11 June 2021

Company Meetings Summer 2021

We met the companies below and you can learn more on any of these by contacting the person at JM Finn with whom you usually deal.

by James Ayling

Research Analyst


Genus


Price £50.50
52 week high-low £55.15 – £31.48
Net Yield 0.59%
Hist/Pros PER 81 – 50.2
Equity Market Cap (M) £3,324

Health Care
Stephen Wilson, CEO and Alison Henriksen, CFO

We met management following strong half-year results in which the business showed no signs of slowing. As a specialist in high quality bovine and porcine genetics (selective breeding and gene editing), Genus was classified as an agricultural business of high importance, meaning operational performance was largely unaffected by COVID-19 restrictions.

Their North American porcine business has however seen some impact, as ‘processing plants’ experienced bottlenecks due to COVID outbreaks amongst workers. But management believe these issues have now largely been resolved. The bigger risk comes in the form of rising feedstock prices, which present a headwind to pig producer margins, whom Genus sell their genetics to. 

Yet, management appear sanguine: Genus’ porcine business is not directly tied to the fortunes of its customers when contracts are agreed on a royalty basis. With this model, a nominal revenue is generated for each piglet born by one of Genus’ sows and is not linked to the financial performance of customers nor wholesale hog prices.

Although the proportion of total porcine volumes under royalty is highest in North America (97%), followed by Latin America (78%) and Europe, Middle East, Africa (73%), Asia remains underpenetrated (41%), particularly China. 

Since 2018, pig herds in China have been decimated by the outbreak of African swine fever (ASF). Although an initial hit to the business, management see ASF as having a long-term benefit. Why? Because it is increasing the market share of larger ‘technified’ producers more likely to use Genus' genetics, and in turn its royalty model.

Management believe China should see a few more years of abnormal growth as it recovers from ASF but expect a downturn to follow.

 

Ricardo


Price £4.59
52 week high-low £5.62 - £3.10
Net Yield 0.38%
Hist/Pros PER 18.1 – 18.9
Equity Market Cap (M) £283

Industrials
David Shemmans, CEO

Ricardo is an engineering and environmental consultancy business that specialises in transport, energy and scarce resources. On top of the consultancy business, Ricardo also has in-house engineering capabilities, delivering high quality, low-volume manufacturing for complex products.

Dave Shemmans, kicked off the meeting with a run through of the half year results which saw the non-auto section of the business account for over half the earnings. The results also signalled a renewed focus on M&A - following an equity raise which reduced debt to a comfortable level (1.8 net debt/EBITDA) - with a focus on higher growth, ESG-related areas such as clean energy, electrification and hydrogen. This is all reflective of Ricardo’s drive to diversify away from automobiles and into more sustainable sectors, which will position Ricardo well to benefit from ever growing environmental regulation. 

Following the results, Dave offered what, in hindsight, seems a prescient view of the progress of the automotive cycle, the last few months having vindicated his diagnosis that the industry was in recovery. Biden’s spending plans were the other key macro theme discussed, Ricardo having just secured further deals with the US military for their Antilock Brake System (ABS) retrofit programme. 

We also spoke on the collaboration in alkaline fuel cells technology with AFC Energy. Ricardo’s focus on fuel cells over battery technology, explained Dave, derives from a belief that the commercial application of fuel cells will be greater in the long run than batteries. Whilst I am inclined to agree, the nascent nature of this industry means we will have to wait a while to see if this comes to fruition.

The meeting finished with gratitude directed towards Dave for his drive to diversify the business throughout his stint at the helm which, after 22 years, is coming to an end. 

Wickes


Price £2.56
52 week high-low £2.88 - £2.36
Net Yield 0.00%
Hist/Pros PER 24.6 - 12.5
Equity Market Cap (M) £680

Consumer Discretionary
David Wood, CEO, Julie Wirth, CFO & Fraser Longden, COO

Travis Perkins (TP) recently demerged Wickes, leaving investors to ponder which business to own; slimmer TP or Wickes. Choosing isn’t obvious. TP is simplifying its corporate structure to focus on professional trade customers, while, Wickes is a more consumer focused do-it-yourself (DIY) or do-it-for-me (DIFM) retailer (the latter customer typically uses tradespeople to install purchased products).

An immediate concern with TP is linked to how they extend credit to their customers. They view offering trade credit as integral to their model. Yet, in economic downturns, I feel it overly exposes them to customer default risk, making their share price volatile in periods of economic weakness … can they manage this credit risk or might a bank be better? 

Wickes, though, historically underinvested across its stores. Independence will drive focused investment to rejuvenate stores which could improve fortunes. During the  pandemic, Wickes’ DIY customers shone through whereas its DIFM customers appeared more cautious. Whilst I view this as temporary , I believe understanding this customer base differential is critical. 

On balance, I’d prefer TP. Ultimately I think younger clients will favour a tradesperson vs. DIY activities. For Wickes, this view highlights a fundamental internal struggle where DIFM growth will outpace DIY growth but overall, revenue growth may stagnate.

If I worked in private equity, I’d think differently. I’d seek to purchase Toolstation from TP. I believe it’s the longer-term crown jewel; offering a digital-first setup, a scalable growth runway, better stock and logistics management and, most ironically, a greater willingness to cater to both trade and retail customers!

COMMUNICATION SERVICES
Walt Disney Company

CONSUMER DISCRETIONARY
Ocado Group
Kering
SA
Wickes
Henry Boot

CONSUMER STAPLES
Imperial Brands

FINANCIALS
Burford Capital
London Stock Exchange
Prudential Financial
TP ICAP Group
HSBC Holdings
Lloyds Banking
Natwest
GoCardless

HEALTH CAREGenus
Dechra Pharmaceuticals
GlaxoSmithKline 

INDUSTRIALSDiploma
Ceres Power
Ricardo

INFORMATION TECHNOLOGYDarktrace

MaterialsRio Tinto
BHP Group
Givaudan SA
Croda International
Hill & Smith

REAL ESTATESEGRO
UNITE Group
Supermarket Income REIT 

UtilitiesSevern Trent


Henry Birt, Research Assistant
James Ayling, CFA Research Analyst
Michael Bray, CFA Research Analyst

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Also in this issue

Johnson Matthey (JM) began life over 200 years ago as a successful gold assay business.

We are very proud to be the recipient of the “Best Wealth Manager” award at the 2021 Good Money Guide Awards.

James Godrich, manager of the JM Finn Coleman Street Investment Funds suggests the recovery may not be accurately priced in by the markets.

Summer Issue Thirty Five