Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Tineke Frikkee, Manager of the Smith & Williamson UK Equity Income Fund, to give her three stock picks.
Hi, Tineke.
Tineke Frikkee: Hi.
Wall: So, what's the first stock you'd like to highlight today?
Frikkee: Well, one stock, which is in my top 10 holdings is a company, I think, everybody knows, BT, British Telecom (BT.A). So you guessed what it does, telecoms. So, it provides clearly the broadband, so it's bit more of an internet play. It's moved more into TV. So, particularly it's been buying sports content.
So, it's trying to keep people hooked in not just into phone or the internet but also their TV service. And most recently, it bought EE. So, now it's the quad play, so you can get broadband, you can get more of a fixed line if anybody still has those, TV and mobile. So, quite a broad package.
And there's a few things I like about them. One thing I tend to like particularly in this market backdrop, which is quite tough, is what I call self-help. So, typically for a company like BT, buys EE, there's sort of an uplift in revenues and we saw some Q1 numbers for the first time last week and there are some synergies, there's some cross-selling.
I'm actually an EE customer, so now I get to – I want to buy TV. So, there's some additional stuff that can happen and I like that and particularly, if not much is priced in. What's important for all my companies is that they make money. So, they are profitable, they generate cash, they can pay their interest, they can pay their tax, and then there's some left to pay to us in dividends and BT ticks all those boxes.
Wall: What's the second stock you'd like to highlight today?
Frikkee: So, I've been involved in sort of the pub and restaurants sector and Restaurant Group (RTN) and Mitchells & Butlers (MAB) are two names that are in there. They are both sort of in a low-ish weight. I see them as one, if you like. So, Restaurant Group used to be a growth stock that has had some issues in its restaurants. What I've done with all the leisure groups I kind of looked at, say, we go into a financial crisis level, we go into a 2008 year, what is the downside and there is guesswork involved here.
But I really trash the multiples and then I look at upside/downside and I found that Mitchells & Butlers – you have to work really hard to get lower – that's on a P/E of 8, for example. So, expectations are low. I actually think that we're going to keep drinking, we're going to keep eating. Weather always plays a role. So, leisure I think is an interesting part.
The other part that is probably – has more competition is sort of the fashion retailers. So, I've had a holding in Next and increased that after the Brexit. It's moved quite nicely. Again, I've put lots of the fashion retailers on financial crisis multiples and looked at, well, what's the downside versus the upside and I've switched my Next into a combination, so again two stocks – so I switched my Next into Marks & Spencer (MKS) and Debenhams (DEB). So, these are companies – Debenhams is obviously pure clothes. Cotton price is high. There will be some pressures on input costs.
Most fashion retailers buy their goods in dollars, so that's not great and they will try to price it on which might be a bit hard. So, there are certainly challenges out there. But when I look at – and Marks & Spencer obviously has more food now than it did in 2008. So, if anything, I think it's a bit more defensive. So, those two stocks, they do have their challenges that are pretty close to sort of maybe you call deep value.
So, within consumer discretionary I'm mindful to have too much because we're still in this what's going to happen with the Brexit. So, one stock gets split in two, but they are cheap, really cheap.
Wall: Tineke, thank you very much.
Frikkee: You're welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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