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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Steve Davies, Manager of the Jupiter UK Growth Fund to give his three stock picks.
Hi, Steve.
Steve Davies: Good morning.
Wall: So, what's the first stock today?
Davies: So, Lloyds Bank (LLOY) is the biggest single position in the fund. We've had some really good news from them in the last few weeks that they are now starting to pay a proper dividend. I think there is a lot more to come on that front and this is at a time when a lot of the big resources companies, for example, are cutting their dividends. So, there is a gap for Lloyds to step up into. The profits of the business have really improved dramatically over the last five years. It's been more, can we as shareholders see those profits as dividend?
So, the regulators have been demanding more capital to stack up on the balance sheet. We've kind of reached the point where enough is enough on that front. And then the other big drain has been PPI, and we're not done there yet, but hopefully, we're going to get a time bar on that. So, as those things drop away, the underlying profits of Lloyds should come back increasingly to shareholders and should support a much higher share price than we've got at the moment.
Wall: And as you say, it was a leap of faith initially those that took a bet on Lloyds, but it looks like that bet is coming off?
Davies: Yeah, I think that's the key now. This isn't something that's two or three years away. We've had real concrete news. They are paying 0.50p to 0.75p dividend this year and it could be an awful lot more in 12 months' time.
Wall: And what's the second stock today?
Davies: So, one I really like is quite a recent addition to the fund is Merlin Entertainments (MERL), so the operator of Alton Towers and Legoland and things like that. And I struggle to find a more visible long-term great story. So, they are going to be opening Legoland in all sorts of places. I think it's Dubai this year, Japan and Korea over the next couple of years, but increasingly in China and other parts of Asia as well.
So, I can see their growth story out to 2030 and there are not many companies particularly in the top end of the FTSE 100 that you can say that about. I've been tracking it for a long time since it IPO'ed. It has always been a bit expensive. It's a company that lots of people like, but the opportunity came last summer, the market soared off and they have the accident at Alton Towers and that was our chance to get involved.
Wall: Of course, we have seen the pattern before where a company that's successful in the U.K. expands internationally and actually they don't pull it off. What sort of gives you faith, especially the time when global economy look uncertain and growth is being downgraded, is this the right time?
Davies: I think the key to them is that they are piggybacking on the strength of the Lego brand and through the combination of the movies, the broadening of the franchise the Lego brand is doing that gives them a very good head start. It still means you've got to pick the right local partners, particularly when you get involved in China or markets like that, but they are not sort of flying blind in that sense.
Wall: What's the third and final stock?
Davies: So the third one is – it's a less well-known company, it's called Sirius Minerals (SXX). So, they are building a huge fertiliser mine up in Yorkshire, creating a lot of jobs out there. There is a lot of talk in the market at the moment about mining stocks that are flying up 20% and down 20% on a daily basis. I don't want to get involved in those. This is something where I think I could add much more value. We've been involved in it for three years already. I own about 7% of the company.
We're going to now spend the next four five years actually building the mine, but they put out a feasibility study recently and I can see them being capable of generating more than $1 billion of profit once the mines up and running and the market cap of that company is only $300 million, $400 million at the moment. So, a proper patient long-term investment, but with a really exciting upside.
Wall: And something you'd really like to hear about here in a British industry being supported and growing.
Davies: Yes, exactly. These big projects is something of rarity and it's going to create a lot of new jobs up on the Yorkshire where they are much needed. So it's nice to be able to supporting that as well, that sort of on top of the financial argument as well.
Wall: Steve, thank you very much.
Davies: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
