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Merchants Trust bets on media boost for UK plc
Simon Gergel, manager of the Merchants Trust, explains why he’s looking at media companies despite the challenges facing the sector.
Media companies are racing to develop more competitive business models amid the explosion of free online content, and some are finding their feet as they grow their events businesses.
Gergel explains that as consumers rein in spending, companies need to find new markets, and those companies hosting trade shows are benefiting from this.
He says one good example of this is UBM (UBM.L) as it makes a growing proportion of its profits from events. Reed Elsevier (REL.L) and Daily Mail and General Trust (DMGT.L) are also top holdings in the trust.
The trust is invested in UK equities and focuses on large companies such as Royal Dutch Shell (RDSb.L), GlaxoSmithKline (GSK.L) and BP (BP.L). However, Gergel has avoided the mining sector in favour of defensive positions such as utilities, pharmaceuticals and food producers.
One of the stocks Gergel has recently bought is BBA Aviation (BBA.L). He says its diversified output, cash generation, dividends and low rating all make it an attractive investment.
Merchants is a highly geared trust, with 23% gearing equivalent to £110 million in assets. Gearing has both helped and hindered the portfolio. It suffered in 2008, and its net asset value (NAV) total return growth over the past five years stands at 2%, compared with its three-year performance of 34%.
Its debt is also quite expensive. Gergel notes that as the trust’s debts mature, with much of the debt due to reach maturity in 2018 and 2023, it will be able to take advantage of cheaper interest rates as the effective rate on its current debt is 11.3%.
The trust is currently trading at a wide discount of 11.2% as its shares are trading at 369p, compared with its NAV of 416p per share.
However, at fair value, which takes into account the cost of debt at the current market price rather than at its final repayment value, the trust is trading at a 3.4% discount.
Gergel says that although the trust has bought back shares to narrow the discount in the past, future buybacks are not set in stone. The trust has ongoing charges of 0.64%.
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- BBA Aviation PLC (BBA.L)
- Royal Dutch Shell PLC (RDSb.L)
- GlaxoSmithKline PLC (GSK.L)
- Bp PLC (BP.L)
- Daily Mail and General Trust PLC (DMGO.L)
- UBM PLC (UBM.L)
- Reed Elsevier PLC (REL.L)
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by Gavin Lumsden on Feb 26, 2014 at 14:52