Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me today is Dan Nickols. He is the manager of the Merian UK Smaller Companies Fund.
Hello.
Daniel Nickols: Hi.
Black: So, you're going to tell us about few stocks in the portfolio that you're quite excited about at the moment. Where are we going to start?
Nickols: Well, I think the first one I'd like to talk about is a business called Clinigen (CLIN). So, this is a well-established business. It's been floated in the UK for around 5 to 6 years already. It's actually $1.4 billion market cap. So, it's I suppose at the bigger end of my spectrum. But what does it do? It's a specialist distributor of drugs essentially. It really has two or three quite differentiated operations as well. So, one of the things it does is to supply drugs into clinical trials and that's a rare skill. So, that's something that they do very well.
They also on behalf of major pharmaceutical businesses will distribute drugs both in the early stage of the registration process and towards the end of their lifecycle as well. And again, that's something that they do on a global basis. And then finally, selectively they will actually buy the rights to certain drugs and reinvigorate them through more effective marketing or by getting further authorizations for them as well. But what this builds up to is a business that actually, I think, benefits from quite powerful structural dynamics and again, clinical trials and the like are very much on the rise on a global basis. But again, in terms of as a share I think it's very attractively valued.
Black: Cool. So, where are we going next?
Nickols: UK telecoms is dominated by incumbent providers. Gamma Communications (GAMA) have developed some quite novel leading edge services that use things like IP telephony and cloud delivery of telephony services and quite simply, they are growing market share, admittedly from quite a base, but they are growing market share very rapidly. And again, it's one the typical things we like to find in smaller companies, businesses that can grow share quickly.
Black: Is it supplying businesses or households?
Nickols: Yeah, good question. So, the key attraction, if you think about an office, historically you would have bought a bit of exchange kit to enable you to receive incoming calls and then distribute them around the office to the relevant person. Now, that's all really done by what's called internet protocol. So, it will basically just be an active – it takes place essentially online, all the bits of information are packaged up and represented as a sort of voice call. So, the beauty of it is that it's much lower cost to operate, it gives much greater flexibility to the actual user as well. And then if we actually look at the financial performance of the business, it's grown extremely well since the point of flotation. But again, we can see many, many years of really good rates of growth coming through. And for me, this is a real cornerstone of the portfolio.
Black: What's the final stock that you're going to tell us about today?
Nickols: So, the final one, a bit different, is Oxford Instruments (OXIG). So, this is a well-established business. It's $700 million market cap and in fact, I think, if you go back in history, it was the first spin out from Oxford University. What does it do? Well, it provides – the clue is in the name – it provides scientific instruments for academic and commercial research. As an investment, one of the other things it should benefit from is quite a large dollop of self-help. So, it's a business which generates margins of about 15%. For the sort of business it is, it should be doing better, and I think even the management team we can see that they should be doing better and again, there are a lots of internal initiatives to improve margins going forward. So, that feels like a really nice package in terms of business that can deliver forecast upgrade and rerating too.
Black: Super. Well, thank you so much for your time.
Nickols: Thank you.
Black: And thanks for joining us.
