Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Richard Pease to give his three stock picks. Richard is the Manager of the CRUX European Special Situations Fund.
Hi, Richard. So, what's the first stock you would like to highlight today?
Richard Pease: Well, I'm going to continue to push Aroundtown (AT1). It did terribly well last year. We made over 50% on our investment. I still think it looks very, very good news. Aroundtown is a general property company run by a guy called Yakir Gabay. And the first point I'd like to make is this guy has got €2.5 billion worth of stock and he hasn't sold a share. The market cap is €6 billion. And the story is simply that he is able to buy commercial property in Germany on about a 7% yield, work it, get to a 9% yield and fund it below 2% and you play the gap.
And the stock is not expensive despite having done very well. We think it's going to yield about 4% in dividend terms and it's growing at about 15% a year because he is still being able to buy things and actually and rental growth is very strong. So, we think we've got 15% of growth a year in both NAV and so this is the asset value and in dividend and that's pretty good news, particularly with the guys committed as that. So, that would be my first push.
Wall: And commercial property is often quite linked to the economic growth and presumably the fact that economic growth is returning to Europe is quite a good thing for the asset class.
Pease: I think it's just a bonus. I mean, he has always bought below replacement cost. He is in the right parts of Germany. The stock price is more than asset-backed already. And if we get good economic growth, that's great. But it's good even if we don't.
Wall: And what's the second stock today?
Pease: Well, I think, I'd probably pick a stock which hasn't done particularly well. It's a company called ISS (ISS). It's an outsourcing story. You guys have probably heard of it anyway. It's about a €5.5 billion market cap, €5 billion market cap and it's a Danish stock. And I think the market got slightly spooked because they had a couple of quarters which slightly disappointed in terms of margin. One or two of the bigger contracts – and they do things like catering and cleaning offices and that kind of stuff – had fallen away and that put a bit of margin pressure on it.
I think before one gets too panicky, I think you want to realize that this company has shown top-line growth for 20 years every year. It grows anything between about 0.5% and 6%, but that's a very nice position to be in. And there's genuine good strong structural tailwind which will continue. And it's got great, I think, great characteristics. It's got, to get slightly technical, negative working capital, which means you can grow forever basically without having to fund it.
It's got very high returns on its capital, got very little capital tied. It's been through private equity like a lot of regular businesses, very leveraged. It's not very deleveraged. And so, it's got lots of M&A potential and it's on about 13.5 times slightly depressed margins, yielding about 3 and 3.25 in dividend terms. And that's for this year. And we think – I saw the CEO actually last week again and he is very confident. So, I would have to mention that one.
Wall: Now, outsourcing in the U.K. is a bit of a dirty word at the moment because there have been several companies which have come a cropper in recent months. But it sounds like the fundamentals for this company mean that they will not be affected by the sort of things that are…
Pease: We did talk about things like Mitie and actually, there's a big difference. I mean, Mitie is very U.K.-only and actually ended up having far too much government work and actually wasn't well run I'm afraid. I think there's a big difference. And I think that's one of the reasons why the stock price has come back because people are concerned about some of the obvious examples which have been bad news.
Wall: And what's the third and final stock?
Pease: I think I'd probably go for what I saw again this morning actually, called Cramo (0E1S), which is Finnish. Cramo does two things; it does modular buildings and it does rental equipment for construction. It's a bit more cyclical clearly. Modular buildings less so. It's a small company. It's under €1 billion market cap. And again, the valuation is not at all demanding, so about 10 times earnings. The yield is just under 5%.
So, not extravagantly valued and we very much like the relatively new CEO who has now been around for a couple of years. And I think we like it because I think the market is getting too concerned about – there's obviously a bit of a bubble in Stockholm upmarket residential prices and that's a very small part of the overall pie for them. But I think they are being overly punished for that. I think it's about 5% or 6% of their exposure essentially, so not enormous.
And we think there's all sorts of things they can actually do and certainly, from the meeting this morning, I think they are very comfortable with the overall picture and we think that the market is being a bit too tough on it. And it's a small company, as I said. It's not a big position, but it's just a good example of an inexpensive decent business run by good management.
Wall: Richard, thank you very much.
Pease: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
