Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today is Dan Nickols, Manager of the Old Mutual UK Smaller Companies Fund.
Hello Dan.
Dan Nickols: Hi.
Wall: So you are Gold-rated by our analysts, I don't know if that means there is any more weight in these stocks picks, but what's the first one you have for us today?
Nickols: The first one I have today is a share that I've been buying into recently myself, it's Crest Nicholson (CRST), the house builder. Really I would pick this out for both of sector reasons and then clearly stock-specific reasons. If we think about the sector more widely first, house building is a contagious issues in this country and it attracts a lot of comment and actually the sentiment swings in the share price terms can at times be sort of quite marked.
But I think for me the real solid bedrock, if you like, to this whole sort of proposition right now, we don't build enough houses in this country.
Wall: 18 million I think is the sort of – the mark between what we need and what we have.
Nickols: I think over time, that's probably right. Job security is improving. I think people slowly, but people are feeling a bit better off, mortgage availability is improving and then most critically, the market for buying land is actually extremely benign. So, if we think about the pre-credit crunch era, a lot of private operators were playing. They can't play anymore. The banks don't want to fund them. The quoted house builders really have a whole market to themselves which means they can buy land on very attractive terms. Crest Nicholson clearly is benefiting from that dynamic.
Wall: You've talked there about how much easier it is to build houses, but of course, when you build houses, you need people to buy them. How much interest rate risk play a part in a stock like this? I mean, the predictions from the Bank of England yesterday showed that majority of investors think that it's not going to be above 1% before 2020 but even going to 1%, that's doubling what base rate is now. Is that a concern?
Nickols: Yeah, clearly, you have to so realistic. Yes, it's something that we have to factor in. I do think nonetheless actually interest rate rises will come through very slowly and the trajectory will be very shallow and I think the Bank of England will be extremely mindful to make sure that these are not done at a pace which causes stress to consumers. So, I do think actually against that benign backdrop the market should remain very solid.
Wall: What's the second stock?
Nickols: Okay. So, the second stock is a business called 4imprint (FOUR) which sits in the support services sector and in many ways – for me this is classic smaller company stuff. So, what does it do? Well, actually this may sound slightly prosaic, it does sources and sells merchandising materials.
So, we think about, there are some promotional umbrellas that get sort of printed up in company's colours or T-shirts, these sorts of things. Again, that may sounds very prosaic, but the reason I like this is that actually 90% of this business is in the U.S. That economy clearly is improving, corporate America is in it would seem sort of pretty rude health.
At the same time, there is quite interesting structural changes going on in the industry. So, as people use the Internet, use online channel more and more to buy these sorts of products, 4imprint as a business with small market share, so 2% to 3% market share and yet probably the largest single operator in that market, is very well placed to market more effectively than most of its competition and hence gain share and we are seeing strong evidence of that having come through in 2014 when you saw something like 25% rates of top-line growth.
Wall: What's the third stock?
Nickols: Okay. So, the third stock is actually in the property services area, so the business I've been looking at would be Savills (SVS). It's got a well-known business, a very well-run business and it's active in a range of property-related spheres from transaction advice, to agency work, to facilities management as well. Coming to the nitty-gritty, the reason I like this share is quite simply because I think it's very cheap.
They did a very interesting deal last year. So, they bought a commercial property agency called Studley in the U.S. last year and as we look forward into 2015, our sense is that actually most of the profit progression that you're likely to see in 2015 compared to 2014 is underpinned by that transaction alone. So it leaves them very little to do in terms of organic progress to actually sort of at least deliver the market numbers.
I suppose the other two sort of key attributes to this for me would be we think there is an element of optionality here. They have a big Asian operation which has not be stellar over the course of 2014, but as it's Hong Kong focused we think can actually improve its performance in 2015.
Finally, I mentioned the valuation before, but actually compared to some of the global peers like Jones Lang LaSalle or CBRE, these trades at a meaningful discount. Those sorts of companies trade on P/Es of about 18, 17 times. So, I see no particular reason qualitatively why there should be that sort of discount. So, I think you've got good valuation support, you've got good growth and I think it's a very high quality franchise too.
Wall: Dan, thank you very much.
Nickols: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
