We have always stressed the importance of cashflow in our stockpicking at SVM, as it gives companies the great optionality to generate shareholder value. But equally key is the management team in place to use this cashflow, with efficient capital allocation typically feeding through into rising share prices.
For us, experience is vital in running any business, as you have to have time to make mistakes and learn from them. Management influence is clearest when a new team comes into a badly run – or simply under-managed – company, initially stabilising things before looking to initiate a new stage of growth.
Within the SVM UK Growth fund, we would highlight names such as Booker and Filtrona as success stories on this front and the strength of management is now reflected in the share price.
Food service wholesaler Booker currently trades on a price/earnings multiple of 19 times against 10x for Tesco for example, and much of that premium reflects market confidence in the former’s executives. Chief executive Charles Wilson joined in 2005 when Booker’s sales and profits were in retreat and the company was in structural decline in its traditional cash and carry business. He has gradually shifted the business away from supplying corner shops with low margin products such as tobacco and drink to higher-margin operations such as food service provision to pubs, improving returns on capital employed and cashflow in the process.
Filtrona offers a similar story, with chief executive Colin Day joining in 2011 after building a reputation as chief financial officer at Reckitt Benckiser over the previous decade. Again, he has been fundamental in moving the business away from its roots as a manufacturer of filters for the tobacco industry, with a rebranding to Essentra imminent. This is designed to reflect the company’s wider role as a manufacturer of specialty plastics, packaging and security products, with a recent acquisition of pharmaceutical packaging business Contego Healthcare. As CEO, Day has driven this shift from limited pricing power products and is building an increasingly international footprint.
Another example in our fund is Thomas Cook, which has been financially and operationally mismanaged in the past. The company had taken little notice of the online shift in holiday booking compared with rivals such as Tui and lost market share as a result. Harriet Green came on board as chief executive last year with a strong record in cost cutting and has quickly set the business on a path to improvement, stripping out costs through closing high street stores and accelerating the shift to online sales. After a restructuring of its debt, the company is out of the casualty ward, her challenge – as for any management team – is to move into a new growth phase, which can bring the reward of a major re-rating.
In addition to these turnaround stories, we would also highlight strong management teams with the vision to drive a business forward in a particular market niche. Among our holdings, Paddy Power has made the most of its first-mover advantage in online gambling for example and this kind of industry pioneering is just as challenging as turning a business around. Elsewhere, Ted Baker founder Ray Kelvin remains with the business and continues to take this ‘affordable luxury’ brand into overseas markets. Mike Ashley at Sports Direct has also moved his business forward with major potential to grow sales in the UK and oversees through its online presence, whereas many of its competitors have gone bust.
Whether driving value through cost cutting, better capital efficiency or basic vision for business, strong individuals can clearly play a key role in generating returns for shareholders.
Margaret Lawson is manager of the SVM UK Growth fund