Each week, professional investors tell us where they’d invest. This week: Bertie Thomson & Mick Dillon of Brown Advisory Global Leaders.
The Brown Advisory Global Leaders Fund invests in market-leading companies that deliver superior customer outcomes. We believe that investing in firms that combine these traits with strong leadership, and the generation of high and sustainable returns on invested capital, can result in outstanding shareholder returns. We search the world for companies that fit these criteria and buy when we believe they are undervalued.
Profitable firm with a robust moat
One such firm is CTS Eventim (Frankfurt: EVD), which has 85% of the ticketing market for live events in Germany and is a leading provider of live entertainment through its in-house promoters and events spaces. CTS’s data (it has more than 25 million customer profiles), plus its network of external promoters, has given it a robust moat and made it the ticketing partner of choice in this winner-takes-all market.
The business is shifting from offline retail outlets to online sales. CTS captures seven times the revenue per ticket from online sales compared with offline, and profit margins are around 65%, compared with just 15% for offline. Top-line growth also benefits from ticket-price inflation of 3%-5% a year. This, coupled with volume growth driven by continued gains in market share, makes for an attractive growth profile. CTS is also starting to explore the best ways to monetise its network, which we feel gives huge potential upside that is not yet reflected in the current valuation.
The silicon revolution
Taiwan Semiconductor (Taiwan: 2330) is the leading independent outsourced foundry to the semiconductor industry. It will continue to take a share in advanced nodes over time, and use its superior scale to maintain its edge over rivals in research and development and pricing. We believe the semiconductor market will continue to grow well into the next decade as innovations such as autonomous driving, virtual reality and artificial intelligence drive rising silicon consumption. As a result of its competitive position, the firm should beat the market and there is room for growth in operating margins as the business becomes less capital intensive. Capital expenditure has run at 33% of revenues for the past three years, but this should trend down to 20%-25% with benefits to free cash flow in the mid-term.
A giant leap in aerospace
Aerospace company Safran (Paris: SAF) dominates the narrow-body engine market. It has a 75% share of current deliveries through its CFM56 engine, and 77% of committed orders on the next-generation aircraft with the CFM LEAP. Safran’s engines are reliable and fuel-efficient, which boosts profitability for customers – for example, the LEAP engine is 15% more fuel efficient than earlier models and maintains a despatch reliability above 99.9%. More than 70% of profits come from recurring aftermarket sales and – owing to the high cost of failure associated with the product – aftermarket customer retention is high. This, combined with a product lifespan of 20-plus years, provides long-term recurring cash generation and visibility. Earnings are currently depressed as it ramps up the new LEAP engine, which offers an opportunity to exploit the market’s myopia.