I have sold my holding in Electra Private Equity, realising a 50% profit.

As Electra is in the process of potentially hiring new managers for the fund, it is realising many of its investments and is about to return more than half of its market cap to shareholders as a dividend. Given this, I am uncertain whether there is still value here and whether it makes sense to continue holding. I have decided to sell up and reinvest elsewhere.

With the proceeds I have topped up holdings in Treatt (to 3.2%), Tristel (to 2.4%) and On the Beach (to 5.7%). With the remainder I have bought two new holdings.

New Holdings

The shares at the top of my watchlist are Just Eat, Intercontinental Hotels Group, Spirax Sarco Engineering, Shire Pharmaceuticals, Nichols, JD Sports, Cineworld and Playtech. From these I have decided to purchase initial holdings in Just Eat and Intercontinental Hotels Group. My high level thoughts on the others:

• Spirax Sarco: looks like a great business with a very consistent track record.  I’d love to add it to my portfolio at some point but the valuation looks a little rich currently.
• Nichols: similarly this seems like a very high quality business but currently on a high valuation given its projected growth.
• Shire: this business undoubtedly has a strong competitive advantage. Long term growth prospects look decent but are always going to be somewhat limited given Shire’s existing size. It scores highly in my watchlist because the valuation currently appears cheap. However, this DCF approximation doesn’t account for Shire’s huge debt pile (from acquiring Baltaxa). Momentum is also a bit weak.
• JD Sports: as I noted in a previous post, looks great on paper but I have concerns about the sustainability of its competitive advantage. I’m still undecided about it at the moment.
• Cineworld:  Cineworld has decent return on capital and a decent track record. Competition between cinemas is local and I believe somewhat muted by the need to find and invest in suitable sites. I think the market should also have some defensive qualities. There appears to be scope for growth for Cineworld through further international expansion (though there appear to be limits to LfL sales growth which is determined to a large extent by the quality of the films). Valuation and momentum both look good. My main concern is that its rate of growth slows but I think Cineworld looks interesting.
• Playtech: Playtech is a business with a very strong competitive position. It also generates a lot of cash and decent returns of capital (provided it does’t make silly acquisitions). Valuation and momentum both look good. My main concern with it is that it appears to be rather desperately on the acquisition trail and have limited ideas or opportunities for how to organically reinvest its cash. I don’t find this very attractive but overall it seems like a decent prospect.

Just Eat

I have bought a holding in Just Eat (1.8% of the portfolio). I doubt Just Eat needs any introduction but just in case – it provides an online platform for ordering food from restaurants. I am a keen user of Just Eat.

Quality

I think Just Eat looks like a high quality business:

• Business economics:  being an internet platform I think the business economics are likely to be excellent. Just Eat has high margins and a very high free cashflow conversion. The ROCE is surprisngly low at about 10% but I believe the long term underlying economics are likly to better than this ROCE suggests (likely due to acquisitions Just Eat has made and investments in its infrastructure)
• Track record: there are no blemishes on the track record but it is limited so far
• Competitive advantage: Just Ear has high margins, dominant positions in several markets and growing market shares. From my experience there is not a good substitute to its product in the UK at least. It does face some competitive threats from customers and restaurants choosing to circumvent the platform or from possible new entrants but I wouldn’t overestimate these. I think network effects (that the value of the platform depends on the number of restaurants on it and vice versa) and customer behaviour (that convenience is valued highly and that habits are strong) means there is a strong competitive advantage to the incumbent with a high market share. I think this is somewhat analogous to Google’s search engine. In the UK at least, Just Eat’s competitors seem to have fallen by the wayside (e.g. Hungry House)
• Growth prospects: I think these are quite exciting. Just Eat is going for global expansion partly through acquisition. I believe consumer take-up of these platforms in a lot of markets globally is likely to accelerate.

Pricing

Momentum is good with Just Eat trading near its all time high and having recently issued a very positive trading update. However, the price has been a little volatile recently after the CEO announced his resignation due to family issues.

The valuation looks quite cheap to me given the growth prospects, though with high growth shares there is always quite a bit of risk of course.

Intercontinental Hotels Group

I have also bought a holding in IHG (1.8% of the portfolio). IHG is a hotel brand owner and franchisor (and manager). Other than a handful it no longer owns its own hotels. They charge a royalty fee which is a percentage of revenue earned by their franchisees. I think it is an excellent quality business:

• Business economics: IHG has an asset light, franchise business model and corresponding excellent margins (40%) and returns on capital (consistently > 30%). IHG invests to develop its brand and in technology to improve the consumer experience. I think the business model is really excellent.
• Track record: the track record is pretty good with modest compound growth in earnings and cashflow over the last few years. The share price has done very well.
• Competitive advantage: I believe the hotels market is fairly competitive. IHG’s competitive advantage must come from the strength of its brands. Its high margins and growth suggest these brands are valuable. I don’t have any particular insight into how sustainable and strong these brands are but I am attracted by the fact that IHG franchise business model means its focus is entirely on continuing to develop and invest in these brands.
• Growth prospects: IHG is quite a large company which often makes further growth prospects a concern. In this case I think IHG has good growth prospects particularly as it operates in a very large growing global market with lots of scope for increasing market share. I think the hotels market is somewhat cyclical but the franchise model more or less eliminates financial risk from this.

Pricing

Momentum for IHG is excellent and has been for quite a while now – a mark of a high quality business in my view. The valuation is reasonable given the long term growth prospects.