For outsiders, Brexit is the show that keeps on giving. For the stoic British, a source of much frustration.
From an investment perspective, Perpetual has been finding a lot of opportunities in the UK, as fears around Brexit and Europe have kept international investors away. As a result, there are a number of companies listed in the UK trading on low multiples, which in fact are international businesses.
Ferguson is the world’s leading specialist distributor of plumbing and heating products. While the business was founded in 1887 in the UK under the Wolseley brand and is listed in London, circa 90% of its business is in the US trading under the Ferguson brand. It has 2,259 branches globally.
In the US, Ferguson is the clear market leader with 18% market share in the commercial market and 16% market share of the consumer market. It has been in the market for 65 years and has been growing at double the market rate. Ferguson has been winning market share due to its strong distribution; it has 1500 branches and highly recognised customer service levels. E-commerce is also a strong growth driver for the company, representing 23% of sales. We expect these outsized growth trends to continue.
Perpetual has been a long-term shareholder in Reece in Australia and, over the past few decades, has witnessed the success that a market leading plumbing distribution company can experience. Perpetual’s team is surprised at the valuation discount that Ferguson trades at, relative to US listed peers and globally comparable businesses, such as Reece. The discount is around 20-30%.
Fortunately, Perpetual is not the only business to have observed the mispricing, attributed to the fact that the business is listed in the UK despite being predominantly a US-based business. Trian, a leading US activist fund has recently accumulated a large position and has encouraged the board to divest their UK business and re-list the remaining US business in the US. The Perpetual team met up with Trian in New York recently, and is supportive of a re-listing in the US; the team believes this will enable the company to trade up to a more appropriate value.
Equiniti is another high-quality business being ignored amid the Brexit fear. Equiniti provides specialist administration and payment services to corporates through its proprietary software and technology platforms. It is the leading share registry in the UK, conducting share registration for 70 of the FTSE 100 companies and half of the FTSE 250 companies. Equiniti’s market share is double its competitors, Link and Computershare. Through its acquisition of Wells Fargo’s registry business, Equiniti holds the number three position in share registration in the US and is slowly winning market share.
Equiniti also helps corporations manage relationships with employees and customers through its intelligent solutions division. This business utilises proprietary technology platforms and software to provide complaints management, credit services, data analytics and cyber security analytics. These businesses generate healthy organic earnings growth, have sticky customer bases and produce strong free cashflow.
The Perpetual team has met Equiniti’s management team, including CEO Guy Wakeley, on numerous occasions and has been impressed with the performance and execution of the team. Despite these positive attributes, the company trades at a stark discount to global peers (for example, a price-earnings multiple of 11x vs Computershare and Link on 15-16x times earnings).
This lower price-earnings ratio is the likely result of a lack of fund inflows into the UK market at the moment, thanks to uncertainty around Brexit. Perpetual identifies an opportunity, similar to Ferguson, for a significant re-rating in the stock price should the company be listed on a different exchange and opened up to a larger investor base.
Perpetual will keep a close on the UK and Europe as the Brexit machinations continue – after all, there’s no telling what investment opportunities may arise from the dislocations it engenders.
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