Fund Managers’ Favourites: Illuminating Investments

VIDEO: Mark Slater from Slater Investments discusses his three favourite equity picks, including a company that is a leader in LED lighting technology

Alanna Petroff 18 December, 2012 | 6:00AM

In the video series, "Fund Managers' Favourites", Morningstar speaks with UK-based fund managers to learn about their top investment picks. In this video, Morningstar journalist Alanna Petroff speaks with Mark Slater from Slater Investments about some recent investment opportunities that have caught his eye, including a company that works in the LED lighting technology space.

Securities Mentioned in this Video:

MFM Slater Growth Fund
Dialight (DIA)
Entertainment One (ETO)
Hutchison China MediTech (HCM)
NCC Group (NCC)
Oxford Instruments (OXIG)

View the previous "Fund Managers' Favourites" video with Mark Slater

Video Transcript:

Alanna Petroff: Slater Investments was recently named Boutique Wealth Management Firm of the Year. The firm won this top honour at the Spear's Wealth Management Awards ceremony and they won the top prize based on both outstanding performance as well as client services. Joining me now is the chairman, Mark Slater to talk about this favourite growth picks right now. So, first of all, Mark, thank you for coming in and congratulations.

Mark Slater: Thank you very much.

Petroff: So, let's go over your three favourite growth stocks right now that are held within your MFM Slater Growth Fund. So, we have Dialight, Entertainment One, and Hutchison China MediTech. Let's start with Dialight, this sounds very interesting.

Slater: Okay. Dialight sells LED lighting solutions into regulated niche markets. And the fact that they’re regulated means that they avoid cheap Chinese competition. These are markets like, for instance traffic lights where they have half of the market in the US and the UK. Strobes for tall buildings, for telephone towers, for offshore wind turbines, those sorts of things. What's particularly exciting is the company is now moving into much larger, new markets like hazardous and industrial environments. So that would be chemical refineries, oil rigs, mines, those sorts of places.

And the proposition for the customer is incredibly attractive. The customer gets a one year payback, because the products use less energy and they're guaranteed for many years, typically five to 10 years. So it's a huge growth market. Dialight is the first mover and they've really got, to a large extent, the playing field to themselves.

Petroff: Okay. That sounds very interesting. An illuminating investment. Okay. Now, let's move on to Entertainment One. Different field. So, let's go over why you like this company?

Slater: Entertainment One is a complete different business. It's a very cheap share. It's on about eight times prospective earnings. It's got healthy double-digit growth. What we particularly like is that the company is in the process of completing an acquisition of a competitor, which is called Alliance, which is a Canadian business. And the combined entity will be the largest independent film distributor in the UK and Canada. It will have a very large library of product. In addition to that, Entertainment One owns a very promising children's division and their most prominent character is Peppa Pig, which wins everything in sight, it's the number one children's pre-school character in many, many countries.

Petroff: I am always hearing about Peppa Pig. Okay.

Slater: And it's just starting out in the States and that--which is obviously a massive market--and that could be very significant. So, the drivers for Entertainment One are synergy benefits, which will be significant. There is growth anyway. They benefit from digital distributors like Sky and Netflix, competing for content. And the shares have been rather unloved recently because of this corporate activity has been sort of hanging over the share price.

Petroff: They are worried about the transition and getting Alliance in?

Slater: Yes. There is a trigger coming up where we hope and expect the company will get monopoly clearance in Canada. It's something of a formality, but nonetheless it would be good to have it and that should be sometime in January. But also there was a financing to help them acquire Alliance and that was a depressant on the share price for a short while. So, all that is pretty well out the way now, and I think that will enable people to look forward.

Petroff: Okay. Now, your third pick is Hutchison China MediTech. Now, we spoke around May 2012 and that was one of your top picks then. It's still one of your top picks. Tell me why you still like it. What's still driving the shares?

Slater: The proposition is similar. The core business, which is a healthcare business in China, is growing sort of 10% to 20% per annum, pretty reliably. Lots of drivers, the main driver being State spending on urban healthcare. And that business is doing its thing, and we still believe that's worth more than the market capitalisation by itself. But very recently there was very good news on another part of the business, which is the R&D division, quite separate from the healthcare division. But the R&D business is looking for new drugs. They have a very rich pipeline of drugs and their most prominent one, which is coming up to Phase III, they've just signed a deal for that to be financed by Nestle. It's in the digestive area, which is why Nestle is interested. And that's something like $125 million worth of finance, which is very significant. So, now you've got that in for nothing. And I reckon that's a 50-50 bet, that one drug, as to whether it works well or not, whether it goes through all the hoops.

Petroff: And that could be--if it goes through--could be a big driver of revenue?

Slater: Massive. I mean that would be – that's a multi-billion dollar proposition if it all happens and works. But in the meantime, there is a lot of other IP in that division which people are beginning to focus on, now that they're attracting large companies.

Petroff: Now, let's go over the key risks for each of these three. We'll just go through them quickly, because then I also want to review your top picks from beforehand. So, the key risk, let's start with Dialight.

Slater: Dialight, I think the main issue they have is hiring enough sales people to drive growth. And there is an absolute correlation between the number of sales people--the rate at which they grow the salesforce and the rate at which sales grow.

Petroff: Okay. I have never heard a risk like that before, all right. Entertainment One, what's the risk there? I guess their merger with Alliance?

Slater: I think the monopoly clearance. Although the legal advice that we've seen is that the Canadian authorities can't stop it, but they can ask for remedy. But the indications are that shouldn't be an issue.

Petroff: Okay. And for Hutchison China MediTech, would it be this Nestle…?

Slater: I think, certainly on the R&D side, there are various milestones along the way over the next few years, the drug may not work, in which case Nestle will stop financing it. So that will be the main risk. But what I like there is it's in for nothing. That very big bet, that very big upside is in for nothing.

Petroff: Okay. Now, let's move on to your other top picks that you brought to us around May 2012. Well, you had listed Hutchison China MediTech, but you had also listed NCC Group and Oxford Instruments. So, just briefly, do you still like these two companies? Are you still buying in or do you own them, what are you looking at?

Slater: I like them both. Oxford has produced very good results in the not-too-distant past. It's doing its thing. It's growing nicely. It's in a wonderful market still where nanotech is growing generally and they're very well positioned in it. NCC; trading wise is fine. They're very well placed in the ethical hacking space, which is a growth market. The shares have actually drifted back recently, so we have bought more.

Petroff: Okay. Thank you very much for coming in today.

Slater: Pleasure.

Petroff: That was Mark Slater from Slater Investments. I am Alanna Petroff, and thanks very much for watching Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Dialight PLC295.00 GBX1.03
Entertainment One Ltd447.80 GBX4.38
Hutchison China Meditech Ltd342.75 GBX0.81
MFM Slater Growth533.59 GBP0.21
NCC Group PLC171.80 GBX-1.15
Oxford Instruments PLC1,338.00 GBX3.08

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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