The collapse in sterling since the UK voted to leave the European Union has led to enhanced acquisition activity. While this may be music to the ears of some, Miton’s Gervais Williams is concerned good companies are being snapped up on the cheap.
At the time of writing, the pound has fallen by 18% versus the dollar since the 23 June referendum. Williams has already seen almost a dozen companies held in Miton being taken over, largely on underwhelming terms.
‘In the short term we are worried more of our companies are going to be acquired at the wrong price,’ Williams said.
‘If you look in dollar terms, our companies are looking cheaper than they were 12 months ago. In many cases they’ve continued to grow over the last 12 months, but in absolute terms some of their valuations are very low at the moment.’
He believes his acquired companies will prove to be worth intrinsically more over the next three to five years than the price paid for them.
This has led Williams to take a three-pronged approach to make sure such acquisitions do not take place, or the valuations are reflective of longer term prospects for such businesses.
The first is talking to the management of the companies to give them the confidence that he is willing to see through the price ‘zig-zag’ in the short term for higher returns in the long term.
Secondly, he is being cautious about signing irrevocable agreements and lastly he says he can buy more and top up his holdings.
The Diverse Income Trust is trading on a 1.1% discount and has a dividend yield of 3.1%. It has risen 27% in net asset value terms over three years versus the sector average return of 24.1%.
Meanwhile, the UK Smaller Companies fund is up 26.2% versus a sector average of 21.2% over three years.
Williams believes the great advantage of investing in both small and large companies is when exogenous shocks spook markets, there are always opportunities. While concerns around the macro picture and market volatility are heightened, longer term he is also worried about possible dividend cuts.
‘Longer term, we have a risk that we suffer a period of margin pressure. Many companies have grown quite used to current margins and any pressure on those would potentially lead to many companies, particularly those which are over geared to implement dividend cuts.’
He is mostly looking at investing in companies benefiting from sterling weakness, citing Lloyd’s of London underwriters and companies that are exporting from the UK, such as manufacturers.
One such example is Accrol Papers. It manufactures soft tissue products and ‘has been taking market share hand over fist’. Williams said: ‘It’s a very niche company and clearly the growth of that sector is going to be very modest but it is at a very attractive margin and attractive cash paybacks for investors.’
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Williams says WYG a global engineering consultancy, is well positioned to continue to take market share in its areas of operations.
‘The reason why we like it is over the last four years, with a new management team, they made themselves much more effective by helping the UK and EU governments in those places where they are investing in overseas aid,’ he said. ‘If they want to put in a new plant or hospital, they need someone to design it. But also someone who will be safe, so it’s quite a sophisticated area and this company has become one of the leading companies.’
He pointed out that government expenditure in overseas aid will remain stable as it is not dependent on GDP growth. Williams took advantage of the negativity surrounding the company following the Brexit vote as many thought the company would struggle getting orders from the EU. However, since the referendum it has continued to receive orders and has the option to build on existing operations in EU countries.
This is a sports nutrition company that Williams started buying late last year.
While the company provides a quality product for professional athletes and cyclists, it has also been investing heavily in building brand awareness.
‘It’s lovely to get a company intrinsically small, but that has a brand awareness of something high profile. In due course they will get a big cash payback. At the moment it’s still loss making because it’s still investing in marketing. It got off to a good start this year and it’s got terrific upside.’
A manufacturing company that produces non-woven fabrics and a specialist in noise and heat management, Autins provides its services to the automotive sector to reduce noise from the engines of Bentleys and Range Rovers.
The group listed on the AIM back in August.
‘The devaluation of sterling is a positive to them. They’re competing with overseas companies and they’ve taken more market share. They used the IPO to put in more capacity,’ Williams said.