Emma Wall: Hello I'm Emma Wall and here with me today to give me his three stock tips is George Godber, manager of the Miton UK Value Opportunities fund.
Hello, George.
George Godber: Good morning.
Wall: So what's your first stock pick?
Godber: First stock pick I'd like to mention is Daejan (DJAN). It’s a FTSE 250 property business and it's a classic example of what we really look for as a value manager in our stocks. The interesting thing about Daejan it's not researched by anybody. So it really is a good chance and a bargain in the stock market.
What is Daejan? It is a prime central London property owner, owns significant number of assets throughout London. It also has property in New York and Florida; has about £1.2 billion of property, very limited debt down to £200 million, so very lowly gear for property business. It's been able to self-finance all of its own construction especially with its new development projects and as while the shares have had a reasonable run of late, we are still seeing very significant discounts to the true asset value of the business.
Wall: Market commentators are divided when it comes to property. Half of them think they were creating a bubble by all the government initiatives and the other think that the government initiatives mean it’s a great idea to have exposure to property in some way. Is that a risk with this stock?
Godber: I think we will move at the behest of the market in terms of property valuations and what people are willing to attribute. What's interesting with this is it's a family controlled business. They hold assets at very, very conservative valuations. Sometimes when they bought those assets back in Sixties, they will still hold them on the books at that level. Where you get the benefit is when is the rental uplift as they redo properties. It actually has one of the greatest track records of dividend delivery of any stock in the U.K. stock market and that is really where you see the quality of the business and the quality of the asset come through rather than what one minute the market thinks about property values versus the next.
Wall: What's the second stock then?
Godber: The second one I'd like to mention again is a FTSE 250 business called Cranswick (CWK). Cranswick is a pork business based here in the UK it’s a former Yorkshire collective run really carefully. They look after every single penny in the business and the second type of company we try and target in the fund are bargain cash generators and if you look at the operating cash flow performance of Cranswick over the last five or six or even eight years, you'll see a fantastic steady performance and that’s with oil at $50 and $150, with Lehman's having gone bust, and all the problems that the world has faced during that time. Yet, this business has consistently delivered, it's been able to acquire well and reinvest back in its business it's helped to cope with price rises and food inflation. But the quality of its product, the quality of its output and the returns it has been able to generate for shareholders really are second to none.
Wall: I know that as a value opportunities investor you do concentrate on bottom up rather than macro noise. But farming is one of those industries that is particularly affected by macro what goes on politically what the EU is saying about its sector. Is that something you have to bear in mind with the stock?
Godber: Absolutely I mean I think if you were to pick up and so key risk at the moment obviously we are in the middle of a very vicious price war from the supermarkets and they do a lot of premium products for supermarkets, but actually in terms for them to deliver supermarkets, quality product that they can ascertain exactly where it's come through every single point of the food chain. With the food scandals that we've had in the UK really sets them apart and the quality of the new premium products that they have been able to deliver to market has actually sold very well for the supermarket.
Yes of course there are always risks we never know, they get moved by European pork prices, by UK pork prices, by feedstock. But actually the quality of the delivery over that business through thick and thin is really what stands it apart.
Wall: What's the third stock then?
Godber: Third stock I would mention is Michelmersh Bricks (MBH). It is the last remaining UK listed brick company, it's a smaller company, and it's one that we helped recapitalise through a rights issue earlier in the year. And what's interesting is over the last five or six years we've had enormous capacity withdrawn from the brick market. In fact actually we are now importing bricks into the UK from Belgium for the first time since the Seventies. So it's an extraordinary situation.
Michelmersh has been able to keep premium pricing through the downturn partly because they are one of the last few remaining people who actually do handmade bricks which really sets them apart. In terms of those we look at it as an asset story. It's got significant property assets in the form of land around former clay pits which we feel are very conservatively valued which they are able to realize and selling through to the house builders. They also often get very significant price rises through as brick stocks around the whole country have come down so significantly and the resurgence in house building with the government programmes – we’ve now got visibility on that until 2020 – have certainly been able to help to the underlying dynamics of the market.
Wall: All three stocks there great stories, but very domestically focused. I mean if we were having this conversation a couple of years ago perhaps that would be much more concerning. But I wouldn’t say that we are home and dry in terms of the recovery. Are you worried about that?
Godber: It’s a very good point – I mean the fortunate thing with the UK stock market is we just have a wealth of opportunities a 1,000 plus companies listed here every sector, every geography imaginable. However my portfolio is very domestically focused at the moment. We've got very good visibility in the UK. The UK will probably be the strongest growing economy in the G7 this year and that means especially for some of the smaller sized businesses they are seeing significant upturn and they are able to grow.
Big is not able to grow at the moment it's difficult for a company that employees that 40,000 to suddenly employee another 20,000. Whereas a company that’s employing 500 or 10 people can easily grow. And so I think UK is a real bright spot. However we've got to be mindful, we've got a general election which could be disruptive coming up, consumer confidence is improving and as is corporate confidence. But I don’t think it would take too much. At the moment we are mindful of the situation, mindful of the risk. But we are absolutely able to still find some fantastic value opportunities within the UK stock market.
Wall: George, thank you very much.
Godber: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
