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Beyond Brexit: AA-rated star's six small cap picks

The overseas earnings power of many UK small caps could be called one of the better kept secrets in investment, says Canaccord's Eustace Santa Barbara

The overseas earnings power of many UK small caps could be called one of the better kept secrets in investment – cloaked by the common misconception that smaller companies are overwhelmingly focused on domestic customers.

In our own fund, Marlborough Special Situations, around half of the revenues of portfolio companies come from overseas.

The reality is that in an age of globalisation and the internet, if a company has an exceptional product or service the opportunities can often be worldwide.

Citywire AA-rated Eustace Santa Barbara is co-manager of the Marlborough Special Situations fund alongside AAA-rated Giles Hargreave

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The overseas earnings power of many UK small caps could be called one of the better kept secrets in investment – cloaked by the common misconception that smaller companies are overwhelmingly focused on domestic customers.

In our own fund, Marlborough Special Situations, around half of the revenues of portfolio companies come from overseas.

The reality is that in an age of globalisation and the internet, if a company has an exceptional product or service the opportunities can often be worldwide.

Citywire AA-rated Eustace Santa Barbara is co-manager of the Marlborough Special Situations fund alongside AAA-rated Giles Hargreave

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Arena Events


Arena Events is a good example. The group, which provides temporary structures at sporting and entertainment events, has operations in the US, Hong Kong, Malaysia and Dubai, as well as the UK.

Clients include the US Superbowl, US Open Golf Championship, the Porsche Carrera motor racing cup in Asia and the Dubai Jazz Festival.

Around 40% of revenues are generated in the US, 40% in Europe and 20% in the Middle East and Asia. Arena is in a growth area and expanding organically and through acquisitions. The company is on a PE of around 10x forecast earnings for December 2019.

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PPHE

PPHE operates hotels, including the Park Plaza Chain, in the Netherlands, Germany, Croatia and Hungary, as well as the UK.

If you break down its property assets by value, almost 40% are in continental Europe, with the remainder in the UK. We like the fact that it develops, owns and operates its own sites, which is increasingly unusual in the hotel business.

Its portfolio of mostly freehold and long leasehold properties was independently valued at around £1.6 billion earlier this year and a NAV per share of just north of £24 means the stock is trading at a discount to NAV of around 34%.

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CLS Holdings

CLS Holdings is another small cap in the property business, this time leasing office space. Just under half of its properties are in Germany and France, with the rest in the UK.

Half of its tenants are governments or major corporations, who should be reliable payers, and around 40% of its rents are index-linked, which should provide protection if inflation picks up.

The net initial yield on its portfolio of properties is 5.3%, which is well below its cost of debt, which is 2.4% and CLS is trading on a share price to NAV of 0.74x, which is a 26% discount. We think there is clear value in the company.

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Ocean Wilsons

Through a subsidiary, Ocean Wilsons operates a maritime services business in Brazil. The company’s biggest assets are two ports in Brazil, Salvador and Rio Grande. These are both world-class ports, with limited local and regional competition, and vital for imports and exports by Brazil and, to a lesser extent, Argentina.

Ocean Wilsons is trading on a PE of around 11x earnings, while our calculations show an average for other port businesses globally of 17x, so the valuation looks compelling. The other attraction is that the company has signalled it is considering selling its ports, which could be very attractive for infrastructure investors or large pension funds, so we believe there could be significant upside here.

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Scapa

Scapa is a global supplier of adhesive-based products serving the healthcare and industrial sectors and generates well over half of its revenues in North America, with the rest coming from Europe and Asia. It has manufacturing centres in the US, Canada, Brazil, China, India and Malaysia, as well as Europe.

In addition to its global footprint, what is interesting about Scapa is the transition it is undergoing. Five years ago, most profits came from the industrial arm of the business, but gradually the company has been increasing its focus on the faster-growing, higher-margin healthcare segment.

The company had a difficult November after a drop in pre-tax profits sent the share price sharply down, but we believe the transition of Scapa presents an attractive long-term growth opportunity. The stock is trading on a PE of around 16x to March 2020.

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Coats

Coats is the world’s leading industrial thread manufacturer and its products are used in the stitching of everything from premium training shoes and tracksuits to fireproof gloves and protective clothing for the oil industry.

Coats has factories in 40 countries and only 1% of revenues are derived from the UK. North America accounts for more than a third of revenues, Europe excluding the UK 20%, China 15%, India 14% and Vietnam 14%.

Trading on a PE of 11.9x forecast December 2019 earnings, we think Coats has attractive growth potential, not least because of its strong focus on labour and environmental regulations, which are important considerations for its customers, which include Adidas and Nike.

What these six diverse companies demonstrate is that although Brexit uncertainty is casting a shadow over domestic growth, there are still plenty of attractive opportunities to be found among the UK’s smaller companies. There is a lot more to UK small caps than the UK economy. 

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