Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Simon Gergel, manager of the Merchants Trust (MRCH), to give his three stock picks.
Hi, Simon.
Simon Gergel: Hello, Emma.
Wall: So what is the first stock today?
Gergel: Well first stock is GlaxoSmithKline (GSK), which is clearly a large pharmaceutical company. Its shares have been under a lot of pressure for several years now as they've had disappointing growth in the new products from their pharmaceutical trials and some of the existing products are not picking. But I think it's really interesting time.
They've done two deals with Novartis last year and now 40% of the business is in consumer health and vaccines where they are world leaders and that’s 40% of sales. And those are businesses that have high barriers to entry, really strong brands, strong growth prospects and limited competition to some extent.
So I think those businesses should grow and the rest of the business, the pharmaceutical business is now at a stage where I think from here it can grow as well. So overall you've got a company at an interesting stage in its development. And on quite a low valuation and very good deal.
Wall: And how reliant on emerging markets is Glaxo for that growth? Because we are having tricky time in emerging markets at the moment.
Gergel: Yeah. They are relying on the consumer side of emerging markets. So whether that’s consumer health or vaccines, these are very low price points and incredibly important for the health of the community. So one of the best ways to improve the health of any country, but particularly in the developing countries, is to vaccinate children… to vaccinate in some case adults, and also to provide basic essential health care products, which Glaxo provides. So they are not at the really high price end where you could see problems they are really at the basic important product end. Does that make sense?
Wall: What's the second stock today?
Gergel: The second stock is United Business Media (UBM). This is predominantly an exhibition and events company now after changing the portfolio. And we really like exhibitions and events these are must-go-to events for people in the industry. So a leading event has little competition in that area it's very hard to set up against any competition.
There are growth opportunities, both from the industry gradually growing but also you can take an event from one country to another. The cash flow is very strong, because exhibitors pay well in advance to be at the event and the return on capital is really high because there is limited investment needed to run the events once you own them, once you build them up.
So for all those reasons we think this is a strong company with high barriers to entry to competition and decent growth prospects and the valuation is very modest because of the history of United Business Media, it's been through a lot of change in the last few years. Investors haven’t yet given the full benefit of doubt for what they have achieved in terms of restructuring the business.
Wall: And is it reliant on economic health, is it reliant on other businesses having the money to spend to attend these conferences? Because it is the sort of thing that you would cut when business is not exactly booming.
Gergel: It's not immune to the economic cycle, but it is very well diversified across different industries from construction to jewelry and a wide range of end markets. So that smooths it out, but it is also not deeply cyclical because they focus on the leading events. Even in a downturn, most companies will still send people to the big events because those events drive the business, they drive sales, they drive marketing, they drive the companies forward. So they are important for the end customers, which is why the leading events are so much better than secondary and tertiary events.
Wall: Spend a little bit of money get a lot in return.
Gergel: Absolutely, yeah.
Wall: And what's the third and final stock.
Gergel: The third company is Inmarsat (ISAT), which is a global satellite communications company. They are leaders in the marine communications for ships, but they also do communications on airplanes you're seeing more and more Wi-Fi on business jets and even on more economy class travel people want Wi-Fi increasingly.
They also do land-based communications and the interesting thing here is they just put up a new fleet of satellites the next generation, which is driving much high bandwidth and we all know that we like to spend more time using our mobile phones and watching TV online and so on and so forth.
So this bandwidth demand is strong we are seeing good growth again it's very high barriers to entry in this area because it's really – you go to have spectrum, you got to have license as you got to have a satellite fleet and you got to have customers. And so it's really well protected business and we see good growth prospects.
Wall: Simon, thank you very much.
Gergel: It's pleasure. Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
