LGIM: 4 UK Stock Picks for Growth

While sell-side analysts typically take a two to three year view when valuing companies before fading sales growth, L&G Growth Trust’s manager Gavin Launder takes a much longer-term view.

“I would say that things like Just Eat (JE.), ASOS, Aveva (AVV), Sophos (SOPH) aren’t going to fade that quickly; they’ve got many years of growth in them,” Launder explains.

He adds that valuations are quite sensitive to growth fades, too. “If you extend the three-year cycle by two years and slow the fade down to 10% from 30% you suddenly get over 100% upside. And, in reality, I think it’s going to go on for longer than that.”

He has a number of different growth buckets in the portfolio, including cyclical growth; management-backed growth, or turnaround situations; and secular growth, including the aforementioned disruptors.

Of course, there are risks. A company trading on 30 times earnings that misses forecasts will get punished. As a result, Launder runs a concentrated, high-conviction portfolio and makes sure he’s extremely comfortable with all companies in it.

We sat down with Launder, who ran us through four recent investments he has made.

GVC Holdings (GVC)

“We used to think Playtech (PTEC) was the one to have in online gambling,” says Launder. Playtech was the facilitator for pretty much all the big betting firms’ websites, so as long as the sector as a whole was growing, Playtech was the big winner. As a result, Playtech was his bet on the sector.

Now, that’s not the case. GVC is a real competitor and continued consolidation in the sector means combined firms – often in deals one will use Playtech and the other GVC – will have to choose between the two.

One advantage GVC has over Playtech is that its chief technology officer is ex-Playtech, so knows the competition. Playtech has the added headwind of potential tighter regulation in its Asia markets, particularly Malaysia.

Further, the US sports betting market has just been opened up for business by authorities, who confirmed no nation-wide ban on the practise. Some smaller states have embraced this already, with the bigger states still to play their cards.

“GVC is very well-placed to get in there and partner with the bricks and mortar casino operators,” says Launder. In fact, it was announced on Monday (30 July) it had penned a $200 million deal with MGM Resorts (MGM) to enter a joint venture, sending shares up 5% to 1,141p.

And boss Kenny Alexander has already mused on the possibility of one of the larger casino players being interested in buying GVC outright at some future point, though Launder admits this may be wishful thinking.

“GVC has a fantastic product, a great track record of integrating businesses and they’ve got a very strong management team,” continues Launder. “The chances of them exceeding the synergy [cost savings] targets for the Ladbrokes deal is very high.”

As a result, Launder expects the balance of power to shift. He sold his Playtech holding in favour of GVC in April, paying around 900p. Already his investment has risen by around a quarter.

Vivo Energy (VVO)

Newly floated Vivo is a good way of playing one of the biggest growth areas globally at the moment – the population boom in Africa. Africa’s population has doubled since the early 1990s to almost 1.3 billion today, and is expected to double again over the next 20 years to over 2.5 billion by 2050.

Admittedly, Vivo’s not exactly set the world alight since its May IPO at 165p. After a brief 13% surge the following day, it now trades 9% below the offer price at 149p today.

Still, it’s early days, of course. “We need them to report the next proper set of results and people to start to look at it,” counters Launder.

Vivo is a fuel retailer that runs Shell-branded petrol station forecourts across 20 different countries in Africa. It tends to be the number one operator in its markets, with Total the top dog in others “so you’ve got very sensible competition”.

While an Africa play may seem risky, those risks are hedged by being in many different countries. This means Vivo is not completely hostage to the oil price, as a high oil price is good in some markets; bad in others.

Launder knows the industry well, having been an owner of DCC (DCC), which does the same thing but in developed markets, for many years. Africa currently has a low vehicle penetration, but that’s likely to change as commerce picks up.

It’s been on an M&A spree, buying up small forecourts and re-branding them Shell, as well as adding ancillary stuff, like shops and fast food restaurants, onto its existing portfolio.

“They also do Shell’s lubricants business, a 50/50 joint venture, which is extraordinarily profitable,” adds Launder.

The L&G growth Trust sold BBA Aviation (BBA) in order to fund its purchase of Vivo, having made around 50% out of the aviation services provider in two years. “It had done very well and we just couldn’t see significant upside from there.”

Weir Group (WEIR)

Weir’s recent acquisition of mining tool maker ESCO and sale of its flow control business marks a significant step away from the oil market for the £5 billion FTSE 100 firm. Launder says the mining sector is more attractive.

“We’re at quite an early stage of the mining capex upcycle,” he says. “That should see continued growth for a number of years, but it’s clearly a cyclical rather than secular growth story.” However, it’s currently seeing double-digit order growth, which should continue.

Launder bought Weir at around 2,250p, which is around a three-and-a-half-year high and shares have come off around 13% since. But he clearly sees upside.

In order to buy Weir, the fund sold British American Tobacco (BATS), which launder says “was a genuine mistake; we shouldn’t have had that”.

While BATS is a low-growth company, when the fund bought it in July 2017 it was also low value and compounding growth with a big dividend to boot. “So, you should just be able to sit back and reap the harvest.”

The next-generation tobacco products – vaping, e-cigarettes and the like – were not much of a worry for Launder. But the US Federal Drug Administration’s announcement that it will look into lower-nicotine cigarettes was.

While BATS and its rivals are trying to soothe investors’ concerns, the market has already punished the firms and it’s an issue that’s not going away for a while. “We think the story’s changed slightly.”

Wizz Air (WIZZ)

At a previous workplace, Launder managed an airline long/short equity fund, so he knows the sector well, and has previously owned both easyJet (EZJ) and Ryanair (RYA) in his L&G funds.

He says he’s been tracking Wizz Air for a while, as it’s been owned by L&G’s UK Special Situations Trust, formerly run by Richard Penny and now managed by launder himself.

He says that the European carrier’s cost base is “every bit as low as Ryanair”, which is key. Passenger growth had been seen as a worry after the Brexit vote two years ago. But Launder thinks this has been overdone and the stock’s bounced back with a vengeance – it’s more than doubled since bottoming at 1,428p in June 2016.

It’s been buying up Eastern European airlines, so is in the process of enlarging its fleet of planes by 50% over the next 10 years. Meanwhile, it’s now the largest operator in Israel, and acts as a link between there and home for Poland and Hungary’s big Jewish population.

Launder picked shares up near a six-month low at around 3,200p and the stock quickly hit an all-time high. However, first-quarter results last week disappointed and shares retraced 14%. But Launder says that was “all very short-term stuff” and added to his position.

“That’s one where there’s structural growth over time, which is rare in an airline and why we always used to prefer Ryanair over some of the others.”

He sold Burberry (BRBY) in order to make room for Wizz Air, having done very well since purchase in April 2017, up around 20%. “All the ingredients are there, but we’re slightly wary that it’s a one-brand business and they’re trying to move into things that they haven’t been strong at in the past,” cautions Launder.