Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Mark Whitehead. He is Manager of the Securities Trust of Scotland. Hello.
Mark Whitehead: Hello.
Black: So, you've got three stocks for us. Where would you like to start?
Whitehead: Well, I might start in the UK if that's all right. We are invested in a company called Ibstock, which is a clay brick manufacturer. We see really good opportunity for this company to grow earnings over the next sort of two, three, five years really because there's a structural lack of houses being built in the UK I think we're building something like 160,000 houses, new houses that is, a year at the moment. The government whitepaper that came out last year was looking for actually around about sort of 300,000 because of population growth, et cetera. So, rather than taking risk in the housebuilders direct, which can be quite operationally leveraged, meaning the catalyst can drive quite quickly when volumes fall, we've gone slightly further up the vertical if you like, because we really believe that Ibstock would be able to sell its products to all the housebuilders across the country, and that there is really good demand for them.
Black: If they doubled the amount of houses they are building, could Ibstock cope with that capacity?
Whitehead: That's a great question because they actually put in a new plant in Leicester last year…
Black: Which they've built with their own bricks.
Whitehead: Yes, exactly. So, it's a very, sort of, state of the art new manufacturing facility. And they are just ramping that up at the moment. So, they're getting pretty much up to full capacity this year, which gives them that volume growth to be able to deliver into the market. We think, again, then they'll probably increase capacity again as we get through into 2022 and 2023.
Black: Okay. What's stock number two?
Whitehead: Cisco, which is a US tech company, of course. They produce a lot of hardware that goes into many of the enterprises and offices that obviously we all work in. So, think of routers and switches and all that sort of stuff in terms of internet protocol. We really believe the company is actually starting to spend quite a bit of CapEx and move the business more towards software, so software-as-a-service, and that will allow the company to be able to produce much more visible earnings – well, revenues and then earnings from that particular line of business, which, because it's quite stable, and it's less cyclical, should allow for a high rating on that stock in the future. So, we're quite excited by that.
Black: I would think they must have quite a sticky customer base as well, because once a company chooses to use one software system, it's a big upheaval to change it.
Whitehead: I think that's exactly right. I mean, it's very difficult. We've seen that with Microsoft as well, haven't we, where, you know, certainly we found in our office that trying to get rid of using Word and Excel and all those sorts of things, once you're in the system, you're stuck in it. And that's very much the same as the sort of hardware et cetera, and the software that you use in terms of the internet protocol. So, we think there's a really good client base that is growing, at least, if not better than GDP and that software angle will bring in more clients, et cetera.
Black: Okay. And our final stock?
Whitehead: Final stock is DSM, which is a Dutch vitamins company. They actually produce some really interesting products. But we think it plays really nicely into the sort of health and wellness trend that we're seeing. So, people eating more plants. So, to get protein from plants, rather than eating animals, I think is a huge trend that we're going to see more of. DSM produces all sorts of different things, including animal feed supplements, for example. And that's doing really well in terms of building a new market, which we think is going to be really quite interesting in terms of they're producing an animal feed which reduces the amount of methane that a cow produces, which is, basically produce around about 14% of carbon emissions into the atmosphere, from all the pigs and the cows and everything that the Asians are eating, et cetera. And so, this supplement is going to reduce the amount of methane that is emitted. And so, it's really good for the environment. But it's going to be a huge a total addressable market for them.
Black: If they're in the sort of human supplement space as well, do they have – is getting approval for these supplements an issue?
Whitehead: I think they – I mean, obviously, they're working very closely with all the regulators, et cetera. But the vitamins that they're putting into lots of human foods, et cetera – obviously, we eat a lot of processed foods, don't we, and the vitamins that they produce hopefully are making that better for us. And so, getting regulatory acceptance for it is actually something that they're pretty well adept at doing and they seem to be producing strong earnings growth from their products.
Black: Well, thank you so much for your time.
Whitehead: Great. Thank you.
Black: And thanks for joining us.
