Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Simon Brazier. He
is Manager of the Ninety One UK Alpha Fund. Hello.
Good morning, Holly. So, you've got three UK stocks for us this
morning. Where would you like to start? I think let's start with one of our longest-term
holdings actually which is London Stock Exchange. It's been a stock I've owned for some time
and it's been through significant transition over the last 10 years. And it isn't what
most people think it is today which is just an exchange business. It has a variety of
businesses. It's sort of the underlying infrastructure plumping I suppose for capital markets. It's
a business that continues to grow significantly right across these different businesses and
it has undertaken a large acquisition which has been looked at by the regulatory authorities,
Refinitiv. But we think that acquisition is really going to strengthen their position
across markets. So, a really interesting long-term play for us.
When you hold a business like that and it changes so significantly over time, particularly
with acquisitions, do you find you have to keep re-assessing it?
Yeah, I mean, we spend a lot of time with management and exactly that. I mean, my analyst
Fred, he spends a lot of time. I mean, when the Refinitiv document came out, for example,
it was 100, 200-page document on that acquisition alone and he spent literally a month getting
to know that business. So, he actually went out to the US to meet their management out
there. So, yes, I mean, it is detailed due diligence because these businesses are increasingly
complicated. Poor old Fred. What's stock number two?
It's actually what I said last year which is Fever-Tree and it's almost the same price
as it was last year, but it's halved since then and then bounced back. Fever-Tree to
me is a really interesting company. It is a genuine growth company. I mean, it's growing
in – one of its great growth avenues is the US It's growing about 90% per annum there.
And it's a business that we know the brand, it's really riding on the back of the premiumization
of alcohol as people are prepared to spend more for better quality drinks. And actually,
the lockdown showed its strength because although it wasn't obviously selling as much in the
pubs and bars, the off trade, what they were selling in supermarkets and the likes was
very strong. So, we think it's a genuine growth business. It's run very well. And who knows,
but I'm pretty sure at one point it will but bought by one of its larger competitors.
And Fever-Tree has now moved into the US Are there any other regions that it could potentially
tap into in the future? Yeah, I mean, it is quite a global brand.
I mean, in Africa I was in a hotel and someone served me – I was very pleased to see my
gin and tonic came with Fever-Tree. So, I mean, it's a genuinely global brand now. But
being honest, Holly, the reality is, is the US market is so large that if they can – well,
they are starting to crack that. If they really do get their brand motoring there, then that
is the real game changer for that business. Okay. And what is our final stock today?
The final stock is what I bought through the crisis actually. It's Next, the clothing retailer.
And actually, one of the things I said to my team was when we look to companies, let's
find those companies that the crisis will actually make them stronger. Now, it might
seem very strange for a retailer, particularly a clothing retailer, how is that stronger
in an environment of weakening economic growth to a degree – but actually, for a few reasons.
One, most of its competitors are now in weaker positions as some of them have gone bust.
So, from a structural perspective, it can gain market share that way. But secondly,
what Simon Wolfson has been – very good chief executive – I think he is one of the
best chief executives I've ever known – has done very cleverly – he's termed that business
– if you remember, it used to be Next directory where you've got the book, that became their
online platform and they are genuinely a leader in that online platform to the degree that
they have at least another 100 brands. So, you buy Ted Baker clothes via the Next online
platform. And if you look at the valuations for some of the things like ASOS and others,
I think that's a very, very valuable part of their business. So, I think it will manage
the transition from selling through physical retail stores into online and it's doing that
very successfully. So, I think it's actually a very valuable business and one we were able
to buy at an incredibly cheap valuation during the crisis.
Even with those drivers though do you find it a concern when you hear about companies
like shopping mall operator into going under because obviously Next will have stores in
those malls? Yeah, I mean, the reality is, is that actually
we love industries where there is a constraint on supply if that makes sense. So, to a degree
Next actually have very flexible leases. That's one good thing is they are not tied into being
in shopping centers they don't want to be. But actually, what I like to hear when there
is a restriction of supply because it actually means that the stronger gets stronger and
I think Next is one of those dominant players that will still be here in 10 years and I
think will be a much more valuable business. So, yes, it's difficult economically, but
I think the reality is, from an investment point of view, that works for us.
Super. Simon, thank you so much for your time. For Morningstar, I'm Holly Black.