Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Alex Savvides, JOHCM UK Dynamic Fund.
My focus as an investor is on companies that are reaping the benefits of change, especially where that change is misunderstood by many investors, or has been neglected by the market. Here are three examples.
Engineering consultancy and support services group WS Atkins (LSE: ATK) has recently enjoyed a pick-up in its UK business. It also continues to post strong performances in Asia and within its energy division. Cash flow has improved despite some unresolved issues in the Middle East and challenging conditions in the US. Better cash flow is a key part of the business-improvement plan at Atkins and a critical part of our investment thesis. If current trends persist and the US and Middle East businesses also start to improve, then 2014 and 2015 should see substantial progress on management’s targets for revenue growth and higher profit margins. Successful delivery of these targets should allow for a significant share price re-rating.
My next tip, mid-cap stock broker Numis Securities (LSE: NUM), is off the radar in the sense that it is not covered by any City sell-side analysts. The last five years have been tough for broking firms, particularly smaller ones where there has been very limited activity in initial public offerings, mergers and acquisitions, or trading. At the same time, technology and competition has led to a decline in commissions. Numis’s revenues and profits have therefore fallen substantially in recent years. But, like any good business, the company has not been standing still. The management team has invested in the company’s core franchise, hiring new research and sales teams, signing new (larger) corporate clients and expanding its offering into debt securities via a retail bond service.
The stocks Alex Savvides likes
| 12mth high | 12mth low | Now | |
|---|---|---|---|
| WS Atkins (ATK) | 988p | 632p | 975p |
| Numis (NUM) | 194p | 89p | 194p |
| Qinetiq (QQ) | 215p | 148p | 180p |
The company has had a good year to date and has been involved in a large number of placings by existing and new clients on both the equity and retail bond side of the business. We expect the current increase in risk appetite amongst investors and companies to continue, which augurs well for transactional activities at Numis. The majority of these extra revenues will drop straight through to the bottom line, as broking firms are extremely operationally geared. The margin of safety is high and the valuation, based on trough earnings, is low. This is, in short, an undervalued business.
My third pick is UK and US defence contractor QinetiQ (LSE: QQ), which is typical of the turnaround story we like. It has a solid history, a high market share and excellent technology. However, it has also struggled with a bloated cost base and inefficient working capital management. A change in senior management in late 2009 has seen the business become better diversified, more commercially focused, more profitable, more cash-generative and less capital-intensive. The share price slipped in May despite the company announcing good full-year results. That’s because investors focused on the poor performance of its smallest division, US Services, where a highly competitive market has dragged down margins. The division is now under review and may even be sold. Irrespective of that outcome, we continue to like QinetiQ overall as the ongoing restructuring of the business progresses and returns continue to improve.