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Five shares to watch in 2019

Brexit uncertainty means this year’s ‘five shares to watch’, lean towards high-quality, long-run growth stories with management track records we feel we can trust.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

We thought picking five shares to watch in 2019 would be a daunting task. Should we prepare for a Brexit bounce, or buckle in for some serious turbulence?

In the end, all that uncertainty has actually made for some clear decisions. We’ve leant towards high-quality, long-run growth stories with management track records we feel we can trust.

This article isn’t personal advice or a recommendation to buy, sell or hold any investment. All investments fall as well as rise in value so you could get back less than you invest. Yield figures are variable and not guaranteed. They should not be seen as a reliable indicator of future income.

Intertek – where quality counts

Intertek is all about quality. That’s because it tests and certifies the quality of products from children’s toys to grizzly oil and gas components.

There are lots of reasons this is a good place to be.

Take food standards, for example, Intertek’s services are crucial to complying with increasingly demanding regulation – from calorie counts to allergens. Through its rapidly expanding assurance division, it‘s able to make money in an advisory capacity too.

The core product quality business is being boosted by continued product innovation. More products mean more quality control checks. And with UK trademark registrations jumping almost 30% between 2016 and 2017, the appetite for new brands continues to grow.

The part of the business aimed at natural resources is more cyclical, and profits drained away on the back of the oil price crash. But with big oil companies stepping up spending, there’s hope for a recovery. Intertek is aiming to both increase revenue and restore margins.

Intertek generates plenty of cash, some of which is used to fund bolt-on acquisitions, such as capital-light staff management business Alchemy. That will positively impact margins, but the core businesses demand lots of highly skilled labour, so moving operating margins beyond the current 16.9% is unlikely to be rapid.

Intertek trades on a price to earnings (PE) ratio of 22.7, above its long run average. Still, we think that reflects its solid track record, good growth prospects and resilient revenue streams. These factors, and the potential to inch margins up, underpin analysts’ confidence profits can rise by over 8% a year in 2019 and 2020.

Intertek operating profit (£m)

Past performance is not a guide to future returns. Source: Thomson Reuters Eikon 1 December 2018.

A new dividend policy of paying out half of earnings means investors can expect that to feed through to a rising dividend, although there are no guarantees. Next year’s prospective yield is 2.2%.

Find out more about Intertek

GVC – rolling the dice

You might know GVC as an online gaming specialist. But it recently bought the Ladbrokes and Coral brands, so it’s now an unusual mix of established high street name and digital disruptor. Meanwhile, legislative change in the US offers an exciting growth opportunity.

It’s not all plain sailing though. UK in-shop trends haven’t been great, and tighter restrictions on gambling machines look set to make things worse. The move to cap staking on fixed odds betting terminals (FOBTs) will hopefully make society richer, but the lost profits will make GVC poorer, at least in the short term. Hence the shares trade for just 10 times expected earnings.

However, the dividend remains well-underpinned by earnings and cash flow, and there are plenty of longer-term growth opportunities. The prospective yield is 4.8%.

Despite the increasing regulation, there are underlying tailwinds, especially online. GVC has impressively surfed the online wave. Gaming and sports betting revenues have risen strongly.

Gross gaming revenues (€m)

Past performance is not a guide to future returns. Source: Gambling Capital study Playtech Annual report 2017.

But what’s really exciting about GVC is on the other side of the pond. A US Supreme Court judgement has paved the way for legal sports betting nationwide.

The illegal sports betting market in the US sees an estimated $150bn change hands every year. The chance to snap up market share in such a populous, affluent and sports-mad country, is a once in a generation opportunity - although of course there are no guarantees.

European bookmakers are piling in left right and centre. But we think GVC has given itself a good chance of success. At least initially, casinos will be the go-to location for sports betting, and GVC has teamed with a US high roller, MGM Resorts. There's a lot to like about the prospect of combining GVC's experience with MGM's well-established brand.

The American dream could more than replace lost FOBT profits, although of course there’ll be fierce competition for a seat at the table. That makes the next 12 months crucial.

Find out more about GVC

Primary Health Properties – looking healthy

Primary Health Properties (PHP) owns and rents out primary care buildings, like GP surgeries, in the UK and Ireland.

With an above-market yield, and some pretty secure revenues, we think it’s worth taking a closer look. Especially given the Brexit uncertainty around.

GPs in England get over 300m visits a year. And with just two visits to A&E costing more than a whole year’s worth of GP care, investing in community services is both vital, and cost-effective.

In England, the government’s aiming to have 5,000 more GPs by 2020. Other community services, like mental health and community nursing, are also being tied more closely to surgeries. This means the facilities needed to keep everything running are getting more complex.

PHP’s purpose-built properties are in demand, and asset values have been climbing steadily. The expansion into Ireland provides more room for growth too.

99.7% of its 313 buildings are occupied, while an average lease that has 12.9 years to run until first break means future rental income is very visible. More importantly, 90% of its rental income comes either directly or indirectly from the NHS or its Irish equivalent. Governments make for very reliable tenants.

As a Real Estate Investment Trust, or REIT, PHP has to return 90% of its rental profits to investors as dividends, making for a potentially attractive income. The result is a prospective yield of 5.1% next year.

Dividend per share (GBp)

Past performance is not a guide to future returns. Source: Primary Health Properties 2018 interim report.

Unfortunately a large payout also limits PHP’s ability to fund new properties, so the company frequently turns to shareholders for extra cash. That will remain a major feature in the future.

The group’s been reducing its level of debt recently, with total loan-to-value falling from 48.2% at the end of the last financial year to 40.5% at the half year stage.

That might suggest management have become more cautious, but also means it’s well placed for future investments. Given the opportunities available both in the UK and Ireland, we suspect it’s the latter.

Find out more about Primary Health Properties

Unilever – no one trick pony

After abandoning its shift to the Netherlands, 2019 could, ironically, be the year consumer goods giant Unilever finally gets to where it wants to be.

That’s because the struggling spreads business has been sold off, and another power brand is on the brink of being added to the portfolio.

Believe it or not, that brand is Horlicks. It’s incredibly popular in India, Unilever’s most important emerging market. After outbidding Coca-Cola and Nestlé, Unilever is currently in pole position to land the business.

Long-term trends in the developing world should see populations rise and wealth increase. Both should provide tailwinds for Unilever. Still, progress can come in fits and starts. Weak growth in South America, on the back of economic strife, is a reminder these markets can be volatile.

Geographic revenue

Past performance is not a guide to future returns. Source: Thomson Reuters Eikon 1 December 2018.

With long-serving CEO Paul Polman stepping aside in January, 2019 will also bring a change of leadership. Polman did a sterling job, but we think his departure comes with only limited risk. The new boss, Alan Jope, has successfully run Unilever’s largest division since 2014.

In any case, the group’s already got a proven formula for success. A multi-billion pound innovation and marketing spend means its household brands, which include Dove, Magnum and Persil, are used by 2.5bn consumers every day.

We expect sales to rise again this year, while plans to increase efficiency should boost margins. That combination would see profits grow, giving room for another dividend increase. As ever though, nothing is guaranteed.

The prospective yield is 3.4%, and the shares trade on 19.4 times expected earning, above the longer-run average, but below the more premium ratings of recent years.

Find out more about Unilever

Activision Blizzard – Where it pays to play

Activision Blizzard's been caught up in the wider US tech sell-off, with its price to earnings ratio falling from 28.4 to 18.9. But we still think it’s got long-run appeal.

The computer game developer is best known for Call of Duty and World of Warcraft, but also owns mobile developer King. Its 200+ mobile games, including Candy Crush, attract 262m users every month.

Global gaming spend is expected to hit $138bn this year. And with 2.3bn gamers worldwide, it’s a very attractive market.

Global Games Market Spending Forecasts ($bn)

Past performance is not a guide to future returns. Source: Newzoo, October 2018.

Call of Duty, World of Warcraft and Candy Crush, are among the most successful gaming franchises going. And, along with Activision Blizzard's Overwatch, they accounted for $4.7bn of revenue last year.

We particularly like the mix of console, PC and mobile gaming. In a rapidly changing industry the group has fingers in every pie, and that’s delivered profit growth of 8.8% a year since 2008.

Unlike some rivals, Activision Blizzard owns its most powerful brands outright, so it doesn’t have to share success with licence holders. The group’s looking to make the most of that through the development of esports.

esports see professional gamers compete live, with fans watching on TV, online or in stadiums. Audiences have been growing – up 19.3% last year.

Activision’s Major League Gaming is a leading organiser of events, including the recently launched Overwatch League. The league grand finals attracted millions of online viewers, 70% of whom fall in the 18-34 year old age bracket.

Millennials are a difficult group for marketing teams to reach, since they consume less traditional media than older generations. That makes esports attractive to advertisers.

A possible concern is in-game purchases, which have attracted some very negative press. Some see ‘loot-boxes’, where players pay for a randomly generated in-game benefit, as a gateway to gambling for children, and regulators have started to take note.

Fortunately Activision is less exposed than some rivals, and its biggest titles target adults in any case. A regulatory crack down would still see the shares stumble, but for the patient investor, Activision Blizzard could represent a long-term opportunity.

Find out more about Activision Blizzard

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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