Emma Wall: Hello and welcome to the Morningstar. I am Emma Wall and I am joined today by Anthony Cross, Manager of Liontrust Special Situation Fund. Hello, Anthony.
Anthony Cross: Morning.
Wall: So, you are here today to give three stock picks from U.K. market. What is the first stock?
Cross: The first stock is a company called Emis (EMIS). It's a software business, it's a company we've owned for a long period of time. It's involved with providing software particularly into GP, general practitioner market and local pharmacies, but it is moving more into the – more general healthcare market into the hospital market.
Wall: How dependent is that on public sector revenue streams, because we're having cuts seemingly every day.
Cross: Well, they've just gone through a renegotiation stage. Of course, its money comes largely, very much largely, from the public purse. But the interesting thing about software going into the NHS and into other industries now in particular. Is that they are reducing the costs for the health service and therefore it's a very important part actually trying to make the health care system more efficient.
Wall: Because I suppose actually a great number of GP surgeries are in essence small businesses. So being able to outsource cost is a good thing.
Cross: It's all really – ultimately it's all about kind of workflow. So they hold your records, your healthcare records. The healthcare system is trying to become more joined up, so that Emis with all those healthcare records is in a very key position for being able to provide information and information flow right through the healthcare system.
Wall: What's the second stock today?
Cross: Second stock today is one that everyone knows, the beloved AA (AA.), one of the most trusted brands in the U.K. and as you recall we like brands and intangible assets. But the key intangible asset for us with the AA is the scale of its distribution network and its recurring income. It's a company which has got scope to improve efficiencies a lot, it came out of private equity.
So it's rather nice because you've got the strength of distribution, the strength of recurring income, the strength of brand, but actually scope to improve profitability quite a lot over the next few years. The other aspect about it is that it came out of private equities as I said with a lot of debt. But it is a very cash generative business and lot of the debt was quite expensive as in the structure was quite expensive.
So the more you can pay that down, the returns to equity holders can flow through very nicely. So a mixture of improving the efficiency of the business and growing the profitability as well as slowly but surely changing the balance sheet structure of the company makes it an attractive investment.
Wall: Which types of business you prefer, do prefer the insurance, you prefer the road recovery, or is it the company as a whole that you like?
Cross: The company has a whole is – the road recovery I think is the more exciting area. But there are spin off services that… you've got an amazing database of people and people that trust your brand. Insurance is actually quite tougher market and I've always been less keen on insurance style business.
Wall: What's the third stock today?
Cross: Third stock is a more recent issue, company called Sanne (SNN) which is a fund administration business. I like it because it's got lots of recurring income and good long-term contracts and it's a sort of business that once you've captured a client and you are during the fund administration for them. As long as you are providing a great service they are very happy to stay with you. So things become very sticky, clients become very much embedded within you.
The other good thing about the business is, it's not a company that seeing any great pricing pressure because ultimately it's the funds that pay for the administration and the fund managers have a much more concerned about getting good quality service than they are trying to get a cheap service.
Wall: You say that, but there has been as you well know, so much pressure on pricing within the fund management industry, within the asset management industry. Just the fact that ongoing charges are coming down, surely then that means, fund managers will be less willing to pay quite so much for a quality product?
Cross: But it's not the managers who pay, it's the fund that pays. And that's where… the fund manager is much more concern, about getting the quality of service and not having a regulatory issue on their hands. And that's why something like a fund administrator is not seeing great price pressure.
Wall: So actually it's beneficiary of all this new regulation.
Cross: Yes, interesting enough, there are a number of companies that have come into that market now. Small cap fund we've just done a stake in company called Curtis Banks, which is a SIPP administrator. So out of all this regulation are coming some quite interesting companies with lots of high recurring income.
Wall: Anthony, thank you very much.
Cross: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
