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Gervais Williams: The ‘hidden gem’ stocks I expect to flourish

21 November 2015

Gervais Williams, managing director of Miton Group, tells FE Trustnet which under-the-radar stocks have boosted the stellar performances of his small and multi-cap funds.

By Lauren Mason,

Reporter, FE Trustnet

It’s common knowledge that the hunt for income has stepped up a pace in 2015, with reliable and growing dividends seeming sparser than ever due to a flurry of global headwinds across the market.

Investors don’t have to make life difficult for themselves though, according to Gervais Williams, who says that there are numerous opportunities near the lower end of the cap spectrum that are likely to have slipped under their radars.

“Dividend growth has largely stagnated across the market this year and the prospects don’t look all that exciting. World growth isn’t very buoyant, we’ve got interest rate rises to come, further austerity, maybe more QE, but net-net-net it doesn’t look very promising,” Williams (pictured) said.

“I think what is interesting is that investors are beginning to get a lot more apprehensive about where dividend growth is going to come from, and I think that is now leading to that widening of the investment universe to include, not necessarily small and micro-caps, but perhaps the top end of the smaller companies area of the market, more than they were previously.”

Williams says that this offers several benefits including the ability to pay dividends, greater dividend cover in many cases, the scope to find companies with safer balance sheets and a greater offering of niche growth opportunities. 

12 month fwd dividend cover for UK indices

Source: Liberum

“I think that the interest in this kind of investing that we’ve been talking about for the last three or four years has become more urgent, and it’s now really quite a talking point across the industry,” he added.

As such, the manager, who runs three five FE crown-rated funds and investment trusts, gives FE Trustnet a taster of some of the stocks that have been boosting his funds’ stellar performances in the below article.

 

Penna Group

Penna Group Plc is a human resource consulting company based in London, which is £66m in size and is a constituent of the FTSE AIM index.

Earlier this month, the company announced that its pre-tax profit and revenue for the first half of the year surged off the back of the continuing recovery of the UK economy.

Between January and the end of June, Penna returned 19.86 per cent, outperforming the FTSE AIM All Share by 11.54 percentage points.

Performance of stock vs index Jan-Jun 2015

Source: FE Analytics

“It’s a group which is involved in outplacement, that’s a polite term for when large companies such as supermarkets make people redundant, they send you off and they help you find a new job,” Williams said.

“Not only do they find you a job about twice as fast as you would do on your own, 88 per cent of employees are placed within three months, which is crazy, and over half of these go into better paid jobs.”

The stock is a recent addition to William’s Miton UK MicroCap investment trust, which first commenced dealings on 30 April this year. He runs the trust, which is £56m in size, alongside Martin Turner and David Barron.

“Penna is a company that has turned itself around and is now seeing a lot of improvement. It’s just announced in some recent figures that it’s doubled its interim dividend from 2p to 4p and it’s trading above expectations,” the manager said.

“It’s doing well and bucking the trend by having its little niche, but most importantly it’s growing cash – it’s got more cash on the balance sheet and of course it’s increasing quite nicely. It’s tiny, but it’s good news.”

Penna Group Plc has a P/E ratio of 18.03, a dividend yield of 2.89 per cent and a share price of 268p.


International Greetings

International Greetings has been a firm favourite of William’s for a while, and is held in both the Miton UK Multi-Cap Income and Miton UK Smaller Companies funds.

It is one of the world’s leading designers, manufacturers, distributors and importers of gift packaging, and is only £87m in size.

“This is a bit of a favourite of ours – their operations stretch across UK, Europe, Australia and the US. This is a manufacturing company largely, and this is a company that has been investing for its productivity improvement, it’s had 10m Capex,” Williams explained.

“You could have bought this company at the beginning of the year for £40m, and as that cash-flow has increased it’s getting the extra sales, net margins are actually rising, and they’re seeing an improvement in share price.”

International Greetings recently reported to shareholders that it has seen an increase in customers and it has generated more cash than expected, which means it has been able to pay a dividend this year as opposed to next year as initially planned.

Since the start of the year, the company has returned 102.77 per cent, outperforming its FTSE AIM All Share index by more than 18 times.

Performance of stock vs index in 2015

Source: FE Analytics

“The share price has doubled and it’s announced it’s going to invest another £10m in the US. What we’re really saying is, if you follow those companies that are not just investing capital but getting cash payback, that cash payback then allows them to build up cash or pay off debt, but ultimately generate cash which is going to pay dividends. It’s an example of a company that is doing exactly what we want,” Williams said.

International Greetings has a P/E ratio of 15.57, and a P/B ratio of 1.4. Its share price is currently 153.5p.


Charles Taylor

Charles Taylor is another stock that Williams has been particularly keen on for a long time. The insurance services company is based in London and manages captives, which are a means of collectively insuring companies via their parent group, which is often more cost-effective.

“The company needs someone third party to do this and Charles Taylor are a world leader, possibly the world leader, in that area. It’s tiny but it’s fantastic,” Williams said.

“It’s about how they manage this insurance business. They have to manage what the premium will be for each company and they also have to judge, when someone makes a claim, whether it’s a fair claim compared with all the other claims. It’s quite a difficult job and they’re very good at it.”

The company, which is £178.8m in size, has been providing insurance services since 1884 and currently has 1,200 staff in 69 countries spread over 28 countries.

Year-to-date, it has almost tripled the performance of its FTSE Small Cap index.

Performance of stock vs index in 2015

Source: FE Analytics

“The reason I’m quite excited by it is because, over the last few years, there hasn’t been many insurance claims – we haven’t had many hurricanes, there haven’t been many disasters thank goodness, but inevitably there will be more at some stage,” Williams continued.

“The earnings are perfectly good and they’re making a good yield, but the share price is quite low because they to do extra fundraising to invest for growth, but most particularly, the underlying growth of the business isn’t that buoyant at the moment and at some stage we expect it to get more buoyant because unfortunately, there are hurricanes and there are disasters.

“So it’s a lovely business and, at some point, we will see a substantial recovery of its operations.”

Charles Taylor currently has a share price of 275p, a dividend yield of 3.89 per cent and a P/E ratio of 13.86.

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Gervais Williams

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.