Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today to give his three stock picks is Chris Morrison, Investment Manager of the GAM UK Diversified Fund.
Hi, Chris.
Chris Morrison: Good morning, Emma.
Wall: So, what's the first stock you'd like to highlight today?
Morrison: First one is Marks & Spencer (MKS), the U.K. retailer. So, this is probably one of the most disliked stocks in the FTSE 100 at the moment. It's perceived as being out-of-date and behind the time, particularly when it comes to bricks and mortar model. And interestingly, it's very emotionally charged stock.
I think anyone you speak to always have an opinion on M&S, which is one sense great because it means it's got a strong brand. But in another sense, it means that sentiment is prone to big swings from optimism to despair. And really, as an investor, that's what I'm trying to capture and take advantage of.
And with M&S, we have very much been here before. So, if you look back to the late 90s, it was the first ever U.K. retailer to achieve pre-tax profits of £1 billion. Two years later it had a huge profit warning. The share price absolutely collapsed. But then it took years and years to rebuild itself and it got back to that pre-tax profit number. And I just think that maybe if we look at it from a historical context, then investors are too quick to write it off at the moment.
Wall: It has been in news quite a lot recently because the new Chief Executive has announced the closure of a lot of stores including the flagship one on the Champs-Élysées, which I personally am very sad about and also have moved to more food-only stores. I mean, how does that rhetoric tie in with the sentiment as you were saying?
Morrison: Yeah, I think, it's been perceived that the clothing offering has to be scaled back. And actually, underneath this as well there has been so much good work going on for the past few years which investors are probably overlooking or the market is overlooking. For example, it's invested more in the last five years than Next has in the last 30, improving its online offering, its supply systems and that sort of thing. And Steve Rowe as well, who is the CEO, he was head of food before. He became CEO. So, he is very experienced within M&S.
Wall: And what's the second stock you'd like to highlight today?
Morrison: The second one is Balfour Beatty (BBY), the U.K. construction company. And just if we'd take a step back, the sort of stocks most drawn to are the ones that have underperformed or undergoing very tough times, have been mismanaged but ultimately and critically have the ability to be rehabilitated. And Balfour firmly sits into that category.
The problems are all too familiar. During the good years, which span 2002 to 2008, it's prioritized revenue growth at the expense of everything else really and it did that through M&A and at the same time contracts were being agreed on very, very lose terms. And essentially as the market rode over the emperor was left without any clothes.
And what's most interesting about it today is that Leo Quinn, the new CEO, has been parachuted in and he is effectively a restructuring specialist and he is not doing anything out of the ordinary, but just very much simplifying the business and making it much centralized. So, for example, it had something like 35 paternity leave contracts before he joined, just to give you an example of how diverse and sprawling it was. And I think that given its very checked history, the market isn't quite yet willing to give it the credit it deserves for all the restructuring that has taken place.
Wall: And what's the third and final stock?
Morrison: The third one is Rentokil (RTO), the U.K. pest control business. So, this is one, it's come an awfully long way from when it was founded in 1925 by a professor at Imperial College. I think he was asked to deal with a beetle infestation at Westminster Hall. And it's further along the restructuring path than the last two stocks I have spoken about and it's one we're intricately aware of this journey because we've been invested in this for over 10 years, but we still think there's further to go.
It has two very, very good divisions and a poor one as well. it's called Workwear and that's where I feel the opportunity is, because it is trying to restructure that. But ultimately, if it can't do it, then maybe it's better off being owned by someone else in which case the proceeds will be returned to shareholders.
Wall: Chris, thank you very much.
Morrison: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
