More gains in pipeline fol­low­ing 69pc rise?

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A top fund man­ager’s pre­vi­ous tips for us rose by two thirds. Can he pull off the same trick again, asks James Con­ning­ton

Abusi­ness that makes plas­tic pipes, another that sells soft­ware to hous­ing as­so­ci­a­tions and a firm that pro­duces elec­tronic com­po­nents may not sound ex­cit­ing, but all are owned by one of Bri­tain’s most suc­cess­ful fund man­agers.

James Baker’s Chelver­ton UK Eq­uity Growth fund has topped the “UK all com­pa­nies” sec­tor over the past three years with a re­turn of 97pc.

The fund fo­cuses on com­pa­nies that aren’t large enough to be­long to the FTSE 100 in­dex and avoids pre­vi­ously trou­ble­some sec­tors such as min­ing and bank­ing.

“The im­por­tant thing for us is that a business con­verts most of its profit into cash and can fund its own growth – ei­ther be­cause it has very high mar­gins, or be­cause it doesn’t need to in­vest much to grow. A com­bi­na­tion of those two things is the real sweet spot,” Mr Baker told Tele­graph Money.

Two years ago Mr Baker iden­ti­fied three stocks that he ex­pected to per­form well in 2016 and be­yond: dotDig­i­tal, IMI­mo­bile and Vic­trex. All three have per­formed strongly, re­turn­ing 116pc, 48pc and 43pc re­spec­tively, com­pared with 31pc for the FTSE All Share in­dex.

Now Mr Baker names three of the stocks he is back­ing for 2018 and reaf­firms his view on dotDig­i­tal.

Mar­ket value £280m; turnover £32m; pre-tax profit £8m Founded in 1999, dotDig­i­tal is a dig­i­tal mar­ket­ing firm that helps clients grow their business on­line.

Mr Baker said: “It started as a UK


business but in the past few years it has started to grow in­ter­na­tion­ally. Now around a quar­ter of its business is over­seas and that por­tion is grow­ing at more than 50pc a year.”

He said the val­u­a­tion of about 25 times fu­ture earn­ings was not ex­ces­sive when the over­all growth rate of 25pc was con­sid­ered.

“The firm has high mar­gins and gen­er­ates a lot of cash, which it is in­vest­ing to fund its international business. Very few busi­nesses can grow at 20pc plus and gen­er­ate lots of cash,” he added. Mar­ket value £230m; turnover £338m; pre-tax profit £5m Dis­cov­erIC pro­duces spe­cialised elec­tronic com­po­nents, which it de­signs and man­u­fac­tures in­house. The business has about 25,000 in­dus­trial cus­tomers and its com­po­nents end up in ev­ery­thing from trains to cof­fee ma­chines.

“Acal gets its com­po­nents de­signed into its cus­tomers’ prod­ucts,” said Mr Baker. “They’re a small part of the cost but crit­i­cal to per­for­mance, so they don’t tend to get de­signed out once they’re in. There­fore the business is able to charge a de­cent mar­gin.”

He said that, with a val­u­a­tion of about 13 times fu­ture earn­ings, the firm was “some­what un­der­ap­pre­ci­ated for a business of its qual­ity”.

“Its rev­enues aren’t as pre­dictable as a soft­ware stock, but it has spe­cialised, cus­tomised com­po­nents de­signed specif­i­cally for its cus­tomers,” Mr Baker added.

“It re­leased re­sults this week and is grow­ing at 9pc a year – a very good rate of growth in the cur­rent low­in­fla­tion en­vi­ron­ment.” Mar­ket value £750m; turnover £440m; pre-tax profit £54m Polyp­ipe makes plas­tic drainage pipes for res­i­den­tial, com­mer­cial and in­fra­struc­ture de­vel­op­ments, in ad­di­tion to ven­ti­la­tion sys­tems.

Mr Baker ex­plained that while Bri­tain might of­fi­cially use met­ric units, in prac­tice im­pe­rial units were fre­quently used, mak­ing it hard for a for­eign business to com­pete with Polyp­ipe.

“No one wants to ship a lot of plas­tic and air to Bri­tain ei­ther, thanks to the cost, so it dom­i­nates the UK mar­ket,” he said.

He added that gov­ern­ment spend­ing on hous­ing pro­jects, le­gacy clay pipe in­fra­struc­ture that needs re­plac­ing and the in­creased at­ten­tion paid to the risk of flood­ing should drive the com­pany’s growth.

“It’s a mid-sin­gle-digit growth business with very high mar­gins. It made a big ac­qui­si­tion a cou­ple of years ago so is pay­ing down debt re­lat­ing to that, and has a gen­er­ous div­i­dend pol­icy,” he said.

Mar­ket value £50m; turnover £20m; pre-tax loss £0.5m This com­pany cre­ates soft­ware that al­lows hous­ing as­so­ci­a­tions to man­age func­tions such as rent col­lec­tion, doc­u­ment man­age­ment and re­pair sched­ul­ing.

Mr Baker said the firm had made a num­ber of ac­qui­si­tions over the years, which it had in­te­grated into one com­plete pack­age that is mo­bileen­abled and avail­able via the “cloud” – in other words, on­line rather than on the or­gan­i­sa­tion’s own com­put­ers.

“It’s a very mod­ern prod­uct for this mar­ket,” he said. “They’re up against large com­pa­nies for which this is only a small fo­cus and which haven’t brought their prod­ucts into the 21st cen­tury yet. So it’s start­ing to gain mar­ket share.”

The com­pany re­cently made two ma­jor sales of its com­plete sys­tem, and once those are up and run­ning Mr Baker said he hoped it would at­tract a lot more in­ter­est.

“Au­thor­i­ties are un­der pres­sure to keep rents down and be ef­fi­cient – this soft­ware is good for that,” he said. The stock trades at about 12 times fu­ture earn­ings.

Home ground: for­eign firms find it hard to com­pete with Polyp­ipe be­cause im­pe­rial units are still fre­quently used in Bri­tain

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