Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today to give three stock picks is Mark Gordon James, senior investment manager of the Aberdeen Emerging Markets Fund.
Hello, Mark.
Mark Gordon James: Hello.
Wall: So, what's your first stock today?
James: The first stock I'll choose is Jerónimo Martins (JMT), which is listed in Lisbon in Portugal, but it actually owns the biggest staples retailer in Poland with a market share of around 50%. It's a contrarian stock pick, because the retail sector in Poland has been under pressure for some months, and indeed the Jerónimo Martins share price has been under pressure for a long time.
But it's a fantastic business, it's a leader in what it does, it's a low-cost producer, a fantastic franchise, got great growth ahead of it. It's got expansion opportunities outside Poland now and they've launched an operation in Colombia and it's trading very attractively.
So for a manager like us, who undertakes our own proprietary research, of knowing the company for many years and the management team and have trust in them. We believe that they'll be out of this consumer suffering cycle in Poland quite soon, hopefully by the mid-half of next year.
Wall: We know the situation in Europe has improved, but it still hasn't improved to the same level that the U.K. and the U.S. has. How sort of exposed are you to macro, to politics, the economy in that region?
James: I mean, all the companies operating in the region will be exposed to the macro side, but if fundamentally the business itself is strong, robust, and there is a clear competitive advantage that gives it an edge, we can still grow into slowing patches of growth. Then when things get better, these companies will capitalise on it. So we are here for the long-term as it were, rather than just a short-term trading goal.
Wall: What's the second stock?
James: Right, the second stock is a shopping mall operator, developer, listed in Chile in Santiago called Parque Arauco (PARAUCO). They have the leading shopping malls across the Andean region, so including Peru and Colombia. They are growing their space at about 15% per year. Their rental income is predominantly fixed, fixed rental income adjusted for inflation.
So the cash flows are extremely stable; and a 15% space growth per year, you'll see that company doubling in size approximately every five years. So what's not to like on around 15 times earnings, is cheap for a great businesses with solid assets.
Wall: Is this presumably just a commercial property play?
James: It's pure shopping malls. They do allocate land around their malls for offices to be built and they sometimes assist in that to add value to the shopping mall and make it a destination.
Wall: So, how much then is that dependent on property prices or is it just a rental income that you are getting from that?
James: Well, they are consolidating really the informal retail sort of markets. So they are providing a shopping mall in a part of town in a suburb or a new city, where there isn't really probably another shopping mall in existence. So it provides space for international brands in particular to come in and take space in retail for the first time in that country.
So for instance, they are building $250 million mall in Colombia in Bogota, which will be the first of its type and of its quality. So, the international brands will gravitate to that mall. So, it becomes this kind of fantastic destination, high-quality asset.
Wall: So there is not exactly a Westfield (WFD) versus Oxford Street situation then?
James: It's more like a Westfield versus sort of much lower order shopping streets.
Wall: What's your third stock?
James: Right, the third one is a Singapore listed company called Petra Foods (P34) and they are the leading brand is confectionary chocolate company in Indonesia. They have about 70% market share, so they dominate the Nestles and the Mars and Hersheys of the world in one of the most populous countries in Indonesia.
We think they can sustain earnings growth at high-teens even low 20s for many, many years to come, a very tiny proportion of Indonesian e-chocolate just around 10% of population regularly at the moment and for the most part they are very, very cheap chocolate bars around $0.10 each.
So this company with distribution across the archipelago will benefit from increasing consumption, increasing scale, innovation they have in the brands and I guess – and ultimately I predict they probably would be a take-out target, but many years down the line.
Wall: How dependent are they on the commodity prices on the underlying cocoa future price?
James: That will have margin impact, but key is their ability to pass on this cost pressures to the customer, so they have to keep being innovative in the products they produce, come up with new brands and ultimately produce something that people will buy and they get the prices – they get the cost pressures through eventually
Wall: Mark, thank you very much.
James: Thank you very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
