In this blog, I am taking the opportunity to look at five of the stocks we have included in the GF European Smaller Companies Fund, which we launched at the start of February.
As with all stocks in the Fund, these pan-European small cap selections have a market capitalisation (at inception) of less than €5bn. This initial stock selection has been based on in-depth quantitative screening and forensic bottom-up financial analysis of companies’ report and accounts. This is a distinct approach in the small cap space as we avoid meeting with company managers, which we believe is vital in preventing any emotional bias towards holdings.
is a gold production and exploration company operating from a selection of sites in Egypt, Burkina Faso and Cote d'Ivoire. Compared with its mining peers, Centamin has a strong cash flow culture, which stretches as far as presenting its strategy to investors under the maxim ‘growth through cash flow’. Our analysis of its historic report & accounts ranked it in the top 10% of the European small cap space. It displayed particularly strong characteristics of what we refer to as recovering value. Analysis of its cash flow statement also shows good working capital discipline, with capital expenditure consistently less than the asset depreciation value in its accounts, and this helps support a healthy free cash flow yield.
is a Swedish consumer products company that scores strongly on the cash flow metrics we employ when screening potential investments. It has made significant efforts to reduce capital expenditure, control working capital and bring down its net debt. This has boosted operational gearing within an environment of modest top-line growth (sales +3% in 2016). Its operating margin, when adjusted to remove short-term currency effects, improved to 9.5% in 2016 compared with 8.3% in 2015. In addition, over 20% of Oriflame’s shares are held by the founding Jochnick family. We often find a large family ownership stake to be beneficial in resolving principal-agent problems of incentive alignment between owner and management. It tends to help foster a healthy focus on cash flow and dividends rather than accounting profits.
The oil price halved from mid-2014 to mid-2015, with a direct knock-on effect to the shares of companies involved in oil and gas exploration and production. As share prices in the sector fell, we saw growing valuation dispersion – i.e. larger differences between the valuations of those companies viewed as having weak or strong prospects. For us, this creates opportunities to analyse companies’ accounts and find instances of mispricing which we can benefit from as they subsequently correct. Tethys Oil
is a small Swedish company operating mainly in Oman. We think that it has handled the oil price downturn better than most – cutting back both operating expenditure and capital expenditure – and is now in a strong position to benefit from improving global oil supply/demand dynamics. Despite the industry headwinds, management continues to focus on cash dividends – indeed calling itself a “cash dividend company” and indicating further cash returns to shareholders will be considered.
Cembra Money Bank
Switzerland-based Cembra Money Bank
was spun off from conglomerate General Electric in 2013. Its corporate history means that it was largely sheltered from the mortgage and securitisation boom and bust which afflicted many banks from 2008. It therefore is not working through legacy issues such as high non-performing loans to the same extent as its peers. It is well capitalised, giving it a strong base from which to grow as economic conditions improve. With interest rate expectations now rising in key global markets such as the US, it is likely that banks’ net interest margins will also improve. One of Cembra’s fastest growing businesses is its credit card business, which recorded 6% growth in the first half of 2016, compared with the 1% expansion in the wider market.
UK high-street retailer JD Sports
is an excellent example of a company executing self-funded growth on the back of strong cash flows. It has high gross margins which result in the business generating significant cash flows. This leads to a high cash return on capital and a strong balance sheet, which includes a net cash position (£232m at 30 July 2017, an increase of £130m in a year). The company’s top-line growth is being driven by both an expansion in its number of stores, as it builds its presence in Europe, and good ‘like-for-like’ sales growth in its existing shops – up 10% over most of 2016.