Henderson Global Investors (LON:HGG) Corporate Fund Manager Jamie Brooke caught up with DirectorsTalk for an exclusive interview to discuss which of his investments did well in 2015 and his thoughts on prospects for 2016. Stocks discussed include Conviviality PLC (LON:CVR), Proactis Holdings PLC (LON:PHD), Redcentric PLC (LON:RCN), 1pm plc (LON:OPM), Digital Barriers PLC (LON:DGB) & Nanoco Group PLC (LON:NANO)
Q1: Which of your investments did well during 2015?
A1: Just before I go to that, I might just give it a slight background on the sort of funds we manage here. The first thing to point out really is 2015 was a very good year, some of our funds were between 10% and 20% returns, 2016 I must say I’m a little bit more cautious about. However, just to go into your question, probably the three most notable big performers were Conviviality Retail, Redcentric and Proactis, all of which we, at full disclosure, good sizable positions in.
Firstly with Conviviality Plc, which is a franchised off-licence and convenience store chain, it’s run by a lady called Diana Hunter who is extremely impressive and a very energetic CEO. Previously she was at Waitrose and Sainsbury’s so an excellent person to get into a business like Conviviality and she pulled off an enormous coo really during the year and bought a business called Matthew Clark, which is the largest independent on-trade distributor of drinks in the UK and it’s the largest by some way. The combination of those two businesses will lead, and is leading, to sales synergies and also incredibly good cost synergies, not so much of the overheads level but at the level of cost of sales so at what price they buy their product at, and then she used a small amount of debt to make the purchase so that in itself lead to some very very big upgrades. So from memory, I think EPS went from about 10 to next year will be at 16p or so which in a business when you’re talking about drinks retailing, is very good EPS growth. So that shareprice went from 150p to somewhere north of £2 so that’s probably the most notable and sort of the best performer of the year I’d say in terms of a single event that drove it.
So Proactis Holdings PLC is a procurement business that helps organisations save sort of 15-20% of indirect spend basically through automation, through spend control i.e. looking at comparisons of smaller ticket items that are often bought. They made a few acquisitions in 2014 and into 2015 and integrated those well and again, made some good cost decisions and it’s lead to some really good cash generation for the business as a whole. Off the back of that and really off the back of people beginning to notice it, because it was a relatively small cap, a micro-cap, and as the market value of the micro-cap began to grow, I think more people paid attention to it. So we saw some very strong price rises in Proactis, particularly towards the second half of the year and I think, frankly, if I was to give a pick for this year coming I think Proactis, and Conviviality actually who have still got some way to go, so we’re sort of very happy holders of both those.
The last one I mentioned was Redcentric PLC which has, really over the last two years, been an excellent performer, they also made a couple of great acquisitions, this is an IT service company and not only that but they’ve managed to drive double-digits organic growth as well which is much better than the market as a whole for IT services and really off the trend of being able to offer a full IT solutions to SME customers and this is large SME and frankly I think it’s got strong contractive revenue, very good net margins, sort of 20% plus and it’s a pretty rare asset in the market to be honest with you and so if you want something that’s going to give you a nice free cash flow yield every year then Redcentric should receive a call. It still looks, I think it’s come off a bit in the last few days, but it still looks very good value and is the sort of business that a lot of people, clearly in potentially trade and private equity would find attractive.
Q2: Now you touched on this earlier, what are your thoughts for the prospects for 2016?
A2: Well it started off as a very difficult year obviously with all the trouble with China in terms of the stock market and the fears over the oil price, frankly the uncertainties in the Middle East, Saudi Arabia and Iran, what Russia’s going to do on oil production, there’s some chat about Russia reducing oil production but of course you’ve Iran coming on to counterbalance that. So I think there’s a lot of macro risks, what I’ve been trying to do is focus on the businesses I think are reasonable well protected and where I think the revenue is, sort of likely to continue strongly or be driven by the macro environment. So of the ones I’ve mentioned; Conviviality, Redcentric, Proactis, I think they’ll be relatively nice performers in 2016 and then a couple of others.
We’re also in a business called 1pm plc, which is interestingly named but literally as in the time, 1pm plc, and they bought at the back end of last year a business called Academy Leasing, the Academy Leasing essentially was a broker who also did a bit of lending on their books. Sorry, 1pm is a leasing business based in the West Country, Academy Leasing moved them into a new geography and frankly, alternative lending to SME’s, which is what these guys do, is growing very strongly and continues to grow strongly. Last year, 1pm did not, I think it was at 5/6%, so was not a huge performer in the year but as they bed down Academy Leasing which happened in the second half of the year, I think you’ll see these benefits come through so I see no reason, this is about a £45 million or so market cap, I see no reason why this couldn’t eventually, potentially with another acquisition or so, be a £100 million market cap company and then it would be a very attractive target for any of these challenger banks who are looking to beef up their SME lending part of the portfolio. So that would be one of my tips, 1pm.
The other two are, one is Digital Barriers PLC which is a security solutions company, it’s been on the market for a few years and frankly has had a pretty tough ride but it is now beginning to see very strong demand for its product, for obvious reasons, it does things like border control and sells to the defence department, police, law enforcement agencies and so on. They recently bought a US business called Brimtek which is very much focussed on the homeland security in the US and with this Brimtek acquisition, it will take it very close to breakeven, up until now it’s been losing money and that’s obviously been a risk and it’s turned off investors. We recently got involved in the placing and frankly that acquisition has made all the difference to the business and once it’s at breakeven, I think we’ll see that the money will come through and then that should drive some pretty substantial profits over the next few years. It’s also got an excellent management team running the business.
The last one I was just going to mention is a business called Nanoco Group PLC which has been on the market for probably five years and it’s in the area of quantum dot technology which is now going to be the sort of new TV displays but also quantum dots can be used for lighting and solar and bio-imaging and it was just quite interesting to note that Samsung in the CES conference in Las Vegas sort of stated that they were delivering truly different products that exceed expectations, televisions are the highest calibre, it starts with their enhanced premium line of SUHD TV’s with quantum dot display. So they are pushing it incredibly hard and I think quantum dot will be, in the next few years, one of the key factors that defines the way the television market goes.
Q3: Finally, why would an investor invest with you and your funds?
A3: The reason our investors invest with us is because of the last 10/12 years, our flagship fund Volantis has produced annualised returns of sort of 11% or so and I don’t think there’s many funds out there that have done that. If we look at our concentrated, by which I mean where we hold 15 or 20 positions, those funds have produced very strong returns about 80% returns in the last 2 and a half years since inception, I’m talking about one particular fund called the cashless fund, and that’s I would have thought certainly top decile performance, 80% over the last 2 and a half years or so and I hope we can continue to do that. We don’t take a sort of generic approach, we take a very active approach, we will take large positions in companies and work with those companies to try and yield the right returns so it does require an active manager to make the returns in this space and history has proven that that’s worked, I just hope it works for the next few years too.
