Portfolio review 2

The next 4 holdings in my portfolio review…

bioventix

Bioventix

Bioventix is 6.5% of my portfolio and is up 48% on my purchase price.

Quality

Bioventix produces antibodies for use in blood testing. It is a company with a clear strong moat, excellent economics and decent growth prospects. It is a high quality business for sure. In a bit more detail:

  • Bioventix’s moat fundamentally stems from its IP in developing particular sorts of  antibodies (sheep based) which are useful for certain tests.
  • It has exploited this very well. It has near certainty of future revenue streams from its royalty model – it has infinite contracts with customers (the companies that make blood testing machines) and these customers face barriers to switching (diagnostic need for consistency of antibodies). Downstream customers (hospitals, clinics) are also unlikely to switch. This makes Bioventix very insulated from competition.
  • Like a pharma company, after Bioventix has developed an antibody for use in a test the ongoing costs are very low. Fixed costs are also low resulting in incredibly high margins and ROCE.
  • Bioventix benefits from certain growth drivers: from demographic changes resulting in greater use of tests and from the possible addition of new tests following R&D in collaboration with partners. Unfortunately it does not appear able to reinvest all its profit successfully in new R&D to grow faster.
  • It is very non-cyclical.
  • Historically its growth rate has been fairly high with high ROCE and cash generation a lot of which is paid in dividends.
  • It is founder managed.

Pricing

Momentum is currently very good though there is an issue with a coming revenue shortfall from a big legacy contract ending. The market appears to be ‘looking though’ this now though the valuation currently at a PE ratio of 20 appears to me to be very cheap given the long term quality and growth prospects. If I had to put all my money into one stock it might well be Bioventix.

electra

Electra Private Equity

Somewhat unusually my next holding is a closed fund rather than an individual share. Electra is 5.9% of my portfolio and up 52% on my purchase price.

My analysis of funds is rather more rudimentary than of individual shares. I buy funds rarely but typically to get exposure to an asset class where I either have little expertise or want diversification across multiple shares. At the time I bought Electra about a year and a half ago I wanted some exposure to private equity. I choose Electra on the basis of its long term NAV performance, recent momentum and discount to NAV. I have been pleased with its performance since.

Electra is also currently subject to some intervention on the part of an activist investor, Sherborne, which seems to believe it can unlock a lot of hidden value in Electra by changing its management structure, reducing fees and improving capital efficiency by holding less cash. Given Electra’s admirable track record, its management and some of its shareholders seem a bit miffed at this intervention but personally I see the shakeup as likely to be positive and with little risk. Sherborne has some track record for similar successful interventions into US private equity firms I believe.

I’m more than happy to continue to hold here as the momentum continues.

micro focus

Micro Focus

Micro Focus is 5.4% of my portfolio and is up 53% on my purchase price. It is a longstanding favourite of mine and I have bought and sold it several times in the past (but should clearly just have held!)

Quality

Micro Focus provides legacy software services – helping customers get the most out of old IT investments. Interestingly (for me) my father owned a business doing something very similar but on a much smaller scale. Micro Focus has a growing portfolio of mostly ex-growth products but also SUSE which is growing significantly. While I have a broad understanding I have to admit that I find the overall business and products a bit complex to fully understand. To complicate things further Micro Focus has recently undertaken 3 very large transformative acquisitions, including lately a reverse takeover of HP software business, catapulting it into the FTSE100.

Despite its apparent complexity, I think the underlying business has many great characteristics:

  • Micro Focus is largely almost totally insulated from competition for existing customers who are effectively locked in to using its products. Even more widely it faces little competition.
  • It also benefits from scale and operational efficiency and appears to be well run.
  • The market it operates in is stable in the long term and its products are indispensable to its customers. It therefore makes stable profits and is very defensive. There are nonetheless some areas of growth, though Micro Focus recent strategy has been to grow by driving consolidation and greater efficiency across the sector.
  • Micro Focus business has great economics: it has huge margins, ROCE and FCF conversion. Shareholder returns have been exceptionally and consistently high in recent years, particularly for a large company. Micro Focus is one of very few companies whose share price grew through the 2008 downturn.
  • Management have very good reputation and track record. They appear very focussed on maximising shareholder returns with good incentivisation.

Pricing

The current share price momentum and newsflow is good. The valuation appears fairly cheap to me given the quality but depends a lot on effective execution of the HP merger. The debt levels are fairly high which is not cause for concern but needs to be accounted for in the valuation. I am fairly sanguine given management’s track record.

craneware

Craneware

Craneware is 4.9% of my portfolio and is up 46% on my purchase price. Craneware is one of a few stocks I bought immediately post Brexit as a likely beneficiary of the sharp devaluation in sterling.

Quality

Craneware provides IT payment systems for US hospitals. I think it is a very high quality business and is highly likely to be able to substantially grow profits in the long term for a number of reasons:

  • It looks to have a good product with a competitive advantage. Its market share is growing.
  • It has a very high moat from ‘sticky’ customers who would face substantial costs to switch to an alternative provider and high barriers to entry for potential competitors.
  • It operates in a market with long term secular growth and little technological risk. It is non-cyclical. There is some regulatory risk, including that potentially raised by Trump (see the recent share price blip) but this seems unlikely from what I have read.
  • It has experienced stable and consistent growth and has high margins, ROCE and cash conversion.
  • It is founder managed

Pricing

Momentum is currently great with management very bullish on growth over coming years and a big currency tailwind. It is not currently so cheap – current buyers are paying up for low risk, high quality and the possibility of accelerating growth. In my view it is currently good value given this but there may well be opportunities to add at a cheaper valuation as there have been recently. I have no intention of selling any time soon.

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