Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today to give his three stock picks is Phil Harris, Manager of the EdenTree UK Equity Growth Fund.
Hi, Phil.
Phil Harris: Hello.
Wall: So, what's the first stock on the agenda today?
Harris: Right. The first stock today is a little company called Blue Prism (PRSM). This is a market-leader in what they call robotic process automation. In simple terms, this is the automation of the very complex tasks by software.
So, if we look historically, when companies save money, they would outsource things to India. The next wave of the industrial revolution is actually to replace all the people by software. So, complex tasks, as I said, that can be automated are some things that is massively growing. This is a U.K. market leader.
It's even bigger than IBM and all the big U.K. tech giants in this area. £700 million U.K. company, growing at about 150%, market leader, growing massively, got some great channel partners, great customers and it's something that is going to take and change the world over the next 10 years.
Wall: And can you give you some examples of where this kind of software is already making up part of our everyday lives?
Harris: Yes, sure. There are some great examples. For example, Vodafone use it in India. So, if you buy the new iPhone, when you try to phone up to activate your SIM card, there used to be about 25 people actually there ready to take that call and to do that. Now, clearly, when new iPhones were launched, there was a bit of a problem. You had to wait 24 hours.
What they now do is use a software system. There are now three people in India; the entire thing is automated, it's taken all those people out. Software robots don't have holidays; they work 24x7. They obviously have to be paid but much less than people and the whole process saves Vodafone a lot of money, makes our life much easier and generally, make things much cheaper for everybody.
Wall: And what's the second stock today?
Harris: Second stock is a little company called Morses Club (MCL). So, this is a mini Provident Financial. For those that don't know it, Morses Club basically does high-interest loans, door-to-door, what they call home-collected credit. This is a very old, very well-established company.
The problem at the moment in the U.K. is that most banks are running very, very low returns on capital. They are all being hit by regulation and various problems. Whereas Morses are earning very, very high returns on what they do. They are earning 27% return on equity. They are virtually unlevered.
So, there's no sort of massive leverage in the business. It's a nice family-type run business that's been around for an awful long time that can continue to grow for sort of mid-teens for the next five to 10 years, very conservatively run, very lowly rated, nice yield, great growth prospects.
Wall: I suppose the question, the obvious question, there is, you say it is a mini Provident Financial and Provident Financial have had profits warnings and are in trouble.
Harris: Absolutely.
Wall: So, how does Morses not emulate that kind of thing?
Harris: Well, interestingly enough, they've actually benefited from what Provident have done. Now, Provident have actually had a problem because of the way they've changed their agents and the way the loans are marketed.
And what happened is they tried to make everyone fully employed rather than self-employed and they've set a lot of their people and they have obviously disappeared off to places like Morses Club. They have also upset the regulators with some of their products. They haven't actually been authorised by the regulators. So, Morses very much have benefited from the self-inflicted wounds of Provident and are benefiting themselves.
And oddly enough, if you look on things like Trustpilot, their customers love them, they get fantastic reviews. It provides a really good quality service. So, completely benefiting from Provident, haven't done any of the silly things they have done, a great alternative to that company.
Wall: And what's the third and final pick?
Harris: Third one is ITV (ITV). For those that don't know it, it is the eponymous U.K. broadcaster. It owns a number of channels, obviously ITV1 originally, but it's diversified into much more. It's the dominant U.K. advertiser on commercial television. It's basically been de-rated over the last couple of years as people have thought there's a structural decline in its markets. Actually, it's been a slight slowdown from some food manufacturing groups who are not putting as much advertising as usual.
It's basically a growth company masqueraded with a valuation of a value company. We think there's some great growth opportunities now going forward not just for their core business but in digital. They have a big content arm. So, they are actually not really just the U.K. business now. They've got a new Chief Executive. The balance sheet is incredibly liquid and strong. So, there's lots of things they can do there, special dividends, more acquisitions, lots of growth opportunities, trading on less than 10 times, yield of 6. So, a great growth business masquerading as a value stock.
Wall: Phil, thank you very much.
Harris: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
