RBS annual results

Royal Bank of Scotland are due to report their annual results on Thursday. 40% of my portfolio is in RBS shares at the moment, so I'll be an avid reader. I'm optimistic - there have been a lot of scare stories in the press about rights issues and cut dividends, but I haven't seen any facts to back up the scaremongering.

For the record, so that I can revisit and see how wrong I was, I expect:

• Some further, relatively minor, writedowns due to subprime or similar. Less than £1bn.
• Record profits.
• A moderate increase in the dividend.
• Confirmation that a rights issue is not on the cards.
• A subsequent jump in the share price, probably settling at about 425p.

I can't decide if I want good news or bad news... I think the ideal would be some superficially bad news (e.g. a big one-off writedown) that depressed the share price to about 300p and allowed me to increase my stake at a good price. Arguably RBS is already too large a proportion of my portfolio at 40%... but I expect to invest more over the next couple of months, which would take the proportion down to a more healthy 12%. I'm not averse to holding a large-ish proportion of the total in one share if that is demonstrably undervalued, and at 300p a further bite of the cherry would be irresistable.

Here's how my portfolio performance looks now. At the moment I'm sitting on a modest 1% loss - if RBS goes up to 425p, then other things being equal I'll instead be up about 3%. In the long run it's all academic of course... but I would like my little graph to look a bit healthier.

Bond International Software

The other day I worried somewhat about my investment in Bond International Software - only a few days after buying shares I couldn't remember what attracted me to it. So I've been back to have another look, and I'm somewhat reassured. Here's why:

• Bond specialise in recruiting software, although they are diversifying into the broader human resources sector. I suspect they are vulnerable to an economic downturn (which I think could be on the cards in the UK over the next couple of years), but I think they can weather the storm, since they have little/no debt on their books (net debt of about £3.5m as of their latest interim statement, but they have since raised £5m from issuing shares at a very favourable price: >200p). According to their interim report, recurring revenue covers 61% of their overheads, which I think puts them in a strong position.
• They are growing both organically and through acquisition. Gross profit in the 6 months to end June 2007 was £13m, compared to £7m the year before. Basic earning per share to the end of 2006 were 13.66p. I bought at a price of 146p, so that puts it on a historical P/E of just under 11. Provided it can integrate its acquisitions well, I think 20p per share should be achievable in the next few years. Analyst estimates are for 15p in 2008 and 17p in 2009. A trading update in January has said that results are in line with expectations.

So all in all, I'm satisfied that this is a good company to invest in, and I think 146p is a good price.

That means I'm happy with all of my investments so far (even RBS which has dropped 10% of its value so far - if it drops further for no good reason I may buy more). I have a few candidates in mind for my next round of investment, and I'll post details when I've actually bought the shares.

British Land

I took a look at British Land today. It's come down from a peak of about 1600p to 1000p. Doesn't mean it's cheap, so I crunched the numbers.

By the way, I read somewhere that Net Asset Value is more important for a property company than earnings... this seems to be a popular viewpoint, but I don't believe it for a moment. If it doesn't earn money, then I don't want it - if commercial property prices crash (which they seem to be doing / have done) and if we head into a recession (which we may be doing) then the only thing that's going to hold up the share price is value investors piling into a bargain, and that's only going to be based on earnings.

So, I looked at the annual report. They earn about £600m per year in rents. They have debt of about £6bn. They have very high occupancy rates with a very long average lease length. Overall a pretty solid company - I'd be happy to buy shares in them if the market offered me a bargain.

But what are they worth? I based my valuation on ((20 x earnings) - debt). I figure their growth prospects are balanced by possibly suffering in a recession, so I'm not adjusting up or down for either of those. So my valuation is £6bn, which works out to a share price of 1200p. So I think they're undervalued, but not by much, and certainly not enough for me to be interested.

Geektime

Being a software developer more than I am an investor, I wrote a program to help me track my portfolio's performance. I bought my first share less than 3 weeks ago, but hey... I like writing software.

So here's what my program produces - the performance of my portfolio so far. The numbers represent the percentage that I'm up or down (or just down in this case...). As you can see, it's been a rocky ride (RBS has been a fun investment to have) :o) Luckily I'm in it for the long term, so I'm not fazed by the short term fluctuations... honest.

All I have to do is maintain a text file with all of my transactions, with dates, prices, quantities, etc.. and my Python script pulls the relevant data from Yahoo Finance, squirts everything into a CSV file, and then Excel produces the graph.

Hopefully things will be more meaningful when I have more datapoints. At the moment it's just a bit of fun.

Here's the Python, and a sample list of transactions:
http://www.danieltebbutt.com/stocktrack.py
http://www.danieltebbutt.com/portfolio.txt

To run, place both in the root of C:\ and make sure you have Python installed. Then just run "python stocktrack.py". It will produce performance.txt in the root of C:\, and I'll leave it to you to figure out how to import that into Excel. It contains comma-separated values: DATE,PROFIT (£ net profit),VALUE (£ total value of portfolio). The graph I look at is just profit vs time, but I've tweaked this for the benefit of the blog to disguise the actual £ amounts and deal in percentage terms.

I've got a batch job with an icon on my desktop that runs the python script and then loads my spreadsheet, which automatically refreshes the data and displays the graph.

Introduction

Who are you?
- I'm Dan. I'm a software developer with no experience in investing. I live in London.

Why are you blogging?
- I've just bought some shares for the first time, and expect to be buying more in the future. I thought it might be interesting to write about what shares I'm buying and why. Mainly so I can come back in a few years time and find out how I ended up owning such a useless collection of crap.

Why should I read your blog?
- No reason :o)

What's your investing philosophy?
- I guess I'm a value investor relying on fundamental analysis rather than technical analysis. I think the market makes mistakes, and if you know better, you can make money from it. I'm sure it's possible to make money from TA, but I think they're making money from people who are less good at it.

So what shares have you bought so far?

RBS.L - Royal Bank of Scotland - 15/1/08 - 399.22p - 40% of portfolio
The history of strong dividend growth, a P/E of less than 6, yield of >5% (if the dividend is maintained) make this attractive. I reckon the banking crisis is unfairly dragging down the share price - I read a very positive interview that the CEO did in December which suggested to me that all the talk of rights issues, cut dividends etc.. is overblown. The acquisition of ABN Amro has undoubtedly left RBS with work to do to restore its liquidity, but it has plenty of assets to sell (a ferry company, Angel trains, a stake in Bank of China) if it has to. So all in all, this looks an excellent opportunity to buy a £6 share at £4.

A few days after buying, RBS went as low as 319p, but it has since recovered to around the purchase price. That didn't really bother me - I'm in it for the long term. I'm never going to be able to time the bottom of the market. If I'd had more money in my sharedealing account at the time I would have bought more at around 350p.

Downside: If RBS have to write off a load of bad debt, they may be forced into asset sales, cut dividend or rights issues. If the economy falters or further problems hit the banking sector, then the entire sector will suffer.

Upside: If RBS can weather the storm, and provided the economic downturn isn't too severe, I think it can continue without having to cut its dividend.

Outer: If RBS remain positive in their annual and interim reports for the next year or two, then I think the share price will recover to around 550p. If not, I think this is the sort of share I could happily hold for the long term.

EDD.L - Education Development International - 29/1/08 - 37.19p - 10% of portfolio
I read something about EDI on a message board, and it caught my interest. I read a few annual & interim reports and looked at the numbers. It looked like it had decent growth, reasonable P/E, low debt, and I think it will be recession-proof. I think online education in the far east has huge potential, and it looks like EDI are showing strong growth there.

Downside: Small company. Currently heavily reliant on the UK market, so government policy changes could have a big effect.

Upside: Seems a decent company quite apart from any growth. I think they have the potential for growth, especially in the far east - I think they're in a growing market, and have the potential to become a market leader, or be snapped up by someone else with ambitions.

Outer: Long term growth or being bought.

ZRX - Zirax - 29/1/08 - 14p - 10% of portfolio
Antifreeze and oil refinery chemicals. What do I know about that? Nothing. The numbers look good - strong growth, P/E around 15, and it has very little debt. Its chemicals seem to be in demand. Provides some nice diversity, and basically I just got a good impression from its financial reports.

Downside: Small, much of its revenue comes from a single annual contract with Moscow City Council (recently renewed for the 5th year in a row).

Upside: Strong growth, little debt.

Outer: Long term growth or being bought, e.g. by Shell, BP...

BDI - Bond International Software - 29/1/08 - 146p - 10% of portfolio
Why did I buy this? I don't really remember. That's a bad sign. I guess I read some reports and it sounded OK. The numbers seemed pretty good. It provides recruitment software, which seems fairly recession-proof, and should be a growth industry. I think I've probably under-researched this one. Smack on wrist.

Downside: I haven't a clue.

Upside: Fingers crossed.

Outer: Let me get back to you.

IEER - Eastern Europe ETF - 29/1/08 - 2136p - 10% of portfolio
IFFF - Far East (exc. Japan) ETF - 29/1/08 - 2181p - 10% of portfolio
LTAM - Latin America ETF - 29/1/08 - 1244.47p - 10% of portfolio
Basically I just want a bit of international exposure. The China & India specific funds have the best rate of return, but I think India in particular is riding a bubble, so I've gone for a broader mix.