Each week, aprofessional investor tells us where he'd put his money. This week:Richard Pease of the FP CRUX European fund.
Over the final quarter of 2016, markets did not deliver what many were expecting. Investors embraced the risks facing the economy, but we don't see much evidence those risks have gone away. The global macroeconomic and geopolitical backdrop remains unsettled. We have seen some higher inflation figures in the UK, but we do not expect global inflation to roar back and so interest rates are likely to remain low.
We look for companies which can thrive in periods of market uncertainty. The businesses we favour are cash generative and typically have very high barriers to entry. They have strong management teams with interests aligned with that of shareholders and conservative balance sheets. We also look for firms that perform a small yet crucial function which compels their customers to continue to buy their product or service, no matter what the economic weather.
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A good example is real-estate investment group Aroundtown (Frankfurt: ALATP). It operates primarily in Germany and invests in commercial and residential property. We like the fact that the management has a meaningful stake in the business: it is run by Yakir Gabay, who owns 55%, with the management team owning a further 6%. It buys properties from distressed sellers and then improves operations, typically increasing the yield from around 6.5% to 9%. The stock is currently on a substantial discount to net asset value (NAV). Aroundtown's portfolio has a free cash flow yield of 7.5% and a loan-to-value ratio of under 30%, so it is under-geared and cash generative. I view this as a good starting point. You can then factor in the rental growth over the next three to five years. During this period, I would expect the NAV to double.
We also like IQE (Aim: IQE), a small Cardiff-based company which is leading the way in advanced semiconductor products. IQE has developed technology that enables a microchip to have 320 layers, which improves the performance of products such as smartphones and solar panels. In the wireless electronic device market, IQE has a market share of more than 50%. It has an impressive management team, a good balance sheet and a lot of intellectual property. We bought in at 12 times earnings and think the shares could double quite quickly.
Spie (Paris: SPIE), is a high-quality and battle-tested stock, which doesn't look expensive on 15 times earnings. Spie is a French electrical and mechanical maintenance company, which is highly diversified across a lot of small contracts. It has negative working capital and, in common with other stocks in our portfolio, it has been through private-equity hands. We often look for similar characteristics as those sought by private-equity firms: capital-light, cash-generative firms with recurring revenue. Spie has a strong management team that owns around 10% of the business.
Richard Pease is manager of the FP CRUX European Special Situations Fund at CRUX Asset Management.
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