Old Mutual’s Dan Nickols: the UK tech stocks poised for growth

Old Mutual’s Dan Nickols has been buying into small electronics and technology businesses with a tilt toward towards mobile data.

Nickols, who manages the Old Mutual UK Select Smaller Companies fund, a pick of Citywire Selection, is targeting companies with high barriers to entry and either a unique business model or exposure to a significant market that can offer above-average growth.

One stand-out theme along these lines is the growing demand for smartphones and tablets, and expectations of non-stop access to high-speed data, he says.

Telecity claims a place

Star performer Telecity (TCY.L) is a firm that fits his brief, and Nickols has topped up the holding to 3% on the back of healthy share-price appreciation.

‘It operates a very specific type of data centre,’ he says. ‘It’s all about the digitisation of the economy. Generally, we are all conditioned to believe that we can have data on demand and this can only be done with these centres.’

The firm is growing profits at a rate of 20% per annum and, since it operates huge energy-consuming data hubs, barriers to entry for competitors are very high.

UK firm taking on Germany and Japan

Strong performance has also come from Anite (AIE.L), which Nickols says has a stand-out position in a similar area – testing sophisticated handsets and data networks. ‘As we go into very data-driven telephony, smart phones have become ubiquitous and tablets are becoming increasingly popular,’ he says. ‘Anite is very well positioned for that.’

With two competitors – one German and one Japanese – Nickols is backing the UK player, which is trading on 15 times forward earnings. ‘We think there is significant growth to come. From a share price perspective it has delivered significant upgrade and that is likely to continue.’

Broadband and mobile network provider TalkTalk (TALK.L) has a spot in the fund, because Nickols thinks ‘it’s finally going to sort itself out’, while AZ Electronics, which makes chemicals for computer components, has a position owing to its operating margins of 30% and low price to earnings (P/E) ratio.

Fenner: niche market

A perhaps more obscure play is conveyer belt manufacturer Fenner (FENR.L), which has differentiated itself from its rivals in the niche market by building better quality conveyer belts and offering to service them after installation. ‘It sounds quite prosaic, but demand for that kind of equipment is still very strong,’ Nickols said. ‘Fenner is a market leader with a high-quality product.’

The stock is currently trading on around nine times earnings and Nickols expects a further upgrade.
Nickols has recently looked to introduce some risk to the fund, and bought into Smiths News (SNWS.L), a stock that has been unloved in recent years.

‘The reason we bought it was not that it was an exciting business per se but it was trading on a P/E of just three,’ he said.