Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today to give his three stock picks is Ed Legget, Manager of the Artemis UK Select Fund.
Hello, Ed.
Edward Legget: Hi.
Wall: So, what's the first stock you'd like to highlight today?
Legget: First stock is our largest holding in the fund, which is Prudential (PRU). Prudential is a life assurance company with significant operations in Asia, the U.S. and the U.K. We like Prudential as we see it amongst the large companies in the U.K., so those top 20 companies in the U.K., as to one actually with by far the best growth prospects.
So, if you look at their track record, they are doubling the size of the business, primarily driven by Asia and to a lesser extent, the U.S. every six, seven years organically and at the same time, the returns they generate from both of those businesses are high enough to fund the growth of the businesses as well as provide dividends to shareholders.
Wall: And I suppose that global remit is the thing which keeps it being enticing. Because I remember a couple of years ago with pension freedoms annuities being scraped. People were very worried about the future of life assurance. But you are saying actually the Pru will do OK?
Legget: We think the Pru will do – well, increasingly, the onus is on individuals to sort out their savings for the future and pension and healthcare provision as the states steps back across the world and as companies step back across the world and companies in that sector that have distribution, have scale, can manufacture the products efficiently, we think, will be winners and Pru certainly fits in that box.
Wall: And what's the second stock?
Legget: Second stock is IAG, International Airlines Group, (IAG) which owns Iberia, Aer Lingus and British Airways amongst other airlines in Europe. Clearly, people have differing views about the products itself and what they are doing strategically. But for us, the most interesting thing about IAG is actually, you know, London airports are full and it's their positioning, both Heathrow and to a lesser extent Gatwick, that provides them, we think, with a material barrier to entry in an airlines industry which historically has suffered from capital coming in and overcapacity.
Wall: And how do you grow as a company like that? Because obviously – well, there are some conversations about there being an extra runway in London. But you're not going to get a new huge hub in a central city, are you?
Legget: You're not, no. And so, that's – I mean, the great thing is having an airline that can't grow for us is attractive. So, it gives them pricing power. It's a capital-intensive business, i.e., I've got to spend a little money to buy the planes and then make a return on that. And for us, the interesting thing about IAG is actually the cash flows of their companies, valued on the very low rating because people look back at the past and say, well, airlines historically have been a difficult place to make money.
They have very volatile earnings streams through time. But we see today the cash flows from IAG today are enough to basically give us the whole value of the company back on a six to seven-year view and we'd still own the company at the end of it. And so, that for us is attractive and the reason it's attractive is, as I say, is that capacity constraint in the London airports.
Wall: And what's the third and final stock?
Legget: The third and final stock is probably a stock that most of your listeners haven't heard of, which is a company called David S. Smith (SMDS). It's a company we've owned for a long time. It's the second-largest carboard box manufacturer in Europe. And for us, it's two aspects to the story. One is, cardboard is actually being used increasingly more. And if you think about eRetail, Amazon, how much cardboard you're getting through your house every day is going up, exponentially, in my case, through time as my family and young kids will start buying more and more products online.
But over time, that's driving a volume story and at the same time, it has been a very fragmented market which is consolidating. So, there's top-line growth coming from FMCG and online retail and then there's consolidation which is driving returns as those very large players in that industry require a pan-European solution.
Wall: Ed, thank you very much.
Legget: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
