Holly Cook: Hello, and welcome to Morningstar. I'm Holly Cook and to give us his three stock picks today, I'm joined by Dan Hanbury. He is the Manager of the River and Mercantile U.K. Equity Income Fund.
Dan, thanks for joining me.
Dan Hanbury: Thank you. Good morning.
Cook: So you are going to give us three stock picks today, three stocks that you are particularly interested in. Tell us what your first one is?
Hanbury: I'm going to tell you about three I have recently purchased. The first one is Standard Chartered (STAN), which is an Asian bank. And we have obviously had a lot in the news about the slowdown in China, concerns over an Asian crisis, and Standard Chartered has fallen dramatically as a result and that's why we think it's an opportunity.
Cook: So, obviously, Asia – Asian slowdown is a risk for you. What's your reason for buying it though if that is the major concern?
Hanbury: The reason we are buying Standard Chartered is, firstly, banks are in a favorable point in the cycle generally we think and we like, so it was only a matter of time with this China slowdown and the opportunities it was throwing that we're going to review the Asian banks which include Standard Chartered.
The analysis we have done is really to compare the current situation with both the Asian crisis and indeed the global financial crisis and have a look at what's priced into the shares. There is clearly a slowdown going on in Asian economies. That’s clearly bad for cyclical companies like banks, but the share price of Standard Chartered has almost halved in the last year. It is falling somewhat further, over 60% since the peaks sort of two, three years ago.
So we are looking at the valuation, saying, well actually, it was only four or five years this was one of the darling stocks of the banking sector. It traded on three times tangible net asset value. It is now trading on 0.6, 0.7 times. A huge discount to where it was before.
Have things changed that much? So, again, we look at back at the Asian crisis, we look at how they are providing for impairments of their loan book and we see that actually they are already being forecast to provide for significant impairments on a par with the Asian crisis. So you've got to believe now really that things are going to get worse than the Asian crisis, which, as you know, started with the devaluation of the Thai baht and ended with the IMF bailout of Indonesia in '99. We don't think it's going to get any worse. So it looks really interesting here.
Cook: Okay. Why don't we move on to our second pick? What's your second stock?
Hanbury: Well, the second pick is a high-quality business. We like to buy a range of stocks growth, high-quality recovery asset base. So the high-quality business is Admiral Group (ADM), which is a car insurance or home insurance, non-life insurance company. Admiral is a FTSE 100 company in the U.K. It has got a very nice yield, 5.5%. It has been somewhat left at a discount on its valuation because people don't believe in the sustainably high returns of this business.
So we've looked to it with interest. And what we see is a company that's got huge competitive advantages based at a cost level. It is based in well. It has got low staff and premises costs, which just gives it an advantage over some of the other players in the market.
They've also got a direct distribution which gives them a better and more efficient sort of distribution platform, and that enables them to have a very high returning model, generates a lot of cash flow, throwing off dividends and we are seeing the cycle – we think the cycle in the current trends is going to bottom over the next two or three years and we are prepared to look through to that cycle turning up and we think actually the trading update was the – if you like, the canary in the coal mine, where they beat forecast a few weeks ago, we've had a profit upgrade and the analyst community in most of the market are quite bearish on this stock and that's the opportunity.
Cook: So this sounds like a pretty sort of positive outlook for the company. What would be sort of a risk associated with that that might possibly concern you?
Hanbury: It is about the cycle really. It's always very hard to call insurance cycles and some of these financial cycles. And so, if it stays soft and the capacity remains in the market, then clearly, it's going to be more difficult for them to do well and that would be the key risk.
Cook: So you've given us two different sorts of financial stocks. What's going to be your third stock to accompany those?
Hanbury: Well, within our portfolio, we also hold about 30 smaller companies and that's where we get a lot of growth ideas. Our third stock is Conviviality Retail (CVR), which is a bargain booze retailer distributor to the retailers. The reason it's very interesting is they have just made an acquisition of Matthew Clark, who are a distributor of bargain booze to the on-trade industry. So that's the hotels and restaurants. They have now become a very dominant distributor to all of those players and we see a huge opportunity for them.
There's lots of cost savings, lots of purchase bargaining power, purchasing and bargaining synergies they are going to ought to bring into that deal. It's about 30% or 40% enhancing and our analyst have been modeling even more synergies than that.
We think that management are being conservative and we see parallels to Booker. When we bought Booker at 30p four or five years ago as a recovery stock, it traded on a p of 10 and now Booker is £1.80 and trading on 25 times, is regarded as one of the highest-quality sort of growth mid-cap stocks in the market. We think there is a lot of potential in Conviviality Retail.
Cook: Now there has been a lot of focus on the beverages industry recently, but if there is a retail stock and retail stocks do tend to be cyclical. Is that a concern for you?
Hanbury: It's a distributor to the retailers and to the ledger stocks. So it's a little bit more diversified and the reason we like it, I guess you are right food retail isn't – food and drinks retail has been very out of favour and again, I guess that contrarian instinct draws us to it. Because it maybe – has been a bit more unloved and I think they have got a very balanced portfolio. They have got lots of blue-chip clients, very, very diversified now, easily the biggest player by margin. That gives us comfort that they aren't overly exposed.
Cook: Well, thank you very much for giving us your contrarian, quality and value ideas.
Hanbury: Thank you.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
