Odyssean Investment Trust looks to invest in high-quality British businesses trading below their fundamental value, with scope for that value to grow through proactive management action.
On this theme, one area where we have been active recently is an unglamorous sector in an unloved part of an undervalued market: UK small-cap industrials. We think the sector hides a number of gems.
Within industrials we look for firms with know-how in complex production processes that is hard to replicate, as this offers the opportunity for pricing power and attractive margins. We like companies with a global customer base, reducing reliance on the UK economy and increasing the potential appeal to overseas investors and acquirers.
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Finally, we like to back proven management teams with a clear plan. We have found a number of such opportunities, which is why industrials is currently our largest sector exposure.
A big blue-chip client base
One of our more recent investments has been Gooch & Housego (LSE: GHH), a leading manufacturer of photonics and electro-optics solutions selling to a blue-chip client base of healthcare, industrial and aerospace customers around the globe.
The group’s end markets are growing strongly, and G&H is well-placed with unique capabilities in optical coatings and materials.
Having historically been built up through mergers and acquisitions, the group recently appointed a new CEO, who is focusing on boosting margins significantly by integrating historic deals better.
Today the stock is on an enterprise-value/sales (EV/sales) ratio of around one, compared with a ten-year average of 2.2. We feel the market is giving little credit to the growth and improvement potential in a group with world-leading intellectual property (IP).
Another more recent addition to our portfolio is James Fisher (LSE: FSJ), a leading provider of marine services and technical products to the offshore- renewables, energy and defence sectors.
The group covers a range of specialist niches where its engineering expertise is crucial, from building offshore wind farms to submarine rescue services.
The group serves global markets with secular growth drivers and often provides unique products or services. Having had a troubled period after the pandemic, the group now has a new CEO with clear plans to drive improved performance across margins and return on capital, a key gauge of profitability.
The shares trade at around book value, which we see as undervaluing the expertise and quality in the group’s varied business units.
Chemring’s wide moat
Finally, we see potential in Chemring (LSE: CHG) a leading provider of countermeasures, sensors and energetics products primarily for the defence industry.
The group enjoys unique IP. It is among the few players globally capable of manufacturing its energetics products; it is an incumbent provider of high-end sensor products on several large US defence platforms; and within the group there is a high growth cyber-security consulting business (Roke), which has world-leading expertise in electronic warfare and cyber defence.
The global reappraisal of defence priorities following the Ukraine war supports ongoing favourable demand and we see the group as well placed to deliver strong earnings momentum from here. On an EV/sales ratio of 1.6 the value of the group’s expertise and its future market demand is, in our view, being overlooked.
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