Brexit uncertainty, depressed sentiment and the recent market correction has thrown up plenty of opportunities for UK-focused fund managers.
Jamie Ward, manager of the FP Crux UK fund, bought three stocks last year having seen cash freed up by the takeover of existing holdings Sky by Comcast late in the year. “That’s my favourite way of eliminating a stock,” comments Ward.
Ward says he is ideally looking for businesses he can buy and conceivably never have to sell. “Now, in reality you often have to, but I’d be very happy to look back in 10 years’ time and see that we’ve only sold five stocks,” he says.
The manager talks Morningstar.co.uk through a trio of recent buys, two of which he’s been tracking for years and finally found an attractive entry point.
Daily Mail and General Trust (DMGT)
Investors could be forgiven for categorising DMGT as a media company that is heavily reliant on the health of the print newspaper industry. And it’s certainly valued that way, trading currently at around six-year lows on a price/earnings multiple of nine times and yield of just under 4%.
But Ward describes the Daily Mail newspaper as “a sideshow” in the context of the overall conglomerate. It has many strong businesses, with the most exciting being Risk Management Solutions, which provides the digital infrastructure that allows insurers and public agencies understand, quantify and manage risk.
The software was able to estimate to within $1 million how much damage – eventually in the billions of dollars range – the 2017 floods caused in Houston, Texas within a day of the event finishing.
Most of the world’s largest insurers use RMS, competitor Verisk (VRSK) or both. While RMS currently earns less than the newspaper business, “it’s got the potential to be earning a hell of a lot more”. “If you stuck it on Verisk’s multiple, you’re basically getting DMGT’s valuation from RMS on its own”.
DMGT has similar businesses in the energy, property and education markets, an events business and owns half of Euromoney (ERM), which “is a brilliant business” one could argue should be in the portfolio outright.
It also has plenty of cash on the balance sheet derived from the £2.2 billion sale of online property portal Zoopla, of which it owned 30%.
Ward says he’s excited about the turnaround going on at DMGT under new management who took over in 2016. Previously an under-invested business, the new team has been rectifying that over the past two years.
Ward concludes that “DMGT has got the potential to compound a hell of a lot of value over the next decade or so”. “On a valuation basis, you can write down the Daily Mail to zero and you could still make a case for the rest of it.”
Relx (REL)
Ward says Relx is the “perfect sort of business" for his portfolio. “It has a little bit of growth in it, but what it’s really got is low cyclicality, a decent balance sheet and fantastic returns on capital,” he explains.
Indeed, in times like these, defensive investments are becoming more highly sought after by many fund managers and Relx is generally seen as a stock that provides this.
Hitherto generally a firm that trades on punchy multiples, Ward says he’d been “waiting for a point where the valuation was good enough to get in there”.
That came around the time Sky’s takeover went through in late October/early November – “a happy coincidence”. The share price has slipped 15% from 1,740p to below 1,500p in the space of six weeks. It’s recovered since to 1,620p, trading on a price/earnings multiple of 20 times and offering a solid, if unspectacular 2.3% yield.
Formerly Reed Elsevier, Relx provides information content and analytics services to the scientific, technical and medical; risk and business; legal; and exhibitions markets.
Renishaw (RSW)
Another “fantastic business” that has “been expensive for a long time” is Renishaw. The firm hit an all-time share price high of 5,775p this time last year – three times what it was five years before.
High-durations stocks like this – where valuation is based on the very long-term – were sold off aggressively in the fourth quarter of 2018. That led to Renishaw falling a third in the space of seven weeks.
After years of watching the company, Ward took the opportunity then to add it to the fund: “It was still not super-cheap, but I managed to buy a bit at a level I felt comfortable with.”
Renishaw is a world leader in metrology – the scientific study of measurement. Its most profitable division makes probes – the best in the world – used for precision engineering.
Outside of that business, Ward says it has an additional two businesses, which he calls “lottery tickets”. The most exciting of which is additive manufacturing, or 3D printing. Used in industrial production, additive manufacturing machines use probes in order to improve the precision of the machinery.
Of course, those probes used in the machines were generally made by Renishaw, so it decided to start making the machines itself. Now, it makes the best machines in the world. This is mainly because Renishaw’s probes are the best in the world, and they can decide who to sell to, i.e not their competitors.
It’s still in the early stages, but that business itself could be worth billions of pounds in 10 years’ time, say Ward.
It’s also now ventured into robotic surgery. Currently Intuitive Surgical (ISRG) is the world leader in this market – its da Vinci platform is controlled remotely by doctors and can perform surgeries like shoulder and hip replacements robotically.
But the systems are not quite precise enough to perform surgery above the neck, like brain surgery or even dental surgery. That’s where Renishaw – with the best probes in the world – steps in.
Renishaw’s been developing a product for this area for a decade and got the relevant regulatory acceptance around three years ago. Now, they’re slowly pushing it out worldwide. “At the moment it’s not making any money, but it could be a huge business for them.”
