Portfolio update for February

Reporting season is one of the more interesting times of the year, a fresh set of numbers providing a new lens through which to view our investments. Squinting through that lens, we see some businesses being built while cracks appear in others. In the latest reporting season, it was more of the latter.

In centre-view was amaysim (ASX:AYS), which warned that lower average revenues from its mobile subscribers would lead to lower profits. The mobile business is now being used as an acquisition tool to capture customers that can then be sold higher revenue energy plans.

On that basis, it makes sense to reduce mobile prices to win more customers, although it's a departure from our original investment case, which was based on the mobile business increasing profits as it won market share from the larger and more inflexible incumbents.

The company will stop paying dividends ‘for the short to medium term', but that probably has less to do with protecting a slightly weakened balance sheet, with $78m of net debt following the acquisition of Click Energy, and more to do with maintaining the flexibility to consider potential acquisitions.

The price fall of 32% in the month triggered an internal peer review process, where we opted to continue holding the stock in our Equity Growth and Equity Income portfolios. But we have no plans to add to our positions at this stage.

PMP (ASX:PMP) was another big faller in the Equity Income Portfolio after it warned (and then reported) that weakness in its newspaper and magazine business has added to problems integrating newly acquired IPMG. With the stock 30% lower following the news we are again minded to hold.

Girl with the curl

The benefits of sensible portfolio diversification limited the damage to losses of less than 1% for both portfolios in February. Much of the credit goes to Flight Centre (ASX:FLT), which gained 13% in the month after reporting a 37% increase in interim net profit.

As senior analyst James Greenhalgh explained in his review of the result, Flight Centre is like the girl with the curl in the Longfellow poem: when it is good it is very, very good, but when it is bad, it is horrid. It was having a horrid moment when we bought it; and just over a year later it's being very, very good again. The stock has returned 87% since then and we're not far off selling; but it's a decent company, albeit with bouncy profits, and we won't be hasty to get out.

After reporting a decent interim result and an expansion into England, Virtus Health (ASX:VRT) has been another good performer. And ASX (ASX:ASX) continues to make steady progress with a 5% rise in profits, as increased revenues from information services offset subdued trading volumes.

Sharp market falls at the beginning of the month also gave us the opportunity to add Scentre Group (ASX:SCG) – the owner developer of Westfield shopping centres in Australia and New Zealand – to the Equity Income Portfolio.

As a ‘yield stock' with a retail twist, Scentre has fallen 27% over the past year and a half. We think the market is overplaying the risk the company faces from online retailers. Most importantly, it's heavily weighted to the premium end of the market, and it's rejigging the tenants in its centres to provide a greater proportion of entertainment and services which are harder to provide online.

The other notable transaction in both portfolios was to take up our rights in Woodside Petroleum (ASX:WPL), which is raising money to fund new developments and the purchase of a 50% stake in the Scarborough gas field off Western Australia.

So it was swings and roundabouts for our Equity Growth and Equity Income Portfolios in February – as has been the case for the past few months. Overall, though, and while it remains early days, we're happy to see both portfolios ahead of their benchmark over one year and since inception.

To find out more about our Equity Growth and Equity Income portfolios, please visit their respective fund information pages.

Note: Our Equity Growth and Equity Income portfolios own many of the stocks mentioned.