Look­ing abroad for op­por­tu­ni­ties in qual­ity

Finweek English Edition - - MONEY - BY PA­TRICK CAIRNS pa­trick.cairns@jour­nal­ist.com

With eq­uity mar­kets as they are, there is an al­most con­stant de­bate around where to in­vest for sus­tain­able growth. The ap­petite for qual­ity com­pa­nies on the JSE has pushed their share prices to very de­mand­ing multiples. This has led many lo­cal in­vestors to look off­shore. Even though in­ter­na­tional mar­kets are not cheap ei­ther, the much wider choice they of­fer means that there are greater op­por­tu­ni­ties to find qual­ity that can of­fer long-term growth.

Dun­can Bur­den and Wil­liam Ball, in­vest­ment an­a­lysts at San­lam Pri­vate Wealth’s UK busi­ness, iden­tify three themes in­vestors could be look­ing at when it comes to global stocks: com­pa­nies ex­posed to struc­tural growth, those that ben­e­fit from grow­ing wealth in emerg­ing mar­kets and those that are un­der­val­ued and unloved.

The first cat­e­gory presents the big­gest op­por­tu­nity, with a num­ber of large in­ter­na­tional com­pa­nies likely to ben­e­fit from a sus­tained re­cov­ery in the global econ­omy. They in­clude MasterCard, Ac­cen­ture, Di­a­geo, McDon­ald’s and Coca-Cola.

“MasterCard is a well-po­si­tioned busi­ness ex­posed to a struc­tural growth mar­ket, with elec­tronic pay­ments set to ma­te­ri­ally ex­pand over the com­ing years,” Bur­den says. “The busi­ness en­joys the rare com­bi­na­tion of a dom­i­nant po­si­tion in a mar­ket with a clear path to growth.”

While MasterCard is the most ex­pen­sive of his picks on a price-to-earn­ings ba­sis, Bur­den points out that the com­pany has grown cash f low from op­er­a­tions by 36% a year and net in­come by 28% since list­ing in 2006. Its cash gen­er­a­tive busi­ness model and low cap­i­tal re­quire­ments mean that this could well con­tinue.

In the case of Ac­cen­ture, the two an­a­lysts see a com­pany with an es­tab­lished name and en­trenched cus­tomer re­la­tion­ships.

“It has more than a 100 clients con­tribut­ing greater than $100m each in an­nual rev­enue,” Bur­den ex­plains. “So it has a well-en­trenched in­dus­try po­si­tion and solid long-term growth op­por­tu­ni­ties, en­abling it to pro­duce a re­turn on eq­uity around 55%, which we be­lieve it can main­tain for the fore­see­able fu­ture.”

Di­a­geo is one of the world’s lead­ing pro­duc­ers of spir­its, with an un­ri­valled port­fo­lio that ex­tends from en­try-level to pre­mium-level spir­its. How­ever, its re­cent per­for­mance has been muted.

“China’s crack­down on gov­ern­men­tal gift­ing has pre­sented head­winds,” Bur­den con­cedes. “How­ever, with the valu-

ation sit­ting at a dis­count to its global peer group and more re­cently ru­mours of M& A in the bev­er­ages sec­tor, we are com­fort­able that now is a good time to ac­cess this struc­tural growth story.”

San­lam Pri­vate Wealth’s UK busi­ness has been a long-term in­vestor in McDon­ald’s and although they don’t ex­pect the com­pany to shoot the lights out, they do see an op­por­tu­nity for it to de­liver a sus­tained re­cov­ery in its US op­er­a­tion through im­prov­ing mar­gins.

“With solid free cash f low gen­er­a­tion, a grow­ing div­i­dend and a re­turn on eq­uity north of 30%, we re­main at­tracted to McDon­ald’s abil­ity to de­liver de­cent re­turns in the low dou­ble-digit range,” Bur­den says.

Coca-Cola is a par­tic­u­larly in­ter­est­ing pick be­cause it is based not only on the com­pany’s for­mi­da­ble mar­ket po­si­tion, but its ap­pre­ci­a­tion that it has to ad­just to chang­ing con­sumer ap­petites. The com­pany is grow­ing its port­fo­lio of non-car­bon­ated soft drinks as con­sumers start to move away from drinks with high sugar con­tent.

“Coca-Cola’s world­wide still bev­er­age vol­umes in­creased by 8% last quar­ter, with solid vol­ume growth across mul­ti­ple bev­er­age cat­e­gories, in­clud­ing juices, ready-to-drink teas, pack­aged wa­ter, sports drinks and en­ergy drinks,” Bur­den ex­plains. “And with a highly-re­puted, share­holder-friendly man­age­ment team de­liv­er­ing con­sis­tently high re­turns on cap­i­tal, we re­main con­fi­dent buy­ers for the long term.”

The com­pany that San­lam Pri­vate Wealth feels is a good play to cap­ture the growth in wealth in emerg­ing mar­kets is lux­ury goods pro­ducer Burberry. How­ever, it’s not just the ris­ing de­mand for its prod­ucts in places like China and In­dia that looks at­trac­tive, but also its on­go­ing busi­ness re-or­gan­i­sa­tion.

“The in­sourc­ing of Burberry’s pre­vi­ously out­sourced beauty busi­ness and the move­ment away from a li­cence model in Ja­pan ap­pears to be gain­ing trac­tion, and should de­liver growth and mar­gin ac­cre­tion over the medium term,” Bur­den sug­gests. “The val­u­a­tion is also at­trac­tive on a rel­a­tive ba­sis.”

The two unloved stocks that the an­a­lysts be­lieve de­serve another look are Sam­sung Elec­tron­ics and Or­a­cle.

“Sam­sung will show al­most f lat year- on-year 2014 earn­ings per share growth due to op­er­at­ing mar­gin con­trac­tion in its hand­set busi­ness,” Bur­den says. “How­ever, we look past this short-term de­cel­er­a­tion to the book value per share, which will in­crease by over 20% this year due to the com­pany’s at­trac­tive re­turn on eq­uity of 18%. The growth in book value this year trans­lates into a price-to-book value of less than 1.2 times based on 2014 es­ti­mates.”

He be­lieves that this is highly at­trac­tive for a busi­ness with sta­ble growth prospects driven by prod­uct in­no­va­tion in its mo­bile divi­sion and the on­go­ing strength of its semi­con­duc­tor divi­sion.

In the case of Or­a­cle, Bur­den be­lieves that the mar­ket may be over­stat­ing some of the com­pany’s chal­lenges and it may be in over­sold ter­ri­tory.

“We con­tinue to be­lieve that Or­a­cle is near­ing an inf lec­tion point of a pos­i­tive sec­u­lar growth trend as­so­ci­ated with its data­base line as well as its core li­cence sales growth,” he ar­gues. “We sus­pect that tra­di­tional ap­pli­ca­tions soft­ware will con­tinue to strug­gle with sec­u­lar pres­sures, but equally all but the worst of these fears ap­pear to be dis­counted, with shares trad­ing at the low­est val­u­a­tion rel­a­tive to the S&P 500 we have seen since be­fore the tech boom. Con­sid­er­ing the free cash f low yield of 7.6%, we see good long-term value in this name.”

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