Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Richard Pease, manager of FP CRUX European Special Situations Fund, CRUX Asset Management.
At the CRUX European Special Situations Fund, we focus on European, high-quality, cash-generative businesses with significant barriers to entry, conservative balance sheets and proven management teams with strong incentives. Despite the economic malaise in the European Union, our bottom-up stockpicking approach has identified many attractive businesses that are not reliant on strongly rising European GDP growth or further quantitative easing by the central bank to drive shareholder returns.
This may be because they are global players with relatively low exposure to western Europe, companies benefiting from secular trends that are largely independent of the broader economy, or “platform” businesses, which specialise in buying profitable businesses.
An example of the latter is the energy distribution business DCC (LSE: DCC). It has consolidated the UK market over the last ten years and recently acquired Shell’s Butagaz division – a first step in plans to take its strategy to mainland Europe. DCC has a strong track record over the last ten years, making investors roughly five times their money while keeping net debt to fairly conservative levels. If management can continue to do well, the shares could prove attractive for another ten years.
Zodiac Aerospace (Paris: ZC) is a global leader in the manufacture of aircraft seats and interiors. It is geared to the rise in global air travel driven by emerging markets and also the increasing use of tailored interiors and seating as airlines seek to stand out from their rivals. Zodiac has recently been something of a victim of its own success as it has struggled to meet demand for its seats. This has caused several profit warnings from the company as it has struggled to clear the backlog and its stock has fallen out of favour with many investors.
Our perspective, however, is that the market has unduly punished the business for temporarily poor execution and that Zodiac is highly attractive on a medium to long-term view. The shares trade at around 15 times next year’s earnings, which should grow strongly in 2017 onwards as profitability recovers.
Another business enjoying favourable secular tailwinds is Sika (Zurich: SIK), the largest speciality chemicals and construction materials player. This is a gem of a business, growing revenues in the high single digits, driven by global demand from construction activity, increasing penetration of its products and rising market share.
Sika enjoys high barriers to entry – it’s hard for start-ups to rival it – and is supported by an extensive intellectual property portfolio (it is one of the top ten Swiss companies registering patents with the European Patent Office, along with giants such as Nestlé, Novartis and Roche). Sika is currently subject to a disputed hostile takeover by French construction giant Saint-Gobain, but we believe the valuation (less than 15 times next year’s earnings) already prices in a worst-case outcome.
Finally, we like Brenntag (Frankfurt: BNR), a German chemicals distributor with more than half its revenues coming from outside Europe. Brenntag enjoys economies of scale that make it hard for competitors to enter the market and its management team, led by Steven Holland, has a strong record of making smart acquisitions. Net debt is below target levels and the shares trade on about 16 times next year’s earnings – an attractive price for a high-quality business.