ve had my fair share of those too (like buying a pub in 2019).

But the point is that pub-style team players attempt too many ambitious passes, and the team loses possession more often. The way to play the game is keep possession, rather than trying to be too clever.

That said, as soon as an effective vaccine was announced in November last year I should have been trying more speculative ideas. Or I could have increased my position size in the likes of SDI Group, Impax AM and Somero which I already owned. Still, +26% in 6 month, it’s a gain that feels like it could be a year of two halves?

Or put another way, what I’m now asking myself is: if the “vaccine rally” was obvious 6-8 months ago, what is now happening which will appear obvious 6 months from now? What is the equivalent of the shopping trolley?

This week I look at 3 stocks: Georgia Capital, which I think could be worth readers looking at and researching some more; Vitec, where the valuation is undemanding, but I’m put off by the remuneration report; I start with Novacyt, which seems too speculative for most people who don’t have specialist knowledge, but it can be entertaining watching the game from the stands.

Novacyt FY Dec 2020

This PCR testing company finally published FY results for last year, with impressive headline numbers, revenue up by 24x to £277m. The business has a gross margin of 76%, so most of that revenue growth dropped down to the Profit After Tax line, £132m vs a £3m Post Tax Loss in 2019. Novacyt had £92m of cash at the year end, driven by £103m of cash from operating activities.

Contract dispute

Novacyt announced in April that they were in a contract dispute with their largest customer, the UK Department of Health and Social Care (UK DHSC). The DHSC is refusing to pay invoices worth £73m (including VAT), of which £24m relates to Q4 2020. Hence last year’s group revenue could be 7% lower, and PAT 15% lower. Note 2.4.1 of the accounts says management do expect to recover the £24m of receivables in full, but this is a significant accounting judgement. The more concerning issue is that a major customer is clearly so upset they’ve resorted to legal action and not paying invoices.

The Board has taken a provision of £19.8m to cover the cost of replacing the product in dispute. They do warn that the resolution of the claim could be materially different.

Current trading to May

The company has given an update for trading to the end of May, reporting sales more than doubling to £88m compared to £41m Jan-May 2020. However, of that £88m, £41m is sales to the DHSC, who are in dispute and refusing to pay their invoices. Excluding the DHSC, Novacyt reports £10m sales per month in Q1 2021, but which has fallen to roughly £7m per month in April and May as infection rates eased and testing has dropped sharply. The company say that this is a repeat of the trend seen in 2020 as countries moved into the summer period and the spread of Covid-19 declined. Testing increased in the second half of last year, and Novacyt H2 revenue was £205m and H2 EBITDA £126m, but it’s hard to know what to expect for H2 this year, given people are vaccinated, but new strains are also a concern.

Testing will clearly be around for some time, but at lower levels than we saw in H2 last year. The company is focussing on 3 areas:

  • Covid-19 testing – particularly keeping track of new variants.
  • Covid-19 Plus testing – adjacent areas of COVID-19, (eg Flu), biomarker monitoring to predict COVID-19 response to treatments.
  • Post-Covid-19 testing – expanding into testing for “superbugs” resistant to antimicrobials (e.g., Carbapenem-resistant Enterobacteriaceae), sepsis, transplantation.

I think the latter could be a significant market, there are around 20,000 deaths per year in the US from MRSA, according to the Centre for Disease Control and Prevention. So it sounds plausible.

The problem is that many stories in life sciences / biotech sound plausible. As an example, I can remember a very convincing presentation five years ago from Evgen Pharma, about sulforaphane-based compounds, the active ingredient in broccoli. It seems a real wonder drug, with benefits against a variety of cancers, also against cardiovascular, neurodegenerative diseases and diabetes. There’s now even a trial with the University of Dundee to see if their product helps treating Covid-19. But though the benefits of sulforaphane are widely recognised, Evgen’s progress getting approval for their stable derivative of the compound: Sulforadex® has been slow. Evgen has never reported a profit since it joined AIM in 2015. The presentation did encourage me to eat more broccoli though!

Forecasts Broker forecasts for Novacyt were cut sharply following the RNS last week: 2021F revenue down by -44% to €96m and 2021 PBT down -54% to €42m. Their broker was already forecasting a decline in revenue in 2022F to €102m, as the need for testing drops off as the threat from the virus recedes. So 2022F revenue was cut -22% to €80m, and PBT -37% to €33m. Novacyt has changed its reporting currency; the forecasts I have from SharePad are in € euro, but the FY2020 results are in GBP. So some of the decline may be down to the currency change, but the majority will be fundamentally reduced expectations.

I think we should be particularly careful with broker forecasts for Novacyt. There’s clearly a wide range of outcomes, and I don’t think anyone really knows. As an example, if we assume £10m of non-DHSC testing for 8 months of the year, and £5m for 4 months over the summer, that will generate £100m of revenue. The £92m of cash at the year end does give some support, but I don’t think investors should assume all of that cash will be returned to shareholders. It sounds like a good proportion could be reinvested in new opportunities or acquisitions.

Opinion The market cap at £235m is likely to be either much higher or much lower next year. I would advise management to be getting out and presenting to investors, and answering questions on webinars. At the end of last year the LTIP paid out roughly £9m in cash to the Chief Exec, so Graham Mullis hasn’t been as badly hurt by the falling share price (down from £12 in January this year) as retail investors who bought into the story. The stock developed quite an aggressive following on Twitter, who were rude to anyone who questioned the narrative. I feel like that’s a bad sign. Too speculative for me.

Georgia Capital Q2 Trading update

This Tbilisi headquartered conglomerate with a December year end, reported “very strong” trading in Q2 as Georgia reopened. The Georgian economy is very reliant on both tourism and remittance payments sent home by Georgians working overseas (both badly hit by the pandemic). I own the stock already, but I’m wondering if rather than shares in cruise liners, airlines or travel agents, this is a lower risk way of continuing to play the vaccine trade? That is, the asymmetry of returns looks favourable, with limited downside (unlike some other vaccine rally stocks) and decent upside. I’ve owned the stock since it span out from Bank of Georgia, so please do follow up with your own research if you think it’s an interesting idea.

Georgia Capital reported revenues in April and May up +55% y-o-y and +33% vs 2019 (ie pre pandemic). They don’t give a PBT figure, but instead EBITDA +123% y-o-y and +63% vs 2019. The company had already reported positive Q1 results +9% y-o-y, and the last major restriction on the Georgian economy (a curfew from 11pm to 5am) will be lifted in early July. Hence I think we can be pretty confident that H1 results will be strong.

Structure I covered this company in detail before here. As a reminder, it’s a spin off from the Bank of Georgia, all the businesses that they owned following defaulted loans from the financial crisis. 17% of CGEO’s NAV is a shareholding in Bank of Georgia, 64% is hospitals and pharmacy, a water utility and insurance (ie industries that should be recession proof), 10% is earlier stage, high potential businesses like renewable energies and education, and the remaining 8% is “other”.

Discount to NAV The NAV was £666m at March 2021 (GEL 2,922 x 4.4 Lari/GBP exchange rate) vs market cap of £326m, so a 51% discount to NAV. In November 2020, management announced they were targeting a trade sale of one of their large businesses within the next two years. If they manage to sell one of their businesses, it should give confidence in the NAV calculation and help narrow the discount that the shares trade at. Management pointed out in last week’s trading statement that the strong performance of their portfolio companies will have a positive impact on their respective valuations which, when coupled with the recent Bank of Georgia share price performance (+22% since the end of March) should mean that end of June NAV is marked up “strongly” when the number is next published at H1 results.

Ownership There’s a good mix of traditional institutions and emerging markets hedge funds on the shareholder register. The largest shareholder with 6.0% is Eaton Vance, an old school Boston-based fund manager, recently bought by Morgan Stanley for $7bn. M&G own 5.7%, Schroders 4.4%. Firebird, the original backers of Bank of Georgia as the country was emerging from a civil war 20 years ago, still own 2.4%.

Opinion I’ve owned the shares since the spin-off from Bank of Georgia in mid-2018. It’s not an easy company to understand, but hopefully performance should reward investors who are prepared to spend the time. The shares are up +26%, since the start of the year, and the chart looks like it’s forming a nice bowl.

Vitec Trading Update FY 2021

This content creation technology company (hardware and software) with a December year end, said they expect PBT H1 2021 to be not less than £19m and FY 2021F PBT materially above market expectations (given in the RNS as Adj PBT £35.6m). They give this positive update despite shortages in electronic components and raw materials.

Financials The company’s revenues were badly hit by the pandemic, down -23% and it reported a statutory loss before tax of £7.7m FY 2020. Probably we should compare future results to 2019, a more normal year when revenues were £376m, gross profit margin was 45% and adjusted PBT was £48m FY 2019. The Dec 2020 balance sheet shows £123m of intangible assets (mostly goodwill from acquisitions but also £21m capitalised software development costs), versus net assets of £145m. The company has net debt of £91m (or £75m excluding lease liabilities).

Acquisitions Goodwill would have grown this year because in April they announced a couple of acquisitions i) Lightstream for £26m in cash and shares, which develops software for content creators, particularly gamers, to liven up their video streams. ii) Quasar for £4.4m in cash, which makes LED lighting.

Ownership The largest shareholder is Alantra EQMC (a Spanish advisory and asset management business, previously called N+1) with 20%, Aberforth own 8%, Franklin Templeton own 6.1% and Schroders 5.25%.

Remuneration The company’s remuneration report runs to 30 pages in the most recent Annual Report. 2020 rewards for the Chief Executive Stephen Bird look reasonable (base salary £475K, total remuneration £701K). But I notice that over the last 4 years his total remuneration has averaged £1.4m per annum, which seems excessive. The Remuneration Report shows a graph revealing that the company has underperformed the FTSE 250 over the last 10 years, while a couple of pages later we learn that the Chief Exec has earned £13m in total remuneration since 2011. For 2020 LTIP awards to vest in full, Vitec’s share price needs to be £18 or higher by February 2023, which doesn’t seem too difficult given the share price is currently just below £14.

Valuation SharePad shows that the company appears reasonable value on a 2023F PER of 15x. EV/EBITDA is 9x in the same year. Given that so much of the balance sheet is intangible assets, the price/NTAV is 25.7x.

On first glance, that p/NTAV might appear eye wateringly high, but right clicking on the column to look up sector statistics, SharePad shows that the average for “Industrial Engineering” (Vitec’s sector) is 68x. That gives some context, but there are only 2 other companies in the same sector.

So with SharePad it is also easy to check the ratio against the “Software and Computer Services” sector (which contains 18 companies) that have an average P/NTAV of 82x or weighted average of 43x. Alternatively you could argue that it’s a mixture of software and hardware (the latter trades on 26x p/NTAV). In any case, Vitec’s price/NTAV is not high in the context of similar companies.

Opinion This is another recovery stock where it’s hard to know how long momentum can continue. The shares were up +13% following last week’s RNS, and up +51% since the start of the year. The valuation is undemanding even after the rally, but I’m put off by the remuneration report. It doesn’t feel to me that management are particularly well aligned with shareholders.


The author owns shares in Georgia Capital

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