February review

Charlie Huggins (CFA) - Fund Manager

10 March 2017

Global stock markets made further gains in February, with the FTSE All Share index rising by over 3%. Kraft Heinz’s on/off bid for Unilever reignited interest in the consumer goods sector, which was helpful for performance given our strong disposition to this area.

Over a third of our portfolio released results in February, with every business reporting growth in revenues and profits on an underlying, constant currency basis (and nine of them benefitting significantly from sterling weakness). Please remember that past performance is not a guide to the future. Meanwhile, strong cash generation supported double-digit dividend increases across the piste, while Fidessa and IHG rewarded us with special dividends too. Reassuringly, each company also gave a positive outlook for 2017, although there are of course no guarantees that positive results will follow.

Biggest positive contributors

Past performance is not a guide to future returns. Correct as at 28/02/2017.

The top of the leader board this month is dominated by our consumer names. We believe the c. 4000p per share offer from Kraft Heinz significantly undervalued Unilever’s long term prospects, and we weren’t sorry to see them sent packing. Kraft Heinz could clearly see potential to raise margins at Unilever and it is now up to the company itself to realise that potential.

Unilever’s strong cash generation and balance sheet give it numerous options, including acquiring another business, undertaking a major restructuring, or selling-off the underperforming foods division. Any of these could create significant long term shareholder value, if done in the right way. Given the conservative, long-term mind-set of Unilever’s management, we are confident that the company can improve operating performance; while maintaining the culture and brands that made it so successful in the first place.

Investors now have a new benchmark to use when valuing consumer branded businesses, which explains Reckitt Benckiser’s rise during the month. Before the Unilever bid was announced, RB sealed a $17.9 billion deal to buy Mead Johnson Nutrition. You can read more about our thoughts on the deal in my previous blog.

Sage recovered on no particular news, following a weak January, while gains for Fidessa and Bunzl came on the back of well-received full year results. Bunzl rarely gets the attention it deserves, but has churned out rising profits year-after-year, and 2016 was no exception. Adjusted earnings per share rose by 6% at constant currency, and the dividend was lifted by 11%, the 24th consecutive year of growth. There are however no guarantees this performance will continue and all dividends are variable and not an indicator of future income.

Bunzl is just the kind of company we like. It operates in a resilient industry, has good cash generation, and has great things to do with that cash. It is a classic rinse and repeat business, supplying products that customers always need, ranging from foam trays to plastic gloves and safety boots; resulting in recurring revenues. Every year, Bunzl uses its strong cash flows to acquire smaller rivals and slot them into its own operations. This highly repeatable acquisition model has created enormous value for shareholders over the years.

Biggest negative contributors

Only four companies contributed negative returns to the fund during the month, and all have a domestic bias. This probably reflects on-going jitters over the UK economy, where consumers face higher prices in the year ahead following the post-Brexit weakness in Sterling.

Past performance is not a guide to future returns. Correct as at 28/02/2017.

Both BCA Marketplace and Auto Trader would probably suffer if used car transactions declined significantly, but this does not seem likely to us in the near term. Both companies issued strong results in November, when they last reported, and gave an upbeat outlook. In recent weeks, results from a number of car retailers have showed continued growth in used car sales.

We own BCA and Auto Trader because they benefit from a commanding business model, with high barriers to entry, pricing power and strong cash generation. We accept they will demonstrate an element of cyclicality, but believe they are capable of driving (excuse the pun) their own growth in most economic environments. We have been adding to both on their recent weakness.

Rightmove’s slightly weak performance in February came despite very strong full year results, with earnings per share and the dividend up by almost a fifth. Cash generation was good once again, enabling the group to return £131 million to shareholders through a combination of dividends and earnings-enhancing share buybacks.

We can only assume investors are fretting over the state of the UK housing market. But so far the UK housing market looks to be holding up fine, with transaction numbers in 2016 broadly flat, and average asking prices up. In the long run we expect Rightmove’s pricing power and dominant market position (we can’t understand why anyone bothers going on Zoopla to find a home nowadays) will continue to stand investors in good stead; and have added further to our holding.

Just Eat had another weak month, on news that its highly-regarded Chief Exec, David Buttress, is stepping down. We think Mr Buttress has done a tremendous job, but we doubt that Just Eat's core customers, the takeaway owners, let alone their own hungry clientele, will notice at all. We added to our position throughout the month. On 7 March the group released encouraging full year results and said it was confident of strong growth continuing; since then the shares have rallied strongly although please remember that past performance is not a guide to future returns.

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