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AXA IM’s two UK stocks for each market cap level

27 April 2017

Three AXA Investment Management fund managers outline their best ideas in the UK large- mid- and small-cap arenas.

By Jonathan Jones,

Reporter, FE Trustnet

Infrastructure, security and high-growth companies are all themes investors should be considering across the market cap spectrum, according to managers from AXA IM. 

While the FTSE 100 has performed better than expected since the EU referendum in June, many investors remain concerned about the UK economy with the mid- and small-cap sectors struggling in comparison.

While investors remain nervous about the uncertainty surrounding Brexit negotiations, diversifying across the market spectrum could help mitigate some of the economic risk. They may also be able to take advantage of some attractively-valued companies.

Below AXA IM managers Dan Harlow, Chris St John and Jamie Hooper outline two stocks at each market level they have bought recently.

 

Large Caps

Jamie Hooper, manager of the £245m AXA Framlington UK Growth fund, includes both large- and mid-caps in his portfolio. He says Unilever should be one company for investors to take a closer look at.

The company, which makes up 2.6 per cent of the fund, was recently the target of a takeover approach by US counterpart Kraft Heinz and Hooper sees some significant upside for the company.

“We’re awaiting a comprehensive review which will be Unilever’s response to shareholders to say ‘we can do this ourselves, we don’t need to get together with someone else’,” he explained.

“And there are four things they could possibly talk about. One would be about how they improve margins because this is one of the criticisms of the company that their profitability lacks their peers.

“Secondly, they could talk about things they may dispose of such as their spreads range. Thirdly, they could talk about things they would like to buy – I’m not so sure they will. And finally, what they are to do with their balance sheet because their gearing is quite low.

“I like the company because it delivers on a role of being reliable, defensive and stable but interestingly on top [of that] now I have a company which has been shocked and forced into self-help and I suspect if they don’t deliver shareholders will agitate for something to happen.”

Performance of stocks over 5yrs

 

Source: FE Analytics

Smaller than Unilever but still very much in the large-cap space is Experian, the data software information business probably most famous for its credit bureaus.

“Crudely the credit bureaus have information on 500 million consumers and 40 million businesses so in this world on needing a credit rating and needing identification to ward from fraud and theft it fits all of those roles,” he said.

“This is a compounding company in a good area with high barriers to entry. It generates lots of cash and Experian is a secular growth company.”


 

Mid-caps

Chris St John, manager of the £175m AXA Framlington UK Mid Cap fund, sees infrastructure as a big driver in the mid-cap space over the next year or two.

The fund, which has been a top quartile performer over three and five years, has 41.66 per cent invested in industrials backing up his belief.

Performance of funds vs sector and benchmark over 5yrs

 

Source: FE Analytics

“We have added to holdings like Hill & Smith which has a galvanising business in the UK and the US and it has an infrastructure business for example providing gantries on motorways, temporary barriers and they’ve also got a business that supplies various crash barriers and asset protection equipment,” he said.

“Things like steel cabling they’ll put up in front of buildings that need protection and given what’s been happening recently [with the increase security following terror threats and attacks] this is the sort of market that is seeing a lot of growth.”

The global nature of the business, which focuses on the US, UK and Europe, also gives it diversification benefits and should allow it to pick up additional traction from policy changes in the US and UK.

“That plays into the infrastructure theme as the world goes from worrying about deflation to getting more concerned of growing inflation and as the world begins to reflate and central banks move from monetary to fiscal stimulus it’s a company that plays well into that,” St John said.

The other company to consider in the mid-cap sector is Marshalls, which also supplies building protection products to the private and public sector and has quite a large portion of its business in street furniture.

“That whole part of the market has increased quite a bit and there is increasing intellectual property there,” the manager said.

“Again they are quite involved in asset protection so you will see when Crossrail starts to be developed above ground and they are developing the stations, rather than having concrete bollards around them they will have what appear to be aluminium benches and flowerpots but these will be asset protection devices.”

Over the last year Marshalls is up 16.28 per cent while Hill & Smith has risen 41.36 per cent.


 

Small-caps

Dan Harlow, who recently took charge of the £291m AXA Framlington UK Smaller Cos fund in June last year, is looking for companies with the ability to grow quickly and organically.

As such, he suggests Revolution Bar, which owns 68 bars across the country but has aspirations to double this number in the medium-term.

“You have really good unit growth, it’s self-funded and yet you’ve got a stock trading at 12 times price-to-earnings paying a 3 per cent dividend yield and a free cashflow yield of nearly 10 per cent,” said Harlow.

“I really like the fact that you’ve got some strong organic opportunities and unit growth underpinning the story and in no way pressuring the balance sheet which is neutral to slightly cash positive.”

As well as this, the manager says the core assets are growing at around 2 per cent “which is not amazing but they’re quite under indexed inside the M25 so it is a particularly strong area nationally”.

“At £2 [per share] we like the story and like the five-year view and yes there are pressures on the national living wage and business rates and sensitive to a consumer slowdown but we think that is more than reflected and the market is underappreciating the organic opportunities,” he said.

Performance of stocks over 1yr

 

Source: FE Analytics

The other example of organic growth is On The Beach Group, which initially listed last year and represents a 1.9 per cent holding of the fund.

“I really like the business model there. The technology is very scalable and very disruptive. There are various comparison websites but what these guys are doing is disrupting a pretty uninspiring market.” Harlow said.

“Package holidays – there’s not much growth there, it is hard work with thin margins – but a lot of that is indicative of the bricks and mortar that a lot of the old guys have had and needed.

“You look at the relationships it has with the hoteliers and you know as an online travel agency as they prove to their clients that they can supply the demand those hotels will give them more inventory to work with.

“A lot of the me-too type players have fallen by the wayside and have got it wrong and On The Beach are still benefiting from that.”

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