Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today to give his three stock picks is Mark Nichols, Manager of the Threadneedle European Select Fund.
Hello, Mark.
Mark Nichols: Hi, Emma.
Wall: So, what's the first stock you'd like to highlight today?
Nichols: First company I'd like to talk about is Dassault Systemes (DSY). This is a French company, operates globally. It's one of the few global market leaders in the technology space that happens to be listed in Europe. So, they provide design software for manufacturing industry. They are big in aerospace; they are big in the auto industry. And this is really a story about transitioning from generation five products to the generation six.
This is a fully integrated 3D design software. And it's a product that many of the market have been quite skeptical about. It's an expensive package. It's a big investment for any company that takes the product on. And it's one where we are extremely confident and that confidence has been boosted recently by Boeing who signed a comprehensive framework agreement with Dassault.
It takes Dassault from just being on the defense side of Boeing to being both on the defense and the commercial side of what Boeing does, so the planes that we are all very familiar with. And it also then extends through to Boeing's supply base who now also have to take on that software product.
It's the largest framework agreement they have taken on and it's probably one of the largest framework agreements available in the marketplace. So, it suggests this huge investment they have made in this new product is starting to gain traction in the marketplace and gives a long visibility on the runway for growth in the future. This is a business, we think, can deliver revenue growth in the high-single-digits for many years to come. And this is also a business that has owner-operator mentality. So, the family remain the biggest shareholder. It continues to be run for very long-term revenue, growth and returns accretion and not for short-term profit maximisation that introduces all sorts of risks to investors.
Wall: And what's the second stock today?
Nichols: The second stock I'd like to talk about is RELX (REN). This is a company used to be called Reed Elsevier. Most people will be familiar with their LexisNexis product. It's legal publishing. But really fundamentally, this is often seen as a U.K. company. It's actually dual-listed. So, we own it as European investors as a Dutch company. The Dutch line often trades at a discount. Partly, that's about scarcity in the U.K. market. There aren't many assets like RELX.
And then the other point is that this is seen often as a publishing company. And while its roots are in publishing and its roots are in finding information and selling that information to professionals, lawyers, accountants, et cetera, it's become a tech company.
It's selling huge amounts of software through its business. It's selling productivity to customers. And it's growing its addressable market by investing in it. The more information it has, the more it can help other companies utilize that information to save money and generate additional returns.
So, we think this is quite a – we think it's a unique proposition. We think it's got access to data that other companies don't have, unique datasets and has a unique customer base. So, the nature of their competition is to continue really drive rising margins and rising returns. So, there is no risk that the faster they grow, you get dilution in terms of profitability.
So, this is one that we think is mispriced and misunderstood in the market. If we were to go back 17 years or so to the peak of the TMT bubble, this had 15% in digital activities. Fast forward to 2017 and it's now 85% operating in digital. So, it's really transformed over the last decade-and-a-half or so.
Wall: Looking at another stock which is making that transition to publishing to digital though is Pearson which has been plagued with difficulties and keeps saying that its transformation is around the corner and then just buys itself another six months. Why is this stock different to that?
Nichols: Yeah. So, if you think about Pearson's customer base, quite often it's students and quite often they don't have an awful lot of money and quite often they are buying Pearson's product because they are told to buy, they have to buy it.
If you think about RELX's customer base, they are buying the product after having had a choice of whether to buy from a whole range of providers of different types of productivity tools or none at all. There is no one forcing these businesses to buy the product and it means that RELX can do value-added selling or value-based pricing. That means that if they save a customer $1, they keep $0.20 and the customer keeps $0.80. If they don't help the customer, they don't get a return.
Some of the difficulties that Pearson is having are really around the way that you sell a product. If you sell a textbook, that's a single discrete sale. If you start selling it online or you start doing rentals online, one sale is now split across six different transactions, for example, and that's quite a big headwind they have to overcome.
Wall: And what about the third and final stock?
Nichols: Final stock is a French company called Elis (ELIS). It's not a household name, but it's quite similar in some respects to Rentokil that people in the U.K. market might be familiar with. And they have recently just concluded a deal to buy Berendsen which was also in the U.K. market.
Elis is the dominant player in laundry and textiles for business customers in the French market. They have over 50% market share. That enables them to operate in parts of France where they have no competition. They on average earn a 15% price premium to the competition in that market, one of whom is Rentokil as it happens. And they recycle the cash from that dominant French market position to go and build dominant number one market shares in other markets around the world.
So, they are also number one in Brazil; they are number one in Spain; they have market positions in places as diverse as Chile and Sweden, for example. So, we think this is an incredibly well-run business with dominant market shares and very strong barriers to entry.
Wall: Mark, thank you very much.
Nichols: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
