Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Michael Savage, partner at, Killik Capital.
We seek to pick good, undervalued, UK small- to mid-cap companies. Here are three that we like.
Titan Europe (LSE: TSW) is an international engineering group designing, developing, manufacturing and distributing products and services for original equipment manufacturers (OEMs) such as Caterpillar and John Deere.
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It focuses on global construction (around 50% of revenue), mining (20%) and agricultural machinery (30%). The outlook has been improving dramatically in recent months, confirmed by upbeat commentary from the equipment manufacturers themselves.
Titan designs and manufactures wheels (44%) and undercarriage components and assemblies (56%) for tracked and wheeled off-road vehicles. The high debt figure (about £150m) is an issue, but the firm's main banks (Intesa SanPaolo/UniCredit) appear supportive, and credit facilities were successfully renegotiated in May 2009. There is also considerable net asset value support of 172p per share. There are two large corporate shareholders on the register: a privately owned German peer, Mefro Wheels (29.9%), and also the US-listed Titan International. The latter made an all paper bid in the spring of 2008. It already holds 17% of Titan Europe and if, as proposed, it buys Goodyear's agricultural tyres business in Europe then a bid for Titan Europe's wheels business (if not the whole thing) looks sensible.
Our next tip, Landkom (LSE: LKI), is a Ukrainian-based producer of soft commodities, including rape seed, wheat, barley, maize and soyabean, with a growing land bank. Given its location, which boasts abundant agricultural land and large amounts of labour, the business has the potential to execute low-cost farming, and compete with other farming regions. Investors who knew the Landkom business two years ago may be wary. However, the issues that caused the share price to fall from more than 100p per share to the recent lows of just 2p the poorly timed purchase of farm equipment and fertiliser at the peak of the commodity boom in 2008 and a heavy reliance on one crop, winter wheat have been corrected.
The British management team has also largely been replaced, with CEO Vitaliy Skotsyk now in control. The interims for 20 July reassured with a sharp fall (over 35%) in operating costs per hectare.
Meanwhile, crop prices, and particularly those of wheat (up 50% since the end of June), have spiked dramatically. The group is on target to break even on a cash-flow basis this year. We think there is even scope for a surprise to the upside.
Our final pick, Nestor Healthcare (LSE: NSR) provides a range of staffing and managed services to both health and social care markets in the UK. Around 70% of revenue comes from social care and the remaining 30% from primary care. Social care encompasses non-medical services offered to care for the ill, elderly or disabled in their homes. The aim is to allow them to live free of institutionalisation where possible. The primary-care division is mainly involved in providing out-of-hours services say if a medical emergency occurs outside of normal GP hours. 90%+ of revenue comes from local authorities and the NHS. However, the risks linked to spending cuts are slim, given the comparatively high cost to the government of pulling these contracts. Furthermore , the main growth driver an ageing UK population is not about to go away.
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