HL SELECT UK GROWTH SHARES
Portfolio update
Fund changes
HL SELECT UK GROWTH SHARES
Fund changes
Steve Clayton - Fund Manager
21 December 2017
We have recently made some changes in the portfolios. On both HL Select UK Growth Shares and HL Select UK Income Shares we have sold out of Playtech altogether. Playtech’s core activity is providing gaming operators with software and support services to help them run both their online operations, and the systems they use within their retail outlets too. The business has been very successful over a number of years, but we feel that cracks are beginning to show.
Regulation has long been a major influencer within the gambling industry, driving operators’ profitability and often their strategic direction too. Some of Playtech’s sales are made to unregulated operators in Asia and the company recently warned of a loss of business in Malaysia after a crackdown on local players who were offering Playtech games via internet gaming cafés. Whilst in its own right, the cost was not that dramatic, it raised the prospect of similar actions in the much larger Chinese market.
At home, it was recently announced that GVC Holdings is to merge with Ladbroke Coral. Ladbroke are a strategic customer for Playtech, who own a stake in the group and provide extensive services to them. GVC intend to introduce their own systems, displacing Playtech. In the short term, Playtech should make a profit on their investment, but face a longer term loss of revenues.
Playtech themselves are struggling with a contract they took on to run Sun Bingo. Playtech pay The Sun for the right to run the Sun Bingo game, but so far, have not been able to earn a profit on the deal and are currently locked in to a loss-maker.
Of all these events, we view the GVC/Ladbroke Coral deal as the most significant. Playtech have a high share of the UK online gaming support market, with most major operators using Playtech software behind the scenes. The argument has always been that without Playtech, operators will struggle to earn the returns they seek. GVC are clearly saying this is no longer so, and that operators can capture the margin currently earned by Playtech for themselves. That undermines the longer term case for the stock.
Accounting for dividends received, the fund made 2% on its investment in Playtech.
We have finished selling our position in Intercontinental Hotels Group (IHG). As we have said in earlier postings, our concern here was that the valuation was at record levels at the same time as online travel agents such as Booking.com were poised to gain market share. Customers searching online for hotels are increasingly offered a huge choice either via the agents themselves, via aggregators like Tripadvisor and Trivago or indeed, even by Google itself.
Here’s what we got when we asked Google for suggestions for a January trip to the City:
Source: Google Maps, December 2017
Intercontinental Hotels Group have just one hotel, the Indigo, just off Vine Street, in amongst the dozens pro-offered by Google. Pricing power is hard to earn in such a competitive market. IHG can try to persuade clients to book via their app, rather than an open search. But if you know how much choice is available, why would you do that?
The liquidity that we have raised has been hedged using the iShares ETF tracker, until we reinvest. We have new positions that we are building, but it will take time to acquire the scale of holdings we require. Once complete we will reveal the new holdings on the fund breakdown pages and explain the rationale behind the positions.
Including dividends, the fund made a gain of 30% on its holding in Intercontinental Hotels.
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