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Oh Lord, where did July go..?! I’d hoped to publish my H1-2015 portfolio performance report a week/ten days ago, but I guess the days kinda slipped away – who can fault a bit of fun in the sun, esp. when my portfolio holdings are slowly but surely marching higher (despite all the China volatility & the fact the US market’s totally sucking wind this year).

Now, if you’re a regular reader, I recently detailed my (still) developing bubble thesis (Parts I to IV), suggesting an increased focus on large cap stocks (a new global Nifty Fifty) might be more profitable. [Though I’m also v conscious of certain small/micro cap successes in the past 12-18 months – a bar-bell strategy, in terms of market cap, may ultimately prove more compelling]. But in terms of immediate portfolio changes, I hastened to add: ‘I don’t believe there’s any great rush here, necessarily’. Well, that being said…let’s first kick off with some (end-June) portfolio changes!

Portfolio Sales:

Alternative Asset Opportunities (TLI:LN):  TLI had a great H2-2014 run – gaining over 22% (inc. a 2p return of capital), making it my top holding at year-end (at 11.1%). Since then, the insured have enjoyed a real stroke of luck, with just one maturity announced. Not surprisingly, the shares are off YTD in sympathy (reducing my holding, in % terms). But I’d focus on TLI’s portfolio instead – adjusting for minor FX unfavourability, and an additional 2p ret. of capital, TLI’s underlying NAV decline was limited to just 3%.

And I see no change in prospects: We’re at the end of a long & painful life expectancy adjustment process (in fact, June NAV inc. a meaningful positive LE impact), and the insured are now 91.5 yrs old on average – maturities will inevitably accelerate (peaking in 2019-20). There’s little financial risk (with an available credit facility, zero debt & cash on hand), and TLI’s focused on regular returns of capital. Sure, we can debate valuations, but shouldn’t lose sight of the big picture – as per the latest results, the portfolio now consists of $132 million in death benefits vs. a current carrying value of $45 million.

But owning such a defensive & uncorrelated investment isn’t as compelling a requirement for me today, and I see equally attractive (albeit, more correlated) opportunities elsewhere. I’ve reduced my shareholding accordingly, from 9.1% to 7.0%. [NB: I normally don’t add to individual holdings beyond a 7.5% limit – TLI remains a substantial position for me].

Donegal Investment Group (DCP:ID):  No real change in my DCP investment thesis either, since I last wrote it up just over a year ago. But after peaking at 7.25 early in 2014, the shares keep grinding lower…as I tweeted, a break of 5.80-6.00 support inevitably targeted 5.15-5.25, where we rest today. Earnings have also been patchy, which has disappointed investors. Wrongly, in my opinion, as DCP’s intrinsic value is mostly unrelated to good/bad earnings – it’s far more dependent on selling non-core assets/businesses & investing the proceeds into share tenders/buybacks (not debt pay-down).

But the burden of proof is now on management – a great sale opportunity for Animal Feeds was missed, Speciality Dairy enjoys revenue growth (yet we still lack segment figures!?) but is presumably still loss-making, while the Monaghan Mushrooms relationship’s descended into litigation. With the court ordering the Wilson family to buy out Donegal’s stake for 26.2 million (over 50% of DCP’s current market cap!), this may finally deliver a substantial disposal. [Unfortunately…Monaghan may still offer the greatest upside in DCP’s non-core portfolio]. But this may be on hold ’til 2016, with the valuation on appeal. If/when the transaction occurs, it presents a real test – is management prepared to go ahead & cannibalise the O/S share count (all too rare in Ireland) to create substantial/additional shareholder value?

Meanwhile, a 9.46 Base Case NAV (which ignores share buybacks) still looks fair to me, hopefully the shares now have technical support, and it remains a cheap & uncorrelated stock. But news-flow could be slow & DCP isn’t a stock which obviously benefits from an ECB-fueled large cap bull market…for the moment, I’ve reduced my holding from 6.4% to 4.7%. [And a significant value uplift (closing the gap vs. DCP’s reported NAV), since my first write-up at 3.63 (about two years ago), is obviously most welcome!].

If/when management executes on non-core disposals and share buybacks (and ideally, maximises the value of its MM stake), ramping up this stake again could be v attractive, even at a higher price – if you note the other NAV Scenarios I mapped out, ranging (not unrealistically) from 15.06 to €26.08 per share. Of course, DCP’s significant discount(s) to NAV might also present a compelling activist target…

Universe Group (UNG:LN):  My last UNG post, a year ago, laid out three approaches to valuation: Value, Growth & Activist Investor Perspectives, ranging from a 7.4p to 17.1p Fair Value per share. The company’s made steady progress since & sentiment’s improved dramatically, with the shares hitting 9p recently. But now we’re moving well into growth territory – further progress depends on sustained improvement in revenue, earnings & investor sentiment. [As for potential activism/M&A – there’s no good way to handicap those odds/timeline here].

So while I have little reason to doubt UNG’s unfolding growth scenario, the risk/reward’s clearly changed significantly since my original entry – accordingly, I’ve almost halved my position, from 5.3% to 2.8%. And it’s a sweet goodbye…UNG’s up almost 300% since my original write-up three years ago!

European Islamic Investment Bank (EIIB:LN):  EIIB shares have gone nowhere YTD, but investors should focus on a number of key proposals from my Jan-2014 letter to the CEO (& board). The recommended £40 million reduction in share premium was completed a year ago, to enable a £20 million tender offer which unfortunately didn’t complete ’til May this year. [And was ultimately achieved via a relinquishment of EIIB’s UK banking licence, which I’d identified as an unnecessary regulatory burden & expense]. A share buyback approval for 3.8 million shares has also been granted.

The tender offer was intended to return surplus capital, to confirm the value & liquidity of EIIB’s balance sheet, to address any potential share ‘overhang’, to enhance NAV per share, and to send a clear signal of management’s commitment to shareholder value. Despite the significant premium (at £2.50 per share, a 39% premium vs. the market price), we’ve seen no sustained improvement in sentiment or the share price, which is pretty frustrating… However, this reflects a prevailing market theme: While small/micro cap stocks are oft-neglected these days, those which get ‘classified’ as discounted asset plays (& specifically those which earn an insufficient return on equity) appear most shunned of all.

Renewed AUM momentum is hopefully a game-changer here – management set ambitious fund-raising targets for 2015, on top of a previously-established AUM target of $3 billion by 2016. Of course, the other solution is to further reduce the equity denominator, i.e. continue returning surplus capital – a share buyback was ideally Part II of a one-two combo, now it’s approved it needs to be fully & aggressively executed. Again, the market’s response should obviously guide future capital allocation decisions…

Not surprisingly, considering my campaign for a tender offer & the actual premium involved, I tendered all my shares. With some investors opting out, 34.6% of my shares were ultimately accepted, which reduced my current holding from 7.3% to 4.7%. With the shares close to 5 yr lows again, I continue to evaluate possible next steps (& potentially increasing my holding).

KWG Kommunale Wohnen (BIW:GR):  Left on the sidelines, watching the big boys of the German residential property market marching ahead, KWG felt like a rather dull & lonely affair. But such is the lot of the value investor… Frankly, I was kicking myself: Why did I opt for the ‘cheap & interesting’ situation…when the vast majority of property investors will only buy the blue chips, at almost any price. But when I sat down & checked, I discovered KWG managed to keep pace with the blue chips – it’s up about 60% in two & a half years (since my original write-up at 5.152). So who’s complaining?! Right, but my conviction’s waned…

Which might seem odd – after all, my German residential property investment thesis was spot on. [Granted, there’s been a chorus of complaints re rising rents & greedy landlords, but ultimately I suspect this will further escalate capital values]. But the intentions of KWG’s controlling shareholder, Conwert Immobilien Invest (CWI:AV), are no longer so clear (or so promising)… KWG’s former CEO & CFO have now departed, and English language IR/reporting’s been abandoned – a pattern of deliberate neglect that’s not unfamiliar with majority controlled (but still listed) German property companies.

Which seems remarkably stupid…one might have presumed Conwert would still welcome any opportunity to benefit from significantly higher German valuations. Particularly as it remains such a maligned & neglected company (despite a rather half-hearted bid from Deutsche Wohnen (DWNI:GR), which was rejected). And the recent arrival of Teddy Sagi on the register (with a 25% stake) is a real disaster coup de grace here…

But KWG still trades at a significant discount to NAV, in stark contrast with the sector (ze Big Five now trade on an average 51% premium to book). Halving my holding from 6.8% to 3.4% seemed like a reasonable compromise…and subsequent to quarter-end, I’ve further reduced my holding to 2.8%. I’m now re-evaluating the sector, to determine whether specific companies/valuations might still deserve a new investment at this point, in light of the continued long term potential for German residential property.

Portfolio Performance:

Moving on, here’s the H1-2015 performance for my usual benchmark indices – so far this year, it’s all about the Eurozone!

H1 2015 Indices

And here’s the H1-2015 performance of the Wexboy Portfolio – ranked in terms of individual winners & losers:

Wexboy H1-2015 Winners Losers

[**Exited holdings. All other holdings: Gains are based on average stake size (yr-end 2014 allocation, adj. for incremental buys/sells), and end-H1 2015 prices (vs. yr-end 2014 prices, or original investment write-up prices). NB: Gain for TLI:LN inc. a 2p per share ret. of capital, while the EIIB:LN gain is adj. to reflect a 250p per share tender offer (for 34.6% of my holding). Otherwise, I’ve ignored all FX & regular dividends.]

And again, ranked by size of individual portfolio holdings:

Wexboy H1-2015 By Holding Size

And finally, merging the two together – in terms of individual portfolio return:

Wexboy H1-2015 By Portfolio Return

Of course, I’m delighted to see my H1-2015 portfolio performance of 10.0% besting my benchmark return (of 6.9%) by almost 50%! [Not to mention some of my holdings have jumped significantly in price since quarter-end…here’s hoping they help deliver a great H2 performance!] But almost inevitably, I lag the best index performance(s), and I rue my caution re home bias. Then again, we all endure the media’s daily obsession with the US market…so I have to admit, totally smokin’ the S&P (which has earned zip this year) more than makes up for it! 🙂

OK, let’s skip the victory laps & take a look at my top winners & losers, in terms of portfolio return:

Winners:

NTR plc (NTR:Grey Mkt):  17% Gain, 1.8% Portfolio Return.

With the recent demerger/share redemption/wind-down plan,  the finish line’s now in sight for (minority) shareholders… I recently addressed some questions in the comments section of my last NTR post. To summarise:  NTR currently has about 229 million of cash on hand, post-collection of US wind farms sale & Osage receivables. Let’s assume Old NTR retains €6.2 million cash. [Old NTR’s cash requirements should actually be minimal, but this cash retention (or preferably, an asset revaluation) would ensure positive net equity]. Which would imply 223 million of cash & 7.4 million of wind assets gets demerged into New NTR – potentially, that equates to a 2.35 NAV per share redemption.

Regardless of the exact redemption price, exiting shareholders will obviously realise almost their entire NTR investment within the next few months. Leaving them with a stub equity cost of maybe only 3 cents per share in Old NTR…vs. a potential €0.685+ Fair Value per share, assuming (for example) the lower end (i.e. €3.04 per share) of my recent Fair Value range.

KWG Kommunale Wohnen (BIW:GR):  26% Gain, 1.8% Portfolio Return.

See above.

European Islamic Investment Bank (EIIB:LN):  23% Gain, 2.0% Portfolio Return.

See above.

Newmark Security (NWT:LN):  53% Gain, 2.4% Portfolio Return.

Newmark’s my second biggest portfolio contributor in H1, but this doesn’t do it justice…the stock’s continued to rally since the end of June, by almost 50%! Over the past 10 months, investors are finally willing to acknowledge the substantial step-up in the company’s revenues, from a 2007-12 average of £13.5 million pa to a current level of £22-24 million pa.

But despite NWT’s recent/sustained momentum, it’s still only trading ’round an 8 P/E!? A great reminder of how ridiculously cheap it was at 2.025p per share last year, when I published my original write-up. My 3.37p per share 2007-12 Scenario is now well & truly off the table – leaving my 4.60p-7.72p per share Fair Value range of Scenarios as a more accurate guide to Newmark’s evolving intrinsic value.

Fortunately, NWT’s final results are due any day now – hopefully, we’ll see the current revenue run-rate maintained/improved upon, coupled with a promising outlook. Presuming that, management should now place an increasing emphasis on capital allocation: i) Surplus cash continues to build (the company has minimal debt), and ii) unless we see a dramatic turn-around, the stagnant revenue & collapsing margins of the Electronic division (Grosvenor Technology) are worth more sold off, with the proceeds returned to shareholders (or reinvested in Asset Protection).

Zamano (ZMNO:ID/LN):  32% Gain, 2.9% Portfolio Return.

Despite being the biggest H1 portfolio contributor, Zamano has been a curious mix of frustration & anticipation for me. Frustration a 65% gain (as of end-June), since my write-up little more than a year ago, still left the stock trading at a huge discount to my original 0.225 to 0.302 Fair Value per share range. But also anticipation this under-valuation would inevitably have to change…

Fortunately, time was on my side…based on Zamano’s end-June market cap of €13.8 million, the company’s free cash flow of €2.3 million pa (on average, in the past 2 years) offered a 17% annual return on investment. And if you strip out its cash pile (€5 million & steadily increasing), you’d be looking at an annual return in excess of 26%! [To put it another way, ZMNO was only trading on a 3.4 EV/EBITDA multiple].

But of course, you know what comes next…Sunday brought some great news: A €20 million/20 cents per share bid for the company, which Zamano subsequently confirmed first thing Monday morning!

While the shares have jumped significantly, I’m a little surprised they finished well short of the offer price. [The London/Irish closes (at 12p/16cts a share) may offer an additional 17-25% upside potential. Though a wide spread isn’t necessarily exceptional in an Irish small/micro cap offer situation…]. Granted, we’re still talking about a preliminary & conditional approach here – but now the bid’s in the public domain, it’s obviously in the bidder’s interest to nail it down asap, or else risk another interested buyer showing up to gate-crash the party… [Notably, the Business Post highlighted Zamano ‘has been the subject of several expressions of interest in recent months from a range of potential buyers.’]

And while executive management owns a minimal equity stake, investors can take reassurance from the three main shareholders (Pageant Holdings, Ulster Bank Diageo Venture Fund & Grillon Holdings) – in aggregate, they own a dominant 52% stake in Zamano. Not surprisingly, a bid would likely offer the best/most viable exit for each of them, so I’m quite sure we can count on them being suitably incentivised here to ensure a bid actually crosses the finishing line…

Petroneft Resources (PTR:LN):  (10)% Loss, (0.0)% Portfolio Return.

I reckon I’m well shot of this holding…unfortunately, it had become a tiny holding, but fortunately this meant the final portfolio impact was negligible. Of course, the shares have perversely enjoyed a bit of a rally since, but collapsing commodity prices still provide a dreadful backdrop for the entire sector. To its credit, management has solved PTR’s cash/debt problems (for the moment, at least), and now hopes to book more reserves. But unless we see a substantial step-up in the production being wrung from existing reserves (which hasn’t changed materially from an average 2,400 bopd in the past 4 years), investors appear unwilling to place any intrinsic value on the majority of the company’s reserves…

Donegal Investment Group (DCP:ID):  (3)% Loss, (0.2)% Portfolio Return.

See above.

Fortress Investment Group (FIG:US):  (9)% Loss, (0.6)% Portfolio Return.

Another excellent set of results from Fortress the other day (see here & here). FIG’s fee-paying AUM reached an all-time high of $72 billion, it has another $10 billion of uncalled ‘dry powder’ AUM, it has $1 billion of gross embedded incentive income yet to be recognised, net cash & investments represent almost 50% of the current share price, and it sports a 9.4% trailing dividend yield! Despite all this, the shares traded down on the news…which frankly, I find quite mystifying. To cap it all, the chart looks lousy & the shares are teetering on a potential technical abyss – the same is true of Apollo Global Management (APO:US), for example, as well as some (but not all) of its peers. I presume what we’re now seeing is investors applying the classic cyclicals rule:

Never buy cyclicals when P/Es (& valuations) appear low..!

But I’d have to disagree (in line with some of my recent posts). FIG’s current valuation (& even its prospects), look attractive to me – as do some of its peers – particularly in terms of a possible market bubble to come… Sure, we’re seeing a couple of sectors (such as natural resources) reflect the potentially daunting risks & prospects of the real world, but then again, we’re seeing little real sign of this discounting process happening across the vast majority of sectors. Now, alternative/private equity firms are obviously high beta plays on the market, which may well explain their canary in a coal mine behaviour – but I suspect we’re now drawing close to an important inflection point.

Will the pull of the floating world ultimately prove a (far) more powerful influence, or will investors keep betting on a potential market apocalypse via alternative asset managers? Frankly, if they do, we should perhaps start worrying about much bigger problems…

Alternative Asset Opportunities (TLI:LN):  (7)% Loss, (0.8)% Portfolio Return.

See above.

Argo Group (ARGO:LN):  (32)% Loss, (1.5)% Portfolio Return.

What can I say that’s new here… For years now, management’s delivered zero value for shareholders – no appreciable new fund-raising, and no fund/asset realisations, while current AUM & revenues continue to deteriorate. Andreas Rialas (CIO) has acknowledged Argo should be wound-down or sold, if AUM deteriorates beyond a certain point – quite obviously, I believe (as does the vast majority of the shareholder base, I’m sure) we’re now long past that inflection point. [And read this piece (Page 6) from Kyriakos Rialas (CEO), published over 18 months ago…he acknowledges as much!?] And judging by the share price (both today & historically), Argo’s business (and/or its assets) are clearly worth far more sold…

I’ll return to Argo Group another day, but let me assure shareholders there’s plenty of buyers out there interested in a London listed/licenced asset manager (not to mention Argo’s hefty discount to NAV). And if I can ascertain this with just a little effort/networking, as a concerned shareholder, launching a formal sale process would obviously elicit far more potential interest & buyers. Of course, that requires the genuine support & effort of both the CEO & CIO…if that isn’t forthcoming, the burden then falls on Michael Kloter (as Chairman) to fulfill his responsibilities to shareholders.

Top Portfolio Holdings:

OK, let’s wrap this up with the portfolio allocation chart I recently shared with you:

Wexboy Jun-2015 Portfolio Allocation

Plus, of course, a fresh snapshot (as of end-June) of my Top 10 Holdings:

Wexboy End-H1 2015 Top 10 Holdings

Please reference this earlier post for a useful listing of posts relevant to these Top 10 Holdings. Plus the following posts are also now relevant:

i) NTR plc (NTR: Grey Mkt) (11.1% Portfolio Holding)

‘NTR plc – Breezin’ Right Along…’

ii) One Fifty One plc (One51:Grey Mkt) (6.4% Portfolio Holding):

‘One Fifty One? No, It’s Worth Far More…’

Of course, I should obviously mention…One51 was actually the other bid announcement of the long weekend! [Yep, it’s like Dublin buses – nothing turns up forever, then two bids come along at once…] News broke on Friday in the Irish Times of a 1.80 per share bid for the company (from Capvest), with One51 confirming a preliminary & conditional approach later in the day.

iii) Newmark Security (NWT:LN) (5.7% Portfolio Holding):

‘Newmark Security…A Real Steal!’

iv) Saga Furs (SAGCV:FH) (3.9% Portfolio Holding):

‘Quite A Saga…’

And if you have any questions about any of these holdings, please feel free to email me or comment here. Cheers & best of luck for H2-2015…

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