HL SELECT UK GROWTH SHARES

HL Select UK Growth Shares: Summer Results

Managers' thoughts

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Charlie Huggins (CFA) - Fund Manager

31 July 2017

In a week full of company results, there were more of our holdings reporting than we have space to cover here in detail. Suffice it to say that for Reckitt Benckiser (RB), British American Tobacco (BAT), Relx and Compass, all looked in order. Each reported solid underlying growth, with no real shifts in their strategic directions. Both RB and BAT have recently completed large acquisitions and in both cases, the early indications from the acquired businesses look to be broadly as expected.

Just Eat reported very strong growth, at home and abroad, but this was widely expected and the shares saw some profit-taking after a strong run. Rightmove delivered another period of double digit growth in its first half, as it continues to exploit its dominant market position.

Busy Burford marches on

Burford Capital has had a busy week, first reporting a positive judgement that could see the group receive a return of as much as $140m from a single court case, followed by interim results that saw the group report a higher profit for the half year than it had achieved in the whole of FY2016.

The merger with Gerchen Keller looks to have gone to plan and the group now has $3.1bn invested or available to invest into litigation finance. The markets that Burford serves are expanding fast; accessing third party funding for litigation matters frees up cash flow for the litigant and if they lose, it is the financier that suffers the cost. Burford have shown great skill so far in selecting the cases they back and returns have been very strong.

So far, Burford has been far and away the most successful position in the HL Select UK Growth Shares fund, with the position having roughly doubled in value in less than eight months. It takes time for capital invested in litigation to produce a financial return, so we have yet to really see any results from the most recent and largest waves of funding that the group has committed to. If they can keep their returns at historic levels, then the future for Burford could be very exciting indeed. Although, it must be remembered that past performance is not a reliable guide to the future. Please remember the value of investments can fall as well as rise, so investors could make a loss.

Ascential impressive

Ascential shares rallied following impressive first half results. Operating profits from continuing operations grew by 28% (helped in no small part by sterling weakness) and free cash flow rose by 27%, underpinning a 20% increase in the dividend.

The majority of Ascential’s brands are truly unique. Cannes Lions has such a rich heritage and is so deeply entrenched in the creative industries it serves, that it would be virtually impossible to replicate. WGSN is so deeply embedded into the workflow of fashion companies that, without it, their ability to predict trends, and to stock their stores and websites accordingly, would be seriously compromised. The size of Ascential’s ‘moat’ or competitive advantage - judged purely on the value its brands create for its customers – is simply enormous.

We met with Ascential’s CEO, Duncan Painter, and FD, Mandy Gradden, following these first half results which reinforced our positive view of the management team. Since 2011, Ascential have steadily focused their portfolio onto their strongest brands, disposing of many smaller, weaker properties, whilst acquiring fast growing assets like Medialink and One Click Retail. These actions have transformed the overall quality and growth potential of the portfolio and Ascential remains a core holding.

Domino’s delivers mixed results

Domino’s Pizza served up a 9.9% increase in underlying earnings per share, and increased its interim dividend by 7.1%, while raising its full-year store opening target. However, the shares fell by 5% as investors focused on slowing UK like-for-like (LFL) sales growth and the group’s plan to invest an extra £4m to “improve value for customers and strengthen national promotions".

We think the slowdown in growth is probably due to a combination of UK consumers tightening their belts and intensifying competition in the online food delivery market from the likes of Just Eat and Deliveroo. However, even though Domino’s growth slowed in the first half of 2017, its share of the UK delivered pizza market still grew. One thing’s for sure, if Domino’s is feeling the squeeze, competitors will be in agony.

In our view Domino’s benefits from multiple competitive advantages, including a superior brand, greater scale, more consistent service, and a better quality product. This means Domino’s franchisees are highly profitable, and clearly still feeling confident, for the group announced a step-up in franchisee store openings, in spite of the more difficult environment.

The shares have fallen by over a quarter in the space of a few months, but we think a lot of bad news is priced in at these levels and are maintaining our position. Domino’s is hugely cash generative, because it is the franchisees, not Domino’s itself who own the stores. This cash generation, combined with a very solid balance sheet, gives the group plenty of scope to return cash to shareholders in the years ahead in our view.

Cheers to Diageo

Diageo grabbed the limelight with their full year results (they have a June financial year end) which saw the group come in a little ahead of expectations, accompanied by a raising of their margin targets and a massive £1.5bn share buy-back announcement. The stock rose to an all-time high on the news. Brokers hailed the results as the best from the group for several years, with positive organic growth in all the group’s key territories.

Diageo has a long history of growing the dividend and announced a further 5% hike in the 2017 payout. Organic operating profit growth of 5.6% was boosted by currency moves, while returns on capital improved to 13.8%, and look set to improve further if Diageo succeeds in raising margins as planned. With the business performing strongly we remain very confident in Diageo’s fundamental strengths, but note that the valuation is currently at a historically challenging level.

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