Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Richard Buxton. He is Manager of the Merian UK Alpha Fund. Hello.
Richard Buxton: Hi.
Black: So, you've got three UK stocks for us for 2020.
Buxton: Three UK stocks…
Black: Where would you like to start?
Buxton: …all stocks I hold. Well, the first is SSP Group, originally stood for Select Service Partners. They provide retail outlets at railway stations and in airports. Now, they have grown very, very strongly in recent years, notably on the airline side where they have been winning more and more concessions in US airports, where there's huge opportunity to grow. But unusually for them, last year in share price terms, they actually fell, and they downgraded profit expectations, largely a victim of their own success. Because when you take on a new franchise, initially, you have to put the investment into the airport. So, that's actually dilutive to profits in the shorter term. But because these are usually (seven) year contracts, it's the classic hockey stick that you make the investment initially and then you get the benefits coming through in years view two, three, four, five.
Black: And presumably, if they're expanding into the US, there's future scope for them to expand into other markets too?
Buxton: They are expanding into other markets. They've got a joint venture in India that's going extremely well. They do have franchises in Asia. They've started doing some in Latin America. So, this is a multi-year kind of growth story, where you've got the opportunity to buy in after a period of time where as I say, the shares have essentially gone sideways. When I think on any medium-term time horizon, you can just sleep easy at night that this is going to just roll out the growth and deliver on the back of the expansion that they are undertaking.
Black: Super. What's stock number two?
Buxton: Stock number two is – it is a similar sector, but Whitbread. In last year Whitbread sold Costa Coffee. They returned a lot of capital to shareholders from that. And so, they are now purely the Premier Inn business, which still has room to grow in the UK. But where they've got another small nascent operation in Germany, which is a very budget orientated hotel country, where it's very, very fragmented, lots of mom and pop operators. And that, again, has a great potential long-term opportunity. Frankly, I expect the most recent trading statements to continue to be pretty downbeat, but I'm going to be looking to add to my holding in it if that is the case, because I think if the UK economy accelerates through the course of the year as I expected to do and then, certainly, through post transition arrangements over the next several years, then this is a very UK domestic economy sensitive stock that I think could benefit.
Black: But even if people are worried about Brexit or exchange rates, that sort of increases the number of people that do staycations and presumably Whitbread could benefit from that.
Buxton: True. The weekends, there's a lot of family and holiday travel and London is very different from the rest of the country. So, London has benefited from a lot of overseas visitors and so on. But the core of that sort of Monday through Thursday night, it is very business orientated and it's the nature of the beast. That has suffered.
Black: Okay. And what's our final stock?
Buxton: Well, the final one is controversial, I'm sure, but Barclays Bank. And Barclays, as we know, has had over a decade alongside other banks of PPI and Conduct fines of having to build capital to new ratios.
Black: These are all setting like great investment case reasons.
Buxton: Well, bit of – but that's all been the last 10 years and the next 10 years surely is not going to be the same as the last 10 years in terms of, you know, the regulators are now comfortable with where banks have their capital ratios.
Black: The PPI deadline is past.
Buxton: The PPI deadline is gone. So, the Barclays' core banking franchise is a very good and profitable one. Barclaycard is a highly successful business. But the rating is entirely driven by the investment bank, which a lot of investors would rather they didn't have. And if they can, this year, continue to demonstrate quarter in quarter out that they are on track to meet their targeted goals of 10% return on equity from the investment bank through cycle, then I think the scope for that to re-rate again over the next two, three years is a very significant one. But on any medium-term view, if say they can improve the returns from the investment bank, if they can demonstrate that they are taking market share, then I'd say the valuation is just too cheap.
Black: Thank you so much for your time.
Buxton: Thank you.
Black: And thanks for joining us.
