Portfolio re-balancing and selling Diageo

The rationale for worries and opportunities in all my holdings are spelled out in my previous post. Today I will just briefly announce my portfolio decisions. One little obstacle in this extremely volatile market is that in the blog execute all trades on close, this might mean quite large deviations from the levels I would have been happy to enter or exit my positions on. Anyhow, that’s how its going to be, the blog NAV is just a proxy of performance.

Some quick thoughts around my investment philosophy in this market:

  • Classical defensive holdings not necessarily defensive in a Covid-19 situation. It’s somewhat of an all bets are off situation here. One would think that Diageo with liquor sales is a super defensive stable business, not so much in this situation. Philip Morris another holding is reporting that they have to close their factory in Spain. It doesn’t matter of how defensive cigarette sales are if you can’t produce cigarettes. This market is truly hard to navigate.
  • Don’t try to be a hero in this market – focus on surviving that will give you plenty of returns long term, permanent capital loss is what will really hurt returns. I will reduce/sell anything I see risk of permanent loss of capital or dilution to shareholders due to leveraged balance sheet.
  • My small cap strategy of investing in less discovered (overlooked) stocks makes sense in a normal market. In an highly distressed market, it might as well be a large cap which is wrongly priced. I will therefore consider all-cap companies going forward. When markets have normalized I plan to go back to my small/micro cap strategy.

Selling:

  • I will fully sell my holding in Diageo, the debt levels the company has is scary in a scenario where sales significantly drops, which is surely in the cards if this continue. It’s unfortunate when a holding you bought for it’s defensive characteristics fall even more than the general market, but here we are. I should have reacted earlier and it’s probably very late to sell, at least I will re-allocate the cash into other cheap companies.

Reducing:

  • Although company proved a turned around, due to debt load and total stop in business I will reduce my holding in Modern Dental Group to a 1.5% position.
  • Reduce position in Olvi to 4%, not due to company doing poorly but just that the business will be hurt, but the stock is not trading as cheaply as many other holdings with better prospects.
  • Reduce position in Tianneng Power to 1.5%, although the company is not doing badly, this was a speculative holding now I want to focus on building positions for the long term in strong companies.

 

All in all this raises about 11.5% of my portfolio in cash

Adding:

  • Greatview Aseptic is in my view a big winner on this, people will be buying packaged food as never before. The company is already super-defensive to begin with, being net cash and very non-cyclical business. I raise this fairly new holding to a high conviction position and take the position size from 6% up to 8%.
  • I choose to double down on my oil positions TGS is increased from 2.6% to a 4% position and Tethys Oil I will increase slightly from 2.3% to 3%. This is a real pain trade to do, since in this sentiment these stocks can probably quickly drop further. At the same time these type of extreme events is when you need to dare to go against the sentiment.
  • Dairy Farm is another company where I spelled out my thinking quite clearly for that this is way oversold and actually quite defensive. I will increase my position from 4.7% up to 7% here.

This takes some 6.4% of my cash, which leaves me with roughly net +5% cash (give or take depending on today’s close prices). These 5% + ~7% in BBI Life Science (if the takeover goes through) is left to be deployed at a later stage.

 

16 thoughts on “Portfolio re-balancing and selling Diageo

  1. I think you are spot on with Greatview …. but I also think it might fit in to a longer term theme that would appear to be in play within the Jardine Group.

    It seems pretty clear to me that they are in the process of building a branded food group, i am not sure if you have seen the new Dairy Farm own brand products ? They are being marketed under a brand name called Meadows mainly dry goods and snacks at this stage and I have to say they are really high quality in terms of content and packaging. So they are looking at competing with the multi national premium brands not at the budget end of the spectrum, so you would think margins will be decent. The products are being rolled out in both supermarkets and 7-11s across the network. I suspect it is going well as the program got a brief mention on the last earnings call. I also recall reading somewhere that Yonghui and DFI are cooperating on own brand product, add to that their interest in Vinamilk (via JCNC) and the fact that their Philippine partners are the Gokongweis who have had huge success in the branded food business with Universal Robena, then it seems to me something might be slowly (it is the Jardine Group after all) unfolding.

    I would not be surprised to see Greatview look to make additional acquisitions in the food packaging business to support this plan, typical Jardine style would be a capital raise where they would look to increase their stake.

    1. Thank you for the very insightful comment! I have noticed DFIs own brand product launch but I had not connected the dots to Greatview. You think Greatview would move outside the aseptic packaging business even and do other type of food packaging?

      1. I think it is a strong possibility. In isolation the Jardine Group purchase in to Greatview does not really fit their model. My suspicion is they have been getting familiar with the business and comfortable with the management team and if those boxes are ticked they would be looking to push in to other types of food packaging, although I think it would be slow and deliberate.

        It is interesting we seem to end up looking at a lot of the same stocks, in case it is useful to populate your future watchlists here are the names that are on my mind at the moment, I own the first two and am still researching the last one.

        83 HK – Sinoland – A decent developer and pretty straight forward property business, some decent near term (18 months) earnings locked in via contract sales a 5.5% divi yield, but for me the interesting aspect is that they $4.90 of net cash per share vs a share price of @$10.5. I like the optionality that this gives them to pick up new projects in the next 12 months with limited competition.

        SSM AU – Service Stream – They support Australian utility, broadband and telecom business with product roll out and repair and maintenance. Contracts tend to be longer term. The business has limited COVID impact, it is net cash, pays @ 4.9% div, consensus PE 2020 is 11.9x and 2021 is 11.3x. Business got itself in to a bit of a mess 5 or so years ago, after a recap and new management they have been going great guns. I rate the current CEO.

        1122 HK – Qingling Motors – This is in effect the ISUZU truck business in China. This one has fascinated me for years. It is so cheap that I look at it and then put it in the “too good to be true” bucket … then they report again and I look at it and put it back in the bucket. I have been looking at it on and off for more than 12 years, but finally decided to try and get to the bottom of it. Share prices is $1.61. It is profitable P/E 10x for 2019, Net debt per share is -$2.4 (so has more net cash than the current shareprice) . FCF per share is $0.31, div is 10.9% (has a good track recored on paying out over the years, the dividend has been variable based on profits but it has not skipped in 20 years). I have downloaded all of the annual reports and have started to wade my way through them. I am not sure this will ever make my portfolio but I want to rule it in or out once and for all. Will let you know what I think when I am done. ATB

        1. Qingling sounds like Tianneng in terms of cheapness and still being a steady good business. It boggles the mind why these companies keep trading so cheaply. Do add me on twitter or send an email, would like to keep in closer contact to discuss topics more frequently!

  2. We should all give up and allocate our cash to Fundsmith.

    While many of us are YTD anywhere between -15% to -25% YTD (if not more)… he scored -7.9 % ! !

    IF we are not let him manage our money… at least we should learn from him. And not try to be smarty pants of nothing.

    1. I see Fundsmith equity fund -18% calculated in USD (which is my benchmark currency). Not sure what you are looking at? Still a good result though and I agree I always look at what they own!

  3. Greatview Asceptic. How do you view the fact that they basically rely on one customer (If the information I have seen is correct)?

    1. Please explain what info you have seen. From what I have seen that is not the case. But yes Mengniu is a big customer. Of course its a risk but it was also Mengniu that wanted to promote this company to push down Tetras margins, I already commented on this in my post

        1. Thats correct, but 47% is not all sales, its less than half. Thats just how this market in China works, there are only 3-4 large players in the milk market in China. So a best case would be even split between them, still leaving some 25% exposure to each.

  4. I believe daily farm is not a good pick. In long run, the retail business is somehow difficult to grow compare to last decades.

    Many retail business is not able to survive due to competition from e-commerce.

    1. Thanks for your thoughts CLLEE! Growth might be challenging from a competition perspective. But from a macro perspective the Asian region is growing its middle class faster than anyone else, so there is that.

      Also growth is not everything. Dairy Farm has been mis-managed and could have much better margins especially in its supermarket segment, if they manage to turn that around I think we could see much larger profits, even with low growth in revenue.

  5. Went back in yesterday.
    Holding just one stock now.
    China Unicom.
    Less likely that earnings will be materially impaired. Plausible growth story if 5G ramps up.
    Good cost control and real synergies from 5G partnership with China telecom.
    Reasonable div. And down 50% since last year.
    Feel there is reasonable margin of safety and upside.

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