Well-regarded stock-picker Stuart Widdowson says there is now ‘obvious value’ in UK markets, a domain being shunned by international investors, for the first time in four years. His comments accompany maiden half year results from his new vehicle, Odyssean Investment Trust (OIT), where his first seven portfolio picks are revealed.
Odyssean Investment Trust listed on the Main Market in May having raised £87.5m, admittedly below the original £100m target with the new issues market growing tougher. It is managed by Odyssean Capital’s Widdowson, who amassed a following with his excellent stewardship of Strategic Equity Capital (SEC), alongside Edward Wielechowski.
Capital growth-focused Odyssean plans to assemble a concentrated portfolio of smaller companies which the managers believe are trading below intrinsic value and where this value can be increased through strategic, operational, management or financial initiatives. For those who want a deep dive into Widdowson’s ‘hybrid public and private equity investment approach’, it is explained in today’s maiden half year results.
While it is still very early days, these reveal net asset value (NAV) of 99.7p per share as at 30 September and an NAV total return of 1.4% for the period from 21 December 2017 to 30 September 2018, despite markets drifting gently downwards since May’s IPO.
At the half year end, 45% of the IPO proceeds had been invested, with money put to work in nine holdings spanning the Technology, Media and Telecoms (TMT), Business Services, Industrial, Consumer and Healthcare sectors.
WHICH STOCKS HAVE CAUGHT WIDDOWSON’S EYE?
Major positions have been taken in Equiniti (EQN), the technology outsourcing firm offering ‘defensive growth characteristics, strong market positions and low individual contract risk’, as well as in defence industry countermeasures-to-niche electronic systems leader Chemring (CHG).
Widdowson is ‘particularly excited about the medium to long-term prospects for value creation at SDL (SDL), the global market leader in translation services and technology’, stating the company is ‘emerging from a period of re-organisation and there is considerable scope for operating margins to improve from their current level (high single digit) towards historic levels (high teens). Crucially, the key drivers for this uplift should be within the control of the management team and are not dependent on end markets continuing to grow.’
In Widdowson’s view, SDL’s potential ‘does not seem to be reflected in the current Enterprise Value/Sales ratio of less than 1.1 times. Prolonged mis-pricing of the company seems unlikely given that there are no poison pills to frustrate a potential acquirer of this highly covetable asset.’
Odyssean has also made four mid-sized investments. These are in media group Wilmington (WIL) and extractor fans leader Volution (FAN), as well as Devro (DVO) and Benchmark (BMK:AIM).
Significantly, Widdowson spots takeover potential at collagen sausage skins maker Devro, ‘the largest or second largest player in all of the geographies it operates in other than China, where it is the fourth largest player'. After a period of considerable capital investment, the company is poised to generate substantial free cash-flow over the next few years.
Widdowson continues: ‘It is also part-way through implementing an efficiency plan, Devro 100, to improve margins. The shares trade on an attractive forward free cash-flow yield and we believe the company is under-researched and under-owned. At the time of purchase, the shares were trading at a very material discount to Viscofan, its Spanish-listed peer. Private equity firms have been active in this niche.'
Benchmark provides genetics, nutrition and healthcare products to the global aquaculture market and has been built by the acquisition of good quality assets. Yet Widdowson argues ‘the current market value is significantly less than the value of the parts. Aquaculture appears to be an attractive long term cyclical growth market. A new chairman has been appointed and there seems considerable opportunity for improved shareholder returns. Recent M&A speculation has reinforced our view of the attraction of the company.’
THE UK OFFERS 'OBVIOUS VALUE'
Widdowson explains that volatility has dominated the period since the end of September, with highly valued companies bearing the brunt of the sell-off, yet he anticipates this volatility will continue to throw up opportunities for his charge.
‘For the first time in four years, there is obvious value in UK markets, which appear to be shunned by international investors. Anecdotal evidence suggests that MiFID II is leading to less communication between buy-side and sell-side market participants. We believe that this could be contributing to what we perceive to be increased share price volatility and polarised valuations.'
‘However, value is not ubiquitous, and despite a de-rating of expensive, higher-growth AIM momentum stocks, many still appear to trade on considerable premia to takeout multiples. Buying shares in these companies seems to us to offer a limited margin of safety.'
