Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Job Curtis, Manager of the City of London Trust (CTY) to give his three stock picks.
Hello Job.
Job Curtis: Hello.
Wall: So what's the first company you'd like to highlight?
Curtis: My first company is Hammerson (HMSO) which is a real estate investment trust.
Wall: And why do you like Hammerson.
Curtis: Well I like Hammerson because it's on a discount to its net asset value of almost 20% at the moment. It invests purely in retail property. It's 25% in France, the other 75% is in the U.K. I think there is an opportunity ahead of the June 23 referendum, there is a lot of uncertainty on property stocks at the moment.
And as a result share prices have moved sideways, been slightly weak. Yet I think the quality of Hammerson's assets which are not just shopping destinations also entertainment destinations for eating out, leisure activities. Generally, I think those quality of assets means that they will be in use come what may after June 23 whatever the outcome of the referendum is.
Wall: Commercial property, the index itself has done very well over the last couple of years. But that tends to be concentrated in the southeast that index. You mentioned there that you are looking at some global diversification, looking in France. Does that help you sort of diversify your revenue streams and indeed keep that growth going?
Curtis: Well, Hammerson is only one stock within our portfolio. So it's really a pure play on retail property but it has as you say got 25% in France which is help, it's got good quality assets in France. But I think I am looking at really as a pure play of retail property I think there's concern that the internet is taking money away from high street which undoubtedly it has. But I think if you got high quality retail assets these are kind of destinations that people go to entertain themselves to eat out, go to cinema as well as shop. So I think they will hold up, despite the growth of the internet.
Wall: What's the second stock today?
Curtis: My second stock is Pendragon (PDG). Which is a motor retailer, again slightly hit in the uncertainty ahead of the referendum. But I think car sales have been strong in recent years, but I think they are set to continue to be strong given low interest rates and the way that people can finance purchase of both new and used cars.
And Pendragon is our largest car retail in U.K. it's well managed, and it's a very cheap valuation, the price-to-earnings ratio is around 10 times and its dividend yield is approaching 4%. So I think it offers a very good value at these levels.
Wall: As you alluded to auto is one of the sectors where people are slightly nervous as there is Brexit. Because at the moment there are no tariffs, are there, between the U.K. and the rest of Europe with auto trades. But they could go up to 20%. You think this is not a concern however.
Curtis: I think it's unlikely that tariffs in traded goods would occur, particularly because Europe has a big surplus in terms of car sales, and we buy many more Mercedes et cetera. We do though sell quite a few cars into the continent often from German manufacturers and Japanese manufacturers like BMW.
But I think the real concern is that the pound could fall quite significantly if we leave Brexit and that would make imports more expensive. But I think sometimes these factors get reflected in valuations and certainly Pendragon looks very cheap at the moment in my eyes. And if we do stay of course, then that scenario doesn’t occur and that the betting odds at the moment do suggest 2-to-1 that we will stay in.
Wall: And lead a nice share price bounce.
Curtis: You should do on that basis from, I mean we begin to anticipate it in the run up to the vote but you should do in my opinion.
Wall: And what's the third and final stock?
Curtis: The third and final one is an old favorite of mine which I have talked about in the past, Taylor Wimpey (TW.) I think still looks attractive. It had very attractive, stunning performance in 2015. It appears to return or approaching 70%. It moved sideways a bit this year. But it's very strongly positioned it’s got a five land bank.
There is a lot of demand for housing across the country generation, rent wants to own and with low interest rates its affordable and Taylor Wimpey's average house price is £265,000. So it's not affected by the problems of – what problems there may be at the top end of the London housing market. So it's certainly attractive from a dividend point of view. They've outlined a dividend policy stretching many years and they have actually upgraded the amount of money they are intending to give back to shareholders. So it's yielding slightly over 5% at the moment.
Wall: Job thank you very much.
Curtis: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
