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Plowden points to Rolls-Royce as tech stocks power Monks recovery

Plowden points to Rolls-Royce as tech stocks power Monks recovery

Monks (MNKS) investment trust manager Charles Plowden is considering increasing his stake in beleaguered Rolls-Royce (RR), which he believes will revive in ‘five or six years’.

Plowden believed the engineering giant should not be underestimated after this month cutting another 800 jobs from its marine business, which has been hit by the slowdown in the oil and gas markets.

Chief executive Warren East, formerly of ARM Holdings, has strived to revive the group's fortunes since joining in the summer of last year. However, the shares have had a tough time, down 16% over six months.

‘We are a big supporter of the new strategy and management team,’ said Plowden. ‘It’s a bit of a murky business with deep-seated problems but the new management team are doing what we hoped they would do,' the manager told investors in London last week.

‘Rolls-Royce’s earnings are very depressed and the valuation multiples are also very low. Low multiples of depressed earnings with new management and a clear strategy, which could build to higher multiples of higher profits in five to six years’ time.’

He added that Rolls-Royce should be ‘given the benefit of the doubt’ and the trust ‘will possibly buy some more’. It held just 0.6% of the global fund in Rolls-Royce at the end of September.

The Baillie Gifford fund manager and his global alpha team switched to Monks 18 months ago after a period of poor performance and are hunting for growth stocks to continue its turnaround.

It's a case of so far, so good. Between Plowden taking on Monks until the end of November, its share price rose by 30.5% as investors returned to the trust and the discount - or gap - between the shares and their net asset value (NAV) halved to around 7%. The underlying growth in the portfolio of 21.4% was less than the 23% from the FTSE All World index, however.

Half-year results released today show a recent improvement, with NAV growth of 25.3% beating the 23.6% from the FTSE All World in the six months to 31 October. Total shareholder returns over the same period were 27.5%. As previously flagged, no interim dividend is to be paid although the trust grew its earnings per share to 1.68p from 0.89p. 

The managers of the trust, which also include Malcolm MacColl and Spencer Adair, invest on a five-year strategy because ‘five years is the period over which we can best hope to predict the share price profit’, said Plowden.

Monks' interim statement shows the companies in its portfolio growing their underlying earnings, or profits, by a mid-teens percentage. ‘We believe the world’s best growth company will be the world’s best investments,’ said Plowden, adding that analysis of growth in earnings and growth in share price bore out this theory.

Monks is also considering upping its stake in international media company Naspers (NPNJn), which at the end of October was its third biggest position at 2.8% of the £1.2 billion fund. The South African company a big contributor to first half performance alongside other technology companies, including Amazon, Alibaba, and Taiwanese semi-conductor manufacturer TSMC.

‘We would like to put more money in,’ said Plowden (pictured). ‘We are having a debate about whether we should increase our holding from 3% to 4%...As a rule of thumb, we ask can we reasonably hope – not expect – to double our money over five years.’

One stock that the Monks team is banking on to ‘make a lot of money’, according to MacColl, is Kirby (KEX.N), which is the largest inland barge operator in the US and has developed a vessel to transport petro-chemicals.

It was hit by the falls in the oil price which had a knock-on effect to valuations but MacColl said that despite a panic in the market over the prospects for the stock the team is confident it will rebound.

‘It’s an unglamorous industry but Kirby is run by a shrewd management team,’ said Plowden. ‘It consolidated its market position with a well-timed acquisition. The stock came under pressure because of the oil price…but it will benefit from the growth in petro-chemicals.

‘We think it is a very much underappreciated growth business and we like the consolidation angle, which we believe will lead to profitability and rising market, and none of that is priced in.’

Writing his half-year commentary in today's results Monks chairman James Ferguson said it was too early to predict what would happen in the aftermath of either Brexit or Donald Trump’s election victory.

‘As with Brexit, the opacity of Trump’s policies means that it is hard to fathom what might happen to the growth patterns of individual companies, particularly those with US exposure,’ he said.

‘Nonetheless, Trump’s state desire of stimulating growth through internal investment could prove a boon to the US economy and the managers remain confident in the underlying growth of the US economy.’

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