Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Craig Yeaman, Manager of the Saracen Growth Alpha Fund.
Hi, Craig.
Craig Yeaman: Good morning, Emma.
Wall: So, what's your first stock for us today?
Yeaman: The first stock for you today is a company called M J Gleeson (GLE). M J Gleeson is predominantly a house builder in the north of England. So, if you think of them, you think affordable housing, so not social housing, but cheaper housing. Their average house sells for £125,000 and they build between say Newcastle and Stoke, Hull and Liverpool, that’s their natural territory. And the reason I like this stock, is the fact that, their plot costs are the lowest in the industry. So their plot costs are roughly 9% of the overall cost. So therefore their margins are very good.
They've got cash in the balance sheet, so they are financially secure and they have a land bank stretching there for almost seven years. So this company is in a very good position, but it's a niche house builder. So last year to give you an example they only built 750 houses, we believe over the next three to four years that figure will go up to 1,500 houses. So the top line is growing, the bottom line is growing nicely and they’ve recently started the dividend. So we believe that dividend will grow possibly double over the next five years.
Wall: Some of the house builders have been hit by policy, this is tax on second homes, but I think those are stocks that are exposed perhaps to Southeast of England where buying second home is more common. Have you escaped that with this stock?
Yeaman: We absolutely escaped that. The typical customer of M J Gleeson is a husband and wife and as I said, the average cost is a £125,000, so it really as far away from buy-to-let as is possible to get, and is not exposed to that at all, so this is a north of England housebuilder.
Wall: And what's the second stock today?
Yeaman: The second stock today is a company called Card Factory (CARD). Now Card Factory, it's a vertically integrated general retailer, so it designs its cards, it manufactures cards and then it sells those cards. Now, 80% of the stock is actually sold for less – 80% of their cards, should I say, are sold for less than £1.
Their typical customer is female, who buy 35 cards a year. So, for her, price is key and what you find is, when they go in to a town, whether it’d Glasgow or whether it’d be a market town in England, they take out the local competition. So the local competition may be an independent company, it may be a Clintons because their cards are of the same quality as a Clintons, but much cheaper, they’re able to drive that competition out of town.
Wall: How much growth do you have with this stock. I mean, surely there’s got to be a point when market penetration has been reached, there’s only so many market towns, only so many stations where these shops can appear.
Yeaman: Yeah, you would think so, but they've actually got eight years of self-funded roll out to continue. They open roughly 50 stores per annum. So they've got eight more years. At the moment they’re not in Republic of Ireland they are only in the U.K., the next territory they tend to go to is Republic of Ireland. So yes, we think that it is eight years.
Wall: And what's the third stock today.
Yeaman: The third stock is a company called Tyman (TYMN). Now, the reason we like Tyman is a geared play in recovering in the U.S. housing market. Now Tyman is currently are in margins of 14%. They believe, they can get up to north of 20% and in order for that to happen, we don’t have to go back to the previous peak in the housing market.
So just last year there was about 1.2 million new houses in the U.S. they believe if that figure can rise to 1.5 million, which is way less than their previous peak, then margins will rise substantially. So that’s a company that has a lot of self-help within it. They're very acquisitive. So they don’t just have a U.S. operation, they also have a European arm and they also trade in the U.K.
Wall: And this is a stock which puts the door knobs, door handles, door sealants into new houses.
Yeaman: You’re, right, it’s absolutely that, it’s knobs, knockers, ceils, so it's very much a player into the new housing market, yes.
Wall: And I suppose the risk with this stock is that the U.S. housing market falters. You say we’re a while off the peak, but of course the last peak was what some say, caused the global credit crisis. So how dependent on the U.S. recovery are you with this stock?
Yearman: We are dependent. When I say we're dependent, we're dependent on the margin increasing. So if we look at the stock, I mean, the last year as I say, it was about 1.2 million new houses, which is not enough for the U.S. market. So the previous peak was well north of two million, so we're not talking about going back to the extent of times, we're just talking about more normalised times and more normalised times in the U.S. is approximately 1.5 million.
Wall: Craig, thank you very much.
Yearman: You’re more than welcome. Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
