It's been too long since I last made it to a company presentation. So when I found out that Equity Development were putting together an evening with two of my recent holdings I was quick to book a place. Of course you don't go to these events just to meet management; half of the fun is catching up with other investors and throwing some ideas around. On that front it was a fun evening and it's great to see Equity Development being so active under new management.
Tatton Asset Management
To kick off the evening Paul Hogarth, CEO, bought everyone up to speed on the services that Tatton Asset Management provide and where they hope to grow. Despite them being listed for almost three years I had no prior knowledge of the company so this was a useful introduction. On one side of the business there is the Investment Management Division which offers discretionary fund management (DFM) to IFAs on UK platforms. This is attractive to IFAs because they don't want to manage client assets and Tatton offer a very low fee of just 15 basis points including VAT. This is substantially cheaper (by 50% or more) than competitors which probably explains why Tatton has by far the largest AUM (at last count ~£7bn) in the DFM space and is still growing rapidly. Another key point is that Tatton design portfolios to match a client's risk profile and this is critical given regulation in this area.
The other, complementary, arm to TAM is Paradigm - the IFA support services division. This provides back-office operations for IFAs along with compliance services (much like SimplyBiz) and a mortgage club (similar to Mortgage Advice Bureau). This is an attractive model for IFAs as it reduces paperwork, removes risk and allows them to focus their time on servicing clients. It's also uniquely beneficial for TAM as it allows them to gather feedback and understand the needs of IFAs. Contrary to popular belief the advice market remains very healthy, with plenty of customers to go round, but the number of IFA firms is pretty static. This is a double-edged sword in that TAM have around 10% of the 5000 directly authorised firms on their books, which suggests that good growth is possible, but these IFAs are also sticky and don't tend to move platform. Fortunately the board have won a mandate from the Tenet Group to handle their client assets and this will appreciably boost AUM and fees.
Overall I'm quite impressed by Tatton Asset Management. This seems like a very sensibly run operation with the corporate culture being set by CEO and Founder Paul Hogarth. Fundamentally this means that TAM are happy to compete on price while delivering investment returns that are comparable to their peer group. Since IPO growth has been almost entirely organic but the company does have the financial means to undertake some M&A in the future. In addition management are looking to promote further strategic IFA partnerships and sign up more white labelling and book management opportunities. It's fair to say that the current price is probably up with events, given that all trading updates until now have been just in-line, but since flotation directors have been keen buyers of shares at a variety of prices. With this, and Paul Hogarth holding almost 19% of the company, I'd say that the board are aligned with minor shareholders and that one of the regular pull-backs might offer a decent chance to invest in TAM.
U P Global Sourcing Holdings
I held a rather short-lived holding in UPGS this year but sold out over concerns around Coronavirus related disruption in China. Andy Gossage, Director, addressed this up front as an obvious concern for the audience and I took this admission as a positive sign. However there wasn't a lot that Andy could tell us as factories across China are closed until January 10th, as an extension to the New Year, and it's possible that the shut-down could extend even further. So UPGS will contact their suppliers as soon as they re-open but those phone lines will be red-hot for sure. Given that 40% of their business is back-to-back, which means that there's no buffer of stock, any supply chain disruption could be a problem. Most likely there will be some cancelled orders or income being deferred but, as Andy pointed out, this is their third pandemic and so they have a track record of surviving them. If necessary they'll update the market on the financial impact but that won't be on Monday - which is when their scheduled year-end update comes out.
Turning to the business it is essentially a designer of household products which leverages a group of brands that are attractive at lower price points. These brands are names such as Beldray (owned), Salter (licensed until 2024) and Russell Hobbs (licensed until 2023). The goal of UPGS is to provide quality products at an economic price that is meaningfully less than the big brands charge. This makes them attractive to discount retailers and supermarkets but there is also appeal internationally and on-line through third-party sites (such as Amazon). This does tend to mean that customers have the whip-hand in negotiations but customer concentration has reduced in last few years and the board are working hard to diversify their customer base (even if this does lead to higher overheads and reduced margins). Still the company has been trading successfully for over 20 years, from a very sensible Manchester base, which suggests a certain level of expertise in this niche. In addition the board currently own over 40% of the company, with some hefty purchases since IPO, which suggests that they believe in its long-term profitable future.
As things stand I think that there is too much uncertainty right now to make a re-purchase wise. I would also like to dig deeper into the ongoing stock position, and its impact on working capital, since this is a big risk to a business like this. That said Andy stated that UPGS aim to manage stock quickly and closely and that invoice discounting is employed to smooth cash-flows. On top of this they're well aware that channel management is key, especially around pricing, as their clients are very protective of their space. So management are on their game and demonstrably add innovation for clients - such as a themed pancake day pack for Tesco. These factors, and the fact that UPGS manage 98% on-time delivery despite producing ~3000 products for ~300 customers, with over 1000 purchase orders out with suppliers at any one time, lead me to conclude that UPGS is an efficient operation that fulfils a genuine need. However retail in household goods is a difficult sector and UPGS endured a terrible 2018 not long after listing. Perhaps this is the type of share best purchased when sentiment is at its most negative? If so we're nowhere near that point yet.
Up until late last year I was happily invested in Watkins Jones and content with their progression. However a large placing by the founding family along with so-so growth forecasts convinced me to liquidate my stake. Since then they've put out FY results which confirmed the low-single digit growth achieved in 2019. Looking forward the tone of the Chairman is cautious but optimistic and this chimes with analysts seeing improved growth occurring in 2021 and 2022. As such I relished this opportunity to hear Richard Simpson, CEO, talk about the company and what they're hoping to achieve. In simple terms they're going to keep delivering student accommodation (PBSA) and build to rent (BtR) schemes as these are adjacent sectors which play to their strengths. The former underpins their growth ambitions while suffering from constraints such as lack of internal resources, competition in acquiring land and the time spent getting planning permission. For this reason it's BtR that'll drive future growth and, after success with their pilot projects, the board is looking to significantly scale up in 2021/22 and the years beyond that.
Looking into BtR in slightly more detail this growing sector plays nicely with WJGs capital-light model. The key here is that the group forward sells all developments which allows them to avoid tying up capital for long periods (boosting ROCE and limiting debt to that taken on for specific projects). This ability to forward sell relies on institutional investors wanting to invest and it seems that investment volumes are increasing, from a low base, with foreign investors attracted by our weak currency and a sense that economic uncertainty is reducing. There is also an ESG angle to this in that developments are perhaps helping to alleviate the housing crisis. On the other side of the coin increasing numbers of households are choosing to rent in the UK and this trend is set to continue. If WJG can leverage the reputation that they've built up in PBSA, which is that they deliver decent quality on-time and to budget, then I can see them remaining an attractive partner.
Watkins Jones also has a secret weapon with their Fresh property management services arm. This part of the group currently manages almost 18,000 student beds and apartments with newly won contracts taking the total to over 20,000 by FY22. More than that though Fresh provides direct, timely feedback from students/tenants which can be used to fine-tune future developments. Right now Fresh is learning the ropes of BtR management since the optimal customer experience is very different compared to that for students (although the back-office is identical) and will fully launch when ready. Given that half of the managed student accommodation wasn't built by WJG I'd say that Fresh has a good chance of growing strongly in the BtR space without being limited to just group developments.
This ties in well with Richard Simpson's desire to develop and push the group's strategy. With him being in place for a year now I think we're seeing how his drive meshes well with the group's entrepreneurial spirit and his appointment from Unite looks pretty inspired in retrospect. Even so WJG is a tough company to influence in the short-term as their developments are almost entirely forward sold for next 2 years - which means high visibility of revenue and earnings but no real scope for a positive earnings surprise. Instead we have a medium term (2023-24) goal to grow up to ~3500 PBSA beds per annum along with ~1000 BtR units. Since each rental unit is equivalent to ~3.4 PBSA beds this should lead to an equivalent split in sales. The bottom-line split may not be so even as the gross margin on PBSA is ~20% but only ~15% on BtR due to it being a lower density product on slightly more expensive land. That said Richard mentioned that are being a bit cautious as they scale up and so, perhaps, gross margin could move to ~18% as economies of scale kick in. That would be nice but even without this WJG should be a bigger, more profitable outfit in 3-5 years time.
Disclaimer: the author does not currently hold any of the shares discussed here