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.
