Brazier: Why I Bought FeverTree

FeverTree stock halved late last year - providing a buying opportunity for Investec's Simon Brazier who previously had deemed the growth stock too expensive

Emma Wall 20 February, 2019 | 7:29AM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today to share his three stock picks is Simon Brazier, Manager of the Investec UK Alpha Fund.

Hi, Simon.

Simon Brazier: Good morning.

Wall: So, what's the first stock you'd like to highlight today?

Brazier: Relx, which has changed its name from a Reed Elsevier business. And to me, this has been a very long-term holding in my fund. It's a very high-quality business. And what it does, a variety of things, but it basically uses data and information in a variety of sectors. So, a lot of that is around academic journals and the legal business where it has a big, big catalog going back tens of – hundred years of the legal business around some of the case law, scientific journals like The Lancet you may be aware of.

But also, it has a risk and business analytics unit, which is growing significantly, you know, 5% to 10% growth a year at the moment as it does things like know your customer and anti-money laundering as compliance is becoming an increasing part of our lives. And those businesses have pretty steady growth and not that cyclical. Yes, there are some risks to academic journals, people worry and make it disintermediated by the internet. But actually, I think, that back catalog provides a bit of a moat. Finally, it does have an exhibitions business which is more cyclical, but the majority of its businesses in those core areas which are growing, decent margins, good valuation, good long-term holding for me.

Wall: And that, as you say, has been a long-term holding. What about something more recently that you've bought?

Brazier: Yes, I'm amazed that I'm actually saying this to you, but recently we bought Fevertree, the premium mixer business, mainly tonic. The reason for that was purely valuation. I've looked at afar, this company has done very well. But the shares nearly halved just before Christmas and it gave us an opportunity to buy the company at a valuation that we think more than makes up for the growth opportunity. I mean, just to put it in context about growth, this is a company that grew over 50% in the U.K. sales last year. Now, we are not expecting that forever. But it has a real opportunity into the U.S. now. They have signed up with the biggest distribution in the U.S. called Southern Glazer. And interestingly, in the U.S., it's not just about tonic. There they have a variety of mixers, particularly ginger ale because people in the U.S. like mixing that with vodka and whisky. But again, we think this is a company that can grow easy double-digit for five-plus years, very cash generative and the valuation that we were able to buy recently at we think gives us downside protection.

Wall: And for people who are unfamiliar with this stock, why did it halve just before Christmas?

Brazier: Well, there's no – if you were sitting at Fevertree and you were the management, there was nothing you would see that was any different in your business plan or your revenues. It was purely the fact that it got way too expensive. I mean, it became a very, very expensive company, which is why we didn't own it. But actually, now the shares have halved and there was risk in the market. People were very concerned abut these high-growth names where a lot of the value is, where you could say the terminal value is not the value today, it's what the company could be. But actually now, you are seeing this business on a much more reasonable valuation.

Wall: And what's the third and final stock pick?

Brazier: Well, again, it's another one that I've owned for a long period of time. It's Smith & Nephew. And the other reason I put this company in as a pick is because I do think there's a lot of uncertainty in the world. But Smith & Nephew has three main areas. Historically, it was what's called an orthopedics business. It makes hips and knees that go into implants. But it also has been growing outside this. So, orthopedics is only about a third of their business now. Another third is in wound management. And another third is in surgery, particularly around things like sports medicine. So, there's quite a nice diversification to this business. And the reality is, is that people's hip replacements or injuries or you know, trauma do not reflect what's going on in the world's economies.

It's pretty anticyclical funded by many – a lot through governments and private healthcare. And it has very strong positions globally. This is a genuinely global business. And not only is it growing its revenues from its product set, but also, it's improving margins. Management is getting on top its cost base a bit better. So, to me, it's a very good long-term steady business, probably one of the best businesses in the U.K., I think, in terms of the product set that can grow revenues, improve margins and generate good cash flow.

Wall: Simon, thank you very much.

Brazier: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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.

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Emma Wall  is former Senior International Editor for Morningstar

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