Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Robin Milway, Manager of the New Capital Dynamic European Equity Fund.
Hi, Robin.
Robin Milway: Hi, Emma.
Wall: So, you are here to highlight three stocks today. What's the first company?
Milway: So, the first company is Deutsche Boerse (DB1). They run the German Stock Exchange and also a collection of OTC and derivative exchanges, the largest ones across Europe.
Wall: And why do you like that stock?
Milway: Well, we like it because since the – they have just announced last month that they want to take over the London Stock Exchange to create a pan-European powerhouse in terms of financial transactions, settlements, clearing. It would just dwarf anyone else globally let alone just in Europe. But the reason why I particularly like the stock is because we feel there is a bit of an asymmetric payoff in terms of owning it at this point in time.
Since they announced the deal – and we owned it pre-deal for reasons which I'll come on to – since they announced the deal, the stock has drifted down, been weak over particular people concerned about the synergies between the deal, people concerned to a certain extent about an external force taking over the LSE, et cetera, and so there's always concern. But we feel that the stock was particularly cheap in the first place given the strength of the management and there will be significant upside in terms of the actual company once the deal goes through.
Wall: And the deal will definitely be going through because there has been a lot of M&A chat over the last couple of years and not everything has come off?
Milway: We believe that the deal – that LSE will be sold to someone. Now, it's unlikely even if the Intercontinental Exchange, ICE, from the U.S. coming with a second bid, which they may well do. It is unlikely the regulator will allow that as a result of the level of indebtedness that the two companies, the combined companies, will face.
We think, while the regulator still has yet to rule on it and the AGM boards both need to go through for both the LSE and Deutsche Boerse first, we do feel that there is a better than likelihood chance of the regulator accepting it at this point in time where it has failed before as a result of the positioning of the two companies and all the work that they have done on an upfront basis is to please the regulator.
Wall: And what's the second stock today?
Milway: Prosegur (PRHA) which are a Spanish security company. The reason why they are both pan-European and also Latin American in outlook with growing business in Asia, places like Singapore, Australia, et cetera.
The reason why I particularly like the company, we've owned them for quite some time, is they are owned by the management – management were the founders of the company – and they have by far the best reputation from a conservative aspect in terms of running the business compared to peers, for example.
So, their peers will be companies like Group 4 Securities, G4S, and the likes of Loomis maybe, or Securitas, and they've got a phenomenal track record of creating revenue growth and also profit growth when macro environments have just thrown the kitchen sink at them. So, they have been able to grow the business over the last 20 years even despite depression, currency devaluation, hyperinflation. All of these things have been thrown at this particular company not just in Latin America but in Europe as well and they have managed to grow the business. It's really quite a phenomenal business model.
Wall: You mentioned there who their competitors within the sector are and G4S overtook Walmart as the largest employer in the world in recent years. I mean, it's not exactly had a great run with the Olympics blot on their past sheet. But it is one of the biggest companies in the world. How do you take on a giant like that and come off well?
Milway: Well, a great little anecdote which Prosegur have said to us before is that the reason why they can compete simply with a company like G4S, is you don’t mix the guns and brooms. So the business model is very set, very different. So whereas G4S is more towards the facilities management route in terms of running buildings, providing the cleaning et cetera. Prosegur is solely focused on the security side, the guns side of things. That focus – that level of focus is management incentivisation based on that level of focus.
Wall: Sticking to their knitting.
Milway: That is what gets you past the post every time and not just their industry, but we feel in pretty much every industry.
Wall: What's the third and final stock?
Milway: So the third stock is WHSmith (SMWH) in the U.K. now we've had a phenomenal run and reason why I highlight it, it's more of a general kind of concept in the sense of. This is a business that has managed to again eek out returns when they've had the kitchen sink thrown at them from a macro perspective. Over the last – sorry, 2015 was the first time that like for likes and revenue growth was not negative in the company.
So that’s a phenomenal job and yet during this time over the last 15 years almost this company has grown profits, well they have trebled profits and the stock's up 150% in that time led by Stephen Clarke in recent years. Stephen Clarke CEO and he was instrumental in the turnaround of High Street and when you pair that with the travel business which they have which has been phenomenally growing with great margins than the stock's been in absolute term, star performer in the portfolio and also in the U.K. index.
Wall: Robin, thank you very much.
Milway: Thanks Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
