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Six best ideas from this star European equity fund
by Wealth Manager Team on Apr 17, 2014 at 07:00
Stuart Mitchell has had an outstanding 12 months on the SWMC European fund and here he identifies six stocks he hopes can keep him on track.
SW Mitchell Capital's Citywire AA-rated Stuart Mitchell's SWMC European fund has been on a strong run, returning 31.5% over the last 12 months versus an average 10% rise in its Alternative Ucits - Long/Short Equity Sector peer group.
Mitchell outlines why he is confident of building on this success this year:
'We have long held the view that the greatest European investment opportunities remain in domestically-orientated companies. These stocks continue to trade at wide discounts, in excess of 50%, to American equivalents.
From numerous company visits in recent months, it is clear to us the European economy is recovering more rapidly than many expect.
By contrast, the market continues to under estimate the risks of doing business in the emerging world. Analysts have been woefully remiss at adjusting earnings forecasts for weaker currencies and slower economic growth.
Here, we unveil some of our new high-conviction investments over the past few months.
The bank has a strong franchise in Germany, as the leading SME lender and the largest online brokerage business. Management has worked hard to restructure the group following the financial crisis.
We have been impressed by how the bank has been able to double market share to 8% in the mortgage market. More significantly, non-core assets have been reduced by over a half since 2008, with minimal impact on equity. At the same time, costs have been reduced by over 30% since 2007.
Capital remains a little light, with a fully phased-in Basel III ratio of 8.6%. However, profit generation should lift the ratio above 9% before 2016. Trading on a half book value, Commerzbank is very attractive.
The company boasts the largest nuclear generation capacity in the world and is the largest power generator in France (80% market share) and the UK.
The value of EDF could grow significantly in the future. Most notably, EDF is preparing to extend nuclear lifetimes from 40 to 50 years. If approved by the French state, this could add some 50% to the value of the group. The French regulator also appears to view the group more sympathetically than in the past. We could expect tariff and interconnect price increases to more fairly compensate for production costs in the future. It appears good value at 10x earnings and at a 6% yield.
For years we have been intrigued by the strength of Orange’s franchise, at 230 million customers, coupled with the very low valuation of the shares.
It has an 8% yield and trades at 9x prospective earnings. The outlook for the group appears to be improving in a number of important ways. Management is working hard to reduce costs, but perhaps more importantly, European regulators have begun to acknowledge the industry has been weakened by fragmentation that long-term investment has been undermined.
Notably, 4G investment is said to be three years behind the US. The regulatory burden is consequently easing somewhat, while at the same time the process of consolidation has begun to accelerate.
Management is working hard to reshape the group against the background of sharply lower power prices and early nuclear power plant closures. Some 4.2bn MW of capacity will be decommissioned or mothballed, which should help balance the power market.
At the same time, €1.5 billion of costs will be saved from 2012 to 2017, through a significant reduction in the workforce. RWE is also working hard to reduce financial leverage. It made €2.2 billion of disposals in 2013 and capex will be reduced to maintenance levels. Debt to Ebitda should fall below three times by 2017. There is a significant chance the German Constitutional Court will rule in favour of the German utilities on the nuclear tax and early nuclear shutdown. RWE is good value at 11x prospective earnings.
The company owns the highly successful BILD and Die Welt brands, as well as the leading German news channel N24. About 60% of Ebitda is now generated from digital activities, following a number of disposals. BILD has managed to successfully move online, with over fourteen million unique users.Furthermore, BILDplus has gained 152,000 subscribers after just six months. Springer also owns leading France real estate portal SeLoger and leading German job portal StepStone. The group is planning to reduce a further €100 million in costs over the next three years. Considering the growth potential of the company, it offers reasonable value at 17x prospective earnings.
The company is world leader in almost all business areas – including flat glass, high performance materials, business distribution and packaging.
Management has introduced €580 million of aggressive cost cutting measures, aimed primarily at reducing flat glass capacity in Europe (19% production) and withdrawing from the solar market.
At the same time, the sales outlook for the business appears to be improving, with residential construction gradually recovering in the US, strong growth in Latin America and a stabilisation in the European automotive markets. Management is also working hard to reduce debt by reducing capital expenditure, while making a number of disposals.