Holly Cook: Hello and welcome to the Morningstar series, 'Three Stock Tips.' I'm Holly Cook and joining me today is Gervais Williams, Manager of the Miton UK Smaller Companies Fund. Gervais, thanks for joining me.
So, we're talking here about three stock tips. Why don't we just jump in there? Give me your first interesting stock tip.
Gervais Williams: Yeah. So, the one which we've been excited by recently is a company called K3 Business Systems (KBT). It's a software business. It's involved in delivering software which is particularly to do with logistics, and also various manufacturing and other areas, but the area which is exciting at the moment is retail, logistics for the retailers. It's an area where there is a real shortage of products in this area. This company has actually just recently introduced some new software on the Microsoft AX Dynamics platform and they can't keep up with demand. There is that much demand for their product. Great news for them. It means they can get good price. They can roll out increased sales. It's a recovery stock, so it's come up from £1 already to about £2.20 which where it is now. It's only a £62 million company and we think the share price could still go considerably further from here.
Cook: So, too much demand is a nice problem to have, but what would be the sort of associated risks that you would warn investors about in this case?
Williams: Well, one of the problems is, of course, it can struggle to get staff and that is a feature for them, to recruit staff with AX skills and they've had some of their staff poached by the people. That's a negative. The company itself has about £10 million of debt. Clearly, it's not risk-free from that point of view. But overall, I mean, it's an unusual position when you're absolutely flat out. So, hopefully, most of those risks are more than compensated by the revenue you get from your customers.
Cook: Looks an interesting one. So, let's hear about your second stock tip.
Williams: Yes. Another recovery stock, probably not started recovering. This is right at the bottom at the moment. It's a company called CML Microsystems (CML). Again, it's another sort of IT company, but it's particularly involved in chips, electronic chips it manufactures itself. It's one of the top three in the world in what it does and these are memory chips. What they do is, they manage memory chips on the memory board and it's really excellent company.
It was making about £6.5 million last year until one of its distributors decided to stop distributing all products in their areas, nothing to do with their product, but the whole area which meant suddenly that sales dropped. Its profit forecast fell about £2.5 million. Share prices come from about halved roughly from the top to the bottom. It's now on its recovery. We're beginning to see that some of those customers are using a different distributor. There is improving demand coming through and we think therefore the share price is ready to recover hopefully back to where it was previously; hopefully, it could double from here.
Cook: So, that problem with the distributor there, would that be kind of one of the key risks in your mind associated with this company?
Williams: Yes. I mean, the key issue is, it's got to make sure that its products are commercial to its end customers and it's a question of whether its customers uses its particular chips or someone else's. There are three others in the world. So, from that point of view, it could lose out market share as a result of this in the very short term. But what I do like is actually the quality of its products mean that its customers are in fact are choosing to use other distributors, coming back to its product and that is why we think sales and profits will recover in the next two years.
Cook: So, your third stock, is that also going to be a tech stock?
Williams: No, just perhaps something with a lot of assets. The markets are uncertain. It's nice to have some tangible assets under the bonnet and that's a company called Conygar (CIC). Now, Conygar is a business which is involved in property development, property investment. It's standing at below asset value in spite of doing five very good years of developing new sort of marinas offshore on the Coast of Wales.
Now, this might not think an obvious area for people to have yachts, but there's plenty of marinas on the Irish Coast, almost none of the Wales Coast and so they think there is plenty of opportunity there. Plenty of housing developments coming through, particularly with the nuclear power station being put on Holyhead.
The Holyhead development they've got is very, very well-timed and we think there is substantial upside on that as well. So, net-net, you're getting into a business which actually standing at a discount to tangible assets, good strong balance sheet with lots of exciting news hopefully is coming through in the next 24 months.
Cook: Well, it sounds like the business is quite diversified among sort of various types of property, but ultimately is it tied to property prices, the success of the company?
Williams: I think the housing market is useful for them because they've got a lot of housing land which is coming on stream, so that will help and the help to buy it has actually helped quite a lot. We've seen London housing market peak out a bit. I think in the regions it's not been quite so buoyant, but I think the fact that they've got this housing land which is bringing inward investment into some of these communities is going to be very positive and the local politicians are very much in favour.
Cook: Gervais, thanks very much for giving us your three stock tips.
Williams: Thank you.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
