Bruce looks at what we can learn from Oscar Wilde and a half-bearded psychology professor on flawed narratives that capture people’s imagination. Companies covered: IPX, SDG, YOU, OXIG and MRK.
The FTSE 100 was up +1.35% to 7,596. Nasdaq100 and S&P500 were both up less than +0.5% in the last five days. In Japan, the Nikkei 225 was up +4% and is now up +24% YTD. That compares to the FTSE China 50 down -9% YTD and down -50% from its peak. Bloomberg reported that China is considering forming a state-backed stabilization fund to shore up confidence in its $9.5 trillion stock market.
I’m halfway through reading Dan Ariely’s book Misbelief: What Makes Rational People Believe Irrational Things. In case you don’t know him, Ariely is a psychology professor, whose research often overlaps with behavioural economics: what actually people do, rather than what economists’ theoretical models predict. Ariely found himself being demonised by various groups online that objected to Government anti-covid measures. Rather than ignoring the abuse, he met with his detractors and explored their narratives of misbelief, which he has now turned into a book. Some people needed a villain, and he was an easy target because of his facial disfigurement from an accident. In dark corners of the internet, he was known by the Harry Potter-esque moniker “The Half-Beard Professor”.
Although the book is about misbelief during the pandemic, it strikes me that there are wider lessons for investing in markets. There are social elements to all financial bubbles and crashes. One of the attractions is not just making money but a sense of belonging to a tribe or “in group” that has a superior view of reality (have fun staying poor!) than the “mainstream”. He also thinks that people who got sucked into conspiracy theories around 5G, Bill Gates and microchips in the vaccine are poor at metacognition – thinking about thinking. Once they’d become fixed on a narrative, they wouldn’t accept evidence (including catching Covid and going to hospital) that contradicted their worldview. There seems an obvious parallel with meme stocks, crypto-currency scams and NFTs.
Ariely’s subjects also defined their ‘circle of competence’ badly, believing themselves experts in vaccines, just because they had devoted many hours on the internet ‘researching’ dubious theories from untrustworthy websites. These are all traits which are likely to damage your investing, as well as your health.
Successful investing often suits contrarian personality types, willing to put time and effort into diverging from the crowd. It’s important not to end up in an amplified echo chamber of mistrust of everything mainstream though. I’ve always assumed that Oscar Wilde would have made a fantastic investor because of his quote: “Whenever people agree with me, I always feel I must be wrong.”
With that in mind, AIM is down -19% versus a decade ago. However, the obvious negatives in UK markets and smaller companies are well known and appear to be priced in. At some point, unpopular UK stocks should outperform Nasdaq which has more than trebled in the last decade.
This week I look at Impax AM, Sanderson Design Group, Oxford Instruments, and YouGov. These are some good quality companies that have seen their share prices punished from a couple of years ago. Then a brief comment on Marks Electrical who seem to have used their broker to put out a profit warning.
There are quite a few more profit warnings that I haven’t written about (Travis Perkins, Forterra) because I think that the building sector will continue to struggle into 2024. I’ve also avoided profit warnings at Eneraqua Technologies and Calnex. I don’t think there’s any need to take a position in companies which are warning at the moment. There are so many good quality companies that are now releasing “in-line” results but have been de-rated sharply from a couple of years ago.
Impax AM Q4 Sept AuM update
Impax AM, the sustainable economy fund manager, last week released a year end Asset under Management (AuM) update, showing £893m of outflows in the final quarter of the year. They currently have £37.4bn of AuM. So annualised outflows are 10% of AuM.
The shares are down -71% from their peak at the end of December 2021, which compares to AuM down -10% versus the same time frame. Rather than just comparing dividend yield, I have created a table comparing the various fund managers (Schroders, far left, the largest with £618bn AuM to Premier Miton the smallest, far right, with £10.5bn AuM). Only Ashmore, the emerging markets specialist, and Impax AM have released Sept AuM figures, so the others show the figure at the end of June.
The average forecast PER ratio is 10.7x, and the average dividend yield is 9.2%. For contrast, US-listed Blackrock with $9.1 trillion AuM trades on a forecast PER of 23x, but 1.0% Market Cap/AuM as so many of the funds are low-fee ETF and passive vehicles.
The lack of dispersion of Market Cap/ AuM from the largest to the smallest seems odd to me. On that measure, ASHM is the most expensive (2.85%) and ABDN, JUP and PMI (0.8%-0.9%) are the cheapest. I’d expect the smaller companies to trade at a premium because they could be potential takeover targets in a consolidating sector. This could be an opportunity for value investors. Alternatively, I noted last week that the whole fund management sector is trading at cheap valuations, which may be indicating a structural problem with the business of managing other people’s money.
Valuation: Impax shares are trading on 11.8x PER and 6.7% dividend yield, which is a small premium to the sector average. The old rule of thumb used to be that fund managers traded on around 4% of AuM, which has fallen to 1.3% as fees have come under pressure. Again, on that measure, Impax is on a slight premium of 1.4% market cap/AuM. Fund managers is a business model that has significant operational gearing, so if we do start to see inflows then the sector, and Impax AM particularly, could benefit strongly. Below is a slide from Impax AM’s H1 presentation, which suggests that it still enjoys favourable secular drivers.
Opinion: It used to be relatively easy to raise money to set up as a fund manager, that is not the case now. In addition, the “moat” for Impax AM is a 20-year track record with a genuinely differentiated environmental strategy. For that reason, I feel that this business ought to trade on a premium to the rest of the sector. There have been a couple of cycles of environmentally friendly investing, which Impax has come through. ESG investing is rather out of fashion now and facing a backlash, but it seems likely that “mission-based” investing will make a return in future. I continue to hold.
Sanderson Design H1 to July results
This luxury wallpaper company, which has licencing agreements with the likes of NEXT and J Sainsbury’s Habitat brand and foreign retailers like Sangetsu (Japan) and Williams Sonoma (USA) announced H1 results to July. Revenue was down -2% to £57m, but statutory PBT rose +13% to £6.2m. Net cash ex-lease liabilities was £16m, up +6% versus July last year.
Similar to Fevertree, which I mentioned a couple of weeks ago, SDG’s smaller US business is growing well +6%, but the UK is struggling down -12%. The US is a quarter of product sales, versus the UK which is almost twice the size at £20m revenue. Management attribute lower sales in the UK to the difficult consumer environment and they have reorganised their UK business to align with lower volumes, so it sounds like they are not expecting the UK to pick up next year. The reorganisation should save £0.6m per annum in future years.
The other area where the business has struggled is third-party manufacturing, with sales down -20% to £9.5m. That was driven by a strong H1 last year, as companies re-stocked inventories of SDG’s products following the pandemic.
Outlook: Management say that they are focused on growing the US and are encouraged by high level of sampling from recent product launches. FY expectations remain unchanged, but they do point to a pipeline of licensing income opportunities: licensing income was up +82% to £7m of revenue which would be positive for margin and RoCE, at it is 100% gross margin.
Valuation: Using Progressive’s forecasts, the shares are trading on 7.5x PER Jan 2025 and 7.1x Jan 2026F. That seems good value for some unique brands that ought to have lasting appeal.
Opinion: I do like the theme of buying British companies that are successfully growing into the much larger US market. Examples include FEVR, GAW and AHT. One negative is that SDG’s forecast revenue of £110m FY Jan 2024F is no higher than FY Jan 2018. Indeed, Sharepad shows that all the way back in 1997 Walker Greenbank (as it was then called) reported revenue of £100m, so it has struggled to grow over the decades.
This consumer research and data analytics company announced FY underlying revenue +9% growth to £258m. Including the acquisition and favourable forex movements, revenue was up +17%. Statutory PBT was up +77% to £45m, with the share price responding +23% following the RNS.
Richard wrote up YouGov at the end of last year, drawing attention to the attractive RoCE but also commenting that intangibles on the balance sheet were a mix of acquisitions (£82m) and internally generated (£32m).
This is a genuinely internationally diversified business, with the US almost twice the size of the UK business. The financial health indicators are also strong, with net cash at £107m, following a £50m placing at 920p per share in July. That net cash figure is likely to swing to net debt because in July they announced the acquisition of GfK’s Consumer Panel Business for €315m. They don’t give a net debt figure on a proforma basis, so we will have to wait until that CPB acquisition closes.
Outlook: Management are confident of meeting market expectations on a standalone (ie pre-GfK CPB acquisition) basis. They have reiterated medium-term guidance to £500m (v £258m just reported) and adj operating profit margin of 25% (v below 19% just reported), first announced at a CMD in May. They will provide further guidance after the acquisition has closed.
Valuation: The shares are trading on 16x PER FY July 2025F and 13x the following year. There is some execution risk, but this does look interesting given the impressive track record and operational gearing in the model.
Opinion: This is another business that I have liked in the past, due to the high margins and RoCE, but have been put off by the high valuation. That valuation has now come down into reasonable levels. My experience is that I have made higher returns buying quality companies at a fair price (GAW) than companies on a mid-single-digit PER ratio, but which never re-rated (TMG).
Oxford Instruments H1 Sept trading update
This scientific instruments company, with a March year-end, announced H1 adj PBT would be “broadly in line” (ie slightly below) with last year’s figure of £37m. They also announced a slightly weaker margin (18.4% H1 last year). Management suggested that they were still comfortable with FY Mar 2024F analyst consensus of £83m (range £76.8m to £84.3m) as they expect a second half weighting.
Looking at their numbers in the previous two years there has been a 46/54 weighting towards H2. However, if we take the £83m mid-range consensus figure, that implies a 43/57 split and a rather heroic +31% increase in H2 versus H1 adj operating profit. So, this looks like a soft profit warning.
The company designs high-technology products which enable the world’s leading companies and scientific research communities to analyse and manipulate materials down to the atomic level. Below is a slide from the FY Mar results, which splits out the revenue growth by activity. Commercial customers are now half of the revenue.
In recent years free cash flow has been falling, from £45m in FY Mar 2020 to £29m most recently reported, despite rising profits. That’s because capital expenditure is up almost 5x in the last 5 years, as the company has invested in a new semiconductor facility. They also spent £34m on R&D.
Valuation: The shares are trading on 17x PER Mar 2025F dropping to 16x the following year. The most recently reported RoCE was 19.8% and has been rising in recent years, as has the EBIT margin. The business had net cash of £100m, at the March year end which represents 9% of the market cap.
Opinion: Selling scientific instruments to universities, research institutes and large corporates ought to be relatively recession-proof. Richard wrote the company up here, pointing out that their acquisition strategy stumbled a couple of years ago. There’s a risk that H2 may disappoint, so I don’t think there’s any urgency to buy, but a company to keep an eye on as cashflow (FCF) ought to begin rising once again.
Marks Electrical H1 Sept trading update
Finally, a brief mention of Marks Electrical H1 Sept trading update, where Cavendish have cut FY Mar 2024F EPS by -20% to 4.4p. I challenge readers to look at last week’s statement and derive that forecast change on their own.
Management comments include: “We remain focused on our full-year targets and expect margin pressure to ease in H2 as we benefit from improved operating leverage during the peak trading period….We’ve exited September with order growth of over 20%, made a strong start to October, and are laser-focused on maintaining our performance management discipline on revenue, profit and cash in order to grow sustainably and achieve our full-year targets.”
MRK seem to be yet another company putting out an upbeat RNS, even talking of achieving their FY targets, but then asking their broker to slash forecast earnings for that year. The shares were off -20% following the RNS. I will continue to draw attention to this whenever I see this contradictory behaviour going on.
Conclusion
Bruce co-hosts the Investors’ Roundtable Podcast with Roland Head, Mark Simpson and Maynard Paton. To listen you can sign up here: privateinvestors.supercast.com
Got some thoughts on this week’s commentary from Bruce? Share these in the SharePad “Weekly Market Commentary” chat. Login to SharePad – click on the chat icon in the top right – select or search for “Weekly Market Commentary” chat.
Weekly Market Commentary | 17/10/23 | IPX, SDG, YOU, OXIG, MRK | Misbelief and markets
The FTSE 100 was up +1.35% to 7,596. Nasdaq100 and S&P500 were both up less than +0.5% in the last five days. In Japan, the Nikkei 225 was up +4% and is now up +24% YTD. That compares to the FTSE China 50 down -9% YTD and down -50% from its peak. Bloomberg reported that China is considering forming a state-backed stabilization fund to shore up confidence in its $9.5 trillion stock market.
I’m halfway through reading Dan Ariely’s book Misbelief: What Makes Rational People Believe Irrational Things. In case you don’t know him, Ariely is a psychology professor, whose research often overlaps with behavioural economics: what actually people do, rather than what economists’ theoretical models predict. Ariely found himself being demonised by various groups online that objected to Government anti-covid measures. Rather than ignoring the abuse, he met with his detractors and explored their narratives of misbelief, which he has now turned into a book. Some people needed a villain, and he was an easy target because of his facial disfigurement from an accident. In dark corners of the internet, he was known by the Harry Potter-esque moniker “The Half-Beard Professor”.
Although the book is about misbelief during the pandemic, it strikes me that there are wider lessons for investing in markets. There are social elements to all financial bubbles and crashes. One of the attractions is not just making money but a sense of belonging to a tribe or “in group” that has a superior view of reality (have fun staying poor!) than the “mainstream”. He also thinks that people who got sucked into conspiracy theories around 5G, Bill Gates and microchips in the vaccine are poor at metacognition – thinking about thinking. Once they’d become fixed on a narrative, they wouldn’t accept evidence (including catching Covid and going to hospital) that contradicted their worldview. There seems an obvious parallel with meme stocks, crypto-currency scams and NFTs.
Ariely’s subjects also defined their ‘circle of competence’ badly, believing themselves experts in vaccines, just because they had devoted many hours on the internet ‘researching’ dubious theories from untrustworthy websites. These are all traits which are likely to damage your investing, as well as your health.
Successful investing often suits contrarian personality types, willing to put time and effort into diverging from the crowd. It’s important not to end up in an amplified echo chamber of mistrust of everything mainstream though. I’ve always assumed that Oscar Wilde would have made a fantastic investor because of his quote: “Whenever people agree with me, I always feel I must be wrong.”
With that in mind, AIM is down -19% versus a decade ago. However, the obvious negatives in UK markets and smaller companies are well known and appear to be priced in. At some point, unpopular UK stocks should outperform Nasdaq which has more than trebled in the last decade.
This week I look at Impax AM, Sanderson Design Group, Oxford Instruments, and YouGov. These are some good quality companies that have seen their share prices punished from a couple of years ago. Then a brief comment on Marks Electrical who seem to have used their broker to put out a profit warning.
There are quite a few more profit warnings that I haven’t written about (Travis Perkins, Forterra) because I think that the building sector will continue to struggle into 2024. I’ve also avoided profit warnings at Eneraqua Technologies and Calnex. I don’t think there’s any need to take a position in companies which are warning at the moment. There are so many good quality companies that are now releasing “in-line” results but have been de-rated sharply from a couple of years ago.
Impax AM Q4 Sept AuM update
Impax AM, the sustainable economy fund manager, last week released a year end Asset under Management (AuM) update, showing £893m of outflows in the final quarter of the year. They currently have £37.4bn of AuM. So annualised outflows are 10% of AuM.
The shares are down -71% from their peak at the end of December 2021, which compares to AuM down -10% versus the same time frame. Rather than just comparing dividend yield, I have created a table comparing the various fund managers (Schroders, far left, the largest with £618bn AuM to Premier Miton the smallest, far right, with £10.5bn AuM). Only Ashmore, the emerging markets specialist, and Impax AM have released Sept AuM figures, so the others show the figure at the end of June.
The average forecast PER ratio is 10.7x, and the average dividend yield is 9.2%. For contrast, US-listed Blackrock with $9.1 trillion AuM trades on a forecast PER of 23x, but 1.0% Market Cap/AuM as so many of the funds are low-fee ETF and passive vehicles.
The lack of dispersion of Market Cap/ AuM from the largest to the smallest seems odd to me. On that measure, ASHM is the most expensive (2.85%) and ABDN, JUP and PMI (0.8%-0.9%) are the cheapest. I’d expect the smaller companies to trade at a premium because they could be potential takeover targets in a consolidating sector. This could be an opportunity for value investors. Alternatively, I noted last week that the whole fund management sector is trading at cheap valuations, which may be indicating a structural problem with the business of managing other people’s money.
Valuation: Impax shares are trading on 11.8x PER and 6.7% dividend yield, which is a small premium to the sector average. The old rule of thumb used to be that fund managers traded on around 4% of AuM, which has fallen to 1.3% as fees have come under pressure. Again, on that measure, Impax is on a slight premium of 1.4% market cap/AuM. Fund managers is a business model that has significant operational gearing, so if we do start to see inflows then the sector, and Impax AM particularly, could benefit strongly. Below is a slide from Impax AM’s H1 presentation, which suggests that it still enjoys favourable secular drivers.
Opinion: It used to be relatively easy to raise money to set up as a fund manager, that is not the case now. In addition, the “moat” for Impax AM is a 20-year track record with a genuinely differentiated environmental strategy. For that reason, I feel that this business ought to trade on a premium to the rest of the sector. There have been a couple of cycles of environmentally friendly investing, which Impax has come through. ESG investing is rather out of fashion now and facing a backlash, but it seems likely that “mission-based” investing will make a return in future. I continue to hold.
Sanderson Design H1 to July results
This luxury wallpaper company, which has licencing agreements with the likes of NEXT and J Sainsbury’s Habitat brand and foreign retailers like Sangetsu (Japan) and Williams Sonoma (USA) announced H1 results to July. Revenue was down -2% to £57m, but statutory PBT rose +13% to £6.2m. Net cash ex-lease liabilities was £16m, up +6% versus July last year.
Similar to Fevertree, which I mentioned a couple of weeks ago, SDG’s smaller US business is growing well +6%, but the UK is struggling down -12%. The US is a quarter of product sales, versus the UK which is almost twice the size at £20m revenue. Management attribute lower sales in the UK to the difficult consumer environment and they have reorganised their UK business to align with lower volumes, so it sounds like they are not expecting the UK to pick up next year. The reorganisation should save £0.6m per annum in future years.
The other area where the business has struggled is third-party manufacturing, with sales down -20% to £9.5m. That was driven by a strong H1 last year, as companies re-stocked inventories of SDG’s products following the pandemic.
Outlook: Management say that they are focused on growing the US and are encouraged by high level of sampling from recent product launches. FY expectations remain unchanged, but they do point to a pipeline of licensing income opportunities: licensing income was up +82% to £7m of revenue which would be positive for margin and RoCE, at it is 100% gross margin.
Valuation: Using Progressive’s forecasts, the shares are trading on 7.5x PER Jan 2025 and 7.1x Jan 2026F. That seems good value for some unique brands that ought to have lasting appeal.
Opinion: I do like the theme of buying British companies that are successfully growing into the much larger US market. Examples include FEVR, GAW and AHT. One negative is that SDG’s forecast revenue of £110m FY Jan 2024F is no higher than FY Jan 2018. Indeed, Sharepad shows that all the way back in 1997 Walker Greenbank (as it was then called) reported revenue of £100m, so it has struggled to grow over the decades.
I last wrote about the company in January last year, when the shares were 178p, commenting that I wouldn’t like to chase the price higher. At 106p they now look much more attractively valued and the investment case looks good, in my view.
YouGov FY July Results
This consumer research and data analytics company announced FY underlying revenue +9% growth to £258m. Including the acquisition and favourable forex movements, revenue was up +17%. Statutory PBT was up +77% to £45m, with the share price responding +23% following the RNS.
Richard wrote up YouGov at the end of last year, drawing attention to the attractive RoCE but also commenting that intangibles on the balance sheet were a mix of acquisitions (£82m) and internally generated (£32m).
This is a genuinely internationally diversified business, with the US almost twice the size of the UK business. The financial health indicators are also strong, with net cash at £107m, following a £50m placing at 920p per share in July. That net cash figure is likely to swing to net debt because in July they announced the acquisition of GfK’s Consumer Panel Business for €315m. They don’t give a net debt figure on a proforma basis, so we will have to wait until that CPB acquisition closes.
Outlook: Management are confident of meeting market expectations on a standalone (ie pre-GfK CPB acquisition) basis. They have reiterated medium-term guidance to £500m (v £258m just reported) and adj operating profit margin of 25% (v below 19% just reported), first announced at a CMD in May. They will provide further guidance after the acquisition has closed.
Valuation: The shares are trading on 16x PER FY July 2025F and 13x the following year. There is some execution risk, but this does look interesting given the impressive track record and operational gearing in the model.
Opinion: This is another business that I have liked in the past, due to the high margins and RoCE, but have been put off by the high valuation. That valuation has now come down into reasonable levels. My experience is that I have made higher returns buying quality companies at a fair price (GAW) than companies on a mid-single-digit PER ratio, but which never re-rated (TMG).
Oxford Instruments H1 Sept trading update
This scientific instruments company, with a March year-end, announced H1 adj PBT would be “broadly in line” (ie slightly below) with last year’s figure of £37m. They also announced a slightly weaker margin (18.4% H1 last year). Management suggested that they were still comfortable with FY Mar 2024F analyst consensus of £83m (range £76.8m to £84.3m) as they expect a second half weighting.
Looking at their numbers in the previous two years there has been a 46/54 weighting towards H2. However, if we take the £83m mid-range consensus figure, that implies a 43/57 split and a rather heroic +31% increase in H2 versus H1 adj operating profit. So, this looks like a soft profit warning.
The company designs high-technology products which enable the world’s leading companies and scientific research communities to analyse and manipulate materials down to the atomic level. Below is a slide from the FY Mar results, which splits out the revenue growth by activity. Commercial customers are now half of the revenue.
In recent years free cash flow has been falling, from £45m in FY Mar 2020 to £29m most recently reported, despite rising profits. That’s because capital expenditure is up almost 5x in the last 5 years, as the company has invested in a new semiconductor facility. They also spent £34m on R&D.
Valuation: The shares are trading on 17x PER Mar 2025F dropping to 16x the following year. The most recently reported RoCE was 19.8% and has been rising in recent years, as has the EBIT margin. The business had net cash of £100m, at the March year end which represents 9% of the market cap.
Opinion: Selling scientific instruments to universities, research institutes and large corporates ought to be relatively recession-proof. Richard wrote the company up here, pointing out that their acquisition strategy stumbled a couple of years ago. There’s a risk that H2 may disappoint, so I don’t think there’s any urgency to buy, but a company to keep an eye on as cashflow (FCF) ought to begin rising once again.
Marks Electrical H1 Sept trading update
Finally, a brief mention of Marks Electrical H1 Sept trading update, where Cavendish have cut FY Mar 2024F EPS by -20% to 4.4p. I challenge readers to look at last week’s statement and derive that forecast change on their own.
Management comments include: “We remain focused on our full-year targets and expect margin pressure to ease in H2 as we benefit from improved operating leverage during the peak trading period….We’ve exited September with order growth of over 20%, made a strong start to October, and are laser-focused on maintaining our performance management discipline on revenue, profit and cash in order to grow sustainably and achieve our full-year targets.”
MRK seem to be yet another company putting out an upbeat RNS, even talking of achieving their FY targets, but then asking their broker to slash forecast earnings for that year. The shares were off -20% following the RNS. I will continue to draw attention to this whenever I see this contradictory behaviour going on.
Conclusion
Bruce co-hosts the Investors’ Roundtable Podcast with Roland Head, Mark Simpson and Maynard Paton. To listen you can sign up here: privateinvestors.supercast.com
Got some thoughts on this week’s commentary from Bruce? Share these in the SharePad “Weekly Market Commentary” chat. Login to SharePad – click on the chat icon in the top right – select or search for “Weekly Market Commentary” chat.