Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Alistair Wittet from
the Comgest Growth Europe Fund. Hello. Good afternoon.
So, you're going to give us three European stocks that you're feeling quite positive
on. Where would you like to start? We can start in the tech sector, ASML. So,
ASML, a provider of lithography equipment for the big giants like TSMC, like Samsung
and these are, if you like, the printing presses that are used to make chips. So, why do we
like this company? For a couple of reasons. On the one hand, very attractive backdrop,
spending generally on semiconductor equipment is growing and you just need to think about
the huge amounts of spending that's being done on datacenters, for example, so we can
all watch Netflix, et cetera. So, there's a huge amount of spending on this industry
generally and there's a desire to constantly improve.
This is one of the few areas very much benefiting from our new virtual way of life and the fact
that I need a very good laptop and internet connection right now.
It is and TSMC recently came out saying that the backdrop is very strong at the moment
and it's for that exact reason. People are buying laptops at home. People are watching
more Netflix at home. That requires server capacity. So, even though in a normal downturn
demand for semiconductor equipment normally suffered, it's actually not suffered so much
this year. Okay. And what is stock number two?
Stock number two, very different company and a very different sector, Adyen. It's a payment
processor. So, every time you make a payment online, there is a company like Adyen who
will quite simply process that payment. Why do we like it? We like it because there's
structural growth in online payments, roughly 15% per year as we increasingly shift our
purchases from in-store to online. Secondly, they are the leader with the sort of, if you
like, the blue-chip customers. So, they have customers like Uber; they have customers like
Netflix, like Spotify. And so, they can leverage the wave of growth for those companies. In
fact, without doing anything they can benefit from the growth of payments on the platforms
like Spotify, like Uber. This is super sticky as well. Once they get
an Uber or a Spotify onboard, that company is not going to change their payments provider.
One of the biggest issues online retailers have is what they call the kind of completion
rate. In other words, very few customers – I think it's something like 2%, 3% of visits
to a website end up with a purchase. And all those steps along the way can prevent somebody
from making that purchase. And for me, the best example is Amazon. There is nothing easier
than shopping on Amazon. It's literally a one-click shop. And you compare that to some
other websites where you're having to spend ages looking for your card, bring your card
details in, then having to do the authentication, then it crashes, and you start again. So,
having a payment processor that makes that payment process as seamless as possible is
completely vital to these companies. And so, as you say, if they find a good one and Adyen
are the best in this for many historic reasons, you'll stick with them.
Okay. And what is our final stock? So, Jerónimo Martins are a discount retailer
in three markets, in Poland, in Portugal and in Colombia. And in particular, in Colombia,
they are a new entrant there, but they are seeing some very strong signs of success in
that market and we think that will sustain double digit growth for this company over
the years to come. If they are a new entrant, because we talk
in the UK about the big four and it's very hard to take market share from them, although
Lidl and Aldi are doing their best. How difficult is it to disrupt other markets?
It's very difficult, because there are such huge benefits to scale in food retail. It's
not just on your buying power with suppliers but it's also about efficiency within the
store. The store is a largely fixed cost for the company. So, it's rent, it's employees,
it's shelves. So, the more people you can put through that store, the more efficient
you're going to be and therefore, the more able you're going to be to invest in price.
So, getting into a new market is very difficult and that's why they first entered in 2012;
they are still not profitable today, but the route to profitability is very clear and the
main reason is, because they are up against somebody like Aldi and Lidl in the U.K., they
are up against large supermarket competitors who have very high food prices and they've
been benefiting from the fact that it's been a bit of a monopoly in those markets and therefore,
they haven't really worked really hard on being efficient. This company comes in with
huge efficiencies. They reinvested in pricing and they are now substantially cheaper than
the incumbents in that market and customers are starting to notice and that's what's driving
the growth in their sales at the moment. Alistair, thank you so much for your time.
For Morningstar, I'm Holly Black.