It takes a degree of bravery to put money into European equities, and in particular European banks, at the moment. A quarter of Henderson European Focus Trust is in financials, and though John Bennett, who manages the fund, has taken some profits off the table in recent weeks in several Nordic banks, he has no qualms about maintaining his exposure to the sector.
He argues that, largely unnoticed, some of the pure retail lenders have been repairing their balance sheets and, providing they can avoid another disastrous round of over-ambitious lending, they are good investments.
Henderson European has 60 investments in all and has a strong track record, having more than doubled its net asset value over the past five years, a time that has been challenging for anyone focused on European equities. Mr Bennett has strong contrarian views; he believes that there are any number of hidden gems among mid-cap Europen stocks, even if some of them are a long way from being household names.
Among them are Galp Energia, a Portuguese company that has almost all its producing assets in Brazil, and Autoliv. The latter reflects the trust’s fondness for smart cars: the company makes technology for hybrid or pure electrical cars, at a time when the automotive industry is having to invest heavily in these and move away from diesel power.
The trust also has a strong weighting towards European pharmaceuticals, though it has been cutting back its exposure of late. At one stage Novartis and Roche accounted for about 8 per cent of the total, after a period of underperformance for the sector. Mr Bennett believes that such companies, along with Nestlé of Switzerland, are global companies that just happen to have their headquarters in Europe and should be rated as such. He himself owns about 1.5 per cent of the trust, having reinvested dividends in recent years. The dividend yield is not huge, about 2.1 per cent historic on the price, off 6½p at £12.54 last night.
This is pretty much equal to the latest net asset value figure, and the shares have tended to trade at a tiny discount to this. The trust’s record, though, suggests further outperformance in the future.
My advice Buy
Why The trust is a good way to get exposure to European equities with strong contrarian views and a solid track record for growth
Ultra Electronics
Ultra’s decision to pay $265 million for Herley, a New England maker of electronic warfare equipment, in 2015 turns out to have been a clever move given the mooted spending plans of the new Trump administration. The standout performance in 2016, though, was the company’s maritime and land business, boosted by sales of sonobuoys to the US navy, its biggest customer. The increasing encroachment of Russian and Chinese submarines into US waters means more and more of these will have to be deployed, all to Ultra’s advantage as one of the leading players in this area.
Ultra has gradually grown into a £1.45 billion company by market capitalisation, though not one always appreciated by the market. The shares, which had surged by almost 10 per cent since the US election, shot ahead another 95p to £20.77 by last night to an all-time high. Of the three divisions, communications and security suffered a slight drop in profits and margins because of a hiatus on a Ministry of Defence cybersecurity contract, but across the group operating profit was up by 9.3 per cent to £131.1 million.
The company used to get about a quarter of all revenues from commercial aircraft programmes. This has fallen back as the US defence market has grown in importance but will rise again as the Airbus 330 and 350 and the Boeing 787 Dreamliner kick in. The shares sell on a relatively modest 15 times’ earnings. At this level one might take some profits but that rating does suggest there might be further to go.
My advice Buy
Why Exposure to US defence market and aerospace
Informa
Informa is three years into a four-year growth programme instituted by Lord Carter of Barnes, the chief executive. Another five businesses were effectively put up for sale yesterday, conferences in difficult markets such as Australia and Brazil.
That conference side was the only one of the four divisions not to see organic growth; Informa is focused on global exhibitions, particularly in the US after the purchase in November of Penton Information Services for £1.2 billion.
That purchase makes the 2016 figures look a tad irrelevant. Exhibitions grew by almost 9 per cent, the clear outperformer. This allowed Informa to push operating profits ahead by almost 14 per cent to £416.1 million, with a following wind from currency movements and organic growth across the group of 1.6 per cent.
The company was sounding a little cautious about the outlook for 2017. Though it is little exposed to any Brexit fallout, exhibitions tend to be the first to suffer in any economic downturn. The shares, up 2½p at 676p are at the top of their trading range, sell on 14 times’ earnings and look fully valued.
My advice Avoid
Why Shares do not seem to have much further to go
And finally...
A reader asks if he should take up the £185 million rights issue to repair the balance sheet at Laird, maker of switching equipment and performance materials for smartphones. The shares were a highly speculative punt in October on the basis that there were signs of improvement in the group’s core markets. The shares, off 4p at 170p last night, are ahead of their value then, while the rights issue is at 85p, a fairly hefty discount to that price. This looks like one to support, even if the shares are on the speculative side.
