Equity Analysis on some Top Ten Holdings of Two Canny Fund Managers

18 May

Two superhero rockstar fund managers have taken a somewhat counter-intuitive approach to the trends detailed above. They have avoided the well-trodden path of buying the big financials, with a scattering of other FTSE 100 staples from mining and oil. Their top ten holdings consist either of real industry innovators, or of lesser-known manufacturers of consumer products with a guaranteed continued demand: carpets, for example; or sausages (Devros, which specialises in collagen sausage casings).

We conduct some equity analysis on their largest holdings, looking at their balance sheets to assess the value proposition underlying the share price.

Elvis Presley

A Little Less Analysation, A Little More Action!


Mark Martin, who manages the Neptune UK Mid Cap, has an impressive record. His total return over five years was 93.4%, vs the peer group composite of 60% – according to trustnet.com, which rates him very highly. Over 6.4 years, his annualised total return was a bonus-worthy 24.6%.

He has clearly decided to take advantage of the projected world food shortage. Or, to put it another way, the growing global demand for animal proteins, by investing in GM livestock engineers Genus. This is a key market trend, particularly in developing countries where the rate of demand is increasing very fast. Over the last 5 years, consumption of milk in India increased 21% and pork in Russia by 25%.

Genus is a major success story, and over the last 6-month interim reporting period – ending December 2014 – it saw a 9% growth in revenue. Its profit before tax was a jaw-dropping 20%. As a consequence it was able to increase its interim dividend to 6.1p vs the previous figure of 5.5p, generously boosting shareholder remuneration by 11%. In aggregate, earnings per share increased from 28.4p to 33p over the reporting period.

The market likes Genus too, and it can hardly be labelled a ‘value’ buy with a PE ratio of 28:51. The company’s share price after close of trading on Friday 15th May was £1,482.00, giving it a dividend yield of 1.86%. Its debt to equity ratio varies depending on whether you classify payables on trade and other deferred expenses, or just straightforward loans.

The latter constitute £71.1million in non-current interest-bearing loans and borrowings, and £13.0million in non-current loans. This amounts to about a third of its total equity, which constitutes some fairly steep borrowing costs. Some of this is explained by the recent acquisition of its rivals, Genetiporc and Birchwood Advanced Genetic Solutions.

Royalty based volumes for its porcine products are at 62% in Russia, and 28% in the Philippines. Genus recently completed successful trials in China, and hopes to grow its market share there. The company performed well across the board with its beef products in North America, Latin America and Europe. Its reproductive solutions are particularly in demand in Latin America, where it has a strong foothold. Additionally, it is strengthening its genomic portfolio in diary, while consolidating its genetic data for beef, with a proprietary index in development.

Less immediately obvious is the presence of Carpetright in the top ten, which over the last reporting period ending April 2014 made a profit of just £0.30million; admittedly an improvement on its 2013 loss of £70million. Carpetright sells “a comprehensive range of beds and floor coverings”, so would be expected to benefit from the uptick in the construction industry.

And in fact, its recovery has already begun, with like-for-like sales increasing to 10.5% in the 12 weeks up to 18 April; compared to 7.5% in the third quarter. An interest-free credit offer seems to have proven attractive to consumers, and stepping up promotional activity increased brand awareness.

Investors have been snapping its shares up in the wake of an optimistic profit forecast which predicted underlying pre-tax profit for the year ending 2 May 2015 will reach £13million, a more optimistic prediction than the previous forecast of £10-11million. During trading on Friday its share value increased by 3.09% to 508.50, beating its previous high this year of 506.00 on Monday February 2.

The firm had been dogged by onerous expenses – which it classed as ‘extraordinary items’ – like the necessity of contributing towards its DB pensions deficit, and of restructuring its European office. It has also had difficulty exiting lease agreements when it decided a location was no longer profitable; some of its operations in the Netherlands, Belgium and the Republic of Ireland are still struggling to break even, suffering partly from currency movements.

To better deal with the issue of property disposals, it last year injected a further £6.6million of cash into its ‘onerous leases’ provision which should prevent this problem reoccurring. It also commissioned an impairment provision of £2.6m for freehold properties in the Netherlands, and a release of £0.7m in the UK.

And the next Act….

Alexander Wright is another superstar whose annualised total return as a fund manager over 7.2 years is 20.2%. The cumulative growth of funds he manages is 292.0%, against a peer group composite of 97.3%. We are looking today at Fidelity Special Situations, which like the Neptune fund has a high portfolio allocation to consumer goods and services, at 8.78% and 12.89% respectively. Its largest sectoral allocation is to financials, with 36.47%, a safe bet but our business today is with the lesser-known mid-caps.

Fidelity Special Situations is a fund with no rules, so almost anything goes – mid cap, small cap, big cap, derivatives when they see an advantage in it… The prospectus describes it as being “not restricted in its choice of companies either by size or industry, and will choose stocks largely determined by the availability of attractive investment opportunities.”

First up is Vectura Group, whose 20% revenue growth over the past year makes it one of the standout British pharmas. Over the reporting year ending 31 March 2014, it made a positive EBITDA of £5.2million, where in the preceding year excessive spending – £6.6million cash outflow vs this year’s total of £3.3million – left a loss for 2013 of £3.4million.

Royalty income, a stable consistent income source over time, increased 25%. Another sideline to its pharmaceutical products is the range of inhalers and dry powder particle formulations, which it farms out to other drug companies for use in clinical trials or through JV agreements whereby the partner company’s drug is dispensed through Vectura’s equipment and transfer medium. Royalties have been earned in this way from GSK, Novartis and Sandoz.

In January it announced a deal with Janssen Biotech “for the exclusive development of novel anti-inflammatory therapies for the treatment of asthma/COPD.” Vectura’s contribution will be to allow the treatment which emerges from clinical trials to be dispensed using its proprietary dry powder inhaler (delivery) technologies.

Dr. Chris Blackwell, Chief Executive of Vectura, explained further: “Vectura’s role in this agreement is to apply its expertise in the development of products for airway-related diseases and to utilise its technology/device platform offerings, some of which have regulatory and commercial validation.”

Another achievement in the product development pipeline is in the biologics arena, which is more difficult to get regulatory approval for, particularly in the US, because treatments with biological components are seen as less predictable and more of a potential risk. Vectura reports that “progress” has been made in getting acceptance by US regulators for its AirFluSal Forspiro (VR315) and orders have already amounted to £1.8m ($3m).

The drug has already been approved in Denmark, Germany, Belgium, Sweden, Hungary, Romania, Norway, Bulgaria and South Korea, and products are now launched in most of these markets. It claims an ‘income milestone’ of £3.7m (€4.5m) following the approval of AirFluSal Forspiro in Germany, Romania and Belgium.

Additionally, it claims its acquisition in 2014 of Activaero GmbH “strengthens development pipeline and enhances technology offering.” The IP gained comprised, firstly, Activaero’s smart nebuliser-based technology (FAVORITE) allows drug deposition into targeted areas of the lung, which is ideal for patients whose respiratory system is severely compromised. Ventura acquired the company, for £2.5million, while the technology was still in the clinical trial stage, and this and its other inhaler lines will augment its total product range. (AKITA® JET, APIXNEB and FOX, both desktop and portable inhaler devices which are adjustable to the patient’s breathing capacity.)

And finally, Regus, a commercial real estate manager which rents offices in more than 140 cities across the UK, as well as subsidiary operations such as business lounges. Its dividend yield is 1.80%, after the share price rose slightly after trading opened this Monday, from its previous close of £250.50 to £252.20.

Over the last reporting period it grew its group revenue by 9.3% at actual currency rates, with gross profit increasing by 9%. It was thus able to increase its dividend by 11%. And much of its earnings were reinvested in a 24% expansion of its property network; in total, £207million of its net capital was channelled into growth. This being said, overheads were still down 1% at actual currency rates.

Instead Regus took advantage of the current low interest rates, borrowing today to fund its future expansion; increasing its net debt to £138million from £57million. It also massively extended its available debt finance, from £164million to £484million, with the associated increased carry costs. The good news is that it used a series of IR swaps (fixed rate vs counterparty’s floating rate) to lock in current interest rates.

All these factors combine to make it an attractive long-term prospect, despite the fact its leverage represents 0.6 of its EBTDA. Investors are advised to check, though, how many of its operational assets are subject to a fixed charge to secure its borrowings.rockstar


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