Clive Beagles has increased his exposure to engineers in the £1.3bn JOHCM UK Equity Income fund, as he says the stocks are mis-priced.
Beagles has bought a 1 per cent position in Smiths Group, which services the medical, oil and gas industry and aerospace industry, and a 1 per cent position in e2v, which services the aerospace, mining and industrial industries. He has also added exposure to Hill & Smith, raising the exposure to engineers by 2.5 per cent.
He says: “Generally, engineers have performed poorly in the last few months, which is why we are seeing multiples of 10 times earnings. However, those are not on super high unsustainable margins either. The margins look sustainable and the multiples have become modest. The companies should be rated more highly than they are.”
Beagles says engineers are traded so cheaply because of concerns over a slowdown in general growth in Europe and a specific slowdown in China in mining and infrastructure.
On Smiths Industries, he says people have lost interest in the stock. He says:”It has quite a big pension deficit, which people have seen as an impediment to any kind of portfolio change or restructuring. We think that might be a little bit harsh. Its revenue growth looks to be improving.”
Beagles says the valuation of e2v is attractive as it is trading on a price-to-earnings ratio of eight times.”This company has high intellectual property. Earnings forecasts have come down in the last three months, but no more than you have seen elsewhere. Their order intake looks to be improving and the market has not priced that in.”
However the manager is steering clear of those engineers tied to the mining sector. He says: “Some engineers have been a play on mining, and mining expansion and capital expenditure. The ones we have got have minimal exposure specifically to that end market. I am not drawn to the mining specific ones, like Weir Group, that have ridden on the mining boom, which seems to be over.”
Beagles has also been adding to HSBC and BP over the last few months as he says they will become the major mega cap dividend payers over the next few years.