UK Construction
FE Alpha Manager Jeremy Hall says UK construction will see consistent earnings growth as the recovery gains momentum but is currently overlooked by the market.
“Investors and fund managers moving back to the UK growth story have tended to think along the consumer angle or house builders,” he said.
“Generally stocks related to retail, pub companies or property, but they don’t make the next step to UK construction.”
“It’s a case of once bitten twice as shy, but you can tell by the valuations that these companies are on, that they’re well priced.”
He thinks the construction market has also been over looked by investors and fund managers because of the legacy of the sector post financial crisis.
“They should ask themselves should they invest capital in this company based on what you know today or what you knew 5 years ago.”
“It’s a bit like getting bogged down in the past rather than looking to the future.”
Hall manages the Cartesian portfolio which includes the Cartesian UK Absolute Alpha, Cartesian UK Opportunities and Cartesian UK Enhanced Alpha funds, with total assets under management (AUM) of £77m.
He recently added positions in Balfour Beatty and Costain, which he thinks are very cheap.
“Balfour Beatty is at 11 times earnings with the prospect to double earnings over the next two years, because of an underlying improvement in the construction market and the balance sheet and cash flow is looking good.”
“During the downturn margins at Balfour Beatty collapsed and the balance sheet was carrying too much debt, and they also have a pension deficit of £300m. They now have a steady stream of contracts coming through.”
“There's allot of PFI and PPP with a tangible value on it and with cash flow, as things recover you get a working capital improvement which therefore drives cash out of the business.”
“The knock-on effect will be you get an improvement in underlying contract margins you throw up allot of cash, so suddenly fears about the balance sheet and pension deficit diminishes dramatically because of the amount of cash.”
Balfour Beatty has had a particularly strong twelve months, with its share price rising 29.23 per cent.
Costain’s share price also rose over the same period, by 7.3 per cent slightly less than the FTSE All Share which rose 9.01 per cent.
Performance of stocks vs index over 1yr
Source: FE Analytics
However, both firms’ share prices are below their pre-financial crisis level. Balfour Beatty is 14.92 per cent down and Costain is 24.92 per cent compared the FTSE All Share which has risen 32.74 per cent.
Performance of stocks versus index since financial crisis
Source: FE Analytics
Hall added Costain as thinks the company is at the early stages of gaining momentum after a fund raising drive aimed at winning larger contracts.
“They just announced this week they are part of a big national grid program after undertaking a placing to raise money to allow them to participate in bigger contracts.”
“End customers want to see a very healthy balance sheet in construction firms before they come to them with bigger contracts and projects.”
“From the budget we didn't get a huge signal that big infrastructure spend but definitely some at the edges.”
“The environmental agency got more money and as did the roads network and of course High Speed 2 will be a big spend and Costain are involved in this.”
African Barrick Gold
George Godber, who manages the £59m Miton UK Opportunities fund, says gold miner African Barrick Gold is his favourite contrarian play.
Godber says it has been undervalued since its parent company, Barrick Gold, sold its stake.
“This is a very exciting investment, it’s a clear example of £1 of assets trading for 50p in the stock market,” he said.
Shares in the company started to fall in 2012 as a six year bull market began to slow.
The stock has lost 51.26 per cent over three years, but has had an upturn in the past 12 months, rising 22.68 per cent.
Performance of stock over 1yr
Source: FE Analytics
Hopes of a turnaround in the company, led by senior management change, have given its share price the boost.
The company’s new chief executive officer and chief financial officer have done a fantastic job of restructuring the business, Godber says.
St James’s Place
Colin McLean, co-manager of the £115.2m SVM UK Growth fund thinks wealth managers St. James Place is a great contrarian play.
The FTSE 250 financial services company is a UK-based wealth management firm which has benefited from regulatory change under the Retail Distribution Review (RDR).
It’s had a stellar run over two years, seeing its share price 139.98 per cent and with a high PE ratio of 23.14, some managers are questioning whether its momentum can continue.
Performance of stock over 2yrs
Source: FE Analytics
Maclean says it is mistakenly thought of by many in the market as an insurer.
“It does indeed looks expensive using embedded value metrics,” he said.“However, it will be increasingly recognised as a unique asset gatherer with a proven sales force. The market is underestimating the consistency of growth.”
888 Holdings
FE Alpha Manager Leigh Himsworth, who runs the UK Select Opportunities Fund at City Financial, says his favourite contrarian play is online gambling group 888.
He says the company’s European business makes it a sound investment but with the possibility of an opening to the US market, it’s a compelling contrarian call.
Three states have recently legalised online gaming in America, which should give the stock a boost, he says. Others are making moves to do the same.
However, Himsworth says further changes could be delayed until after the elections for the US House of Representatives later this year,
Over three years the stock has had a remarkable upturn, appreciating 262.35 per cent, but is down 5.13 per cent over 12 months.
Performance of stock over 3yrs
Source: FE Analytics
“888 has profitable operations in Europe (45 per cent in the UK), generating 7 per cent growth in revenues in 2013 despite large costs associated with setting up the US,” Himsworth said.
“The cash flow from the European business alone makes it an attractive investment. Should other US states open up the opportunity for the group becomes significantly greater.”
“We understand the likeliest is California, which constitutes the ninth largest economy in the world, in its own right, and which would dwarf the $270m revenues currently generated in New Jersey.”
