David vs super-sized Goliaths? Small companies versus large companies

Matthew Tillett

Premier Miton UK Value Opportunities Fund manager

For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

Finding exceptions to the rule

One generally accepted assumption in the stock market is that larger companies are less volatile investment propositions than smaller companies. Large caps tend to be more mature companies, and so are less affected during rough markets as investors fly to quality and become more risk averse.

Larger companies tend to be more diversified geographically. They are more likely to be industry leaders. They also benefit from greater access to debt capital markets, potentially reducing their financial risk profile during times of economic stress when smaller companies may be facing prohibitive financing costs.

In the short term, the stock market tends to reflect these presumptions. Just looking at the recent period (from 07.03.2023 to 06.04.2023) since the onset of the troubles in the US regional banking sector, the FTSE mid 250 has lost 6.3% and the FTSE small cap has lost 6.1%. In contrast, the large / mega cap-oriented FTSE 100 has held up much better, losing only 1.8%, as investors have sought the safety of larger, more diversified internationally focused companies.

But what may be true in aggregate is not always so at the individual company level. The exceptions can be much more interesting than the rule, especially as they may bring with them contrarian investment opportunities.

Below are four examples of UK listed small or medium sized companies that are genuine global operators. In our view all benefit from long term structural growth drivers. They come from a range of different industries, some defensive, others more cyclical. Most importantly, all except one are being valued at under 12x p/e (price to earnings ratio), based on current year consensus earnings forecasts, for reference the current p/e ratio of the FTSE 350 is 13.1x (as at 13.04.2023 according to FT.com).

Healthcare: Hikma Pharmaceuticals

£3.9bn market cap as at 13.04.2023

Founded in Jordan in 1978, Hikma is a global pharmaceutical company with a focus on injectable drugs, a strong presence in the Middle East and North Africa (MENA) region and a US generics business. Injectables is an attractive industry we believe due to the very high safety and regulatory standards, which make it hard for smaller competitors to enter the market.

Recent years have seen consistent high single digit organic growth with high profitability. Hikma also benefits from its strong local presence in the MENA region where it is capitalising on the long-term growth of healthcare spending. The current valuation of the company’s shares most likely reflects the recent challenges in US generics where pricing pressure has reduced profitability across the industry. But these trends may prove temporary in nature.

Distribution: Inchcape

£3.1bn market cap as at 13.04.2023

Selling cars may not seem like the most obvious place to find a growth company. In most developed markets, this is a mature industry with most car purchases being replacements or upgrades. Inchcape is different due to its presence in emerging market countries where motorization rates are rising from a low level.

Current motorization rates – vehicles per 1000 people

Source: Derco acquisition prospectus www.inchcape.com

These also tend to be smaller markets where the big car manufacturers do not have a local presence, opting instead to use distributors like Inchcape. This is a highly fragmented market in which Inchcape has real global experience, offering a lot of potential for both organic and acquisitive growth.

The current valuation reflects understandable concerns over the economically cyclical nature of the automotive industry. However, this must be considered in the context of industry volumes which are already close to a cyclical low (down over 15% 2019) due to supply chain constraints which are now starting to ease.

Travel: SSP

£2.0bn market cap as at 13.04.2023

SSP is a food service business supplying outsourced catering services to infrastructure owners such as airports and railway stations. This is an attractive growth industry in our view. There is secular growth in travel volumes, especially in emerging and middle-income countries. Travel infrastructure owners are also increasingly choosing to outsource their food service offering to specialists such as SSP, where the mix of in-house expertise and powerful third-party brand relationships leads to higher customer spending on site.

SSP have only one or two globally credible competitors which gives the company a fantastic long-term growth opportunity. SSP’s current share price reflects the fact that the company is on a rapid recovery trajectory from the pandemic era, which may see profits grow from current levels.

Construction: Keller

£495m market cap as at 13.04.2023

This specialist in ground engineering is a very different business model to a traditional construction contractor. There is a greater level of expertise and specialist kit required for the projects that the company works on. Much of this kit is owned outright, which means Keller has a large asset base.

Increased height and overall complexity of buildings and infrastructure projects may drive long term growth for ground engineering services within construction. Keller benefits from several strong local market positions, in some cases dating back decades. The current share price likely reflects Keller’s association with the very different and arguably lower skill – traditional construction contracting industry.

If the cap fits?

These examples – and many others besides – showcase the wide range of internationally diversified business models that can be found in the listed UK mid and small cap market. In the short term, their share prices may continue to move up and down with the broader swings in economic sentiment. But over the longer term, these businesses could reap the benefits of their international diversification and growth prospects just as much as their large and mega cap peers.

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Risks

THIS FUND MAY EXPERIENCE HIGH VOLATILITY DUE TO THE COMPOSITION OF THE PORTFOLIO OR THE PORTFOLIO MANAGEMENT TECHNIQUES USED.

The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Investment in smaller companies is typically higher risk than investment in larger companies. Shares in smaller companies can experience greater levels of volatility.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on the information contained within.

The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

Whilst every effort has been made to ensure the accuracy of the information provided, we regret that we cannot accept responsibility for any omissions or errors.

Reference to any particular stock does not constitute a recommendation to buy or sell the stock.

Source: FTSE International Limited (“FTSE”) © FTSE 2023. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

All data sourced to Bloomberg unless otherwise stated.

A free, English language copy of the Prospectus, Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or copies can be requested by calling 0333 456 4560 or emailing [email protected]

Financial Promotion issued by Premier Portfolio Managers Limited, (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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By clicking accept you acknowledge that your use of this website is subject to our privacy policy, cookie policy and our general legal and compliance information available on our website.

THE UNITED STATES OF AMERICA: The investment products referred to on this website have not been and will not be registered under the United States Securities Act of 1933, as amended. They may not be offered or sold in the United States of America, its territories and possessions, any State of the United States of America or the District of Columbia or offered, sold or transferred to US Persons (as defined below). The investment products referred to on this website have not been and will not be registered under the United States Investment Company Act of 1940, as amended. Premier Portfolio Managers Limited has not been and will not be registered under the United States Investment Advisers Act of 1940.

 “US Person” generally includes the following: (a) any natural person resident in the United States; (b) a partnership or corporation organised or incorporated under the laws of the United States; (c) any estate of which any executor, or administrator, is a US Person; (d) any trust of which any trustee is a US Person; (e) any agency or branch of a non-US entity located in the United States; (f) any non-discretionary account or similar account (other than an estate or trust) for the benefit or account of a US Person; (g) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organised, incorporated or (if an individual) resident in the United States; and (h) any partnership or corporation if: i. organised or incorporated under the laws of any non-US jurisdiction; ii. formed by a US Person principally for the purpose of investing in securities not registered under the 1933 Act. In addition, a Shareholder must qualify as a “Non-United States Person” as used in the US Commodity Futures Trading Commission (“CFTC”) Rule 4.7.

 Investment products referred to on this website may not be sold or transferred to a US citizen, or an entity taxed as such or required to file a tax return as such under the United States federal income tax laws (a “US Tax Resident”). If those investment products are held by a US Person, a US Tax Resident or a person who does not qualify as a “Non-United States Person” within the meaning of CFTC Rule 4.7, Premier Portfolio Managers Limited shall be entitled to redeem such Shareholder’s entire holdings.