The six months since the last review has been one of generally rising markets, and the Wise AIM portfolio has risen alongside. The portfolio gave a total return of 16.7%, compared to 4.2% for the FTSE AIM All Share and 9.7% for the FTSE All Share, representing the ‘main market’ of larger companies. Underlying the performance the portfolio had risers and fallers as ever, but the general uplift in market mood meant that positive contributors outweighed the negative. At a fundamental level there has been solid progress in most of our investee companies. We prefer to focus on the fundamentals rather than short term price movements; if a business performs well the price should follow, providing it doesn’t get overpriced (on which more below).
At the top of the positive contributors, Prezzo and Portmeirion are executing their growth strategies well in the restaurant and homewares business respectively. An attractive feature of these companies is the ability to fund growth from profits, i.e. they haven’t needed to ask investors for further capital in order to expand. The risks to holders of these stocks are reduced by their debt-free balance sheets, so if things don’t quite go to plan there aren’t a bunch of hungry creditors waiting in line before shareholders.
May Gurney has powered upwards thanks to takeover interest, first from Costain and then from Kier. I wrote in the last review that there had been issues in some of May Gurney’s contracts that hit the share price hard, but that the shares seemed to be trading at an attractive valuation. The constructors possibly agreed, with Kier’s offer a premium of around two-thirds to the pre-offer price. The Office for Fair Trading has given the merger the all clear, and so it is likely to complete in the near future. Whilst it provides a short-term boost to the portfolio’s performance, the offer shrinks the pool of available AIM investments. There are still a great many of what we judge to be good quality companies on the AIM, but we won’t invest at any price. Firms that capture investors’ imaginations can rise to expensive levels.
A case in point is James Halstead, an industrial floorings specialist. Sports fans have trampled across their products in the Millennium Stadium and the Allianz Arena, and patients wheeled across them in hospitals amongst many other applications. I would argue this is one of the highest quality companies available for the portfolio. Unfortunately for us, the company’s share price more than reflects these qualities according to our measures. Having reduced the holding last year, I removed James Halstead from the portfolio early in 2013. I hope that we’ll be able to invest again at a more attractive price.
Company Focus – Immunodiagnostic Systems
Previous companies detailed here have been firms where everything has been ticking over nicely (although December’s subject Zytronic suffered from the ‘tipster’s curse’ with a profits warning last month). The same cannot be said of Immunodiagnostic Systems Holdings Plc (IDH for short). IDH makes diagnostic testing kits, primarily to examine the presence or otherwise of vitamin D in blood samples. Traditionally these were for the manual market, where a laboratory worker would do the test by hand – the sort you see on the news when there’s an outbreak of the flu, pipetting things into test tubes. In 2010 they launched a machine called iSys, which automates this process and is primarily suited to small and medium-sized laboratories. It was the first such instrument to gain regulatory approval, before high-throughput machines available from giants like Abbot and Siemens.
We first met with the company in January 2011, and were impressed by the apparent quality of the iSys instrument, the size of the vitamin D market and IDH’s position within it. The intellectual property in the iSys is appealing. The investment case looked good but we were not happy with the share price, riding high at around 900p. So we put it on the subs bench, hoping that the price would fall.
We had to wait a while, but in late-2011 the price started to feel the effects of gravity. This usually involves some bad news, and IDH was no exception to the rule. While placement of the iSys was going according to plan, the traditional manual testing market was slowing. This was still the main part of the business at that time, and the price fell rapidly. We bought in at 425p early in 2012. This proved to be a little premature, with the stock falling to a low of 243p in mid-2012. Not only was the manual market falling, but competitive pressure began to weigh on iSys as competitor instruments came on line. We held on nonetheless as our valuation estimate, which includes the effects of competition as standard, indicated the shares had become undervalued. The iSys still had its niche, and was still growing. There has been a shake up in the management team, and the firm is now being lead by Patrik Dahlen, with a new strategy to develop the iSys being put into action.
The market has reacted positively, and the stock is finally trading above our initial purchase price. We don’t know whether this will continue, but there are three key factors that give me comfort that the downside has some protection. First, the niche that IDH has carved itself remains. Second, the company’s balance sheet is very strong, with a large cash surplus. Third, the current valuation doesn’t look expensive. This will be an interesting one to watch develop, and if the company performs, I hope returns will follow.