Buy, hold, sell: Old Mutual UK Smaller Companies

Buy, hold, sell: Old Mutual UK Smaller Companies

Daniel Nickols has been the lead manager of Old Mutual UK Smaller Companies since 2004. Launched in 2001, this UK smaller companies fund, has about 80 holdings and its investment universe is based on the Numis smaller companies index, which is comprised of the bottom 10 per cent by value of the quoted UK market.

Nickols describes the team’s investment style as ‘flexible’, as they will try and adapt the fund’s positioning ‘to reflect perceptions of the macro outlook and how markets are generally likely to respond to that’. While he believes that the prospects for economic recovery are ‘benign on a global level’, he thinks that ‘closer to home it’s very difficult to say’, though the UK economy is moving forward reasonably well.

The fund has almost a third in industrials and 19 per cent in financials. It returned 12 per cent over three months and 34 per cent over one year to 24 May.

BUY: Accesso (LON: ACSO)

‘This company is a software business that develops software for theme parks and attractions,’ says Nickols. He adds that while this may sound esoteric, ‘it is a global leader in what it does’. For example, it has just signed a deal with Merlin Entertainments.

Nickols explains that when people book tickets online, Accesso allows them not just to buy the ticket but also to do ‘all the things you might want to do over the course of the day’, such as having a meal or paying to jump the queue for a ride. The company takes a revenue share in each case.
Nickols adds that ‘it’s also branching out into ticketing for assigned seating areas’.

As a result the company has multiple growth avenues, which is a ‘feature that you want to find in classic growth stock’. Nickols first bought the stock four years ago and has added to his position several times since then. His average buying price is about £7 and the shares are currently worth £18.80, which means that ‘in the short term they are quite expensive’.

However, ‘given the nature of the rollout and its organic growth’, he believes that the price/earnings  ratio – currently 40.3 – will fall to 32 in 2018 and 24 the year after, as earnings are boosted.

HOLD: Clinigen Group (LON: CLIN)

This company is a specialist distributor for pharmaceuticals. Nickols explains that the origins of the group are in clinical trial supplies. ‘A lot of trials are comparative studies, which test new products against existing ones, so the comparatives need to be well-sourced otherwise they could invalidate the trial process.’ He says that while this is an important business in itself, the company has added more key operations to its business over the years.

These operations include ‘managed access’ and ‘global access’. As he explains, ‘when there is a patient who has a terminal disease, these products can be made available pre-authorisation, and if the pharma company doesn’t want to distribute them itself, this company will distribute them.’

Another key business involves Clinigen ‘buying rights to certain products that may have enjoyed significant sales in the past but have tailed away’. He adds that it’s a business focused on distribution rather than on developing new products, and has a ‘strong and global presence’.

‘We buy the idea this is a business that can deliver good rates of earnings growth, and it’s not particularly expensively valued,’ he says.
His average purchase price for the stock is £6.19, with the shares currently trading at £8.63.
He has added to his position in about 10 chunks, as he tends to buy small caps ‘in bursts over
time’, and plans to hold for three to five years.

SELL: Telit Communications (LON: TCM)

This is a company the manager says he doesn’t particularly like and hasn’t had a position in for a while. He sold the stock two years ago, having held it for 18 months prior to that.

Telit is an IT hardware business, which makes modules for applications such as smart meters, automotive electronics and the like.
‘The business doesn’t look expensive for a tech stock. It is within the internet of things theme, but the reason I’m wary about this business is that its cash flow is poor,’ says Nickols.

In rough terms, he explains, ‘the company is arguably twice as expensive in terms of its price/cash flow ratio as its price/earnings ratio because of the way research costs are treated, which can increase short-term profitability. That’s been the case for a number of years.’

He adds that ‘it’s ostensibly not heavily geared, but it chose to raise over $50 million (£39 million) recently for acquisition purposes – however, no particular acquisition has accompanied that.’ Worried by the poor cash flow, Nickols sold the shares at about £2.30 two years ago; they are worth £3.40 today.

Nickols' fund is up 34 per cent for the year to 30 May

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