A professional investor tells us where she’d put her money. This week: Bettina Edmondston, Saracen Fund Managers.
We are generally indifferent to where a business is domiciled, but acutely interested in where sales are generated. Over the past 12 months, our analysis has identified European-listed companies as being attractively priced compared with their US-domiciled competitors, despite having similar geographic sales profiles. The European investment case has been fogged by political uncertainty, most of which is gradually clearing. It is early days, but businesses that we’ve met have been generally more optimistic that the recovery is gaining strength.
Svenska Handelsbanken (Stockholm: SHBA) is one of the strongest banks in the world, with a common equity tier one (CET1) ratio, a measure of financial strength, of over 23%. It tends not to be the cheapest provider on the high street, but because customers appreciate its quality of service the bank manages to attract a higher share of deposits. In return, Handelsbanken knows its customers well, which means it is easier to avoid high-risk borrowers.
Its lending has a high bias towards mortgages, which account for around 80% of total loans. In good times, banks are often judged by their ability to grow lending. However, the business is also about controlling costs and avoiding losses on loans, by accurately pricing the risks of default. In recent years the disparity between competitors has narrowed. This does not, in our opinion, reflect the inherent strength of Handelsbanken’s business.
Heidelberg Cement (Frankfurt: HEI) is a leading producer of building materials, operating in 60 countries. It has revenue growth prospects from an uplift in infrastructure spending in the US, recovery in Europe and structural growth in emerging markets. The business has a strong and sustainable margin profile. The balance-sheet leverage is currently higher than normal at 2.8 times net debt/earnings before interest, tax, depreciation and amortisation (Ebitda). This reflects the firm’s recent acquisition of Italy’s Italcementi. However, we forecast that Heidelberg will quickly delever and refinance debt at more competitive rates. Most importantly, the shares currently trade on a very attractive valuation.
Pandora (Copenhagen: PNDORA) is a manufacturer of affordable contemporary jewellery. The firm has the potential to grow sales by launching new products and entering new geographic markets. It also has extremely strong margins, with gross margins of 75% and operating margins of 35%. Pandora has a very solid balance sheet and generates large amounts of cash. Due to investors’ concerns about a structural change in the US and UK markets and a change in dividend policy, the shares have derated significantly this year. At current valuation, we see Pandora as a fantastic long-term growth story offering both a high initial dividend yield (of greater than 6%) and dividend growth.