Hello and welcome to Morningstar.
I'm Emma Wall.
I'm joined today by Andrew Paisley, Manager of the Standard Life European Smaller Companies
Fund.
Hello, Andrew.
Hi.
So, what's your first stock pick today?
So, the first stock pick I have today is a German company called Nemetschek (NEM).
It's the European market leader in the provision of 3D, 4D and 5D software to the architectural
and construction markets.
It's a classic German Mittelstand business set up by Professor Nemetschek in the 1950s.
He is still a big shareholder in the business and is involved in the management and the
supervisory board.
Now, this is a business which has a long growth trajectory in front of it we believe.
The construction industry, in particular, has being quite late to adopt technology,
and you know we've all seen some big construction projects overrunning with fairly disastrous
consequences for the contractor.
Now what the software does is to reduce that risk, both in terms of 3D being able to visualize
the building, 4D in terms of the actual timeline of construction of the business and a 5D,
which also takes into account price and cost.
Collectively, this is called Building Information Management.
As now being mandated by the EU and all public sector tenders.
But on top of that, there is strong growth coming through from the private sector.
You clearly see the benefits from managing contract risk.
As I say the European market leader now branching into North America, strong growth prospects
there, we believe the market is underestimating the growth potential of this business as company
have held for a couple years, but we believe we'll be able to hold it for many years to
come.
So, high quality business with good growth and strong momentum.
And what's the second stock pick?
So, the second stock pick, a bit closer to whom is a company that we own in the U.K.,
the European and the global small cap fund, Fevertree Drinks (FEVR), which is a manufacturer
of premium tonic water for the premium gin markets.
Again, setup by – there's two founders who are still involved in managing the business.
They still have a big shareholding in the business.
So, clearly, aligned to us as external shareholders.
This business has seen very strong earnings momentum.
The two analysts, when it first floated quite conservative forecast and it's quite clear
to us that they were likely to do much better than was expected by the consensus.
That's what we've seen, quite dramatic upgrades and the share price has performed accordingly.
Now, we believe the consensus is still too conservative looking a couple of years, given
the growth prospects of the business, both in terms of geographic expansion, but also
product expansion.
So, moving away from purely the gin market into other product categories, particularly
addressing the dark spirits markets, which is actually six times bigger than the gin
market.
So, premium cola, premium ginger beer and ginger ale, and none of that is in analyst
forecast.
So, you know, we expect again to be holding this business for the long-term.
Very high quality, excellent growth and very strong momentum from this business.
Do you think Fevertree is a prime M&A target, because of course you have in this soft drink
space some ginormous U.S. companies, such as Pepsi-Cola and Coca-Cola.
Surely, as we've seen with other brands, it gets to a point where someday I think I'd
like a piece of that.
I think absolutely that's correct.
It's not part of the investment case.
However, clearly, this is a very attractive business with great growth dynamics and a
very strong brand.
It wouldn't surprise us if at some point that one of these multinational brands that buys
Fevertree to complement their staple of brands, particularly targeting the premium end of
the market.
And what's your third and final stock pick?
The third stock pick, again, a completely different company and that reflects very much
the eclectic bottom-up process that we run is a Norwegian company called Borregaard (BRG).
Now, this business is a manufacturer of a chemical, which is a by-product from the wood
pulping process called lignin.
It is an environmentally-friendly product, which is used in hundreds of different applications,
mainly as a binding agent in areas such as concrete, in agriculture, but also in car
batteries.
And what we're seeing is a structural growth trend here as this environmentally product
is displacing oil-based equivalents, which are really quite nasty chemicals.
Our non-consensus view is around on increasing capacity, which we believe will result in
significant earnings growth over the next three years, which the market is not factoring
in at the moment; and effectively, as much of this product that they can produce, they
can sell.
So, very long-term structural growth driver here.
Again, a high-quality company; margins of over 20%, and good earnings momentum, not
well-covered by the sell-side at all.
Emma: Andrew, thank you very much.
Thank you.
Emma: This is Emma Wall for Morningstar.
Thank you for watching.