06 Jul 2021
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The UK market tends to be maligned for its narrow focus. But UK equity income manager, Nick Shenton, believes this stigma means investors may be overlooking the opportunity to invest in undervalued UK businesses with potential for growth.
Reference to specific stocks should not be taken as advice or a recommendation to invest in them.
In the context of global equities, the UK market tends to be maligned for its narrow focus and lack of variety. But we believe this stigma detracts attention from some businesses with characteristics that are viewed – and valued – very differently in other markets.
There is a lot of focus on the lack of exposure to new technology in the UK market. There are few ‘pure’ technology plays. But we would argue that many UK companies are using developments in technology in very innovative ways to enhance value both for clients and shareholders. We are seeing companies with industry expertise, customer relationships, scale, data ownership and heritage who are harnessing new technology to reach their clients in different ways, distribute goods through new channels or exploit richer data sets.
We see examples of this across a wide range of sectors but it is not reflected in valuations, which seem to be anchored to the UK market rather than to international companies with similar characteristics.
Here we highlight two companies that we feel are misunderstood:
DMGT’s full name – The Daily Mail & General Trust – attracts a lot of attention. Any mention of the ‘Daily Mail’ in the UK tends to evoke emotion and polarised views. And yet, the Daily Mail is now a very small part of DMGT’s business – on our estimates probably 5-10% of its enterprise value. DMGT’s management recognised 20 years ago that the traditional newspaper business was declining and so started the process of investing in other companies. The management tries to invest in businesses where its experience in the newspaper industry can add some value.
The result is that DMGT now has a collection of assets that are underestimated and poorly understood by UK investors. For example, one of their largest businesses, RMS, is the global leader in data services and information for the reinsurance market. It has migrated its business to the cloud and is now selling its risk models to other industries. Another large holding is in Cazoo, a disruptor in the used car market, which was launched by the founder of Zoopla. DMGT’s management look for businesses centred on digital content and data services – highly attractive business models with recurring revenues. They have focused on realising value through disposals. Yet it seems DMGT is still viewed (and valued) as a newspaper business.
Last year was a bumper year for the stock exchange but it accounted for less than 5% of the group’s pro-forma revenue. So if not a stock exchange, what is LSEG? As the world continues to digitalise and globalise, it needs a digital global infrastructure for data on financial markets. LSEG is one of a handful of companies helping to enable that. 70% of its revenues come from subscription-based services in data and analytics. Digitalisation of financial markets’ data is still in its early stages and presents a long-term opportunity as demand grows from banks, wealth managers and asset managers among others. Yet LSEG’s share price trades a deep discount to its global peers.
The undervaluation of UK companies versus global peers is not going unrecognised by all participants in capital markets. In the past six weeks alone, there has been £19 billion of M&A in the UK market, including high-profile names such as Morrisons. It is also encouraging that these companies are not being sold on distressed valuations – many are priced on healthy multiples. It seems many UK companies are worth a closer look.
To find out more about the Artemis Income Fund and its positioning visit the fund page at www.artemisfunds.com.