STOCKS | FUNDS | INVESTMENT TRUSTS | PENSIONS AND SAVINGS
VOL 19 / ISSUE 28 / 20 JULY 2017 / £4.49 SHARES WE MAKE INVESTING EASIER SEARCHING FOR SMALL CAP VALUE Why fund managers are cashing out of star performers like Fevertree to reinvest in better opportunities
OUR GREAT ALL CHANGE IDEAS ARE at the top BEATING THE for EasyJet MARKET and ITV 14% AVERAGE GAIN CARILLION OVER 12 bounces back MONTHS from share price collapse
FIVE WAYS TO BOOST YOUR RETIREMENT INCOME EDITOR’S VIEW Do the rewards compensate for the risks taken? We look at performance for investors risking their money in the mining sector
hareholders in miner Rio Tinto (RIO) have for half of the year; sustaining that trend for enjoyed a 12.3% total return so far this year. the rest of 2017 would imply a 24% return on S While more than twice the total return an annualised basis. Therefore you are being from the FTSE 100 index (5.6%), is such a reward adequately compensated in this situation for the adequate to compensate for the risks involved with risk of investing in mining, in my opinion. investing in such a volatile sector? Just remember that past performance doesn’t Investors should always think about the ‘equity always equate to future performance – you aren’t risk premium’ when establishing the desired return guaranteed to make that extra 12% in the second from putting money in a certain sector. That is the half of the year. extra return you hope to generate on top of the ‘risk-free’ rate, which in the UK is benchmarked WHY INVEST IN RIO? against the UK 10-year government bond (aka gilt). It is one of the lowest cost mining producers At the time of writing, the 10-year gilt yield is on the market and has one of the strongest balance 1.31%. The equity risk premium is the excess return sheets in the sector. required by shareholders to justify investing in BlackRock fund manager Tom Holl predicts a stocks rather than risk-free government bonds. market re-rating of miners with strong cash flow. The FTSE All-Share index has achieved 6.35% He says Rio, in particular, has a double-digit free total return so far this year. Deducting the 1.31% cash flow yield if you run the calculations using risk-free rate means the equity risk premium, spot iron ore prices. Iron ore accounts for a large or the reward for investing in equities, is amount of its earnings. approximately 5%. Investment bank Jefferies says it expects That figure represents a basket of sectors. The a significant increase in capital returns to expected returns vary considerably at an individual shareholders from many miners this earnings sector level. season as ‘balance sheets are strong and cash is For example, you might expect a fairly low abundant’. return with utilities as they have fairly stable and It believes Rio’s surplus cash in its 2018 financial regulated earnings. You might want 8% to 9% from year will represent c8.5% of its market cap. That retail, for example, as that sector is at the mercy of money is the cash available to return to investors consumer spending habits and economic health. or investing in projects without increasing net When it comes to mining and biotechnology, debt/EBITDA (earnings before interest, tax, you may want to have significant returns – such as depreciation and amortisation) to more than a 15% to 20% a year (at a minimum) – to compensate one times ratio. with the risks of those industries. Mining is exposed Jefferies doesn’t believe all the cash will be used to unpredictable commodity prices; biotechnology for dividends or share buybacks. ‘However, we do can often be a binary outcome – a new drug either consider surplus cash to be a direct measure of works or it doesn’t. financial strength’. Rio looks as rock solid as you can get in the mining LOOKING AT RIO TINTO sector, assuming there isn’t a major downwards With Rio, if it has made circa 12% for shareholders correction in the price of commodities. (DC)
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AJ Bell includes AJ Bell Holdings Limited and its wholly owned subsidiaries. AJ Bell Management Limited and AJ Bell Securities Limited are authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales at 4 Exchange Quay, Salford Quays, Manchester M5 3EE Contents INTERACTIVE PAGES CLICK ON PAGE NUMBERS TO JUMP 20 July 2017 TO THE RELEVANT 20 STORY
EDITOR’S VIEW 02 Do the rewards compensate for the risks taken?
BIG NEWS 06 E asyJet reveals post-Brexit plans as CEO departs 06 BIG NEWS GREAT IDEAS 07 Sa ge to sidestep 12 A ccrol is flush HMRC’s digital delay with potential
BIG NEWS GREAT IDEAS 08 K eep toasting 13 A ccesso looks like a cash-generative prime takeover target Conviviality GREAT IDEAS UPDATES BIG NEWS 15 Our Great Ideas are 09 Br exit puts squeeze beating the market on consumers and businesses WEAK AHEAD BIG NEWS 19 Financial results 06 Wha t will McCall STORY IN NUMBERS and ex-dividends do at ITV? 10 Premier Oil’s over the coming week significant discovery, BIG NEWS latest property stats MAIN FEATURE 07 Carilli on bailed and other stories in 20 S earching for small out by HS2 numbers cap value
securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor DISCLAIMER agrees that the reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, IMPORTANT self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. 2. Reporters will inform the editor on any occasion that they transact shares, Comments published in Shares must not be relied upon by readers when they derivatives or spread betting positions. This will overcome situations when the make their investment decisions. Investors who require advice should consult a interests they are considering might conflict with reports by other writers in the properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited magazine. This notification should be confirmed by e-mail. do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. 3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor. Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it 4. A reporter should not have made a transaction of shares, derivatives or spread will be disclosed. Shares adheres to a strict code of conduct for reporters, as betting positions for seven working days before the publication of an article that set out below. mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within seven working days after the 1. In keeping with the existing practice, reporters who intend to write about any on-sale date of the magazine.
4 | SHARES | 20 July 2017 Contents
SMALLER COMPANIES INVESTMENT TRUSTS 38 Ga teley offers the 32 Looking for 32 full service opportunities among large companies SMALLER COMPANIES 39 S ound Energy MONEY MATTERS switches focus 34 Fi ve ways to boost to Morocco your retirement income UNDER THE BONNET 40 Th e rapid growth MONEY MATTERS story flying under 36 Th e importance of the radar shopping around for your pension FEATURE 42 Three stocks to play LARGER COMPANIES the digital healthcare 37 Are investors revolution focusing on the wrong catalyst for Ryanair’s INDEX future growth? 45 Index of companies, funds and investment trusts in this issue
37
WHO WE ARE BROKER RATINGS EXPLAINED: EDITOR: DEPUTY NEWS Daniel EDITOR: EDITOR: We use traffic light symbols in the magazine to illustrate Coatsworth Tom Sieber Steven Frazer broker views on stocks. @SharesMagDan @SharesMagTom @SharesMagSteve FUNDS AND REPORTER: JUNIOR REPORTER: CONTRIBUTORS Green means buy, Orange means hold, Red means sell. INVESTMENT TRUSTS David Stevenson Lisa-Marie Janes Emily Perryman EDITOR: @SharesMagDavid @SharesMagLisaMJ Tom Selby James Crux The numbers refer to how many different brokers have @SharesMagJames that rating.
MANAGING DIRECTOR PRODUCTION ADVERTISING Eg: 4 2 1 means four brokers have buy ratings, Mike Boydell Head of Design Senior Sales Executive Rebecca Bodi Nick Frankland two brokers have hold ratings and one broker has a sell 020 7378 4592 rating. CONTACT US: Designer [email protected] [email protected] Darren Rapley The traffic light system gives an illustration of market views Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, but isn’t always a fully comprehensive list of ratings as some 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852. banks/stockbrokers don’t publicly release this information. All Shares material is copyright. Reproduction in whole or part is not permitted without written permission from the editor.
20 July 2017 | SHARES | 5 BIG NEWS EasyJet reveals post-Brexit plans as CEO departs Low-cost airline establishes base in Vienna
ow-cost airline EasyJet’s (EZJ) preparations for dealing with any potential fallout from the LBrexit negotiations coincide with news that chief executive officer (CEO) Carolyn McCall is leaving the company. On 14 July EasyJet announced plans to establish a new holding company, EasyJet Europe, in Vienna. The company indicated it will shortly be issued an air operator certificate from Austro Control and an airline operating licence from the leaving EasyJet after seven years at the helm to Austrian Ministry of Transport. become the new chief executive at broadcaster With this licence, EasyJet can operate flights ITV (ITV) in January 2018. across Europe and domestically within European According to Panmure Gordon analyst Mark countries once the UK has left the European Irvine-Fortescue, McCall has performed well, Union. This should help protect the firm from the measured on the operational, financial and outcome of future UK-EU aviation talks. shareholder performance. Stockbroker Goodbody is positive about the While he says the ‘timing is not ideal’ he believes move. ‘While this will add some complexity and EasyJet will be able to attract a strong successor. additional cost to the business, it does represent Whoever follows McCall will have to address a significant step in overcoming the risk of the issues relating to weak free cash flow conversion UK’s exit from the EU says analyst Mark Simpson. and operational concerns, says Irvine-Fortescue. In May, EasyJet suffered a £212m half-year HARD ACT TO FOLLOW pre-tax loss as higher fuel costs, the weaker pound On Monday (17 Jul), it was announced McCall is and a delayed Easter break took effect. (LMJ)
as being very good with What will McCall do at ITV? people, at building a strong People skills and links to Government seen as management team around key strengths her and at the ability to “work the room”. ‘She also has very good fter much speculation reflecting her success in turning links on the Government side, EasyJet (EZJ) chief around the low-cost airline which should be very helpful Aexecutive Carolyn McCall is during her tenure. She faces a in areas such as retransmission to leave the airline and take the challenge in boosting sentiment revenues for ITV.’ top job at free-to-air broadcaster towards ITV which is down 15% Whittaker does not expect ITV (ITV) in January 2018. year-to-date. a big shift from the current The news was received Liberum analyst Ian Whittaker strategy of focusing on content positively by the market, lists her strengths: ‘She is seen and digital revenue. (TS)
6 | SHARES | 20 July 2017 BIGBIG NEWSNEWS Carillion bailed out by HS2 Troubled support services business joined by Balfour Beatty and Costain in list of contractors
he award of a contract on the And while the shares are still down heavily HS2 high speed rail project may Carillion on the 192.1p at which they traded before T have raised eyebrows but it is JV wins the profit warning, they are up nearly 30% also having a restorative effect on since the HS2 and EY news to 72.9p. construction services firm Carillion’s £1.3bn The market seems to believe these (CLLN) share price. HS2 contract developments will make it easier for After a major profit warning on 10 July, Carillion to raise the funds it needs to which saw the departure of chief executive repair a stretched balance sheet. Richard Howson, questions were asked about Fellow construction play Balfour Beatty (BBY) the decision to award £1.3bn of work to the won two HS2 contracts with a total value of £2.5bn joint venture in which Carillion is partnered by in partnership with French outfit VINCI. Its shares Eiffage and Kier (KIE). A HS2 spokesman said it ticked up 1.8% to 270.8p on the news (17 Jul). had ‘sought reassurance’ and carried out Meanwhile, small cap peer Costain (COST) ‘additional due diligence’. gained nearly 5% to 461.5p on the same day as it Carillion has also announced the appointment of revealed HS2 is ‘minded to award’ the company consultant EY to support a strategic review process. two civil construction packages. (TS)
Sage to sidestep HMRC’s digital delay But underlying growth remains key to premium rating
ccountancy software below the £85,000 per year VAT supplier Sage (SGE) looks threshold, will now be made Alikely to sidestep any exempt from enforced digital major fallout from the HMRC’s tax reporting beyond basic VAT delayed making tax digital declarations. scheme. The original plan from Sage concentrates on providing freemium strategy, effectively the Government’s tax authority a suite of accounting and tax stripping out a marketing cost. would have forced the smallest tools for small and medium-sized Sage’s bigger challenge is to businesses and sole traders to businesses above the VAT level. It accelerate its underlying growth start online quarterly reporting had planned to offer a so-called beyond the mid-single digit from April 2018. ‘freemium’ entry level module of levels of the past. Shares has That plan has now been basic tools for smaller operators. previously pointed out that firm pushed back to April 2019 at the Freemium models provide a low progress on plans to accelerate earliest amid outcry from MPs level of tools for free, with more growth is key to holding on to and businesses. The very smallest features available on a sliding fee a price to earnings (PE) rating UK businesses, those operating scale. Sage may well now ditch its above 20. (SF)
20 July 2017 | SHARES | 7 BIG NEWS Keep toasting cash- generative Conviviality Drinks wholesaler’s buying power and market reach to serve investors well
hile the consumer environment drinks market mitigates this issue. looks increasingly tough, Shares Supplying retailers, pubs, hotels, bars and Wbelieves drinks wholesaler-to-franchised restaurants with booze, food and tobacco, off-licence operator Conviviality (CVR:AIM) will Conviviality’s competitive pricing, notably via remain resilient. the Bargain Booze chain, gives the group the Full year results (17 Jul) revealed a better-than- ability to serve cash-strapped consumers with expected adjusted pre-tax profit, up more than affordable alcohol. 100% to £45.8m, upgrades to synergy guidance Free cash flow rose 349% to £51.2m last and news of strong momentum across the business year while net debt of £95.7m was a beat in the nine weeks to 2 July. versus previous guidance of £99m. Prized for its Guided by CEO Diana Hunter, the £574.7m cap compelling cash generation, Conviviality raised the has been transformed over the last two years via total dividend 33% to 12.6p. Investec Securities has the acquisitions of Matthew Clark, the UK’s largest upgraded its price target from 350p to 375p and drinks distributor to the on-trade, and wines and forecasts a further dividend rise to 14p this year. spirits wholesaler Bibendum. Sales in the year to April rose 85% to £1.56bn, reflecting a full year SHARES SAYS: from Matthew Clark, a boost from Bibendum and We’re positive on Conviviality at 339.7p for its earnings healthy organic growth of 5.8%. resilience, strong cash flows and 4.1% prospective Consumers’ disposable income is being squeezed dividend yield. (JC) with inflation running ahead of wage growth but BROKER SAYS 5 0 0 Conviviality’s sheer scale and reach across the UK
Weir seeing Yu Group to Pressure on North American beat forecasts Blancco Technology shale recovery BUSINESS ENERGY SUPPLIER CASH CONVERSION REMAINS SCOTTISH ENGINEER WEIR (WEIR), Yu Group (YU.:AIM) is on track to one of the biggest stumbling which provides pumps used by beat expectations for both revenue blocks to share price recovery at shale gas operators in the US, says and operating profit this year to 31 data erasure business Blancco a rebound in activity will support December 2017. Technology (BLTG:AIM). better-than-expected full year profit The company continues to disrupt Analysis by FinnCap estimates from its oil and gas division (17 Jul). the big six suppliers and will report just 43% of earnings before interest, This will be partially offset by a ‘at least £35m’ of revenue this tax, depreciation and amortisation one-off charge of £13m relating to year, ahead of the £34m previously (EBITDA) in the past year turned its Gabbioneta flow control business. anticipated. The company already into cash, and that’s excluding The group will release its half year has more than £20m revenue exceptional items. results on 27 July. (TS) committed for 2018. (SF) Blancco shares have collapsed from 306p in March to 102.5p. (SF)
8 | SHARES | 20 July 2017 BIGBIG NEWSNEWS Brexit puts squeeze on consumers and businesses Stocks remain near record levels but for how long?
he UK economy has held up surprisingly well how much further this can go as household savings since June 2016’s vote to leave the European ratios have already fallen to very low levels.’ T Union, but the gloves might be now coming Business investment is also showing some off. Economic growth is slowing in Britain as the signs of strain. Much of this is down to limited brakes of uncertainty drag. visibility, which makes budgeting for business The latest data from consultant PwC anticipate far harder. UK GDP growth of 1.5% this year, slowing again The weak pound and exports may offset some in 2018 to 1.4%. That’s versus 1.8% progress in of this pressure, especially for the UK’s very biggest 2016, according to PwC’s latest UK economic companies in the FTSE 100 index. Many earn a lot outlook report. of income from overseas markets, so declines in Consumers are right at the heart of the matter sterling make British goods sold overseas more with reduced spending in the face of rising inflation competitively priced. and limited wage growth. That goes a long way to explain why the FTSE Higher borrowing has allowed high street and 100 continues to trade at close to record levels, at online spending to remain reasonably robust to about 7,400. That’s less than 2% below the all-time date, but as PwC points out, ‘there are limits to highs, hit first in May and again in June. (SF)
Guinness Asian Equity Income Fund Guinness Global Innovators Fund Equal weighted | Concentrated | Quality Equal weighted | Concentrated | Quality April 2017 April 2017 £18,000 Growing Dividends £58,000 Growth through Innovation £51,238 £17,000 £53,000 £16,625 *Simulated past performance: The Fund was £16,000 Past performance is not a guide to future returns £48,000 Source: Financial Express. launched on 31.10.2014; performance prior to this £43,000 date is based on our US Global Innovators Fund run £39,419 £15,000 in £14,739 by the same investment team in accordance with £38,000 the same methodology. £14,000 a Equal weighted | Concentrated | Quality £33,000 Past performance is not a guide to future returns £13,000 Source: Financial Express. £28,000 £12,000 £23,000 £11,000 £18,000
£10,000 £13,000
£9,000 £8,000 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Discrete years % gross total return (GBP) Apr '13 Apr '14 Apr '15 Apr '16 Apr '17 Discrete years % gross total return (GBP) Apr '13 Apr '14 Apr '15 Apr '16 Apr '17 Guinness Asian Equity Income 35.2 -10.2 37.0 Guinness Global Innovators strategy* 25.1 20.7 21.3 -3.1 39.4 MSCI AC Pacific ex Japan Index 18.4 -6.8 22.5 -12.8 36.4 MSCI World Index 22.5 8.1 18.7 1.1 30.6
Guinness funds are built on an investment philosophy that should serve investors well. We run a group of long only equity funds which, at sector and regional level, get involved with megatrends such as innovation and the emergence of China and Asia and manage these as core global and income strategies. We focus on growth and quality, try to do it all intelligently and with discipline and with high conviction - using equally weighted concentrated portfolios and low turnover with a value bias. Providing investors with good, actively managed ideas - attractively priced - that that could merit consideration for inclusion in a long term portfolio. Available on AJ Bell Youinvest Learn more about the story at guinnessfunds.com
Innovation | China | Energy | Quality The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested. The OCF is taken from the funds’ capital which will a ect future performance. Guinness Asset Management is authorised and regulated by the Financial Conduct Authority. www.guinnessfunds.com / 0845 519 2161 STORY IN NUMBERS
4.6% Housing market remains resilient THE NUMBER OF property sales agreed in June 2017 increased by 4.6% year-on- year according to the latest survey by property website Rightmove (RMV). 1.4bn to 2bn Cumulative sales agreed in the first six months of Premier zooms higher 2017 were only down 0.4% from the same period of on Zama find 2016 despite a rush of transactions early last year AN OIL DISCOVERY offshore Mexico could contain between 1.4bn ahead of new stamp duty and 2bn barrels of oil, according to Talos Energy which is partnered guidelines (which made with Premier Oil (PMO) and Sierra Oil & Gas on the Zama-1 well. for tough comparative Premier, which has a 25% stake in Zama-1, calls the discovery figures to beat this year). ‘world class’. It provides welcome respite for the business which Rightmove director and recently faced a difficult financial restructuring process. housing market analyst Shares in Premier were up by a quarter in the immediate Miles Shipside says: ‘A aftermath of the news and have now settled at 62p. year on from the shock The well is the first to be drilled by a private sector company referendum result and offshore Mexico. According to industry consultant Wood subsequent dent in activity Mackenzie, Zama is one of the 15 largest global shallow-water levels the fundamentals discoveries in the last two decades. Drilling will now continue to remain strong.’ test a deeper target. WIDECELLS AIMS TO TAKE ADVANTAGE OF LUCRATIVE CORD BLOOD MARKET STEM CELL SERVICES provider agreements with global facilities WideCells (WDC) hopes to that store approximately 1,000 take advantage of 3m cord blood cord samples worldwide. blood samples held in storage The company uses these deals 3M in 500 facilities globally. Cord to offer stem cell insurance when blood remains in the placenta people want their blood cord and contains stem cells, which stem cells stored. The company can be used to treat genetic expects to expand its deals to disorders. cover another 5,000 to 6,000 WideCells currently has samples in the next three years.
10 | SHARES | 20 July 2017 STORY IN NUMBERS
ROBOT WORKFORCE ON THE MARCH THERE HAS BEEN lots of talk workforces. Regular Shares about robots taking British readers will also be aware of jobs and leaving people things like robotic process 76% underemployed. More than automation (RPA), which can 4.5m retail, manufacturing free staff to do more interesting and admin roles are at risk and value-adding tasks, leaving of automation replacement, computers to do dull stuff according to data from business like crunching spreadsheet consultancy PwC. numbers, an area where AIM- That’s anywhere from 37% quoted Blue Prism (PRSM:AIM) CARILLION GOES to 46% of those industry is carving a fast growing niche. INTO FREEFALL Top 5 industry jobs at risk (Total number jobs / % of each UK industry) 60 CONSTRUCTION SERVICES FIRM % Carillion (CLLN) saw 76% of 50 56.4% its value wiped off in five days starting on Monday 10 July. 40 46.4% The sell-off was sparked 44% by a profit warning which 30 37.4% resulted in the departure of CEO Richard Howson. The 20 25.6% company had been the most shorted for 18 months. 10 The main issue concerns 2.25m 1.22m 1.09m 0.95m 0.78m Carillion having to set aside an 0 £845m provision relating to Wholesale and retail trade Transportation and storage troubled contracts in the Middle Manufacturing Professional, scientific and technical East and Canada. Administrative and support services
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Click here for details on upcoming events. You can also watch videos from past events. We look forward to seeing you soon GREAT IDEAS Accrol is flush with potential Profitable and cash-generative toilet paper maker is on a roll
oring can be beautiful. Significantly, the discount Often businesses operating ACCROL BUY segment, where Accrol’s market in seemingly unglamorous (ACRL:AIM) 151p share has grown to over 50%, B Stop loss: 120.8p industries are often able to is the fastest growing part of a generate strong shareholder Market value: £140.4m UK tissue market estimated to returns, among them toilet roll be worth £2.2bn and growing specialist Accrol (ACRL:AIM). at around 1% a year by value, Liberum Capital has initiated helped by the UK’s mushrooming coverage (10 Jul) with a ‘buy’ population. rating and 200p price target Maiden results for the year to implying 32.5% upside, arguing April (10 Jul) revealed a 58% surge Accrol is well placed to capture in adjusted pre-tax profit to £13m growth from the consumer shift on sales up 14.2% to £135.1m. towards value formats. Net debt reduced by £41.7m to £19m, reducing Accrol’s net ON A ROLL debt-to-adjusted EBITDA ratio Lancashire-based Accrol from 4.0 times to 1.2 times. manufactures toilet rolls, kitchen For this year, Liberum forecasts towels, facial tissues and AFH pre-tax profit of £14.6m for (Away From Home) products earnings of 12.5p (2017: 11.8p) including hand towels and and a hike in the dividend from industrial wipes. The company manufacturing facility at Leyland 6p to 7.5p. supplies UK discounters, major to create extra capacity, is well Despite a 51% rise from June supermarkets, independents and placed to benefit. 2016’s IPO (initial public offering) AFH customers with private label price, the shares should have and Accrol-branded products WIPING AWAY further to go given a modest such as Triple Softy toilet tissue. THE COMPETITION prospective price-to-earnings Customers include Booker We like Accrol’s relatively (PE) multiple of 12.1 times. With (BOK), B&M European Value capital light, flexible model. The free cash flow rising, Accrol Retail (BME), Wilkinson and company buys in 100% of its also offers a prospective yield Aldi and increasingly the major parent reels (paper) and doesn’t approaching 5%. (JC) grocers such as Tesco (TSCO), have any capital tied into paper ASDA and WM Morrison mills, giving it the flexibility BROKER SAYS: 2 0 0 Supermarkets (MRW). to take advantage of an over- ACCROL GROUP HLDGS Accrol is geared into the supplied industry. FTSE ALL SHARE structural spending shift towards Improving efficiencies and 170 Rebased to first the discounters and cheaper investment in new technology is 160 own-label products. As retailers enabling Accrol to win profitable 150 push up prices to mitigate cost new contracts. One of last 140 130 inflation, these trends will only year’s highlights was a deal to 120
accelerate. An agile Accrol, launch Lidl’s Floralys range in 110 Source: Thomson Reuters Datastream which has invested in a new November 2016. 2016 2017
12 | SHARES | 20 July 2017 GREAT IDEAS Accesso looks like a prime takeover target Best in class technology specialist remains a unique UK investment
ccesso Technology Accesso believes (ACSO:AIM) is a unique XXXXACCESSO BUY it can leverage its state-of-the- growth story on the TECHNOLOGY(xxx) xxxp BUY art, cloud-based technology to A Stop loss: xxp UK market. We believe it will (ACSO:AIM) £16.50 undercut commissions earned by eventually get taken over at a big MarketStop loss: value: £13.20 xxx rivals, making it a more attractive premium to the market price. partner to event organisers and Accesso has developed best- Market value: £370m performers. in-class, cloud-based queue- The $80m (£62.3m) acquisition beating solutions and ticketing parks in the UK and Europe of TE2 on 12 July is the latest in technology. under licence, is also a client. a long list of deals that should It helps theme park visitors These type of relationships help it meet its objectives. TE2 to avoid standing in endlessly have helped Accesso develop an provides customer engagement long lines. That leaves then excellent growth track record. software to the leisure, with more time to enjoy the The company is profitable and hospitality, entertainment and attractions with an improved cash generative. retail sectors. experience, and importantly Big growth opportunities are Customers include Merlin, for site operators, spend more cropping up in emerging markets Cedar Fair Entertainment and money across other parts of the across Latin America, the Middle SeaWorld Parks & Resorts, theme parks. and Far East, including China. blending a mixture of new with Dubai, for example, plans to take opportunities for build deeper IN DEMAND TECHNOLOGY on Florida as the world’s number relationships with several Owners of some of the world’s one holiday destination. existing Accesso clients. biggest attractions are sold Analysts anticipate compound on the idea, such as Six Flags EXPANDING OPPORTUNITIES annual growth of about 18% Entertainment, the $5bn owner Accesso has greater ambitions through to 31 December 2019, of theme and water parks across still, launching itself into the which would double last year’s the US, plus several zoos. global event ticketing market, $15.3m pre-tax profit to $32.3m. The UK’s Merlin currently dominated by That would almost halve the Entertainments (MERL), which Ticketmaster. This encompasses prospective price to earnings owns Alton Towers, Chessington, major sporting events and pop multiple, from roughly 40 to 21.7 and operates several Legoland concerts, for example. by the end of 2018. (SF)
BROKER SAYS: 2 2 0
ACCESSO TECHNOLOGY GROUP FTSE ALL SHARE 2100 Rebased to first 2000 1900 1800 1700 1600 1500 1400 1300
1200 Source: Thomson Reuters Datastream 2016 2017
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www.sharesmagazine.co.uk/videos GREAT IDEAS UPDATES Our Great Ideas are beating the market More than a third of our key selections post double-digit gains
ur Great Ideas section includes our two best Oinvestment ideas every week and we are currently beating the market handsomely. We run our list of stocks on a 12-month rolling basis and track the performance of the portfolio against the FTSE All-Share. The latest figures show us up 14% on average against a 4.4% advance for our measure of the FTSE All-Share, all excluding dividends Shares’ (see ‘How it works’). great ideas Our best performer among trades still running is cyber security play Sophos (SOPH) +14% which has seen its share price (on average) vs double on growing interest in 4.4% from the its market niche and robust market operational performance. More than 30 of our selections have delivered double-digit returns. In this article, we give our view on the constituents in the portfolio which have issued news in the past few weeks and show some of our best performing ideas over the past 12 months and how they’ve performed.
HOW IT WORKS In each article we record The result is a rolling After each edition of Shares, the share price of the stock 12-month list of stocks. Readers published every Thursday, we featuring in Great Ideas and should always conduct their add the two featured Great separately we record the index own research off the back of Ideas stocks to the list and value of the FTSE All-Share on article ideas in Shares and/or remove the two oldest picks the day the story is published. seek financial advice before (unless we’ve already taken This way we can compare the buying any security. Past profit on them or the trades performance of the All Share results are no guide to future have hit their stop loss). over the same time frame. performance.
20 July 2017 | SHARES | 15 GREAT IDEAS UPDATES
A SELECTION OF SHARES’ BEST PERFORMING GREAT IDEAS OVER THE PAST 12 MONTHS
Company EPIC Date Entry Stop Price Return Status price loss now (p) (p) (p)* Purplebricks PURP 22/09/2016 134.31 107.4 386 187.4% Took profit 22 June Sophos SOPH 28/07/2016 220 176 456.2 107.4% Still running Distil DIS:AIM 23/02/2017 1.46 None 2.95 102.1% Took profit 20 April Treatt TET 16/02/2017 258.93 207.14 466.75 80.3% Still running GoCompare GOCO 24/11/2016 62 49.6 110 77.4% Took profit 13 July Joules JOUL:AIM 01/12/2016 185 148 296.5 60.3% Still running Luceco LUCE 20/10/2016 150 105 239.75 59.8% Still running Velocys VLS 29/09/2016 30 24 46.25 54.2% Still running Ryanair RYA 25/08/2016 12.09 9.67 18.62 54.0% Still running Jimmy Choo CHOO 08/12/2016 133 106.4 202.75 52.4% Still running SSP SSPG 13/10/2016 323 258 492.1 52.4% Still running Yu Group YU:AIM 13/04/2017 287.5 230 437.5 52.2% Took profit 25 May Ideagen IDEA 11/08/2016 56 45 83 48.2% Still running Kainos KNOS 19/01/2017 198 158 290 46.5% Still running Fyffes FFY 22/09/2016 128.8 103.04 186 44.4% Took profit 15 Dec Quixant QXT 20/10/2016 285 228 410 43.9% Still running Proactis PHD 18/08/2016 130.5 104 187.5 43.7% Took profit 4 May UDG Healthcare UDG 28/07/2016 575 460 823 43.1% Still running Spirax-Sarco SPX 04/08/2016 39.81 n/a 55.25 38.8% Still running Engineering Ibstock IBST 26/01/2017 180.5 none 245.4 36.0% Still running GB Group GBG 27/10/2016 253 202 338 33.6% Still running IMImobile IMO:AIM 08/12/2016 158.5 127 210 32.5% Still running Clipper Logistics CLG 01/09/2016 307 245.6 405.5 32.1% Still running
16 | SHARES | 20 July 2017 GREAT IDEAS UPDATES
Company EPIC Date Entry Stop Price Return Status price loss now (p) (p) (p) Elementis ELM 10/11/2016 234.5 n/a 306.2 30.6% Still running Zytronic ZYT:AIM 03/02/2017 405 324 520 28.4% Still running Marlowe MRL:AIM 23/03/2017 310 217 397.5 28.2% Still running Cranswick CWK 17/11/2016 2216 1773 2840 28.2% Still running Burford Capital BUR:AIM 03/09/2017 734 587.2 918 25.1% Still running Savannah Resources SAV:AIM 03/11/2016 4 2.8 5 25.0% Still running Eckoh ECK 15/09/2016 39 31 47 20.5% Still running SDX Energy SDX:AIM 02/02/2017 38.23 25 45 17.7% Still running AG Barr BAG 06/10/2016 508.5 406.8 598 17.6% Still running Countryside CSP 25/05/2017 301.2 210 350.8 16.5% Still running Properties Howden Joinery HWDN 26/01/2017 368.9 n/a 423.1 14.7% Still running Fishing Republic FISH:AIM 18/05/2017 39 23 44.5 14.1% Still running Allied Minds ALM 08/09/2016 328 n/a 372.1 13.4% Took profit 23 Mar Sopheon SPE:AIM 22/06/2017 330 231 361 9.4% Still running Cineworld CINE 16/03/2017 632 443 685.5 8.5% Still running PZ Cussons PZC 16/03/2017 326.9 261.52 352.8 7.9% Still running Tharisa THS 29/09/2016 77.5 54.25 82.75 6.8% Still running Card Factory CARD 03/09/2017 273.1 218.48 291.6 6.8% Still running Glaxosmithkline GSK 01/12/2016 1530 n/a 1631.5 6.6% Still running Diageo DGE 01/12/2017 2173 1738 2309 6.3% Still running Ramsdens RFX:AIM 15/06/2017 142 100 150.5 6.0% Still running UP Global Sourcing UPGS 05/04/2017 178 142.4 187 5.1% Still running Tesco TSCO 25/08/2016 164.45 131.58 172.7 5.0% Still running MySale MYSL:AIM 06/08/2017 110 88 115 4.5% Still running
Source: Shares, Google Finance, *Latest price is market price on 13 July 2017 or the price at which we took profit or the trade stopped out
20 July 2017 | SHARES | 17 GREAT IDEAS UPDATES
FOOD PROVIDER ON Technologies (AMO:AIM) should Ramsdens (RFX:AIM) took the THE MOVE be a source of satisfaction for AIM market by storm when it We’ve enjoyed just over a 50% shareholders. floated in February. gain since saying to buy transport Very strong on cash We identified the opportunity hub food operator SSP (SSPG) generation, Amino was bolstered at 142p and it is currently up last October. The latest trading by higher margin kit and services, 6% on that level at 150.5p. The update (12 Jul) revealed 14.6% lifting profit margins. company’s full year results (7 revenue growth for the three There are modest doubts Jun) show the strength of its FX months to 30 June 2017 at about the timing of some large offering and the company also constant currencies. The start of contracts in the second half. The beat forecasts that had already operations at Chicago Midway shares remain below our 213.5p been upgraded. airport and success in India were pitch level, but we remain firm It may be impacted by notable highlights. supporters. gold price fluctuations in its Although the shares are pawnbroking and metals now highly rated on 25 times SHOCK CASH CALL business but still looks like it forecast earnings for the year to News (5 Jul) of what ended up a has plenty of scope for growth September 2018, we’re sticking £200m share placing by CityFibre despite a recent cyber attack with them for the time being. Infrastructure (CITY:AIM) came (11 Jul). We said in our original as a shock. article on Avesoro Resources The company had previously (ASO:AIM) in June that the gold been scared off by diluting miner’s second quarter results existing investors at what it wouldn’t be that great; and that’s sees as unattractive levels, yet REGULATORY PRESSURES now been confirmed (11 Jul). the latest cash call was well supported. AND CONSUMER DEMAND Regulatory pressures and MEAN NOW IS THE IDEAL consumer demand mean now TIME TO REALLY CHASE is the ideal time to really chase growth, the company believes, GROWTH,“ THE COMPANY WE IDENTIFIED THE and we tend to agree. Buying BELIEVES, AND WE TEND internet service provider OPPORTUNITY AT 142P AND Entanet will give CityFibre more TO AGREE IT IS CURRENTLY UP 6% ON say in end-user take up. THAT LEVEL AT 150.5P Spending on IT across the NHS has been very limited for “ the past 18 months or so, even STILL TO CONVINCE ON in the face of the WannaCry EMERGING MARKETS hacking attack. Therefore Kainos We felt emerging markets (KNOS) sealing a healthcare specialist asset manager digitisation contract in Ireland is Ashmore (ASHM) could” profit Don’t be put off by production encouraging news (6 Jul). from US president Donald figures coming in slightly The shares have been a Trump’s failure to get some below analyst forecast.” This successful trade to date, up of his key policies through is a turnaround story which from 198p in our feature at Congress, which would see was always expected to start the start of January to 290p, capital move from the US into showing improvements on the equal to a 46.5% paper profit. developing economies. production and cash flow side We remain happy to let this We saw an opportunity at later in the year. trade run. 360.7p but the stock is now More robust half year Pawnbroker, foreign exchange down by 4.7% to 343.6p. results (11 Jul) from Amino and precious metal dealer Investors need to be patient.
18 | SHARES | 20 July 2017 WEEK AHEAD
FRIDAY 21 JULY INTERIMS ACACIA MINING ACA CAPITAL & COUNTIES CAPC TRADING STATEMENTS CLOSE BROTHERS CBG EUROMONEY ERM VODAFONE VOD Mobile giant Vodafone (VOD) is Investors should check whether MONDAY 24 JULY a very popular stock with retail sales of GlaxoSmithKline’s (GSK) FINALS investors and they will be glued asthma treatments have further TUNGSTEN TUNG to the group’s trading update on declined when it reports half year INTERIMS 21 July. results on 26 July. In April, sales ASCENTIAL ASCL Particularly interesting will be of its Advair/Seretide products in DIALIGHT DIA any news on the performance of the US fell due to lower volumes RECKITT BENCKISER RB. key markets, such as India, and to and prices. TRADING STATEMENTS assess turnaround potential in its Generic competition against CRANSWICK CWK laggard UK backyard. There’s also Advair has been restrained been media speculation about after the US Food and Drug TUESDAY 25 JULY possible job cuts in Germany. (SF) Administration prevented US rival FINALS Mylan from launching its Wixela GAMES WORKSHOP GAW Inhub product in its current form. PZ CUSSONS PZC INTERIMS CRODA CRDA INDIVIOR INDV DOMINO’S PIZZA DOM INTU PROPERTIES INTU INFORMA INF JUST EAT JE. PROVIDENT FINANCIAL PFG JARDINE LLOYD THOMPSON JLT PROTEOME SCIENCES PRM LLOYDS LLOY RATHBONE BROTHERS RAT FTSE 100 stock Provident NATIONAL EXPRESS NEX SEGRO SGRO Financial (PFG) will be hoping PRIMARY HEALTH PROPERTIES PHP SPECTRIS SXS to reassure its investors ROYAL DUTCH SHELL RDSA TYMAN TYMN when it releases interim results RELX REL on Tuesday. RENTOKIL RTO WEDNESDAY 26 JULY The company released a profit SCHRODERS SDR FINALS warning last month as its plans SMITH & NEPHEW SN. JOULES JOUL to transition its home collection ST JAMES’S PLACE STJ INTERIMS business faltered badly. VESUVIUS VSVS BERENDSEN BRSN The 135 year-old company WEIR WEIR GKN GKN has other divisions which are TRADING STATEMENTS GLAXOSMITHKLINE GSK performing well so it might CMC MARKETS CMCX HAMMERSON HMSO surprise on the upside. We’ll be DAILY MAIL AND HUNTSWORTH HNT watching closely. GENERAL TRUST DMGT INTERNATIONAL KAZ MINERALS KAZ PERSONAL FINANCE IPF LADBROKES CORAL LCL ITV ITV THURSDAY 27 JULY SOPHOS SOPH JUPITER FUND MANAGEMENT JUP FINALS TATE & LYLE TATE STAFFLINE STAF ANGLE AGL THOMAS COOK TCG TULLOW OIL TLW DIAGEO DGE EX-DIVIDEND UNITE GROUP UTG RENISHAW RSW FENNER FENR 1.4P TRADING STATEMENTS TOROTRAK TRK INVESTEC INVP 13P ANTOFAGASTA ANTO INTERIMS PROVAIR PRV 1.5P BREWIN DOPHIN BRW ANGLO AMERICAN AAL SOMERO ENTERPRISES SOM $0.13 COMPASS CPG ASTRAZENECA AZN SSE SSE 63.9P 3I GROUP III BRITISH AMERICAN TOBACCO BATS MARSTON’S MARS BODYCOTE BOY PARAGON GROUP OF COS PAG Click here for complete diary COUNTRYWIDE CWD www.sharesmagazine.co.uk/market-diary SAGE SGE INCHCAPE INCH
20 July 2017 | SHARES | 19 Searching for small cap value
By Daniel Coatsworth and David Stevenson*
Why fund managers are cashing out of star performers like Fevertree to reinvest in better opportunities
here have been some very successful WHY ARE FUND MANAGERS TAKING small cap stocks in recent years, reward- PROFIT ON SUCCESSFUL STOCKS? Ting shareholders with returns equal to The problem lies with valuation rather three or more times their original investment. than anything wrong with the actual The ability to make significant gains is a key factor companies. Many fund managers are sitting behind investors risking their money in smaller on significant paper profits and they feel it companies. is prudent to crystallise some of those gains We believe there could soon be a shift while the equity valuations are high. in investor appetite as a result of sky-high Other fund managers have point blank valuations. Many small cap fund managers ignored the rapid growth small caps – are already taking profit on successful stocks which includes the likes of BooHoo.com including Fevertree (FEVR:AIM), Gear4Music (BOO:AIM) and Purplebricks (PURP:AIM) (GFM:AIM) and Blue Prism (PRSM:AIM) as they – saying their valuations were too expensive see better value elsewhere in the market. Should even before share prices surged. you do the same? ‘I can’t get my head round it,’ says In this article we explain why some fund Downing small cap fund manager Judith managers are reducing exposure to these types of MacKenzie. ‘They are good companies but stocks and where they are reinvesting their profit. the valuation doesn’t make sense. Small We talk to other managers about why they aren’t cap ratings in general are too high. They are tempted by super-high growth stories and we the most expensive I’ve seen in fifteen-plus reveal the secrets of their stock picking success. years.’ Finally, we profile five stocks tipped by some of Richard Powers, head of quoted smaller the leading small cap fund managers as among companies at asset manager Octopus, their brightest hopes for making money in goes as far as calling some small cap the future. valuations ‘scary’.
A SELECTION OF SMALL CAP SUPERSTARS COMPANY 1-YEAR TOTAL RETURN Blue Prism 570% Gear4Music 531% Taptica 345% WANdisco 316% Boohoo.com 273% Purplebricks 267% Keyword Studios 193% Bango 155% Eagle Eye 149% Crossrider 137% Source: SharePad. Data to 13 July 2017 20 | *NoSHARES relation | 20 to theJuly Amati 2017 fund manager with the same name mentioned in this article Searching for small cap value
As a comparison, traditional estate agent Foxtons (FOXT) trades on 2.1 times forecast sales for its current financial year which is more than six times cheaper than Purplebricks. Some Powers at Octopus says he has recently taken examples of some profit in Gear4Music and Blue Prism, Small although he insists both companies remain Cap attractive. Old Mutual has selling down stakes valuations in Gear4Music and Fevertree; Kames has also taken profit on the latter stock. BlackRock has been selling Keywords Studios (KWS:AIM).
To give you an idea of current valuations, Gear4Music and BooHoo are both trading on 76 times forecast earnings for the current financial year; and Fevertree is on 62 times Not forward earnings. everything In general, most investors prefer to buy is decent companies on sub-20 times earnings. expensive Some people, however, would be prepared to buy stocks on a higher rating if they demonstrate rapid growth – such as has been the case over the past few years with some of the companies mentioned in this article. Purplebricks isn’t forecast to be profitable It is important to stress that elevated valuations until 2019 so you cannot calculate a PE ratio on do not apply to the entire small cap sector; far the current year’s metrics. However, you can from it. Fund managers are still finding plenty of work out that it trades on 12.8 times forecast opportunities, as we will discuss in this article. sales for the year to April 2018. Richard Bullas, who co-manages Franklin UK Smaller Companies Fund (GB00B45G7D25), says the FTSE Small Cap index trades on 12.7 times forward earnings, compared to the FTSE All-Share on 14.3 times. He believes the former rating is more in line with the longer term average. ‘Small caps were trading at a 25% discount to the market last summer. That discount has narrowed to about 10%. I wouldn’t say small caps are overvalued, neither would I say they are cheap. It is all about being selective when picking stocks in this area.’ We spoke to numerous small cap fund managers for this article and many said they were now looking at companies valued at less than £400m, some even preferring the sub- £100m bracket. Interestingly, the majority of people we interviewed expressed a preference for companies that generate cash and make a profit.
20 July 2017 | SHARES | 21 Searching for small cap value
the ‘nature, maturity and future growth of their business’. Such criteria might not favour the super-fast growth companies which constantly need more cash, yet this process did previously identify Chasing some of the current star performers on the the market, hence why he has stakes in Fevertree disruptors and Gear4Music.
Many investors have become excited about companies trying to disrupt markets with new technologies or innovative business models, such as robotics firm Blue Prism whose share price has increased 11-fold in 16 months. Bullas says he isn’t tempted by such firms as many are loss making and are likely to The Amati fund’s latest monthly investment continue to require additional funding. ‘I prefer report says some profit has been taken in companies that have reached a tipping point various ‘high flying stocks’. Stevenson confirms with profitability. Some of the high growth this group includes Fevertree, Keyword Studios, stocks can give you amazing returns but they DotDigital (DOTD:AIM), GB Group (GBG:AIM) are very difficult to value.’ and among the large caps, Just Eat (JE.). The fund manager says he doesn’t want ‘We’ve taken some profit on these stocks but to pay something like 80-times earnings as still retain material holdings in each as we still that would be pricing in considerable success, feel valuations are justified given the growth which isn’t guaranteed. ‘I’d rather wait for outlook for these companies,’ he comments. demonstration of profit, even if it means giving ‘This was a pre-emptive measure, as there up some of the share price upside.’ has been a noticeable shift in UK market Downing’s MacKenzie says she always looks dynamics recently, with growth stocks losing at the potential downside to an investment leadership as investors lock in some gains. case, hence why she prefers backing companies ‘We feel this is linked to the step-up in with positive free cash flow and profit, as bond yields, as capital markets anticipate an something to fall back on. approaching inflection point in central bank You might think these more conservative stimulus, and leadership passes to financials approaches will result in only backing slow which are likely to benefit from increasing growth businesses, but that isn’t necessarily the market rates.’ case. Many of the small cap fund managers we interviewed say they are still able to find firms with the potential to be much bigger in the future at a decent price. ‘I’D RATHER WAIT FOR DEMONSTRATION OF For example, David Stevenson, who co- PROFIT, EVEN IF IT MEANS GIVING UP SOME runs TB Amati UK Smaller Companies Fund OF THE SHARE PRICE UPSIDE.’ (GB00B2NG4R39), says he has a strict selection process which favours companies which can – RICHARD BULLAS, FRANKLIN TEMPLETON convert a high proportion of their profit into cash, and which are appropriately financed for “ 22 | SHARES | 20 July 2017 ” Searching for small cap value
At 410p, Quixant presently trades on 24 times forecast earnings for 2018. That’s a fairly punchy rating, although nowhere near as high as the likes of Fevertree and BooHoo. Richard Power at Octopus is another fund Getting manager excited by the stock. He says Quixant in has the potential to be a much bigger company. early ‘Getting a few more tier 1 customers will be transformational for the business. There are also regulatory developments in Brazil and Japan that will open up new markets for them,’ he says. There is a similar valuation debate for You have to consider that many fund managers radiology specialist Medica (MGP:AIM), a stock may have originally bought the star performers flagged to us by Jeff Harris, fund manager at at much cheaper valuations than at present, so Strategic Equity Capital (SEC), who says it ticks owning them now doesn’t necessarily mean a lot of the right boxes for what he desires in a they overpaid for the stocks. small cap business. The key challenge is when to sell – is the At 230p, it trades on 26.7 times forecast current rate of growth sustainable or could earnings for 2018. Investec has a 253p price it accelerate? Is there a risk that the pace of target (based on a discounted cash flow model), growth could slow? The answer would have a which doesn’t imply much upside from the bearing on justifying the current valuation and current level. Therefore investors buying today whether to hold or sell. have to put a lot of faith in the business to Stevenson explains his approach: ‘Our deliver decent growth for years to come. investment research effort targets high quality, Harris bought at the float price of 135p in robust businesses which have the potential to March 2017 and has already enjoyed 70% grow over the longer term at rates faster than valuation uplift on his investment. Nonetheless, the stock market average. his enthusiasm implies this is a stock that has ‘One current example would be Quixant much further to run. (QXT:AIM), the designer/manufacturer of hardware and software solutions for the global gaming and slot machine industry. This is a highly regulated activity, and Quixant is a key service provider to a diverse range of mid- tier customers, but the largest targets are yet to outsource.’
20 July 2017 | SHARES | 23 Searching for small cap value
‘It is the UK market leader and enables The fund’s current holdings include industrial hospital radiology departments to send CT automation software provider Servelec scans and X-rays to a Medica (NHS qualified) (SERV:AIM), education technology firm Tribal radiologist to remotely interpret the scan,’ says (TRB:AIM) and financial adviser IFG (IFP). the fund manager. Harris says he focuses on the ‘four drivers of ‘It has grown strongly due to the growth in equity returns’. First is growth in operating cash scanning activity driven by demographics and flow. Second is re-rating potential. healthcare guidelines alongside the shortage of ‘The public market derivative of earnings radiologists in A&E departments. per share is the PE (price to earnings) ratio. ‘We performed significant primary diligence, We consider this, but do detailed cash flow speaking to healthcare professionals in the UK analysis and use a cash flow based valuation and the US where the market is more mature metric,’ he explains. ‘This is operating cash flow and believe the prospects are good. less maintenance capex over enterprise value, He adds: ‘It is higher growth than (one of our) which takes into account the capital structure.’ typical investments but we believe the business The third driver is corporate activity, both is very high quality with many long term as a buyer and as a target. ‘There is empirical structural growth drivers and has the possibility evidence that transaction values are a better to move into other therapeutic areas.’ gauge of fair value over the long term. We assess precedent transactions and use our network to understand “real world multiples”. ‘We look to avoid companies with impediment to take-out such as a large pension scheme or blocking shareholder.’ What are fund The fourth driver is de-gearing and a detailed managers analysis of cash flow to assess the potential looking transfer of value from debt to equity holders. for Harris believes public markets don’t place today? enough value or emphasis on cash flow, focusing a lot on dividends, which are often paid out of debt. ‘We look at dividends but also the ability to pay down debt from free cash flow. We believe Jonathan Brown, who manages the Invesco that by focusing on all four drivers rather than Perpetual Smaller Companies (GB0033030528) growth or value in isolation, it gives the best fund, says he looks for growing businesses chance of achieving our desired returns.’ which can be twice as large over a five year period. ‘We like companies that have good profit margins and returns on capital which indicate they have something special about their business.’ WE BELIEVE THAT BY FOCUSING ON ALL The Invesco portfolio currently includes IT consultant FDM (FDM) and textile rental FOUR DRIVERS RATHER THAN GROWTH provider Johnson Service (JSG:AIM). OR VALUE IN ISOLATION, IT GIVES Harris at Strategic Equity Capital says he doesn’t seek ‘supernormal’ growth when trying THE BEST CHANCE OF ACHIEVING OUR to spot new small cap investments. Instead, he DESIRED RETURNS prefers ‘longer term sustainable growth driven “ by high IP (intellectual property) and durable business models’.
24 | SHARES | 20 July 2017 ” Searching for small cap value
Livingbridge had done research into the sub- sector which identified the business as a strategic asset in that industry,’ he reveals. The fund’s largest holdings, as of 30 June, Future include deep fat fryer cleaner Filta (FLTA:AIM) take- which floated on AIM in November 2016; over corporate foreign exchange specialist Alpha FX targets (AFX:AIM) which joined AIM in April 2017; and energy procurement services group Inspired Energy (INSE:AIM).
Takeover potential is something that’s also integral to Livingbridge’s investment process. You may have heard the advice ‘never buy a stock purely as a bid candidate’; however, an important Replenishing part of small cap investing is being able to identify a future exit. portfolios Small cap stocks can be very illiquid, so fund managers need to be confident they won’t be stuck holding a large chunk of a business that they can’t sell in the future. One exit route is a takeover. ‘Our style is seeking growth at a reasonable The downside of takeovers is that a fund manager price. Livingbridge has a private equity arm, needs to redeploy the cash proceeds and rebuild so we are well plugged into the corporate their portfolio by adding something new or finance community,’ says Ken Wotton who increasing a stake in an existing holding. manages CF Livingbridge UK Micro Cap Fund Investing in small caps often requires patience, (GB00B55S9X98), formerly called Wood Street so a fund doing well one year thanks to a number Microcap Investment Fund. of takeovers may not necessarily do as well the ‘That side of the business buys and sells following year as a result of new holdings taking companies regularly, so we’ve learnt the time to come to fruition. importance when considering an investment, ‘While we typically like to run our winners, of finding out who the potential corporate we may sell a stock if a company reaches an buyers might be and what they are looking for in unjustifiably and unsustainably high valuation,’ acquisitions.’ says Charles Montanaro, fund manager of Livingbridge is clearly very good at spotting Montanaro UK Smaller Companies Fund (MTU). future takeover candidates. Wotton says 23% of ‘It is also worth pointing out that companies do the holdings in the micro-cap fund since inception leave the portfolio due to takeovers. have been taken over, either when it held an ‘In 2006 we lost no less than twenty of our investment or later on after it had sold out. holdings for this reason. While this is often Examples include Kalibrate Technologies exciting – particularly if the premium is high – it (KLBT:AIM) which is in a bid situation now; and can be frustrating to lose a company that we had System C Healthcare which was on AIM until hoped to hold for decades. being bought by US pharmaceutical distribution ‘We would far rather enjoy steady, conservative giant McKesson. returns over the long-term through holding a ‘We originally invested in System C as one company and management team we know well of our colleagues in the private equity side of and trust.’
20 July 2017 | SHARES | 25 FIVE STOCKS MAKING FUND MANAGERS EXCITED
ATTRAQT GROUP REAL GOOD FOOD CO. FTSE ALL SHARE - PRICE INDEX FTSE ALL SHARE - PRICE INDEX 50 46 48 44 46 42 44 40 42 38 40 36 38 34 1 36 2 32 34 30 32 28 30 26
28 Source: Thomson Reuters Datastream 24 Source: Thomson Reuters Datastream AUG NOV FEB MAY JUL AUG NOV FEB MAY JUL ATTRAQT (ATQT:AIM) 40.5p REAL GOOD FOOD (RGD:AIM) 34p Selected by Matt Tonge of Liontrust UK Selected by Judith MacKenzie of Downing Micro Cap (GB00BDFYHP14) Strategic Micro-Cap Investment Trust (DSM)
Attraqt sells website search, visual Funds managed by Downing struck a deal merchandising and personalised product in June to invest £11.5m in loan notes and recommendation software to online retailers. equity in Real Good Food, best known for ‘For example, if ASOS (ASC:AIM) sends an cake decoration. Fund manager MacKenzie is email to a customer with an offer and that also taking a seat on the board of directors. customer clicks on a link, the Attraqt software Unlike many small caps which tap the will personalise what appears on the landing market for funding just to keep going, Real page, offering those products the customer is Good Food has raised new money because of most likely to buy,’ says Tonge. growing demand for its products and services. ‘The company has intellectual property ‘The expansion capital is coming off the in the software code. It enjoys embedded back of contracts and demand. Confidence distribution network strength as customers in the top line is strong; it’s now all about come to rely increasingly on the product execution,’ says the fund manager. to drive improved conversion of “clicks” to The company has a double digit margin sales. It also sells its products on a monthly sugar paste operation and runs in-store recurring software-as-a-service subscription bakeries for the likes of Waitrose and Marks basis, meaning around 90% of revenues are & Spencer (MKS), says MacKenzie. recurring. She believes Downing’s equity investment ‘Attraqt has a fantastic referenceable (it has taken a 10% stake in the business) customer base in a structurally growing could increase by at least three or four times market. Furthermore the valuation versus in value over time. similar listed companies leaves room for upside.’
26 | SHARES | 20 July 2017 five stocks making fund managers excited
AVATION PENNANT INTL.GROUP FTSE ALL SHARE - PRICE INDEX FTSE ALL SHARE - PRICE INDEX 240 100 95 220 90 85 200 80 180 75 3 4 70 160 65 60 140 55 50 Source: Thomson Reuters Datastream 120 Source: Thomson Reuters Datastream AUG NOV FEB MAY JUL AUG NOV FEB MAY JUL AVATION (AVAP:AIM) 230p PENNANT INTERNATIONAL (PEN:AIM) 87.5p Selected by Ken Wotton ofCF Selected by Matt Tonge ofLiontrust UK Livingbridge UK Micro Cap Fund Micro Cap
The commercial passenger aircraft leasing The Liontrust fund manager likes Pennant, a company has some well-known customers Gloucestershire-headquartered firm which include Virgin Australia, Air France and provides equipment to the defence industry. Thomas Cook (TCG). ‘Its main products are highly realistic Ken Wotton at Livingbridge says Avation ‘is simulators of pieces of capital equipment in a nice position with really good visibility of (such as tanks) which military colleges and earnings’. He adds: ‘It buys aircraft and leases departments of defence use in training them on long-term contracts. It focuses on programs,’ says Tonge. a few types of planes used by mid-range ‘Pennant possesses skills in hardware and airlines. It also has options to purchase software engineering. It has requisite security planes quite far into the future. clearance to be allowed to see the blueprints ‘These are very popular planes and it is of the systems it emulates; and once installed quite competitive to get them new. Avation these systems can generate service revenues could trade its options if it so wished.’ for many years. The fund manager says Avation has ‘For example, it’s been providing training exciting potential with good earnings and a on the AgustaWestland route to expand its fleet. ‘It trades on a cheap helicopter for over multiple and pays dividends.’ thirty years. It’s rich in intellectual property, has very strong customer relationships and operates in an industry with high barriers to entry.’
FFI HOLDINGS FTSE ALL SHARE - PRICE INDEX FFI is the world leader in providing completion 160 contracts to financiers of the global film and TV industry, according to Stevenson. It recently joined 158 the stock market (30 June 2017) at 150p and has 5 subsequently risen in price to 157.5p. ‘Its contracts give insurance against cost and time 156 Source: Thomson Reuters Datastream 30 3 4 5 6 7 10 11 12 13 14 budget overruns,’ says Stevenson. ‘FFI has a history JUN JUL going back to the 1950s and a dominant market share. FFI (FFI:AIM) 157.5p ‘Although the bulk of the risk is sold down to Selected by David Stevenson of TB conventional insurance companies, FFI’s specialist Amati UK Smaller Companies Fund knowledge still generates significant margins.’
20 July 2017 | SHARES | 27 THIS IS AN ADVERTISING PROMOTION
HENDERSON OPPORTUNITIES TRUST:
AIMing for Neil Hermon something different
CONTRARY TO POPULAR belief, seeking opportunities across the that, if firms put their noses to investing in the alternative wide range of diverse business the grindstone, it’s much easier investment market (AIM) can areas found in the small-cap for a small-cap to transform expose you to international as space. revenues of £10m into £100m, well as domestic end-markets, Around 50% of the portfolio then it is for a larger firm to and a wide variety of niche is in AIM, otherwise known as turn £1bn into £10bn. It is this sector specialisms. London’s junior market. Here potentially strong growth of Amid election and Brexit firms are small - tending to be no earnings that translates into uncertainty some investors bigger than around £2bn. stellar share price returns. have been put-off small-caps*, Many of the UK’s youngest and instead opting for the perceived brightest star companies start THE SHEER DIVERSITY OF IT! safety of larger internationally here due to its less onerous rules Hughes points to AIM’s wide exposed companies in the on listing. It comes with risks of variety of sector specialisms. FTSE100. Caution is fair. The course: lighter touch regulation; It drives profitability through necessary Brexit shock absorber greater share price volatility; their strong dominance of of a weakened pound has poor liquidity (the ease in which niche markets, often creating served to import inflation and you can buy and sell shares in growth that is structural – where threaten domestic spending larger amounts); concentrated revenues come in regardless of in the short-term; and clearly revenues on fewer product lines; the health of the wider economy. business uncertainty surrounds concentrated end-markets for It contrasts the FTSE100 where negotiations with the EU and sale. businesses operate in more what this will mean for the UK But if you’re comfortable commoditised product or economy. with taking a bit more risk, customer-sets such as in banking Aware of the uncertainties, capital returns on AIM can be or oil & gas, and are grouped in fund managers James Henderson significantly greater than that of fewer sectors. and Colin Hughes of Henderson the larger FTSE100 listed stocks. He adds that the multi-cap Opportunities Trust – a multi-cap Henderson and Hughes have approach is a key advantage portfolio that aims for out-and- many years’ experience picking of the Trust because volatility out capital growth – have been AIM stocks and point to the fact can be dampened by larger-cap
28 | SHARES | 20 July 2017 THIS IS AN ADVERTISING PROMOTION
positions and diversity added to BLUE PRISM – learn from them and adapt with small-caps, extending the ROBOTS, OF A KIND software processes for the revenue reach of the portfolio Commentators laud the creeping future. Blue Prism’s robotics are into a multitude of weird and disruption created by a world of intelligent but only ‘learn’ in a wonderful marketplaces. increasingly intelligent robots. supervised fashion – you may not The global exposure of AIM The Terminator it may not be, want processes changed outside companies is also perhaps but jobs aplenty are up for of their programmed confines, surprising to some, who automation. Analysts put half of particularly where regulatory traditionally view the smaller all US jobs at risk. or technical specifications are company sector as domestically Blue Prism operates in this quintessential to the task at focused. Indeed Henderson space, in an area called Robotic hand. and Hughes have constructed Process Automation (RPA). The other important point a blended portfolio where the This involves software robots here is that RPA processes can be underlying companies’ revenues whose job it is to take over retrofitted to incumbent systems are broadly split 50/50 between some repetitive back-office without the need for complex international and domestic task performed by humans and integration – ideal for legacy markets. recreate it more accurately, systems or where large scale cheaply and quickly. M&A has taken place. PORTFOLIO POSITIONS The company differentiates Its solutions have been itself through the crossovers generating high returns for RWS – LOST IN TRANSLATIONS their RPA software has with projects, creating ‘sticky’ RWS specialises in translation artificial intelligence (AI). AI is customers who return to services for patenting and life a broad term but largely based commission further projects sciences, two very niche areas. on ‘machine learning’ concepts as they deliver strong results The former is its bread and – the idea robots can use the to their Boards. Their clients butter as the longest running vast quantities of data that are spread across a multitude segment and biggest slice of we or other processes create, of industries and locations, its revenues, operating in 130 recognise patterns they’re not including Fidelity, Bank of Ireland, countries across the world. programmed to find and then IBM, Accenture and Deloitte. Life Sciences became material more recently in 2015 following the acquisition of Corporate Translation. It is a very separate but equally skilled area. The traditional business model is under pressure as creeping technology disruption creates an increasingly commoditised market for straightforward translations. RWS sidesteps these risks due to the fact its work requires much more specialist technical knowledge alongside the linguistics. Even the most advanced algorithms are unable to deal with the complexities, allowing RWS to command higher prices and strong margins.
20 July 2017 | SHARES | 29 THIS IS AN ADVERTISING PROMOTION
SAFESTYLE – It’s a cash generative business SMALL IS MIGHTY FRAMING THE FUTURE helped by its low-cost asset The business interests of small- Safestyle operates in a base. Safetstyle has risen to caps are wide and varied, domestically focused niche become market leader amid particularly those listed on sector, and is a market leader. It’s high margins from economies AIM. Risks come with investing a pure investment play in an area of scale and strong pricing in smaller companies but the called RMI (repair, maintenance power. But its dominance experienced fund managers of and improvement) in the is focused in the North; Henderson Opportunities Trust’s residential housing sector. Here its strategy to ramp-up its construct the portfolio to best they replace old style windows operations in the south to gain manage these risks and diversify with new plastic PVCu ones. It’s further market share forms the the revenue’s geographic and a strong market as the UK has backbone of the investment sector exposure. They believe some of the oldest houses in the case. The niche dominance it this blend should enable the western world and over the past holds is very attractive in an fund to deliver the portfolio’s decade little has been invested in RMI cycle that is swinging to aim of strong capital returns over maintenance. the positive. the long-term. AVERAGE AGE OF HOUSES (YEARS) AUSTRIA BELGIUM DENMARK FRANCE GERMANY IRELAND ITALY NETHERLANDS POLAND SPAIN SWEDEN SWITZERLAND ENGLAND US
35 40 45 50 55 60 Source: Safestyle as at 2016
* Small-caps – Small capitalisation refers to the total market value of a company’s public shares; or in other words, the size of the business. In the UK this means those of around £200m to £2bn in size. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.
The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. [Telephone calls may be recorded and monitored.]
© 2017, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC.
30 | SHARES | 20 July 2017 INVESTMENT FACTS. WHO CAN YOU TRUST?
In uncertain times, when the economy is buffeted by change, it can be hard to know who to trust when investing.
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* The £1 for 1 month and then £12 a month offer is only available to new subscribers. Your first payment will be £1 and thereafter subscriptions will automatically continued, billed at £12 per month unless cancelled. Subscriptions can be cancelled at any time by calling 0207 378 4424 between 8am - 4.30pm on Monday to Friday. No refunds are offered during the cancellations period but all outstanding issues and services will be fulfilled. For enquires contact us at [email protected] INVESTMENT TRUSTS Looking for opportunities among large companies Professional stock pickers in the investment trust space are still finding blue-chip bargains
ondon’s high-flying FTSE the portfolio isn’t high turnover, 100 hit a record high in May, but he doesn’t have a buy and Lclosing above 7,500 for the hold approach. ‘We will move first time and currently trades the portfolio around to where above 7,400. WE WON’T BUY A BUSINESS we see value. We’ve sold out Many large, liquid, WE THINK HAS STRUCTURAL of many companies where we internationally-diverse just find the valuations are too companies are in demand at a PROBLEMS JUST BECAUSE high. And therefore, our portfolio time of economic uncertainty, IT HAS GOT A GOOD looks very different to many particularly as beneficiaries of DIVIDEND YIELD equity income funds.’ lower sterling. Their overseas “ earnings are worth more when ONE EXAMPLE OF AN EXIT translated back into pounds. Merchants recently sold its This is manifesting itself in remaining position in British stretched blue chip valuations American Tobacco (BATS). As but the finest fund managers at management fee in the UK Gergel argued in his recent the helm of investment trusts are Equity Income sector at 0.35%. factsheet: ‘BAT has been a very still unearthing value from the ‘Merchants has one of the strong performer and is now market’s upper echelons. highest dividend yields in the highly valued on almost any sector and we make no” apologies measure. The industry faces MERCHANTS’ MAGIC for that,’ says Gergel. ‘We are unprecedented change, with FORMULA genuine income investors – we healthier e-cigarettes and next One fund with proven pedigree try and buy companies with generation tobacco products in finding value and providing a good yield as part of our disrupting the traditional plump payouts is The Merchants investment process. We yield cigarette business. Whilst these Trust (MRCH). Managed by significantly more than the innovations are not necessarily Allianz Global Investors’ Simon market (the FTSE All-Share), but negative for the companies, the Gergel, the trust provides an we also yield more than other outlook is more unpredictable above average level of income income trusts.’ than in recent years, and and income growth, together Gergel stresses that a high both the large UK tobacco with long term growth of capital, yield strategy has delivered companies carry considerable through investments mainly in strong long-term performance. debt on their balance sheets,’ higher yielding UK large caps. ‘But we don’t buy companies he says, also referring to Classed by the Association of just for the yield. We’re always Imperial Brands (IMB). Investment Companies (AIC) as looking at the total return we can He is however enthused by a ‘dividend hero’, having grown get and we won’t buy a business the likes of FTSE 100 insurer the shareholder reward for 35 we think has structural problems Prudential (PRU) – ‘a high successive years, Merchants just because it has got a good growth stock and a very high- trades at a 4.5% discount to net dividend yield.’ quality company’ bought asset value (NAV), offers a 5.1% An active investor prepared following a Brexit-related dividend yield and has the lowest to take strong views, Gergel says de-rating.’
32 | SHARES | 20 July 2017 INVESTMENT TRUSTS
One recent purchase is the Alastair Mundy. Quick-witted and ranks. Fidelity Special Values FTSE 100 media giant WPP quirky, Mundy manages Temple (FSV) is a special situations (WPP), a formidable dividend Bar (TMPL) with a contrarian fund that thrives on volatility growth stock whose strengths style, seeking undervalued, and uncertainty and offers an include leading positions in the out-of-favour companies with exposure to large cap names. The digital and new media sectors strong balance sheets. Typically, likes of Royal Dutch Shell, Citi and and in emerging markets. WPP he wants at least 50% potential Ladbrokes Coral (LCL) all nestle was bought following some upside from his against-the- in the portfolio. disappointing trading updates grain investments. Mundy uses Elsewhere, The Scottish which lowered the valuation to enterprise value (EV) rather Investment Trust (SCIN) also levels which don’t reflect the than market capitalisation to pursues a firmly contrarian growth potential, in his opinion. ensure his analysis allows for strategy under lead fund manager An alternative trust with a debt, pension deficits and other Alasdair McKinnon. Trading at an similar remit is City of London liabilities. 8.8% discount to NAV, holdings (CTY). A fellow ‘dividend hero’, While the majority of Temple include Tesco (TSCO) and Marks the Job Curtis-managed fund Bar’s portfolio is invested in the & Spencer (MKS), as well as has increased its shareholder FTSE 100, Mundy is happy to Japanese gaming giant Nintendo. reward for half a century. delve into FTSE 250 and small The trust’s leading holdings cap stocks and runs the rule over GREAT COMPANIES, range from Royal Dutch Shell international stocks too. Top 10 GREAT VALUE (RDSB) and Vodafone (VOD) to holdings include mega cap bank Any discussion of large cap AstraZeneca (AZN). HSBC (HSBA), recovering grocer value would be remiss without WM Morrison Supermarkets mentioning revered buy-and- CANNY (MRW) and Lloyds hold investor Nick Train. His CONTRARIANS Banking (LLOY). Finsbury Growth & Income Trust Prowling the market Fellow contrarian (FGT) includes great companies for value opportunities, fund manager Alex offering attractive long-term sometimes at the Wright is also alive to value, stemming from their mega-cap end of the value opportunities ability to compound earnings market, is Investec across the market cap and dividends over time. Asset Management’s The portfolio is spearheaded by veritable dividend machine Unilever (ULVR). Kraft-Heinz’s attempted takeover highlighted the underappreciated value in the consumer goods colossus, which Train argues is only in the foothills of its opportunity to distribute its brands across emerging markets. Kraft-Heinz’s tilt offers a positive valuation read-across for other Train holdings with great brands and emerging markets exposure. These include alcoholic drinks giant Diageo (DGE), luxury leader Burberry (BRBY), lager leviathan Heineken and biscuits, chocolates and beverages behemoth Mondelez. (JC)
20 July 2017 | SHARES | 33 MONEY MATTERS Helping you with personal finance issues Five ways to boost your retirement income Top tips to ensure your income meets your needs in later life
or many investors the thought of funding a F lengthy retirement is a stressful one. Experts suggest aiming for retirement income of 70% of your current earnings, so someone earning £40,000 would target a pension of £28,000 a year. This translates to a pension INCREASE YOUR pot of around £600,000. get from the Government if the It’s a lot of money, but 1CONTRIBUTIONS money is invested into a pension. fortunately there are some The most obvious way to Tom Selby, senior analyst at AJ simple steps you can take to boost your income in Bell, says investors should aim to ensure your retirement income retirement is to save more save the equivalent of half their matches your desired lifestyle. money. If you invest £300 a age at the point at which they month for 20 years and achieve start contributing into a pension. an annual investment return A 26 year-old would target a total of 5%, you’ll amass savings of contribution of 13%, while a 40 £123,310. If you increase your year-old would aim to put away monthly contribution to £500 20% of their salary. a month, it produces a savings You can also add lump pot of £205,517. sums to your pension pot, for These figures don’t take into example if you get a bonus or account the 20% tax relief you’ll inheritance.
Kate Smith, head of pensions This option isn’t open to at Aegon, claims someone everyone as it will depend on 2 with an average retirement pot your line of work and health. making the average level of ‘It is far better to save and contributions could see their then choose to keep working pension income increase by that to have it forced upon two thirds if they defer you in order to maintain retirement for five years. your lifestyle,’ says Fiona Tait, ‘This is a result of the triple technical director at Intelligent boost of continued investment Pensions. ‘Having more savings RETIRE LATER growth on the pension fund, will also provide you with a If you work for a few years longer further contributions being added cushion if you suffer from ill- and keep saving into a pension and, ultimately, fewer years to health in later life which might it can dramatically improve your spread the fund over once no impact on your ability to extend retirement income. longer working,’ she explains. or obtain employment.’
34 | SHARES | 20 July 2017 MONEY MATTERS
the funds you invest in. If your priority is keeping costs down, you might want to consider investing in low-cost passive funds which track an underlying index or benchmark,’ he says. Modern personal pension plans tend to have lower FEES charges so it’s worth checking whether you have any plans DON’T OVERPAY that are more than 10 years old. You could transfer the funds to 3 4WITH FEES a newer product, although it’s Paying higher fees – platform important to check whether fees, pension provider fees and there any guarantees or specific fund fees – will reduce your policy conditions which would income in retirement. be lost on transfer. A 25 year-old saving £50 a ‘Another point is to check INVEST month and earning returns of that you are only paying for the APPROPRIATELY 4.5% per annum net of fees will services which you are using,’ You can increase your pension accumulate £64,200 by age 65. says Intelligent Pensions’ Fiona pot by investing in assets that But if they only achieve returns Tait. ‘If for example you are in a deliver higher returns, for of 4% per annum, because fees self-invested personal pension example shares. According to the are 0.5% higher, their pot at age (SIPP) and are not using the Barclays Capital Equity Gilt Study, 65 will shrink to £57,000. wider investment range available shares have delivered a real AJ Bell’s Tom Selby warns you are effectively paying for return (after inflation) of 5.6% a that seemingly small differences something you don’t need.’ year over the last 50 years. Cash in charges can balloon over To avoid losing track of your has returned just 1.4%. time, potentially reducing workplace pensions you could Higher growth assets tend to your final pot by tens of consolidate them with one be more volatile – the prices can thousands of pounds. provider. This will give you a swing a lot over short periods. ‘Make sure you shop around clearer idea of how much your This means they’re more suited to get the best deal on both pension is worth, but again you’ll to people with an investment your platform provider and need to watch out for charges. time horizon of at least 10 years. ‘If you are younger, you can usually take a longer term view management consultant at and accept some volatility,’ Mattioli Woods, says if you can says Ben Gold, head of pension make pension contributions as investment at Xafinity. ‘If you a higher rate tax payer you’ll are closer to retirement you benefit from tax relief of 40%. need to very carefully consider When you retire, if you the balance between returns control your withdrawals from and stability.’ your pension fund you could be People who aren’t used MANAGE YOUR classed as a basic rate taxpayer, to investing could consider which means you’ll pay tax on a managed fund, where the 5INCOME TAX withdrawals of 20% instead of investment decisions are made Managing your current and 40%. for you in line with specific future income tax liability This effectively boosts your investment objectives and risk can save you thousands of net income in retirement by parameters. pounds. Adrian Mee, wealth 20%. (EP)
20 July 2017 | SHARES | 35 MONEY MATTERS Helping you with personal finance issues The importance of shopping around for your pension We look at the key issues to consider for managing your retirement money
hether you’re signing up to a Wbroadband provider, W W choosing an electricity supplier or buying travel insurance for a holiday, it pays to shop around for the best deal. And it’s no different when you’re looking to turn your pension savings into retirement income. In fact in some circumstances scouring the market could leave you thousands of pounds better off. The Financial Conduct HYBRID: a few providers has a great calculator to get Authority (FCA), the UK regulator, offer products that combine you started: has raised concerns not enough drawdown and annuities. www.moneyadviceservice.org.uk people are shopping around These are mainly sold through for their pension. So what do independent financial advisers. SHOPPING AROUND you need to think about as Given the first two options – FOR DRAWDOWN you prepare to take this huge annuities and drawdown – are Going into drawdown is different financial decision? by far the most popular, that’s to buying an annuity in that you where we’ll focus. can switch provider or change CHOOSING YOUR your income level at any time. PREFERRED ROUTE SHOPPING AROUND So rather than shopping Before shopping around the FOR AN ANNUITY around at the point you market you need to decide how If you’ve decided you don’t enter drawdown, you should you want to take an income from want to take any investment be regularly reviewing your your retirement pot. There are a risk and would prefer a secure, provider choice, withdrawals and number of different routes you guaranteed income for life, investment strategy – at least can go down depending on your it’s vital you get the best deal once a year. retirement income needs: possible – because there is no It’s worth doing this even if going back. your priority is getting your 25% ANNUITY: a product sold by This means making sure you tax-free cash. insurers that guarantees to pay a get the best rate on offer and Remember the bulk of your set level of income for life. ensuring you get the right type pot will remain invested and it’s of annuity. important you’re comfortable DRAWDOWN: entering If you have a health condition with both the risks you’re taking drawdown means your funds or are a smoker, for example, you and charges you’re paying. remain invested. You can choose could get a better ‘enhanced’ to take whatever level of income income from certain providers. Tom Selby, you like from your pot. The Money Advice Service Senior Analyst, AJ Bell
36 | SHARES | 20 July 2017 LARGER COMPANIES Are investors focusing on the wrong catalyst for Ryanair’s future growth? Investors shouldn’t only look at ticket sales to judge the health of the airline
earnings growth at low-cost airline Ryanair (RYA) could be driven by higher ancillary sales, Finstead of aggressively slashing ticket prices to drive sales volumes, according to Deutsche Bank. Traditionally, the market focuses on ticket prices and load factor, which is the percentage of available seats on scheduled flights occupied by passengers. ANCILLARY In the year to 31 March 2017, REVENUE NOW average fares fell 13% to €41 while ACCOUNTS FOR load factor was up 2% to 96% in the year to June 2017. Deutsche Bank analyst Anand Date 27% believes that investors are fixating on OF RYANAIR'S the wrong factor at Ryanair, flagging that REVENUE over 75% of group profitability is ancillary a range of €1.4bn to €1.45bn in the derived. financial year to 31 March 2018. ‘Ryanair is, in our view, still in the preliminary Ancillary revenue is becoming a bigger part of stages of generating a significant uplift in its Ryanair’s business. The airline says it is currently ancillary profitability’, comments Date. on track to reach 30% of total sales from this Sales in this division are generated from non- source of income by March 2020. tickets sources, including baggage fees, on-board Revenue generation from ancillary products has food, car hire and hotel bookings. been strong in the past, reflected by a 13% sales If Ryanair focuses on ancillary sales growth jump to €1.8bn for this part of the business in the to help offset its low ticket prices, this could year to 31 March 2017. That represented 27% of theoretically help to boost overall profitability. group revenue. However, news (19 Jul) that companies will Deutsche Bank is not the only one flagging no longer be able to add surcharges for UK card ancillary services as a potential growth driver. payments from January 2018 is negative for Davy analyst Barry Dixon says ancillary revenue Ryanair’s ancillary revenue. Airlines are among growth, improved economics from Boeing Max the worst offenders with 2% to 3% typical fees for aircraft and cash flow generation over the next customers who pay for tickets with credit cards. five years could help push Ryanair’s share price The card fee clampdown is part of an EU rule to €25 over the next year. It presently trades change. at €18.47. Deutsche Bank says ancillary sales could be supported by an increase in the number of SHARES SAYS: passengers flying, a greater breadth of ancillary Buy at €18.47. (LMJ) services and higher spend per customer. BROKER SAYS: 15 3 2 Group net profit is expected to rise by 8% to
20 July 2017 | SHARES | 37 SMALLER COMPANIES Gateley offers the full service We debate the merits of investing in a law firm
nvesting in the only law firm listed in London, Gateley (GTLY:AIM), may not initially appear a Isound decision. These companies are ‘people’ businesses, their tangible assets are their lawyers who make money through client instructions. Others in the legal market have seen their companies decimated by high profile (high billing) partners leaving for pastures new and in some cases taking their clients with them. Gateley though has had a great time on the stock market since floating in June 2015. Its share price has shot up 85% on its 95p IPO price and it has attracted quality lawyers from global law firms such as Hogan Lovells and King & Wood Mallesons. This is a company clearly on the up, underpinned by a solid dividend. Its financial results for the year ending 30 April 2017 make for impressive reading. Revenue was AS WELL AS up by 15.7% to £77.6m, pre-tax profit up 18.8% BEING IN 7 MAJOR to £13.1m and basic earnings per share increased CITIES IN THE UK, 15.3% to 9.43p. GATELEY HAS AN acted for consultancy OFFICE IN FULL SERVICE EY and bank Macquarie DUBAI Gateley covers a wide variety of legal practices, Equipment Finance over unlike Aussie-listed Slater & Gordon which matters of corporate crime. focuses on personal injury claims. The firm offers As well as being in seven major cities in the UK corporate, family, private client and family advice as including London and its base in Birmingham, well as having a fairly sizeable dispute resolution or Gateley has an office in Dubai. With its full service litigation team. model and chief executive Michael Ward looking at This diversity can work well for law firms. When acquisition targets, the firm has growth potential. there’s a market downturn, not so many deals are being done so the corporate practice gets hit. At THE FUTURE the same time, litigation disputes tend to come Going forward, Ward says he intends to distribute to the fore in up to 70% of profit after tax to shareholders, GATELEY (HOLDINGS) FTSE ALL SHARE uncertain times as adding that depending on where the share price is, 200 Rebased to first 190 parties are keen to the yield should be around 4%. 180 recover damages 170 160 if the market is SHARES SAYS: 150 Buy this full service law firm. It has good growth 140 having a wobble. 130 prospects and pays a healthy dividend. (DS) 120 Gateley also 110 has an impressive 100 Source: Thomson Reuters Datastream BROKER SAYS: 2 0 0 2016 2017 client list, having
38 | SHARES | 20 July 2017 SMALLER COMPANIES Sound Energy switches focus to Morocco Failure in Italy creates an opportunity to buy shares at a cheaper price
ne of AIM’s 2016 success stories, shares at just over 47p. Sound Energy (SOU:AIM) is in After a mixed result from drilling on Orecovery mode after a big sell- its Sidi Moktar licence in central off in response to a disappointing Morocco, the company plans to take result from the Badile well in Italy. the rig back to its Tendrara block in We think the shares are attractive the east of the country and resume at the current 53p level. operations at that location. Badile was a highly anticipated An independent audit of reserves gas exploration well onshore Italy at Tendrara and a final investment which had been in the works for decision on a development plan for several years, so it is unsurprising the asset are expected by the end the market reacted badly to the of 2017. Both could provide catalysts news it had failed to land a commercial for the stock. discovery. Now at roughly half its 12-month high, the future direction of the share price depends on SHARES SAYS: the company’s progress in Morocco. While the recent news was disappointing, the Directors have been backing the company reaction to the Badile well looks overdone and with their own money. Greenberry, connected we see scope for upside. (TS) to non-executive director Marco Fumagalli, acquired 200,000 shares at a price of 49.58p. BROKER SAYS: 1 2 0 Chief executive James Parsons bought 53,158
Arena gets its Monthly sales at Thalassa abandons skates on Venture Life hit subsidiary sale five-year high ARENA EVENTS is hoping to raise OIL SERVICES MINNOW Thalassa £60m as it seeks an initial public MARKETING EFFORTS AT (THAL:AIM) is shelving plans to offering (IPO) on AIM on 25 July. Venture Life (VLG:AIM) appear sell its marine seismic subsidiary The business provides temporary to be paying off as its UltraDEX WGP Group after it determined venues, seating and interior products, including toothpaste third party proposals did not fixtures for things like seasonal and mouthwash, in June enjoyed provide shareholders with ice rinks. their highest month of sales over sufficient value. It works on big sporting the last five years. Noting a gap between its tournaments such as Wimbledon The company promoted the market value and what it sees as and the Ryder Cup golf product range in the UK through the intrinsic value of its assets, competition. It claims 70% TV advertising and promotions the business is upping its share recurring revenues and operates through independent coffee buyback programme from £2m across the globe. (SF) shops. (LMJ) to £4m. (TS)
20 July 2017 | SHARES | 39 UNDER THE BONNET We explain what this company does The rapid growth story flying under the radar Velocity Composites serves a multi-billion pound industry
urnley-based Velocity Composites (VEL:AIM) Bmakes aerospace composite material kits. It joined the stock market in May but remains under the radar of most investors. We think it is worth a closer look. A composite is an umbrella term to describe a number of materials, usually made up of two different components that together have very different properties than the individual elements. Bridges gives the example in-house, they would have to buy to facilitate this growth. This of ‘pre-impregnated materials, all the composite rolls in advance is where Velocity Composites’ such as woven fabrics pre- and store them in freezers as the efficiencies make it a unique impregnated with resin’. materials are fragile. offering. ‘We don’t manufacture any Then they’d have to cut the David Buxton, an analyst at materials; there are already large material into two dimensional the company’s broker FinnCap, multinational material suppliers shapes after defrosting them. says Velocity’s growth ‘is driven who are on pricing agreements This would lead to wastage of by a number of factors including with the likes of Airbus and materials; essentially in-house volume growth on existing Boeing,’ explains chief executive production is inefficient. aircraft programmes, recently Jon Bridges. Bridges says: ‘By us doing all won customer contracts ramping ‘Neither do we manufacture that work upfront for them, it up over the next two years and any parts as there’s already a makes it more efficient, less the start of production on new large parts manufacturing supply wasteful and more repeatable aircraft platforms’. chain feeding into the aircraft so they focus on their core assembly line.’ business.’ WHY NOT CUT OUT THE MIDDLE MAN? SO WHAT DOES THE PRODUCTION CHALLENGES While it would be inefficient for COMPANY DO? The entire composites an aerospace parts company to Velocity sits between the industry is facing a challenge make what it needs in-house, material and manufacturing to scale up its production as surely that business could just companies and consolidates components transition from take Velocity’s entire process the diverse supply chain. Its kits being niche towards volume and make it a division of their remove waste and shorten the manufactured goods. company? length of production process. The composites supply Bridges dismisses this notion If an airline materials chain and logistics will need as his firm has spent 10 years manufacturer tried to do this investment and change in order developing bespoke software to
40 | SHARES | 20 July 2017 UNDER THE BONNET make its business as efficient as profit increased by 19% to possible, thus hard to replicate. £1.9m. By cutting raw materials to BREXIT MAY IN FUTURE Don’t be fooled by a pre- size before the manufacture tax loss of £35,000 as it of the structural composite RESULT IN SOME SHIFT IN doesn’t accurately represent components, it can provide these PURCHASING PATTERNS, the underlying health of the kits in a timely and competitively business. priced way. ALTHOUGH AT THIS STAGE, That negative figure was a And by focusing on such a THIS IS A MATTER OF result of costs associated with niche part of the market, it has “ its stock market flotation and LONGER-TERM CONJECTURE refined its processes to such an investing in a new facility in extent that companies are happy Fareham. to outsource what can be an The company is forecast to expensive albeit essential part of report a full year pre-tax profit aeroplane manufacturing. of £0.5m in the year to October 2017, rising to £3.8m in 2018 EVOLUTION AND According to FinnCap’s Buxton, and £6m in 2019. Those are very KEY CLIENTELE the company is forecasting sales attractive levels of growth. The use of composites in aircrafts growth from existing customer has been growing steadily. Over programmes who have” ramped RISKS TO CONSIDER the last 15 years their use has up their production of planes The civil aerospace industry is grown from marginal to over such as the B787 Dreamliner, subject to cyclical up and down 50% of the structural body of A350 and A330neo. swings. As for Brexit-related risks, modern wide body jets. we note aircrafts and their parts This trend is forecast to SHARES HAVE YET are tariff-exempt under WTO continue as there are commercial TO TAKE OFF (World Trade Organization) rules. pressures to reduce the weight At 86.5p, Velocity Composites ‘Many of the company’s current of planes to save on fuel costs. is trading only marginally and potential customers are These commercial above its 85p IPO (initial public involved in the Airbus supply considerations are coupled with offering) price. chain. These customers have a regulatory pressures for aircrafts Buxton says this represents complex, integrated, multinational to improve their fuel efficiency an opportunity not a supply chain. The location of and emissions. Composites are disappointment. He claims Airbus’s suppliers, and the jobs also stronger and more durable that nothing has changed in attached remain a politically than aluminium. the group’s strategy, market sensitive issue,’ says Buxton, This growth in use of conditions or production discussing the Brexit issue. composites is an obvious boon visibility. ‘We believe the current ‘Brexit may in future result for Velocity as the likes of valuation is compelling, standing in some shift in purchasing aerospace giants like Boeing at a significant discount to patterns, although at this stage, and Airbus have huge order aerospace sector, while the this is a matter of longer-term backlogs to fulfil. growth story provides significant conjecture. Velocity’s strategy attractions.’ to expand geographically would VELOCITY COMPOSITES The analyst believes the provide a defence to this issue.’ FTSE ALL SHARE 96 share price could hit 144p in 94 the next year, representing 66% 92 SHARES SAYS: 90 potential upside. 88 Velocity Composites is a vital 86 Financial results for the six 84 component of multi-billion 82 months to 30 April 2017 indicate 80 pound industry. A speculative 78 Rebased to first a growing company. Revenue 76 Source: Thomson Reuters Datastream buy at 86.5p. (DS) MAY JUNJUL was up 31% to £9.3m and gross
20 July 2017 | SHARES | 41 3 STOCKS TO PLAY THE DIGITAL HEALTHCARE REVOLUTION EMIS, SERVELEC AND KAINOS AMONG THE COMPANIES USING TECHNOLOGY TO IMPROVE PEOPLE’S LIVES
n a world where people could live until 100, it is Berenberg analyst Asad Farid thinks an age no surprise health services are struggling to treat of digital solutions is nearer than many think, an ageing population requiring increasing levels speculating the digital healthcare market will be I of care. worth $140bn by 2026. One solution to this issue is technology, which could relieve pressure on the NHS by allowing DIGITISING MEDICAL RECORDS people to have video consultations or help monitor EMIS manages the Patient.info website, which their health electronically. It could also drive provides healthcare information, while its Patient electronic medical records, helping people to easily Access tool lets patients book appointments, order change GPs and share information with other care prescriptions and view their medical records. providers. The healthcare software firm wants to monetise For investors interested in tapping into digital its direct-to-consumer platform Patient by boosting healthcare trends, UK-listed EMIS (EMIS:AIM), user numbers, improving advertising and media Servelec (SERV) and Kainos (KNOS) work in this sales, and developing an online market platform to area. No companies on the UK stock market procure clinical services. provide video consultation services, although this N+1 Singer analyst Chris Glasper says this could may change in the future. be ‘transformative’ by adding more than £10m The chief executive of life sciences resource worth of extra profit over the next five years. hub Sarah Haywood believes GP apps have the Healthcare IT supplier Servelec develops ‘potential’ to take the strain off the NHS, but says electronic patient records, administration and flow companies need to show the positive effect of the systems used by organisations such as the NHS. technology and people have to adopt it. It has been a volatile year for Servelec as it ‘Digital tech can put tools into hands of patients. recovered from a challenging UK market for its Whether it makes them change is down to remote telemetry units, although Glasper thinks behavioural science and how effectively the tech is these problems are behind the company. speaking to the patient,’ says Haywood. Servelec chief executive officer Alan Stubbs is
42 | SHARES | 20 July 2017 confident the company can take advantage of Dr Now chief executive Lee Dentith believes integrated systems which enable care providers to his platform is relieving pressure on out-of-hours work together. services by dealing with appointments that don’t Stubbs is also excited about healthcare becoming necessarily require a consultation such as chronic ‘mobile’ as it will allow people to become involved conditions. in their own care programme. Dr Now plans to allow select clinical commission Kainos offers the Evolve EMR platform that groups, which plan and commission healthcare streamlines services and ensures NHS staff have services for their local area to use the app for free. access to accurate information about their patients. Internal projections suggest this could help cut The company wants to help the NHS become costs of approximately £75m annually by relieving paperless by 2020, which would cut costs and pressure from A&E and out-of-hours services, and ensure medical records are safe through integrated reducing wasted medicines between September data. However, integrated data needs to be 2017 and September 2018. properly developed to ensure it is safe, an issue exposed by the recent cyber attack on the NHS. HOW BIG DATA CAN DRIVE INNOVATION Edison analyst Katherine Thompson believes big REMOTE CONSULTATIONS AND data is a huge opportunity for the healthcare INTELLIGENT TECH sector as it could determine if people are at Outside the stock market, private companies are risk of certain diseases through the analysis of developing game-changing products. One of these anonymous data. is Dr Now, a mobile platform that connects patients She highlights EMIS Health’s collaboration with with GPs through a remote video consultation for the University of Nottingham, which can more £42.50 per session. Other companies working in accurately predict if a person is at risk of bowel the same area include Push Doctor and Babylon. cancer using a web calculator. (LMJ) 2 MILLION 5 HOURS Is the approx. amount of people Is the amount that life in the UK that Dr Now’s mobile expectancy has been rising by platform covers. every day according to the NHS.
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