Companies we've met during the past quarter
John Royden, Head of Research
James Godrich, Fund Manager
52 week high-low £25.75–£20.47 Net Yield 3.60%
Hist/Pros PER 16.2–19.5
Equity Market Cap £5,355m
Liv Garfield, CEO and James Bowling, CFO
Liv Garfield (“Liv”) is an inspiring CEO. Aged 41, she does a day a week in a high vis jacket on the front line and makes a point of getting a lift to the depot with the manager to get an understanding of what is actually going on.
Ofwat have just published Water 2020 which sets out their thinking for the next five year regulatory period. Liv Garfield explained that the regulator is pressing for there to be water companies that win and water companies that lose. Why should a customer’s bill be larger by £10 because the water company is relatively poor at dealing with their sewage? Efficiency and innovation is the name of the game.
Ofwat want companies that take risks to improve customer service and Liv sees lots of opportunity here. She has people working on getting the water content of sludge down (so that it costs less to move around) and scouts water constrained places such as Tel Aviv, Australia and Tokyo in an effort to learn the secrets of minimising leakage. Severn Trent want to be using telemetrics to give them better insights into how their assets are working and being one jump ahead of a potential leak or problem.
The move to indexing water bills to CPI from RPI is balanced, in the case of Severn Trent, by allowing revenue increases in other areas so overall effect is value neutral for shareholders. Liv thinks that nationalisation by a Labour party is less of a risk than some think as there appears to be weak political grass roots support from Labour MPs. She is enthusiastic about the business and its ability to thrive in the new regulatory environment and that is possibly why she pushed the uplift in the dividend from RPI to RPI +4%.
52 week high-low £17.08–£13.80 Net Yield 2.09%
Hist/Pros PER 23.0–20.9
Equity Market Cap £14,317m
Brian Cassin, CEO and Lloyd Pitchford CFO
Experian is one of just three credit bureaus in the UK and one of four that compete nationally in the US. The company collects, stores and resells data and analytical tools that are used to manage credit risk, prevent fraud, target marketing offers, and automate processes.
The business splits broadly into two segments; business-to- business (B2B) and business-to-consumer (B2C) - albeit financial reports are separated into four divisions.
B2B sales have seen strong organic growth within the group in recent years, driven mainly by their ‘ONE Experian’ strategy. As part of this, Experian have been able to use their range of services and depth of data to drive cross-selling opportunities and to take a greater share of revenue across the value chain.
B2C however, has seen more issues of late with management having to reposition the business as a result of innovative disruptors entering the market.
Where Experian had generated revenue by offering a single subscription-based product to customers, new entrants began to buy data from bureaus, provide a similar service for free to consumers and monetise the offering through referral fees.
In order to counter these disruptors, Experian have set about growing their membership base by providing credit scores for free to new and existing members. The medium term intention here is to drive revenues by selling additional products and services into their membership base, which is now 1.7 million strong in the UK and 9 million strong in the US.
The bureau market, in which Experian competes, remains a highly concentrated one with strong and defensible barriers to entry. With two-thirds of the business growing organically at over 5%, a return to growth in the not too distant future from the consumer side is feasible.
52 week high-low £2.85–£1.66 Net Yield 1.74%
Hist/Pros PER 27.7–17.6
Equity Market Cap £838m
Guy Wakely, CEO and John Stier, CFO
In the Summer 2016 edition of Prospects we wrote on Equiniti where we described the group as a share registration, pension payment and administration services business. We highlighted their remarkable level of stickiness, high percentage of recurring revenues and average contract length of 27 years.
So stable and predictable is their business model, that were it not for a recently announced foray into North America, we would have little to add.
In July 2017 management announced the acquisition of Wells Fargo’s Share Registration & Services business (WFSS). The £176m acquisition combines the number one player in the UK with the number three player in the US to create a global share registration business.
WFSS holds a leading market position with a growing market share. Over the previous three years the business has grown revenue by 6% on average each year and in 2016 posted revenues of £81m and adjusted profits of £14m; this compares with Equiniti as a whole in the same time period with £383m and £41m in revenue and profit respectively.
The strategic rationale for the acquisition comes mainly from integrating Equiniti’s market leading IT platform into Wells Fargo’s existing business, alongside cost synergies, estimated to be around £8m per annum. On this basis alone the acquisition is expected to be double digit earnings accretive to shareholders by the end of year two.
So whilst the deal looks good on paper we now hope for management to execute successfully on the integration of the near 1,200 public and private US companies, alongside 9,200 shareholder records in their typically unexciting but predictable manner.
We met the companies below and you can learn more on any of these by contacting the person at JM Finn with whom you usually deal.
Victrex, Rio Tinto, Johnson Matthey
Coca-Cola Hellenic Bottling, Victoria
Intercontinental Hotels Group, Moneysupermarket.com, Marston’s, Wizz Air Holdings, El Group, RELX, ZPG
London Metric Property, Standard Life PLC, HSBC Holdings, Assura, Purplebricks Group, Provident Financial, Workspace Group, Prudentia
Gooch & Housego, Cobham, Experian, G4S Security Services, Smurfkit Kappa Group, Equiniti Group, Halma, Intertek Group
National Grid, Severn Trent