Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Ken Wotton. He is Manager of the Gresham House UK Micro Cap Fund. Hello.
Ken Wotton: Hi, Holly.
Black: So, you're in the micro-cap space and that means actually quite a lot of the stocks you invest in are on the Alternative Investment Market. And you're going to talk us through three you are feeling quite positive on at the moment. What's our first stock?
Wotton: Sure. Okay. The first stock is a company called XPS Pensions Group. It's an actuarial consulting business which sounds a bit boring but it's actually we think a really exciting opportunity. It focuses on the defined benefit pensions market and provides services and advice to the trustees of those pensions. What XPS is trying to do is built an incredible second tier, the leading second tier player to try and challenge those large players who are expensive and perhaps where quality of service is less of a focus. They've been very successful in that market. They've made material acquisitions that they've been on the market. And this has also had a very steady track record of generating cash and paying out attractive dividends. It's a business which de-rated on the back of the Covid-19 crisis, but really, it's pretty resilient in terms of its operations, it was not very economically sensitive. So, we've been adding to our holding there quite at lower price that we think is the really good opportunity from a long-term investment.
Black: Okay. And what is stock number two?
Wotton: Stock number two is called Ten Entertainment Group. It is the number two tenpin bowling center operator in the UK It's got 45 sites across the country. And it fits the core investment theme of ours which is low ticket experiential leisure. It's an area of the consumer discretionary space that we think is economically resilient because it offers value of money and people are looking for entertainment in the form of experience rather than stuff. Clearly, Covid-19 crisis has had a material short-term impact on the business. Lockdown has meant that their centers to be closed. They are not generating any revenue. But the management is very strong. The long-term story we think still is intact. And importantly, the company's balance sheet means that it has the cash available to withstand a very protracted lockdown period which actually doesn't look like it's going to come right.
Black: And have you spoken to the management about changes they are going to make to the business, because I'm sure a lot of people are going to feel pretty reticent about putting their hands into a bowling ball after this?
Wotton: Yeah, I mean, it's a good question. I think they are very, very cognizant of the fact that being able demonstrate cleanliness and sanitization procedures is going to key to confident the customers. And one of the things they're trying to do is to only open every second lane so that nobody is sharing a (indiscernible) port. It's just (indiscernible) will share the same port and then they will be cleaned after every round. So, they are very aware they need to demonstrate that that's what they are doing effectively to keep customers coming in. But this is a site where people might feel more comfortable to come for a drink or just food because they can space out much more effectively than they might be able to do in a pub, for example.
Black: Okay. And what is our final stock?
Wotton: Our final stock is a company called Inspired Energy Group. Inspired Energy is a specialist energy procurement consultancy business. So, it focuses on mid-sized corporates, typically ones that use greater amounts of energy than average and it advices them on the sub-optimal tariffs that they should be entering into for their gas and electricity and also advices them on how they can reduce their energy consumption that is very topical at the moment sort of as sustainability becomes a more prominent thing in people's minds. And this is a business that has really successfully used the AIM market over the time it's been listed. So, we invested in that business in 2011 when it came to the AIM market. It was a 10 million market cap company and made profits of just over £1 million. Roll forward to last year, and it made profits of £18 million…
Black: And is it often that you'll hold a company for that long, particularly it's still fitting your micro-cap remit?
Wotton: Yeah. So, we are long-term investors. On average, we'll hold a company for four to five years, but we have some which we've held for shorter times and some we've held for much longer including Inspired Energy. And we look at it based on the opportunity and whether we still believe there's good attractive returns to come and this is in category of – it was a very small company. It's now sort of a medium-sized company but we think there is a good growth opportunity for the next few years.
Black: Ken, thank you so much for your time. For Morningstar, I'm Holly Black.
