Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Ben Leyland, Manager of the JOHCM Global Opportunities Fund, to give his three stock picks.
Hi, Ben.
Ben Leyland: Hello.
Wall: So what's the first stock today?
Leyland: The first stock would be Travis Perkins (TPK). We like builders merchants, the barriers to entry are very high, the margins are very stable. Clearly that's sensitive to construction volumes. I would suggest that in the aftermath of Brexit we will see more fiscal stimulus. And Travis Perkins in particular post-Brexit got to a stage where the valuation was very attractive. So we added that in the fund to Wolseley which we already owned.
Wall: And quite a lot of these stocks are domestically focused stocks. As you say are really beaten down in the run up to Brexit and in that weak post-Brexit. How do you sort out the stocks that are being rerated for a reason and those which are actually at the wrong price?
Leyland: We try and differentiate between stocks on the basis of how bad the worst case scenario is. With a distributor with a strong balance sheet, the worst case scenario is the things tick along a little more sluggishly than they would have done otherwise. With other more geared businesses the worst case scenario is much worse than that and we would avoid those. We like catching falling knives but we like to know where the table is first.
Wall: So that's the case with Travis Perkins.
Leyland: Yes.
Wall: And what's the second stock today.
Leyland: The second stock, let's talk about Woodward (WWD), which is U.S. aerospace company, which has a very strong position after a period of heavy investment in systems to regulate aero engines. Now having gone through a period of investment, we're waiting for the delivery cycles of the next-generation of engines and planes to come through which we expect to happen over the next three – start to come through in three years' time, but that will last for 15 or 20 years in terms of delivery cycles.
They have positioned themselves very strongly for that, but certainly 6 to 12 months ago, the stock wasn't being given any credit for the growth potential that has created,
Wall: And how dependent are they on their order books? If we have a look at the U.K. and European aerospace companies, we have an air show this year, which happens every couple of years, and actually was a very muted order book compared to a couple of years ago, partly because of economic backdrop, partly because great years aren't always repeated. So how dependent on that is this stock?
Leyland: The thing about Woodward and many aerospace companies, particularly those focused on engines is that they build an installed base, which means that as a plane and engine goes into production, they get an OE sale, an original equipment sale, but then after that they get the aftermarket and the spares and repairs type revenues, which will last as a say for 25, 30 years as long as that plane is flying.
So what we like is things like Woodward which are building that install base to create this sustainable series of cash flows as opposed to just a one-shot equipment sale.
Wall: And what's the third and final stock?
Leyland: The third stock is a Japanese company, an energy company, which wouldn't be necessarily a natural home for quality-biased investor. But as I say, we like reinvestment phases. Inpex (1605) has done an awful lots of investment into an Australian LNG field. This is mostly in the aftermath of Fukushima, where Japan changed its energy profile away from nuclear towards more gas sensitivity and Inpex was the vehicle through which they did that.
So there has been a very heavy investment phase into low-cost long life gas reserves signed on long-term contracts to Japanese utilities. Again, we're about to see the volume growth start to come through from that Ichthys field over the next maybe 18-24 months.
Wall: And of course, commodities have had a significantly volatile couple of years. I suppose now if they are surviving at this level, I suppose the only way is up.
Leyland: That's exactly the point. When we were sifting through the wreckage of the energy market in the aftermath of the oil price going down from $120 to less than $30 at one point, we were looking actively for businesses that had a low cost of production.
So they'd always generate cash regardless of the oil price and a strong balance sheet to allow them to continue to invest in growth even through a period of weakness. Inpex was already in the portfolio, met that description and we headed a galp through that process because that had the same characteristics.
Wall: Ben, thank you very much.
Leyland: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
