Quick update

Since selling off 90% of my portfolio I haven't really been on the lookout for anything new, so I've been pretty quiet recently.  Sadly the world at large hasn't remained quite so static:

• Game Group continued to plummet, before staging a minor recovery.
• Maxima has cratered.

At the moment all my trading decisions are driven by tax / administrative reasons.  Accordingly I have:

• Held onto BDI, GMG and MXM in order to realise the tax losses when I move to Norway.  (Also ROK, but I can't sell those even if I want to).
• Sold IAPD to realise the capital gain at £18.82.
• Made a small investment in IS15, a short-term sterling corporate bond ETF from iShares at £102.52.  (I've recently opened a new trading account that I can use after moving to Norway and you need to hold some shares to avoid inactivity charges).

As always my entire portfolio (plus all the shares I've ever held) is available here:

http://www.danieltebbutt.com/portfolio.html

And every trade I make will appear on this blog.

P Z Cussons

As a follow-on to my recent article on Unilever, I've now written about a potential acquisition target: P Z Cussons.

Unilever

After a couple of months of being distracted by (a) buying a house, and (b) selling 90% of my portfolio, I've finally written a new article at shareworld.  I was looking for a company that I'd be happy to invest in after moving to Norway, which means it must be:

• International.  Working for a UK company gives me quite enough exposure to the £ already.  I don't mind it being listed in the UK as long as its revenues come from all over the world.
• Safe.  I am going to have a lot more debt, and far fewer financial assets.  My personal risk threshold will be much lower than it has been in the past.

So I took a look at Unilever.

Sell shares, buy Norwegian property

Not the best investment advice I'm pretty sure, but nevertheless that what I've done over the last week.

The big move
I have bought a house in Norway.  The price of houses in Norway is ludicrous, and the exchange rate is extremely unfavourable.  But needs must when the devil vomits in your kettle - I need somewhere for my family to live when we move, and renting is not exactly cheap out there.

Anyway, for the next few months I need every penny I can lay my hands on, and accordingly have today sold 80% of my investments.  Between now and July I will sell another 14%, leaving me with just the 6% of my portfolio which has an associated capital loss (which is deductible against income tax in Norway, and which I will sell later in the year).

Once the big move has come and gone (late July / early August) and we can sell our house in the UK, I should once again have some money available to invest.  When this happens I hope to be a better investor:

• I will have far less disposable income, and fewer liquid assets, so I will be more risk-averse and more concerned with liquidity (fewer micro-caps).
• My cost of funds will be higher (because I will move off my fantastically cheap UK mortgage), so I will set the bar higher in terms of the return I am looking for.
• My portfolio will be smaller and more concentrated - less like a closet tracker.
• My transaction costs will be higher (because I will have to use an off-shore or Norwegian broker), so I plan to trade less often.

We'll see.

Regrets

Of the shares I've sold today, I've been pretty sanguine about selling most of them.  The ones that have given me pangs of regret are:

• Berkshire Hathaway.  I think this remains cheap, and would like to hold it for many more years.
• De La Rue.  Personally I would have taken 935p from Oberthur, but I can understand why other shareholders were reluctant - I think De La Rue will trade north of £10 again in the not-too-distant future.
• Tesco.  Has remained cheap ever since I bought my first shares, and is another one I'd like to hold for the long run.

And some others that I'm not too unhappy about:

• Carpathian.  Has done very well, and probably worth a bit more than the price I sold at, but the easy money has already been made here.
• National Grid.  I never really felt I understood it well enough, and the scary balance sheet has made me nervous ever since I first bought shares.  Happy to have this one off my mind.
• Diageo.  Great business, but a bit too highly leveraged to be worth a P/E ratio of 19.

2010 / 2011

Looking back
On the whole it has been a good year for the Danfolio.  Over the year I've made capital gains of 20% and earned 3% in dividends, outperforming the FTSE 100 by about 10%.  Thanks to ISAs, capital gains allowances and my wife's basic-rate tax status none of the gains are taxable.  In fact, because this year I am moving to Norway (where capital losses can be offset against taxable income) I have earned about 1% in tax assets.

I've been a net investor over the course of the year, adding 18% to my portfolio, so as a result I have 40% more funds under management than at that start of 2010.

The 3 largest constituents of my portfolio (together making up about 35% of its value) are:

• Berkshire Hathaway, which rose by 25%.
• BP was up 41%.
• LLPC, the Lloyds preference share, returned 39%.

None of the 3 pay a dividend.

Some highlights from the rest of my portfolio.

• Carpathian, unfortunately one of my smallest shareholdings, returned a capital gain of 60% and capped it with dividends worth another 24%, for a total return of 84%.
• British American Tobacco returned 28% capital gain and a further 5% in dividends, for a total of 33%.
• Barclays returned 30% even though I sold it in March(!).  If I'd held it for the rest of the year I would only have broken even.

And just in case I was getting too smug, let's not forget:

• Rok, a complete wipeout in terms of capital, although it did pay 3% of dividends before expiring.
• Game Group, down 22% in only 8 months, slightly redeemed by 6% in dividends.

Looking forwards

As I said above, this year my family and I will move to Norway.  Property is rather expensive in the area we'd like to live in, and therefore I expect to sell off the majority of my shares to fund the purchase of a house.  I hope to continue investing, but (initially at least) my portfolio will be smaller and more concentrated.  Longer term I expect to build it back up to its present size and beyond.

Southern Cross prelims - covenants further relaxed

As I expected last week, Southern Cross have announced a further relaxation in their bank covenants as part of their final results.  The fixed charge cover is now down to 1.1x.  No further news on a possible takeover, except to reiterate the earlier news that "the approaches are still preliminary in nature, and the Board continues to believe it to be in shareholders' interests to continue to hold exploratory discussions."


A fixed charge cover of 1.1x is pretty generous.  They only need to manage adjusted EBITDA of about £20m to hit that.  And they have about £30m of headroom in their revolving credit facility.  Perhaps the more important figure now is their cash-flow neutral point - I reckon they need at least £30m of adjusted EBITDA to be cash-flow positive.


I see no sign of this company going bust imminently - they seem to be within their covenants, they have headroom in their credit facility, and their bankers have repeatedly demonstrated their unwillingness to call in administrators.  But then I've just suffered a total wipeout with Rok, so what do I know?

De La Rue - fundamental value >905p per share?

I certainly seem to have picked a few exciting shares to buy recently.  My last 4 purchases were:

• (June) BP.  Down 15% at one point, now 27% above my purchase price.
• (August) Rok Group.  Bankrupt.
• (August) Southern Cross.  90% up within a week of purchase on a takeover approach, now down 13%.
• (September) De La Rue.  Down 20% at one point, now up 25% after a takeover approach.

Today has seen plenty of news for De La Rue shareholders to ponder.  First of all a belated announcement of a "highly preliminary and opportunistic" takeover approach, which drove the share price up to 780p.  Then confirmation that the bidder was Oberthur, a French rival - and the news that they had made an indicative offer of 905p in cash - that was enough for the shares to hit 840p.  Finally De La Rue responded with their justification for rejecting the offer (apparently it "in no way reflects the fundamental value of the Company").

In August I wrote an article about De La Rue where I said they were "worth in the region of 900p".  Perhaps I should become a full-time oracle?  Of course I also said "I think I‘ll sit this one out for now and hope for an opportunity to buy at 600p", which I singularly failed to do, taking a punt at 677p.

So what are De La Rue worth?  Oberthur obviously think >900p, otherwise they wouldn't be bidding at that level.  The board of De La Rue agree, otherwise they wouldn't have rejected the offer.  As for me, my valuation of 900p was based on De La Rue remaining independent - as part of a bigger company, dominating its industry, I can see it being worth a fair bit more.

I don't know how deep Oberthur's pockets are (and it's privately held, so I can't find out) but I suspect they probably have a bit of headroom for a higher offer - say 950p or 1000p, just enough for the board to capitulate and support it.  Whether a deal happens all comes down to De La Rue's big shareholders.  If they've been spooked by the recent quality problems and CEO resignation then they will probably be delighted to jump ship at this sort of price.

As for me, I'd be happy to sell my shares at 905p and take a quick 33% profit.  I'm in two minds whether to bail out now at 840p - but since my valuation was at 900p I suppose I should hold on for that.