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Monthly Report: International Fund February 2020

29/02/2020
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International Fund February Monthly Report

Global stockmarkets tumbled in February, with the MSCI All Country World Index falling 4.7%. A benign initial response to the emergence of the COVID-19 coronavirus in China gave way to panic as the virus went global.

At the time of writing, the number of people infected outside China was growing exponentially. It’s likely to continue doing so. While the range of potential outcomes is wide, this virus is going to have significant human and financial costs.

The Forager International Shares Fund has not been spared. The Fund owns companies directly exposed to travel, including Skywest (NYSE:SKYW) and Hostelworld (LSE:HSW). But the selling has been widespread, offset to some extent by a good month for the Fund’s largest investment, Blancco Technology Group (AIM:BLTG). This allowed us to realise some profits and deploy that capital and spare cash into beaten up opportunities. We have added to Skywest and Hostelworld. We bought one new US-listed company and another with a UK listing but US focus. They’ll be discussed in future reports.

While volatility is welcome respite from the relentlessly rising markets of recent years, remember it comes after a long bull market. The S&P 500 index of US stocks, for example, is only back where it was in October last year.

CEO Archie Bethel announced his retirement from engineering services provider Babcock International (LSE:BAB) after 15 years at the company. Two weeks later, Babcock released a disappointing trading update. Management stuck with its previous ‘normalised’ guidance for the full year, but investors continue to be slugged with asset impairments and ‘exceptional’ costs. We invested in this company for its predictable revenue and margins. The exceptional costs have become so unexceptional that we think them likely permanent.

While the order book and pipeline remain at a record high of £34bn, the Fund sold some of its stake recently. More attractive opportunities have become plentiful lately.

Blancco reported a strong first half of its financial year, with sales up 19% to £17.4m. Adjusted operating profit rose 47% to £2.5m— incremental additional sales are highly profitable. The ZroBlack deal in 2019 is paying off, significantly reducing the time it takes for mobile diagnostic and erasure customers to process a phone. As a result, Blancco won new, recurring business from several large phone processors, but this has also created an unusual headwind. A big US telco who used Blancco solutions in-store has now moved its business to a third party processor. While Blancco will still provide the solution, revenue from that one large customer will fall— crimping total revenue by about 5%.

It’s a single step down in an otherwise structural growth story. Despite the headwind, management has maintained its prior outlook for full-year growth in revenue and profitability. Blancco is a resilient business with no debt and significant recurring revenues, although it’s foreseeable there will be some impact to its sales effort due to virus-related travel bans and customer budget cuts.

Norbit ASA (OB:NORBIT) is the Norwegian research-focused manufacturer outlined in our October 2019 letter. The first two results reported after the initial public offering were mildly disappointing. The company turned it around with its recent fourth quarter result. The Oceans division, which makes specialist sonar equipment, increased sales 44%. The high margin ITS business, maker of dedicated short-range communications solutions for tachograph and tolling systems, also delivered good growth. The 2020 outlook for ITS is muted given exposure to the weakening European truck cycle, but Oceans should keep delivering. Nevermind, the stock sold off with everything else. CEO Per Jørgen Weisethaunet, Norbit’s second largest shareholder behind its founder, bought US$280,000 worth of shares in late February.

While coronavirus is only taking off outside Asia now, the impact in China was felt over most of the first quarter of 2020. Some customers of IPG Photonics (Nasdaq: IPGP) experienced longer than expected shutdowns which resulted in sales and deliveries being pushed out into future periods. Zebra Technologies (Nasdaq: ZBRA) noted that they are seeing disruptions within their manufacturing supply chain in China, impacting earnings guidance. Although recent commentary suggests that things in China are getting back on track, we’re watching closely. And the rest of the world can expect similar disruption.

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