Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Charles Luke. He is Manager of the Murray Income Investment Trust. Hello.
Charles Luke: Hi, Holly.
Black: So, you've got three stocks for us today. Where would you like to start?
Luke: So, I think the first company to talk about is LondonMetric, which is a property company, focused on distribution and urban logistics. It's interesting because it's a non-technology company that's benefiting from the internet and ecommerce and next day delivery. Supply is very constrained. Many of the sites that could be used are residential. So, those supply and demand dynamics are attractive. The company has a high-quality tenant base. Supply chains are very fragile. So, that tends to mean that companies pay their rents on time and in full. And that's happened over last year and in this challenging and more difficult period. It also benefits from an entrepreneurial management team and an attractive cashflow.
Black: So, something I find interesting about this space is how companies like this are going to react to this. We're all getting much more demanding. We want next day or even same day delivery. So, what does that mean for a company like LondonMetric?
Luke: Well, for LondonMetric, it's good news, because e-tailers need more space for the returns for holding more stock. So, that certainly will help in terms of benefiting from demand and in the long-term higher end.
Black: Okay. What's stock number two?
Luke: So, the next stock is Inchcape. So, I'm fortunate to work in a large team at ASI. We cover the FTSE 350 in-depth with our own proprietary research. And what we think we've discovered in Inchcape is a company that is good quality but that has underappreciated quality. Many people think of Inchcape as a car retailer but actually 95% of its profits come from distribution, and that distribution business has good margins. It has a high return on invested capital. It has strong barriers to entry, and it has some very long-term relationships. So, it's been distributing cars for the likes of Jaguar Land Rover and Toyota for over 50 years.
It also benefits from emerging markets growth. It's got a strong balance sheet, and recently it's changed sectors to move to the business support services sector. And if you look at the valuation of the company compared to its other peers in that sector, then it seems very, very modest indeed.
Black: But the car sector has undeniably been hit by the COVID pandemic. Is that not a concern for companies like Inchcape?
Luke: It's a short-time concern, but earnings have been relatively resilient because there's always the servicing market. And as we've seen, the pickup in electric vehicles can benefit the company. And you would expect over the medium term that recovery in terms of total ticket sales.
Black: Okay. And what is our final stock?
Luke: So, the final stock is Kone. And Murray Income can invest in overseas-listed companies and there are a couple of benefits of doing so. The first one is to diversify risk in concentrated sectors. The second one is to provide access to companies that you just can't find in the UK market. So, Kone, the elevator company, is a good example of that. Kone has the number one position in China which accounts for about 60% of new equipment sales globally. It is well placed for some attractive long-term trends in terms of urbanisation, regulation and population growth. It has a strong business model and net cash balance sheet. And what we particularly like about KONE is the fact that the Herlin family, who founded the business over 100 years ago, are still very much involved in the business which provides that attractive long-term focus.
Black: But are the prospects for the company affected if the demand for office space changes going forward, or we see this deurbanisation trend where people are moving out of city centres?
Luke: Yeah, that's a potential risk. I think what's also important is the ability and the way that if you move people around offices is increasing as well and KONE are very well positioned to benefit from that, from their software and their expertise in the industry.
Black: Charles, thank you so much for your time. For Morningstar, I'm Holly Black.
