What Was The Last Share/Fund You Bought?

Intrigued to discover what everyone has bought of late. No need for a long write-up (although they are welcome!); a bullet-point summary will suffice. Hoping that some useful ideas might surface. Not sure my last buy is that useful, but here it is anyway:

System1 (SYS1) purchased late last year at 173p:

Pros

  • Owns proprietary ad-testing data validated by partnership with ITV
  • Transitioning to more predictable data/subscription business
  • Recovery seems underway with talk of new client wins
  • Could trade at 8x earnings with net cash at c20% of market cap
  • Founder/chief exec still owns 23% while LTIPs pay out only at 500p+

Cons

  • Income remains dependent mostly on ad-hoc consultancy work
  • New £5m ad-testing service yet to report any material revenue
  • Guidance/dividend suspended as ad industry recovers from Covid
  • P/E sums based on only one quarter of recent profitability
  • ‘Owner management’ not stopped shares presently trading at 2007 levels

Have you bought something more attractive? I’m sure you have!

Maynard

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I bought Fonix Mobile (FNX) a few months ago shortly after it listed on AIM. It seems to be in the same sort of space as Boku and Bango but it makes decent profits and generates cash

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SPSY Spectra Systems

I have a small stake right now. Results Full Year tomorrow.

Operates in the space of authenticating items: commonly this means banknotes but also includes other areas such as tobacco products.

A sense of of what they cover (from 2019 AR):

  • $1m of lottery and gaming transactions processed per day
  • 45bn banknotes in circulation contain SPSY materials
  • $950m of energy drinks sold per year containing its materials
  • 10m bottles of wine protected by its technology over the past three years,
  • 155m American passports protected by its materials in the last 10 years, and

PROS
Recent Interims stated:
The Board therefore believes that the Company is on track to achieve record earnings for the full year and expects both revenue and earnings to significantly exceed market expectation for the full year.

H1 results:
H1 Rev £6.5m
H1 PTP £2m

Stockrank = 92 [Q98 V28 M95[

brokers have raised their target prices from 200p to 240p. following above contract announcement

Lots of cash: Declaring special annual dividend up 28.5% to US$0.09 per

FORECASTS
$ millions unless stated

Year 2020 2021
Turnover 15.0 +13.3% 16.5 +10.0%
EBITDA 6.1 +11.5% 6.4 +4.9%
EBIT - -
Pre-tax profit 5.8 +27.9% 6.1 +5.2%
Post-tax profit 5.8 +33.8% 6.1 +5.2%
EPS (¢) 10.9 +4.8% 11.4 +4.6%
Dividend (¢) 9.0

Cons

Information about their activities is hard to fathom. Not that easy to fully appreciate what they do
US classified so requires a W8BEN form
F/C PER about 22, so underperformance will likely see the shareprice punished.
Customer risk: Majority of revenue from small number of clients

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I bought IAG, as I have made a decent return with them in the past. I had been holding it for 3 years and had dumped IAG in January 2020, when I thought that it had reached its potential, and was not having as great a year as 2018 (but still reasonably alright).

Pros:

  • I feel travel is the first thing that is going to take off, and IAG seem well-suited to benefit from it over the next 2-3 years.
  • Still very much at a discount.
  • With vaccination going well, travel is going to resume, especially business travel, which is where BA makes the most money/profits.

Cons

  • Summer may get cancelled because other countries are not as fully vaccinated as the UK.
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this morning’s update looks like a partial beat:
Revenue up 11% for the year at US$14,675k (fc $15m)
PTP Adjusted PBTA1 up 15% to US$6,039k (fc $5.8m)
Adjusted earnings per share up 14% to US$11.9 cents (fc 10.9c)
Buy-back of 645,000 shares

other to note
cash of US$14,038k
commentary ““These highly stable revenues underpin our growth and enable us to continuously innovate with products that could lead to more explosive growth in the coming years.””
Plans for share cancellaiton per "“Finally, the Board of Directors will be extending the share buy-back authorization of up to 4,500,000 common shares through the end of March 2022,”
Which is 10% of issued shares.

And it wouldn’t be SPSY without added complexity: “In December 2020, the Company made an investment in Solaris BioSciences, whose core technology is well understood by us and can be effectively developed by our in-house staff. In addition to the issuance of Company stock, the investment included cash of US$294,058 and a commitment by the Company to provide in-kind services at cost of US$100,000. To date, there remains approximately US$87,000 of in-kind services to be provided and Solaris BioSciences’ cash balance is approximately US$240,000.”

So more moving parts to understand too!

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Hi Riccie,

Interesting thread on Spectra (SPSY). It is the last share which I purchased too and one of my larger positions.

I am particularly bullish on it:

Has made excellent progress on a number of fronts for it’s technology in recent years, having invested heavily up to 2016/17. It now appears to be benefiting from that investment.

The company has no debt and a very strong balance sheet.

Top line revenue growth is consistent. Order for covert consumables for bank notes (core of their business) are at record levels at present. They mention in annual report that major order is only partially filled and remainder comes into 2021 YE. Spectra is very conservative in how it reports so I would say 2021 revenues are already under-pinned.

Quality metrics are consistent and very high. For me the conversion of profits into cashflow is excellent and CFS easy to follow.

It is a growth business but pays a dividend of around 4% at current prices (DPS increased to 9.5 cents per share).

Forecasts are extremely conservative. The forecasts which you mention above do not include a potential US $42m revenue stream between now and 2024 (on a business with current revenue of $15m). This is to develop and install new sensors with its main central bank customer. Difficult to be sure, due to the nature of their business, but the first stages of this contract are already in place and looks very likely to be significant revenue over medium term.

It has a wide range of possible additional revenues which are not baked into existing forecasts and are likely to be high margin additions (as customers pay for all development work). For example the TruBrand material / app revenues from Chinese tobacco sales, covid-19 cleaning systems for bank notes etc etc.

Good insider ownership. Nabil Lawandy is CEO and owns a sizeable position in the company plus the new Solaris BioSciences investment. I thought they handled the related party transaction with admirable transparency and appears to have joined SPSY at a fair value.

Cons:

Key man risk through Mr Lawandy (in his 60’s).

Nature of contracts (with central banks) means difficult to understand commercial terms.

Key customer risk? Still quite a small business; susceptible to loss of large customer (but long term contracts)

Cashless society (but actually cash in circ has gone down (due to gig economy, states hoarding cash – rainy day?) Production is needed to increase. Western world scenario with trends in developing countries – global notes going up).

I feel pretty comfortable here and feel the upside is extremely high.

It would be great to hear Maynard’s thoughts too.

Thanks

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The last shares I bought –

Church and Dwight at $78.7 on the 3rd of March. I must admit to having bought it on the decision made by Terry Smith’s Fundsmith portfolio. I didn’t follow his lead with Nike, Starbucks and LVMH though.
During the pandemic sell off I bought Drax, which I have now sold as I don’t fundamentally believe in what they do, it just seemed like a crazy cyclical opportunity given the government subsidies – which perhaps are becoming less and less justifiable.
Those that I bought in the sell off, which I will keep include, AG Barr, Nichols, Fevertree, Coca Cola HBC, PZ Cussons and Hargreaves Lansdowne.

Games

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Hi @riccie @JamesH

Not looked at SPSY before. I always look at possible downsides first :slight_smile:

From the recent results:

Our long relationship with a major world central bank continues to drive the introduction of more advanced products and an increasingly steady stream of hardware sales. We have received significant funding from this customer to develop a new generation of sensors with manufacturing anticipated to begin in 2024. In addition, we have received development funding for the detection of “exotic counterfeits” from this same customer. While the number of sensors to be ordered is not yet specified, the sale of sensors is expected to result in $34MM-$42MM of revenue, depending on whether or not the newly developed “exotic counterfeit” detection capability is requested. In addition, we will have received between $7.5MM-$8.8MM of development funding from the central bank over the period from 2019-2023.

I get the impression SPSY’s revenue is dependent on large contracts with a handful of customers. The 2019 annual report said two customers supported 52% of revenue. Not ideal generally. But the “long relationship with a major world central bank” does suggest customers tend to stick around.

Development funding is interesting. Such funding is recognised as revenue “over time as the services are performed” and I am not clear what happens to that funding if SPSY does not have a ready product at the end of the development phase.

The 2019 annual report says one customer agreed to pay $10.5m over five years from 2018 for a technology licence that extends the right of use “into perpetuity”. So after 2023, perhaps $2m or so of revenue could be lost following this deal’s expiry. Presumably this royalty revenue has low/no associated costs, so the expiry may have an amplified impact on profit.

I am not sure whether this royalty customer is the bank-note printer mentioned in the latest results below:

We sell covert materials directly to one major world central bank and indirectly to 19 other central banks through our supply and licensing agreements with a major banknote supplier and printer which pays a licence royalty for the exclusive rights to our technology.

The related-party transaction is not ideal:

On December 10, 2020, the Company increased its equity interest in Solaris BioSciences (Solaris) from 4.79% to 48.65% on an as converted basis for total consideration of $702,000 consisting of $294,058 cash, the issuance of 126,252 shares of the Company’s common stock valued at $305,942, the commitment to provide $100,000 of research and administration services at cost to Solaris over the ensuing 24 months and the conversion of a $2,000 receivable due from Solaris. In addition, the Company will provide nominal accounting support to Solaris and allow Solaris use of optical table space and facilities at Spectra”.

Shareholders could ask how the chief exec i) arrived at a fair value for this transaction, and ii) spends his time between SPSY and his side projects.

The annual report reveals SPSY buying “certain assets” from Solaris during 2015 for $213k. SPSY has been set to pay Solaris 10% of any revenue derived from the assets, and $4k was paid during 2017 but nothing was paid during 2016, 2018 and 2019. SPSY’s arrangement with Solaris was seemingly unfavourable on that occasion.

Any thoughts?

Maynard

(PS I will hive off all the SPSY comments into a separate topic if they start to dominate this topic)

Inspiration Healthcare in Dec/Jan

Pros
Decent position in stable and growing market
Management experience and skin in the game
Acquisition potentially misunderstood
10x pro-forma EBITDA represented comparitively good value
Good chance will exist and be bigger in 10 years

Negative
Model risk: distribution moving to OEM
M&A unproven - always a big risk
Slightly ramped at the time of purchase and more so since

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Yes, customer concentration is a concern on the banknote business. But it is to be expected due to the customer base being small in number (i.e. sophisticated central banks). Equally, I believe that there is only a small number of qualified suppliers (such as Spectra, De La Rue). They talk of a 30 year relationship with the G7 Central Bank customer which makes up a large proportion of revenues and the new contract to develop and supply sensors is expected to renew the relationship for a further 10 years (it is the third generation of materials, sensor and servicing). I am completely guessing that this customer could be the US Federal Reserve as 62% of revenues in 2019 came from the USA (under geographic concentration).

What I believe will also continue to underpin the relationship is the need for the customers to continue to innovate and develop covert security on their banknotes. This is where Spectra appears to have a strong offering. CEO talks of Spectra being “technology and innovation driven”, with s strong patent estate (over 100).

As the product being developed has been specifically requested by one customer (and I assume cannot be cross-sold to other customers due to nature of covert security products), I suspect Spectra is guaranteed funding for the development work irrespective of end product.

In October 2020 the company announced a big contract with 3 phases.
Phase 1 was completed during 2020 ($1.9m), Phase 2 has commenced and runs until 2023 (contract worth $5.6m) and has the big kicker of $34m sales of sensors from 2024 if moves to Phase 3 (Investegate |Spectra Systems Announcements | Spectra Systems: Contract with a Central Bank)
Thereafter it would expect service sales (on the sensors) of about $750k per year for 10 years.

Interesting point and I had not recognised this previously. Thanks for raising it. My gut feeling is that the useful life of the technology license to the customer may not run much beyond 5 years, due to pace of change and need for central banks to continue to innovate (in order to minimise fraud / counterfeiting risks). If Spectra can innovate and come up with an enhanced offering then it may be able to push customers into new licenses. Technology moves fast !

Yes, I would probably agree with you and it would be good to know how many similar types of side projects the CEO is involved with. They mentioned at the time: “This transaction is expected to be the first of several over time which are expected to be a vehicle for building additional value for investors in business areas outside the authentication business which have rapidly evolving valuations. Spectra seeks to find early stage technology companies in the healthcare, biotechnology and energy sectors which draw on its core technology capabilities and where it can minimize the use of cash consideration.”

However, Nabil Lawandy (CEO) is not taking a salary from Solaris during the prototype phase.

My view within the small cap world is that a big part of the investment case is backing top quality people and top quality CEO’s. From everything I’ve read about Spectra (albeit from limited sources due to nature of their business), Nabil Lawandy appears to be an extremely smart and commercial CEO. So, I’m happy to back him (as part of the investment thesis) and I would rather have his ideas and other projects within the core business.

If you are interested, there is a couple of short videos on Proactive Investors and he comes across very well to me. Note the picture of Albert Einstein in the background if you watch the video!

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Looks very positive with a considerable lift in the share price. Trading update here.

System1 Group, up 28% at 244.40 pence, 12-month range 85.00p-244.40p. Shares in London-based ‘advertising effectiveness’ agency hit fresh 12-month high. Says profitability was stronger in second half than in first half as sales picked up faster than adjusted operating costs which were 16% lower than last year in the second half. Expects to report a adjusted pretax profit of around GBP2.9 million for financial 2021, up from GBP2.0 million in financial 2020.