Portfolio review 3

And the next 4 holdings…

onthebeach

On the beach

On The Beach is currently 4.7% of my portfolio and is up 35% on my purchase price. I bought when the price fell post Brexit and added more on better than expected results subsequently.

Quality

On The Beach is an online platform for booking holidays that allows customer some flexibility around the component parts. It appears to be a high quality business:

  • It looks to have a competitive advantage with growing market share. Its USP comes from platform functionality and good supply agreements. The brand power appears to be growing.
  • Its market should be growing long term – there is a likely shift away from more traditional travel agents to online. I was particularly encouraged that On The Beach was performing well despite the current industry headwinds (currency and terrorism). However, I believe the market is likely to be fairly cyclical.
  • The business appears to have good scaleability and scope for expansion geographically and demographically.
  • The business should have excellent economics in common with other online platforms: great cost structure (v low variable costs) and network effects meaning that its value increases significantly with the number of customers and hotels etc. that use it.
  • It is newly listed – ROCE, growth in profits and cash flow are currently good but a little erratic over the short lifetime of the published accounts. I have not understood exactly why this is the case but it is likely due to investments made by the business. I haven’t sought to explore further but am hoping this clears up in future results. It is definitely something to keep an eye on.
  • It is founder managed.

Pricing

The newsflow and short term momentum is good despite currency and terrorism headwinds. The medium term momentum is a bit more erratic, with low share price liquidity and a large institutional seller.

I believe the current valuation is bargain basement given the business economics,  the projected growth and the business’s current resilience. My DCF experimentation suggests it could reasonably be valued considerably more highly. I will be looking to add to my position especially if and when more good results are published giving me greater confidence.

abdp

AB Dynamics

AB Dynamics is currently 4.5% of my portfolio and is up 29% on my purchase price. It is another post Brexit purchase that came up on a number of my screens and is a non-sterling earner.

Quality

AB Dynamics is an engineer that makes vehicle testing systems for car manufacturers. It has:

  • An apparent ‘moat’ from product IP and know-how. It operates in a niche and does not appear to face significant competitive threats (though I have not researched this thoroughly).
  • It came up on my screens with excellent numbers: consistent profit growth and high margins, ROCE and FCF conversion. A consistently rising long term share price is another good sign.
  • Its market appears likely to experience stable secular growth, though may be a little cyclical in line with demand for cars. There are no obvious technological risks.
  • It appears to have plenty of scope to reinvest for further growth with good revenue visibility and several recent investments in capacity and new products.

Pricing

The current business and share price momentum is great. The valuation seems reasonable given the business quality and growth profile. With few apparent downsides I like this business a lot and will be looking to add more to my holding.

cranswick

Cranswick

Cranswick is 4.2% of my portfolio and is up 4.5%  on my purchase price.

Quality

Cranswick is a processor of pork and supplier to retailers, especially the supermarkets. It is a fairly straightforward business and I believe the case for investing in Cranswick is similarly straightforward.

  • Cranswick has a competitive advantage from scale and low cost. There are very high barriers to entry from caped requirements for potential competitors. I believe it is in quite an unassailable position has a reasonably high margin for a food processor as a result.
  • Cranswick has consistently grown revenues and profits over a long period of time at a reasonably high rate. It has a good ROCE and converts much of profits into cash. Its share price has correspondingly steadily increased over time.
  • Cranswick appears to have plenty of growth opportunities in a defensive market experiencing secular growth.

Pricing

Business and share price momentum is good. The valuation appears reasonable given the quality of the business. I believe Cranswick is a good defensive long term hold that is highly likely to deliver reliable compound growth over time.

hilton

Hilton Food Group

Hilton is 4.1% of my portfolio and is up 17% on my purchase price. It is a very similar business to Cranswick and my reasons for holding are similar. I originally bought as it scored very highly in my screening.

Quality

Hilton is a meat packaging company geographically diversified across Europe and Australia. It provides bespoke customer specific meat packaging facilities for large customers such as Tesco.

  • Similar to Cranswick I believe Hilton has a moat from high barriers to entry from caped requirements (that Hilton has already incurred). Hilton appears to be well-run and efficient.
  • An obvious potential weakness is from its reliance on large customers (such as Tesco) who can put pressure on margins.
  • It has low margins but a consistently high ROCE and very consistent growth in profit with long track record. It appears to be good at profitably allocating investment likely as sales profitability are quite stable and predictable. It also has impressive cash generation for this type of business.
  • It is in a market with secular growth and no apparent technological threat. It is defensive with good scope to profitably grow. Growth comes primarily from geographic expansion and overall market growth. Increased scale should reduce its reliance on big customers over time.

Pricing

Momentum is good with recent business wins. Valuation appears reasonable for a defensive business. This is not a business to get very excited about and there is some risk from customer concentration but this should continue to reduce over time. I’m a happy holder.

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