Richard introduces the latest fish caught in his 5 Strikes net. The seven shares include a giant caterer, a software supplier with a perfect track record, and a travel agent that makes “jollies even jollier”.
Post-Christmas, there is a bit of a lull in the annual reporting season. That is because a large number of companies with year ends corresponding with the calendar year-end are still preparing theirs.
Consequently, there is a short list of companies that have published annual reports since my last trawl of the stockmarket and also scored less than three strikes according to my 5 strikes system:
| Name | TIDM | Strikes | Score |
|---|---|---|---|
| Cerillion | CER | – IPO | 1 |
| Compass | CPG | – Holdings – Debt | 2 |
| Dewhurst | DWHT | – Growth | 1 |
| Hollywood Bowl | BOWL | – IPO – Debt | 2 |
| On The Beach | OTB | ? ROCE | 1 |
| Renew | RNWH | ? Holdings – Shares | 2 |
| Victrex | VCT | – Holdings – Growth | 2 |
| Source: Sharepad and Richard Beddard. | |||
| Our guide to 5 Strikes: How the system works, and what the strikes mean. | |||
5 strikes is a way of quickly identifying shares with decent financial track records. These are shares that ought to be fairly straightforward to analyse.
The companies have demonstrated they know how to make good money without recourse to leverage, so the task ahead is to work out how they do it, what could stop them from making more money, and what they are doing about that.
If a coherent story emerges, and the shares are not too dear, more likely than not we have netted a good long-term investment.
The first step is to briefly summarise how these companies make money.
First up, four shares I do not currently follow. A word of warning. These are businesses I am just getting to know. In the cases of Cerillion, Compass and Renew you are with me from the very beginning of the adventure.
Cerillion – valuable customers
The only strike against Cerillion is the float date. The company floated in 2016, just one year short of the listing duration I deem sufficient to demonstrate a track record. Other things being equal, it will score no strikes next year.
The company provides billing, charging, and customer relationship management (CRM) software to about 80 customers around the World, most of them telecom companies. It says customers stay with it, typically, for more than ten years.
Cerillion earned nearly £40 million in revenue in 2023, so these are valuable customers on multi-year contracts. The key selection criteria for a recently acquired big customer were, according to Cerillion: “The commercial, operational and financial advantages of our ‘out-of-the-box’ product”.
The company says this enables Cerilion’s customers to create new products and packages for their end customers more quickly and cheaply than “traditional” best-of-breed or bespoke applications. It is introducing Artificial Intelligence, so non-technical telco staff can create product bundles using natural language.
It earns about half its revenue from Software licences, Software as a Service (SAS) payments, support, hosting and maintenance contracts. The other half, Services revenue, is earned when Cerillion implements new projects.
Cerillion has a short but perfectly formed financial track record, which may be explained by the fact that its product meets customer requirements for ease of configuration better than rivals.
But the company has little more to say about its business model, strategy, and employees in the annual report (beyond the normal boilerplate), which will make it difficult to form a view on its prospects.
The principal risks report reveals declining telco revenue, declining fixed-line and mobile volumes, and a concentrated customer base.
Cerillion’s biggest customer was responsible for nearly 20% of revenue in 2023, and the top 5 customers brought in nearly 60% of revenue.
Compass – scale advantage
You have almost certainly eaten food at a facility operated by Compass, but you might not know it.
This massive £31 billion revenue company runs restaurants, canteens, takeaway and vending machines for other organisations: businesses, sports centres, schools and colleges, and healthcare providers.
Its strategic focus on people, performance and purpose suggests it might treat customers, employees, and shareholders well. It also hints at wider societal goals. From this much good might spring.
From a performance perspective that will come from the Compass “Management and Performance Framework”, which focuses on winning new business from clients, and getting the product right so we eat lots, and pay handsomely for it.
The rest of the business model keeps a lid on costs. Compass’ vast scale means it can buy food cheaply, and since food makes up a third of costs this is a significant advantage. It also seeks productivity improvements from its 550,000 strong staff through an entrepreneurial decentralised (aka unbureaucratic) organisational structure.
The numbers bear out the story, Compass is highly profitable, and profitability is a measure of how efficiently a company uses its capital.
I awarded two strikes against Compass, although neither are deal breakers.
Its debt-to-capital ratio of 31% is a little higher than my arbitrary limit of 25% (remember debt in Sharepad is not just bank debt, it includes leases). But, many would argue that a profitable business like Compass can carry greater financial obligations. They are lower than they have been in the past too.
Typically of massive companies, the directors only own a tiny fraction of the business, although chief executive Dominic Blakemore’s £8 million holding is not insignificant, surely, even to someone earning a FTSE 100-sized salary.
Beyond that, the company’s risk report includes a sentence on “ongoing structural changes in working and education”, also known as “working from home”.
On The Beach – wrangling with Ryanair
On The Beach is the Online Travel Agent (OTA) that makes “Jollies even Jollier” by cobbling together flights on scheduled low-cost airlines and beds from hotels and bulk-buyers of accommodation known as bed banks.
Its key differentiator is the website, which makes choosing a holiday easier and promises hiccup-free holidays through slick automation of customer service.
Because it does not operate flights or hotels, On The Beach’s main costs relate to marketing and technology.
Scoring On The Beach I had to make a big decision. The company has performed well on all metrics, except during the pandemic, when people could not go on holiday.
I did not penalise it for the steep drops in revenue, hefty share issues to stay afloat, and losses in cash and profit terms during the peak pandemic years of 2020 and 2021.
A pandemic only seems like a big risk, because we have experienced an epic pandemic. We may be due another one soon, but history does not tell us they come that frequently.
When I last looked at On the Beach four years ago it was sparring with low-cost airlines making it difficult for OTA’s to book flights.
The sparring has developed into a battle, and most of On The Beach’s ire seems to be focused on Ryanair. The annual report describes increasingly sophisticated anti-competitive behaviours: blocking OTA bookings, and smear campaigns “casting doubt about the validity and benefits of booking package holidays with OTAs.”
On The Beach is lobbying for a Competition and Markets Authority (CMA) review.
In the past, I have been put off by this conflict between the company and its suppliers. Generally, I look for businesses where everyone wins. It seems to me they are most sustainable.
Other portfolio candidates
Renew scored only two strikes, one for holdings and one for share count. That could be harsh.
The directors only own 0.7% of the shares, which does not sound significant, but the company’s market capitalisation is about £660 million. A bit of arithmetic tells us the directors’ holdings are worth nearly £5 million. Many of them belong to chief executive Paul Scott.
The share count has increased by a third over the last 11 years, but most of that increase happened in 2018. Then, the company spent a lot more than it earned on acquisitions. That is unusual, so perhaps we can deem it a one-off.
Renew’s engineering services keep our transport, energy and utility sectors going. This is not a business I usually associate with big profits, but apparently that is my misconception.
Like Cerillion and Compass, it joins my research list. On The Beach has rejoined it.
The remaining three shares, Dewhurst, Hollywood Bowl and Victrex, have been on the list and researched routinely for years. I will be updating my analysis of those companies on interactive investor imminently.
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Contact Richard Beddard by email: richard@beddard.net, Twitter: @RichardBeddard, web: beddard.net
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