Emma Wall: Hello and Welcome to Morningstar. I'm Emma Wall and I'm joined today by Olly Russ, Manager of the Argonaut European Income to give his three stock picks.
Hi Olly.
Olly Russ: Hi there.
Wall: So what's the first stock today?
Russ: First one is Swedbank (SWED). Scandinavian banking story I think is relatively well known. They, particularly in Sweden, they had to do banking crisis. They went through one in the early 90s. So when they had this banking crisis, they knew exactly what to do, which was basically end their global ambitions. They shut their bank in the Ukraine, for example, recapitalized the bank, sack the management, cut the dividend to zero and basically started again. And that has been a very successful strategy.
They did it very quickly and now we see the bank very well capitalised. The Scandinavian banks are probably the best capitalized in Europe, so lots of capital there, now paying a cash dividend of about 6% over the next year or so.
What they are, really are utility banks. They've made the psychological leap from we are growth company to we are utility. That means return of capital as well as return on capital. So, what you have seen is a very good capital discipline, very strong cash dividends coming through. Really that's all they can do. They can't grow faster than Swedish GDP in the long run, because they are already the biggest bank in Sweden. So, really it's about returning money back to shareholders. Hopefully, now we're in an excess capital position, we may see even further special dividends.
Wall: So is that 6% sustainable, because that seems like an awful lot for a bank when you are sitting in the U.K.?
Russ: It is an awful lot, but it's not impossible. Banking is done cautiously, a very profitable business. You think of Lloyds in the U.K. before merger with HBOS, safe conservative bank with a high yield. That's presumably where Lloyds will end up again one day. There are several banks on the continent that are in that position, maybe coming back from a cancelled dividend position now growing that dividend back to where it should be, a bit like Lloyds, also a bank itself which generates quite a bit of cash.
Wall: What's the second stock today?
Russ: Second stock is very different Drillisch (DRI), it's a virtual mobile network operator in Germany, exclusively Germany. The advantage of this as a model is they don't own their own networks. They actually rent or buy space from the existing networks. What Drillisch has done very successfully, it has gone after the sort of prepay customers, sort of lower end of the market. The big brands don't really want to almost bother their brand with, because they start giving very cheap discounts at the bottom end with their own brands, sooner or later the top end clients want to move in that pricing direction.
So they are quite happy to outsource this to MVNOs like Drillisch. Now, they have just moved into a new strategy now. They have bought a considerable part of spectrum from one of the major operators in Germany. They now have to fill that up. Sounds a bit of a change, bit of a risk, that's a fixed cost. But they could double their subscribers over the next couple of years. And if they do that, then they will start to put out really significant dividends.
Wall: You have hinted that, but there has been a lot of consolidation in this market. A lot of people are suggesting that Europe will move towards the three to four player model as they have in the U.S. How will that affect the stock?
Russ: Well, it has already got a large alternative player in the market that has taken a big stake in them. So presumably, at some stage that stake could well go up actually, so you are absolutely right. Consolidation in this market is ongoing and we've seen a lot of it already and undoubtedly there'll be more in future.
Wall: What's the third and final stock?
Russ: Third one is Amadeus FiRe (AAD), which we don't own in our main income fund, but we do it in our enhanced income fund. It is a little bit small for the main fund. It is German again. It is a recruitment consultant hat's actively or a provider of employment services. Basically it provides temporary accounting staff or finance staff generally in Germany. So when BMW have a special project that needs 10 accountant starting on the Monday morning, Amadeus FiRe is the number one in the marketplace to be the first people to call.
Very niche business, quite fragmented; but they are the best at it, they've got a net cash position and they basically payout all their earnings to shareholders because they have no further use for the money.
Wall: And presumably they are very tied into the recovery story because you're talking about special projects there, which is not something that corporates take home when they are under fire. Germany, obviously, is under strain at the moment because of what's going on in China with the revenue links there. Are you worried about that element? I mean will this company be hurt should the German economy falter?
Russ: It is much less cyclical than your typical recruitment agency, which is more blue collar that is highly cyclical and much lower margin. This is much higher margin and actually through the last credit crunch or oil crisis actually continued to do quite well. So, I am not too worried about cyclicality. In uncertain times, a lot of companies do move more to temporary contracts, so they might make more use of people like Amadeus FiRe than less. So it isn’t deep in a problem, but obviously is something to watch.
Wall: Olly, thank you very much.
Russ: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
