Burford Capital & Kainos Group Updates – Portfolio Up 15%

My last portfolio update was on the 4th May, which was to cover the first 3 months of the year so far. This update brings us up to date.

Since the end of March, it’s been a hectic couple of months on the political side of things…

UK General Election

On the 18th April, Theresa May announced a snap general election, which is scheduled for 8th June 2017. The pound reacted favorably but the FTSE 100 less so. The FTSE had it’s worst day following the announcement since Br-exit wiping £46 billion pound off Britain’s top companies. The pound has climbed from approximately $1.25 since before the election and continued the upward momentum. Over the last week or so, we have seen the pound come of highs of almost $1.31.

When the pound rises, the FTSE 100 typically falls. The companies included in that index are mostly international companies reporting their earnings in dollars. That’s means when the money earned in dollars is converted back into pounds, their profits are higher. Vice Versa happens when the pound falls. I prefer to see the pound rise as most of our assets are internationally based which means the value of those assets will fall. That means I can buy them cheaper.

French Election

The French kicked off their elections in April. There were market jitters with the major indices pulling back from their highs. The concerns were that Marine Le Pen, a pro Fr-exit electorate, may come out on top. Markets have rallied making up for lost ground thanks to a clear victory for Emmanuel Macron on the 7th May. The euro went to six month highs on the back of Macron winning French election, getting 66% of vote. Any chance of a Fr-exit situation which could cause instability in the markets has now been suppressed.

The Markets

Markets over the last 2 months have continued to defy gravity. Strong earnings have been driving the markets to new all time highs. The Nasdaq broke through the 6000 (now 6200) level for the first time ever at the end of April. Ahead of Trumps much anticipated big tax reform announcement. The healthcare bill was finally passed by congress early May.

The Fed kept rates on hold in May. Data showed that the US economy grew at its slowest pace in three years, in the first quarter of 2017. The slowdown in growth, included consumer spending rising at its weakest rate since the financial crisis.

Wall Street’s fear gauge is at 10 year lows. The index has remained surprisingly subdued, despite the string of geopolitical events that investors and strategists had warned could rock markets. The VIX has averaged 13.6 since last May and just 12 since the start of the year, more than 30 per cent below its historic average of 20.

Investors are relieved the French presidency did not go to an anti-euro candidate but new risks are filling the void. The new market worry is China. Weaker than expect data has put a spotlight on the country’s economy. PMI manufacturing data showed signs of slowing and trade data was weaker than expected.

Portfolio Update

My Employers Share Incentive Plan

My employers SIP hit a new all time high at the end of April which has been a long time coming. The share price had been hovering around the $130 mark for sometime. My SIP is listed on Nasdaq, although the company is domiciled in Ireland. Because the pound has been rising, the share price once converted back into pounds hasn’t actually moved much.

On the 5th May 2017, the company announced it’s Q1 results which beat analysts expectations by some way. Consensus called for EPS of $3.33, and the company reported EPS of $3.71. Revenues of $2.283 billion were expected, but the company reported revenues of $2.319 billion.

Total costs of providing services decreased 2.7% year over year to $1.9 million. Adjusted operating income increased 5.4% year over year to $681 million in the quarter. Free cash flow was $33 million, plummeted 54% year over year. The company projects adjusted earnings per share to be between $8.40 and $8.55 in 2017.

Burford CapitalBurford Capital

On the 26th April, Burford Capital released an RNS stating that it was holding meetings with investors to gauge demand for a possible issue of bonds. The Burford share price quickly retraced back down to around £7.30 from a high of £8.40 prior to the announcement. I’m not sure if this news was cause for concern with some investors??

On the 11th May, Burford Capital announced formally that it had launched a new 10 year bond yielding 5%. The share price double dipped to £7.30 the day before. A double bottom or double top often indicates a turnaround. Sure enough, a week later the Burford Capital share price was hitting new highs again. The bond issue was another success and over-subscribed as usual. Burford raised £175 million this time around compared to £100 million the same time last year at a rate of 6.125%.

Burford Capital got a positive mention in the Shares magazine on the 25th May:

“This injection of capital should help the company accelerate growth by investing in more cases. Market leader Burford has two arms which both conduct the same activity, namely funding law suits in return for a share of a compensation award. Numis estimates Burford has delivered an average internal rate of return (IRR) of more than 27% and, factoring in the new funds which the company can deploy, the house broker ups its earnings per share forecast for 2019 by 11% and hikes its price target from 880p to 950p. Analyst Jonathan Goslin says: ‘Litigation finance represents an attractive asset class with the potential for uncorrelated high returns from investments with automatic exits. ‘In our view, investing in Burford represents one of the most profitable and easiest means of accessing this rapidly growing industry.’ Keep buying this excellent business.”

Investors on record for the 26th May 2017 will be paid a final dividend of 6.48¢ on the 16th June 2017. That takes the full year dividend to 9.15¢, up from 8¢ the year prior.

Further Reading:

Kainos GroupKainos Group

Kainos Group released it’s preliminary results on 30th May. I have to say, I was a little disappointed at first by the figures and was expecting a little better. The fact that the share price went down approximately 10% on the day suggests I wasn’t alone. Although the share price has recovered a little since.

Financial Highlights

Adjusted pre-tax profit*£14.3m£14.1m+1%
Statutory profit before tax£13.3m£14.3m-7%
Sales orders£94.8m£87.2m+9%
SaaS sales orders£10.1m£8.6m+17%
Adjusted diluted earnings per share*9.5p10.5p-10%
Diluted earning per share8.7p10.6p-18%
Proposed total dividend6.3p6.0p+5%

Notes: * Calculated by taking the statutory profit before tax and adding back £0.95 million share based payments (2016: £0.52 million) and £Nil exceptional items (2016: £0.68 million gain)
** The value of contracted revenue that has yet to be recognised

My thoughts on the figures

The pre-tax profit was slightly higher than the broker forecast. I was expecting higher numbers to be honest though. So my initial thoughts to my lower than expected profits was that it may have been due to the cost of acquiring staff. However, 82% of new staff were recruited directly rather than through an agency. It turns out that they doubled their investment into research and development, which I wasn’t expecting. I don’t begrudge any company investing in the future, especially a growth company. If we exclude their investment into R&D then their profit would have been £16.9m. It’s also worth highlighting that statutory profit before tax decreased by 7% to £13.3 million (2016: £14.3 million), largely because of the effect of the exceptional gain of £2.0 million in 2016 in relation to the sale of SpeechStorm.

The chief executive, Brendon Mooney seems very upbeat in his report. Growth in revenue, sales and back orders remains strong. I like the way the business is positioning itself in the market, especially with the SaaS offerings from within the Digital Platforms side of the business. All in all, I am happy with the results and will be looking forward to an uptick in figures in 6 months time.

The final dividend, if approved by shareholders, will be 4.4p and payable on 20 October 2017 to shareholders on the register on 22 September 2017, with an ex-dividend date of 21 September 2017.
This will take the total dividend for the year to 6.3p (2016: 6.0p).

Further Reading:

Final Summary On The Portfolio

Below you can find the latest statement for the portfolio. There hasn’t been any transactions since the last update other than the usual monthly contributions. They are to the employer SIP and the TW Global Equity Tracker Fund in my pension. As I see things at the moment, i’m not expecting to make any changes to the investment portfolio soon.

As mentioned in the last update, reducing my cash pile over time is part of my new strategy. Cash doesn’t earn anything. That said, the stock market continues to defy gravity and all the time it does, I am in no rush to reduce my cash reserves. All new pension money is going into the global tracker fund. When we get a pullback of more than 5%, I will consider drip feeding the cash pot into the global tracker fund.

Portfolio Financial Highlights

  • Our portfolio is up 14.91% this year. Note, that I am holding £35,000 in cash so return on equity invested is actually higher. The MSCI All Companies World Index is up 10.56% and the FTSE All Share Index is up 6.57% year to date.
  • TW Global Equity Tracker Fund has gone up 7.66% year to date. This fund is under-performing the MSCI World Index due to it’s higher than normal exposure to the Emerging Markets and UK.
  • Shares in my employers SIP started the year at £99.40 and were £114.10 by the end of May 2017. That’s an increase of over 14.78%.
  • Shares in Burford Capital started the year at £5.72, and were at £8.90 by the end of May 2017. That’s an increase of over 55.59% this year.
  • Kainos Group started the year at £2.04, and were at £2.32 by the end of May 2017. That’s an increase of over 13.72% this year.

Scroll / slide to see whole spreadsheet

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