SIF Folio: I ditch Bilby, but are my overseas shares doing any better?

I suppose I should be thankful for small mercies: shares in building services group Bilby (LON:BILB) have risen by nearly 80% from the all-time low of 24p seen in April.

However, that’s cold comfort when for the second consecutive week I find myself recording a loss of more than 60% on an outgoing SIF folio stock.

As it’s the end of May, I’m reviewing stocks that have been in the SIF folio for at least nine months. This month, there’s only one – Bilby – so I’m going to take a final look at this disappointing performer and explain why I’m sceptical about its potential as a value buy.

I’m also going to catch up with the performance of my International SIF and check whether I need to sell any stocks from this virtual portfolio.

Bilby: value buy or value trap?

If my new rule of selling immediately after a profit warning had been in place last year, SIF’s losses on Bilby would have been considerably smaller. I’m confident this is the right approach and as always with these things, wonder why I didn’t do it sooner.

However, Bilby shares have bounced back strongly from the lows seen in April. Does this suggest hidden value for contrarian buyers? I’m not convinced. I think several factors suggest that the balance between risk and reward could be poor.

I’ve documented the timeline of Bilby’s decline previously. But in summary, we’ve seen a founder share sale and retirement followed by two profit warnings. This combination doesn’t bode well, in my view.

More bad news to come? A more specific concern is that the guidance provided in Bilby’s second profit warning (in March 2019) seemed pretty open-ended to me. Two major contracts appear to have run into problems. One has been delayed and the other – with the Ministry of Defence – has been terminated but is subject to “dispute and resolution proceedings”. No clear estimate of cost has been given for either contract.

Underlying EBITDA for the group is expected to fall from £6.3m last year to “2.0 to £3.0 million”, but this guidance excludes costs associated with the MoD contract termination and other, unspecified, restructuring costs.

The problem contracts relate to Bilby’s Pamp;R subsidiary, which is expected to report a loss this year. Bilby doesn’t break out results by subsidiary in its annual report, so I took a look at Pamp;R’s accounts for 2017/18 at Companies House. Based on these, I estimate that Pamp;R generated EBITDA of about £620k last year from revenue of £22.4m.

To put this in context, Bilby group revenue for the same period was £78.8m, with underlying EBITDA of £6.3m. So it seems that Pamp;R generated about 28% of group revenue, but just 10% of group EBITDA.

This combination suggests to me that this low-margin business was already one of the least profitable parts of the Bilby empire. However, Pamp;R’s large revenues could mean that the cost of resolving these problem contracts is high.

A risky trade? There are two further risks I feel I should point out.

The first is that Bilby’s market cap is now just £18m. Although recent buying has driven up the price, that has happened in the absence of any serious selling.

If more bad news emerges, selling could become difficult without accepting rock-bottom prices.

The second point is that broker forecasts don’t seem to have been updated since the March profit warning:

As a result, I would treat Stockopedia’s forecast price/earnings ratio of 3.3 and 6.3% dividend yield for this stock with great caution. I don’t believe these figures are realistic given the scale of March’s profit warning.

My decision: Bilby has been one of the worst performers so far for the SIF portfolio. But I’m in no doubt about my decision to sell, as the company fails a number of my screening rules and breaches my new profit warning sell rule.

Verdict: Sell
Total return: -65%

As usual, I will sell Bilby from SIF and my personal holdings after this article has been published.

International SIF continues to struggle

After adding several new overseas stocks in April, this month’s it’s time to sell shares that have been in the International SIF virtual portfolio for at least 10 months and no longer pass all of my screening rules.

Let’s start with a look at the performance of the portfolio as a whole — this is what matters most in investing, in my view.

As you can see, performance has remained poor, worsening again after a promising start to the year.

Ranking the holdings in order of performance, we can see that running losses remain high – much higher than in my UK SIF.

I have to admit that my confidence in this rules-based international portfolio is not very high. But if we look at the stocks in aggregate, they seem to have some attractive characteristics:

I’d be happy to own a portfolio like this, wouldn’t you?

Will this apparently affordable mix of value and growth deliver better results as the year progresses? We’ll see. I’ll probably run this until at least November (2 years) before deciding whether to continue.

If I do throw in the towel, I will probably opt either to focus exclusively on UK stocks, or to create a dedicated US portfolio. This would have a modified set of rules and allow me a greater level of discretion. I’d welcome any thoughts subscribers might have on this.

7 stocks – can I keep any?

Seven stocks have been in this virtual portfolio for at least 10 months. This means that if they don’t pass all of my screening rules for overseas stocks, they must be sold.

As space is tight, I’ve condensed this section somewhat — apologies for this, but I don’t think it makes sense to steal space from UK coverage.

Only one profit out of a total of eight UK and international stocks reviewed! Not a great month. Let’s hope for better in June.

Disclosure: At the time of publication, Roland owned shares in Dixons Carphone and Bilby.

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