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Trading Diary

Trading Diary – 11 September 2019

We’ve made three sales this week and reallocated this capital into three new positions. Following these trades the Model Portfolio continues to hold 18 stocks in total. 

Sells

  1. Silverlake Resources (SLR) – +30% profit
  2. Service Stream (SSM) – +16% profit
  3. Mirvac (MGR) – 6% loss

Silverlake Resources (SLR)

Our holding in SLR allowed us to capture a large part of the bull move in gold since the beginning of 2019. While it’s impossible to say whether this uptrend has now come to an end, it certainly looks to be pausing for the time being. As a result, many gold-related stocks on the ASX have also pulled back. 

SLR has been no exception. Having run-up in parabolic fashion, it also fell more quickly than others, especially after announcing a takeover at the end of July.  The fall has triggered our stop-loss, and as a result, we have sold our position. At this time, we have one remaining gold-related holding left in our portfolio. 

Service Stream (SSM)

We sold Service Stream as the current uptrend appears to be coming to an end. The stock violated its 10-day moving average for the first time since January when the current uptrend kicked off. The stock also closed on a lower low. As a result, we’ve exited our position. 

Mirvac (MGR)

The current uptrend in MGR appears to be coming to an end. What looked like it might be a basing pattern before the resumption of the uptrend seems more likely to have been the end of the current upturned. 

While MGR retains the defensive characteristics and potential to benefit from both falling interest rates and the falling AUD, our trend model has identified better opportunities at this time.

Buys

  1. Western Areas Limited (WSA)
  2. Kogan.com (KGN)
  3. Smartgroup (SIQ) 

Western Areas (WSA)

Western Areas produces Nickel. As such, its stock price has a high correlation to the price of Nickel. Nickel is the key ingredient used in the production of stainless steel, which is the primary end-market for the metal. 

In addition to stainless steel, a new market for nickel is emerging in the production of lithium-ion batteries. This sector is surging on the back of global electric vehicle demand.

Nickel is a critical element in the nickel, manganese, cobalt (NMC) cathode formula for lithium-ion batteries used in electric vehicles.

Each electric vehicle with an NMC lithium-ion battery requires about 50kg of nickel. Analysts expect Nickel demand to grow to around 6Mtpa by 2035 from the current level of about 2Mtpa. Batteries are forecast to account for almost half of that need.

The Nickel price has surged in recent months to its highest level since 2014. Western Areas management remains confident in the long-term fundamentals of the market, despite the recent volatility.

Development is underway on the company’s second operating mine – Odysseus at Cosmos. This new mine will secure the company’s long-term nickel production. The company expects pre-production CAPEX for this mine in the order of $299 million with first Nickel concentrate produced late in 2022. WSA has Cash on the balance sheet of $144.3 million and no debt.

Kogan (KGN)

Topline revenue growth is slowing at Kogan; however, this seems to be primarily the result of the decline in the company’s Third-Party Brands business. Third-Party Brands has reduced as a proportion of overall gross profit from 38.8% in FY18 to 26.7% in FY19.

In contrast, Exclusive Brands continued to achieve significant year-on-year revenue growth with an increase of 41.6% vs FY18. Exclusive Brands now represents 49.7% of overall gross profit in FY19. 

Growth in Exclusive Brands and Kogan Mobile contributed to a year-on-year increase in gross profit of 12.5% to $90.7 million (FY18: $80.6 million).

During FY19 Kogan also launched Kogan Marketplace, which has achieved $1.5 million in commission-based revenues, which all falls to gross profit. The launch of Kogan Marketplace is potentially transformational for the company. 

Kogan Marketplace will allow the company to reduce its reliance on Third-Party Brand inventory and thereby become more capital-light. 

Kogan has developed a strong brand with 1.6 million active customers and 74% of website traffic coming from free sources. With a backlog of sellers looking to onboard onto the Kogan marketplace and reach Kogan.com’s customer base, this a potentially exciting new avenue of growth for Kogan.  

The stock has been in a trading range since May 2019. Since the release of its full-year results on August 20, the stock has shown significant strength in breaking out above this range despite continued share sales by the company’s founders, Ruslan Kogan and David Shafer. 

Ruslan and David’s combined holding is now at ~30%, and both have no intention to sell any further shares before the release of the FY20 result.

Smart Group (SIQ)

Smart Group has been on a tear since releasing HY results. These highlighted that the business is more defensive than realised. Also, they showed that the company has solid organic growth prospects despite the downturn in the new car market. 

Furthermore, policy changes by the Federal government now look unlikely with the return of the Liberal party at the recent federal election. Labour is also unlikely to want to take another controversial policy to the next election. This reluctance is likely to mean that the regulatory risk for the company is now significantly reduced.

SIQ is a high quality, stable business. Demand for the stock appears to be driven by the attractive and growing dividend yield coupled with the potential for further capital management or accelerated growth through acquisitions. 

The stock is now back within 10% of all-time highs. A pause at these levels is likely as sellers get another chance to exit near the former high. Sufficient demand, coupled with a limited new supply that pushed the stock into a new high, would be very positive. 

By Danny Sandler

Founder of Ocean Asset Management.