Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Jamie Ross, Manager of the Henderson U.K. Alpha Fund. Jamie is here today to give his three stock picks.
Hi Jamie.
James Ross: Hi Emma.
Wall: So what’s the first stock today?
Ross: The first stock I would like to talk about is Shire (SHP). So Shire is a very interesting company because actually this was the one that was the subject of a failed bid by AbbVie of the U.S. last year. So it's a specialist pharmaceutical company. It has very strong franchises in a few key areas and those would be ADHD, gastrointestinal and rare diseases. Now it's interesting because recently this company has approached and successfully gone through the process of acquiring a company called Baxalta.
Which should hopefully complete mid-way through this year. Now why is that interesting because, I think the deal is an okay deal. The market thinks it's not a very good deal at all. So over the last three, four months as news flow emerged that they were trying to buy this company. The shares have taken a real dive. So I think this is a very interesting starting point.
Wall: When the market didn’t like the fact that the previous deal fell through either. Shire's shares have had a double hit.
Ross: Absolutely yeah. So the deal when that broke last year that was a huge surprise to everyone. So the shares took an absolute tumbling there and actually recovered very strongly since. But again then started to as you say take that double hit when people started realizing they were going to buy this U.S. company. So it's an interesting starting point. As a fund manager when you see a share price chart that look so negative, it's always something that’s interesting. It's always a starting point again to do the work on the company.
Wall: And M&A is also a trigger for the second stock that you are going to highlight today as well, isn’t it.
Ross: Yes. Indeed this is a very different proposition. So the second stock is a much smaller company. Shire is £25 billion market cap, something like that. The company that I've again recently initiated a position in is a much smaller mid-cap company about £1 billion market cap and that’s bwin (bpty). So bwin is online gaming company. It's got a lot of exposure to Germany which is a, I suppose the way to describe is a gray market.
A pseudo regulated online gaming market. What's particularly interesting about the company at the moment is that there is, they are the subject of a reverse takeover by GVC, which is an AIM listed company which is much, much smaller. So GVC is £300 million market cap and is buying bwin.
Now why do I think this is interesting. Well, it's really my analysis on the combined entity. So what this company looks like post the deal. And what it looks like is this it’s a company that if you bolt together the earnings of both companies it has about €150 million of EBITDA and then I believe that the cost synergies that they can extract from this deal are probably about 125 and that’s a number that GVC management have talked about.
That’s a number that bwin are very happy with. So it’s a huge amount of cost that can be extracted. Once those costs have been extracted this is the cheapest gaming stock and in my opinion on a cash flow basis one of the cheapest stocks in the FTSE.
Wall: So from something pretty exciting to something quite boring.
Ross: Yeah, certainly operationally. I hope management of the company aren’t watching as I describe their operations as pretty mundane. But the next company I'll talk about is Berendsen (BRSN). So Berendsen in my opinion is a very good company. It has many of the characteristics that myself as an investor really like. So what does it do. Well essentially Berendsen cleans mats and work wear. So as I was saying pretty mundane activity, but it's interesting. And it's interesting because this is an industry that 10 years ago, 15 years ago was operated and run by very small family owned businesses and increasingly is consolidating. And the consolidated entities one of which is Berendsen have a far stronger margin and return profile than those independent family owned businesses did.
So the business is a better business than it would have been 10, 15 years ago. Why now? Well the company have just changed their CEO. Now the old management team very strong, very highly regarded. No issues with them at all. But what's interesting is that the company has delevered quite a bit over the last decade. And the balance sheet they have always targeted somewhere between one and two times net debt to EBITDA and right now they are operating about one times.
We got to bear in mind this is a very stable defensive. As I said quite boring cash generative business. So for balance sheet that's there under geared we think there is an opportunity actually to use that balance sheet slightly more aggressively. And the new CEO James Drummond who is coming in has alluded to the fact that he might be a bit more aggressive on M&A and if not I believe will get some cash back to shareholders.
Wall: Jamie thank you very much.
Ross: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
