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GLG's AAA-rated Dixon backs housebuilders and the conglomerate discount

GLG's AAA-rated Dixon backs housebuilders and the conglomerate discount

AAA-rated Henry Dixon is backing the ‘conglomerate discount’ as a key theme within his GLG Undervalued Assets fund.

With the stock market moving sideways and valuations far from cheap generally, Dixon is finding opportunities in large caps that are looking to restructure. ‘Within big conglomerates, some parts of the company are not being valued by the market,’ he said.

‘The current environment is an exceptional one for companies to undertake a form of portfolio management and unlock the value in these divisions.’

He points to top 10 holding BHP Billiton as a case in point as it looks to jettison a number of divisions to refocus the business. ‘BHP Billiton is unlocking hidden value through non-core disposals and the valuation is not demanding at 13x earnings and a 3.5% yield.’

Dixon also highlights Old Mutual as a company undervalued by the market and trading at a large conglomerate discount. ‘It is a three-pronged business with US and UK fund management and its platform, Skandia,’ he said.

‘Old Mutual is trading at less than 10x earnings but every one of its constituent parts would demand a greater valuation.’

However, he had been selling down his position in BP before it complained EU sanctions on Russia would damage its business, as he is finding greater value in blue chip miners than in big oil.

Around one-third of the fund is currently held in large caps with another third in small caps, 22% in mid caps and the remainder split between an 8% weighting to Europe and cash.

Although mid caps sold off sharply earlier in the year, Dixon said he was now more ‘optimistic’ about where they are in the cycle after valuations had risen way ahead of earnings growth.

‘The mid cap sell-off was for the simple reason that they had got too expensive, which people conveniently forget,’ he said. ‘There have been a lot of people making excuses about the sell-off but the best way to isolate yourself from indiscriminate selling is to base your investment decisions on valuation.’

In his mid cap allocation he is playing what he perceives as a mispricing of motor insurance through holdings in esure and Direct Line.

‘We have a more optimistic view on pricing than the market,’ he said. ‘Esure is trading at 10x earnings and will be a great beneficiary of any short-term rise in rates. We think the pricing environment will be much better than people think.’

He is executing his view that the housing cycle will be more durable than expected through a position in Bovis Homes, which is trading on 1.5x book value and 7.5x earnings with a 3.9% yield.

Moving down into small caps, Dixon acknowledges that upgrades to corporate earnings have been rare of late and delivered by companies trading on an average price to earnings ratio of 16x.

However, Trinity Mirror has been bucking this trend, consistently beating estimates while still only trading on a price-to-earnings ratio of 6x.

He said the shakeout in local newspapers had been largely worked through with ‘corporate Darwinism’ leading the weaker players to fall away, which has benefited the company.

‘It is unbelievably cash-generative but the valuation says in six years it has no business model at all,’ Dixon said. And while he agrees print media is in structural decline, he expects many of the regional titles to move online and improve the monetisation of their websites.

Elsewhere within the portfolio, Dixon recently benefited from holding Mecom Group, which is to be snapped up by Belgian publisher De Persgroep at a premium of 35% to the stock’s closing price on the day of the announcement, while another holding, Mothercare, surged on a bid approach before knocking Destiny Maternity’s offer back.

On the flipside, Dixon has sold out of surveillance company Synectics, whose share price slumped 16% following a disappointing trading update on the back of rising costs.

The GLG Undervalued Assets fund’s track record is short, having only been launched last November, However, Dixon is AAA-rated for his performance on the Matterley Undervalued Assets fund, which he used to manage alongside George Godber but now runs on an outsourced basis.

Matterley Undervalued Assets is up by 56.4% over three years to the end of June compared with a sector average return of 33.8%. 

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Henry Dixon
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