Jacob Mitchell, CIO of Antipodes Partners and manager of the Antipodes Global Fund – UCITS
For a long time, minority shareholders in Korea have been negatively impacted by an unhealthy closeness between chaebol-controlled conglomerates and the government. However, newly elected government officials are beginning to position themselves independently of the country’s most powerful families and are implementing reform to eliminate many of the shareholder unfriendly actions that have been prevalent in the country.
We are bullish on the prospects for Korea and have an approximate 10% net long exposure to the country. Korea remains a cheap market and the prospect for continued corporate governance reform heightens our appeal towards the country.
Despite a strong run in recent years, we are still optimistic on Samsung Electronics, which is trading on an ex-cash P/E below 8x. While the group has had to overcome corporate governance issues in recent times, it is continuing to improve its operational structure and is pursuing a more shareholder-friendly dividend pay-out and share buyback policy – the significance of which should not be underestimated.
Oliver Bell, portfolio manager of the T. Rowe Price Frontier Markets Equity Fund
Guaranty Trust Bank
One stock we are currently optimistic on is Guaranty Trust Bank, and we have been adding to our position in the stock over recent months. A high-quality Nigerian financial institution, we believe Guaranty Trust Bank stands to benefit from the stabilisation of politics and improving macroeconomic backdrop in the country.
Nigeria faces a mix of challenges, but recent exchange rate reform and new infrastructure projects are resulting in a gradual recovery for the economy. Greater reform momentum, sustained oil production and a further currency correction will be necessary supports.
Guaranty, which is predominantly a corporate lender and is the third-largest Nigerian bank by market share, was trading at an attractive entry point in the third quarter, following the recent adjustment in the naira currency and we took advantage of the valuation to increase our exposure. With 200 branches in Nigeria, the bank also has small operations in some other African counties, as well as in the UK, where it services overseas nationals.
Jeremy Lang, partner and co-founder of Ardevora Asset Management
Abcam is an unusual company. It was founded in 1998 by three Cambridge academics that had the idea of making it easier for research scientists to buy antibodies across the web. The business has diversified since the early days and more recently has moved into the direct production of biotechnological products. The rapid growth of the company, in addition to the changing and highly specialised nature of the business, has made it difficult for analysts and investors to value.
The requirement to invest in the business has held profits back for extended periods of Abcam’s life. As a result, the shares have generally looked expensive, analysts have been twitchy, and this has induced anxiety in the hearts of investors.
To us, Abcam still looks interesting. Being an unusual business makes it difficult for analysts to value. There is no obvious peer group to compare it with. Yes, the headline numbers suggest the shares are expensive, but management has been consistent and clear in the plans for the business. Current investment is being made to ensure the company has the best possible chance of taking advantage of the significant growth opportunities that lie ahead. Management behaviour looks sensible to us. The company is lucky to have these opportunities in a world where growth is hard to come by. For investors who are prepared to look forwards rather than backwards, we think patience will be well rewarded.
Richard Nackenson, portfolio manager of the Neuberger Berman US Multi Cap Opportunities Fund
Portfolio construction is an important component of our investment process and consists of three distinct investment categories: ‘special situation’, ‘opportunistic’ and ‘classic’ investments. Opportunistic investments, such as Nike, continue to be a strong driver of performance for our strategy.
Nike is the global leader in the design, development and worldwide marketing of athletic footwear, apparel, equipment, accessories and services. The company recently hosted an analyst day and highlighted its plans to drive high single digit revenue growth and mid-teens earnings per share growth by focusing on innovation, execution, and improving the customer experience.
We believe management is making the right decision to focus on its direct-to-consumer offering in an evolving retail landscape. Nike has an exceptional brand, solid long-term growth prospects and superior return on invested capital characteristics.
Thomas Sørensen and Henning Padberg, portfolio managers of the Nordea 1 – Global Climate and Environment Equity fund
We focus on three main investment areas in the climate and environment space – innovators within the alternative energy sector, companies aiming at resource efficiency, as well as adapters focusing on environment protection. The majority, or 70%, of our strategy is allocated to resource efficiency – companies improving efficiency with products and services. An example of a company thriving in this space is Hexcel Corp, the leading carbon fibre producer in the world.
Carbon fibres offer significant material advantages, being significantly lighter and stronger than steel and aluminium. New generations of airplanes, such as Airbus’ A380 and Boeing’s 787 Dreamliner, are built with approximately 50% carbon fibre, resulting in 20% more fuel efficiency than older airplanes of equal size. With fuel being one of the largest costs for airlines, Hexcel is providing significant savings for airline companies and value creation for shareholders – not to mention helping to decarbonise the aviation industry.
In addition, carbon fibres are also making inroads into other industrial applications – such as wind turbines and high-end cars. The numerous tailwinds for Hexcel has helped drive its share price up almost tenfold since the beginning of the bull market in 2009 – far in excess of the rise for the broader market over the same period.
Stuart Mitchell, CIO of S. W. Mitchell Capital and manager of the SWMC European Fund
French semiconductor group STM is strategically focused on ‘smart driving’ and ‘the internet of things’. The group is geographically diversified, with roughly a third of sales coming from each of the Americas, EMEA and Asia Pacific.
The company is restructuring its set top box business, which has overshadowed the group for a number of years. It is redeploying 600 developers from the digital business to its more successful automotive and microcontroller areas. The restructuring programme will also include 1,400 redundancies. Overall, the project should yield about $170m of annualised cost savings from the end of 2017.
We have been impressed by the quality of the remainder of the business. Approximately half of revenues are derived from the microcontroller and automotive divisions, where it is positioned second and third in the world respectively. With a broad range of different technologies, STM is positioned to benefit from the emergence of areas such as autonomous vehicles, home automation, health and even drones.
Ben Peters, Evenlode Global Income Fund
Business-to-business media is a sector we like at Evenlode, having a high degree of intellectual property through content, data, analytics, and increasingly recurring cash flows from subscription revenues.
Wolters Kluwer is a Dutch-based diversified media, analytics and digital services company with operations in healthcare, tax & accounting, governance, risk, compliance, and law. Its software and content helps medical practitioners make decisions, accountancy firms to manage their practices, and businesses to comply with their regulatory obligations, amongst many other applications.
The value-adding subscription services provide a steady stream of cash flow, giving a free cash flow yield of over 6%, covering the dividend three times. Such a level of cover gives ample opportunity for dividend increases over time.
Claire Shaw, portfolio manager of the OYSTER European Mid & Small Cap Fund at SYZ Asset Management
Ion Beam Applications
There is a disruptive technology that has been gaining traction at an exponential rate – proton therapy – in which Belgium’s Ion Beam Applications is the market leader with a 50% global share. Proton therapy is an advanced type of cancer radiotherapy that uses a beam of protons to target and eradicate tumours. Its advantages are huge: it minimises exposure to healthy tissue, reduces the risk of secondary cancers and can improve patients’ quality of life by reducing side effects. It is therefore no surprise this field is expected to post a 15% CAGR to 2035.
In the short term, however, IBA is out of favour. The company has delivered three profit warnings in the last nine months, mainly because delays in the construction process have halved the share price. Our long-term investment horizon allows us to see past these temporary, cyclical factors and invest in a company that benefits from high barriers to entry in a structurally attractive oligopoly, a strong backlog equating to over €1bn in sales and a rock-solid balance sheet which can support future growth.
Phil Harris, fund manager of the EdenTree UK Equity Growth Fund
Applied Graphene Materials
We are always also looking for the next great innovation or technological advance. Graphene, for example, has been heralded as a disruptive technology with the potential to replace or enhance the performance of existing materials in a wide range of applications and sectors. But, like many great scientific leaps forward, practical or commercial applications have been frustratingly slow to emerge.
Due to this disconnect, Applied Graphene Materials has seen a steep stock price decline as it has also needed to raise additional capital. However, the company has now developed the necessary consistency and quantity of graphene for products and new significant contracts are now near. We believe it could be just the beginning of a new growth curve.
Jonathan Pines, Asia Ex-Japan portfolio manager at Hermes Investment Management
Steel company investors have been focused on the dynamics of the iron ore industry based on the presumption that there is strong correlation between iron ore prices and steel company margins. Hyundai Steel’s stock price has also been hurt by particular concerns about production and profitability of group company and main buyer, Hyundai Motors. However, despite weakness in the iron ore market and Hyundai Motor’s problems, Hyundai Steel’s profits have remained remarkably consistent over much of the past decade. Yet the stock is trading near a record low multiple relative to book value. Cuts in Chinese steel production in response to the country’s pollution concerns might too help Hyundai Steel’s profitability.
Colin McQueen, manager of the Sanlam FOUR Stable Global Equity Fund
AmerisourceBergen is one of the three main pharmaceutical distributors in the US. These stocks have fallen over the last year on weakening drug price inflation, fears over potential government intervention in the market, and most recently the threat of Amazon entering the wholesale distribution space.
Amerisource is the strongest business of its peers. It is singularly focused on distribution, has superior working capital management, a low-cost structure and 30% ROIC. It’s partnership with Walgreen Alliance Boots provides a unique competitive advantage through joint international sourcing, and underpins 30% of their turnover. Amerisource also has a dominant position in the fast growing and profitable specialty drug segment.
We believe the concerns over the impact of Amazon create a buying opportunity. Prescription drugs is a highly regulated market, where the bulk of drug purchases are paid for by insurers, government plans etc., with extensive contracts determining their delivery. With operating margins of 1%, in a consolidated, scaled industry (the three dominant players have a 95% market share), there simply isn’t enough available share for Amazon to develop a credible competing offering.
Despite the pressures on drug pricing, Amerisource revenues and earnings are forecast to grow at 8% pa for the next two years. The stock is attractively priced at 14.2x 2018 EPS and 7.5% FCF yield. As a domestic earner, paying >30% tax rate, the company would also be a major beneficiary of US tax cuts, and these are not yet factored into market estimates.