Download Saracen Growth Fund February Commentary February proved to be

Saracen Growth Fund
February Commentary
February proved to be a busy month for Saracen Growth Fund with the addition of three new stocks.
We bought DX Group, Morgan Advanced Materials and First Group over the course of the month
and the rationale for buying each of the companies is given below.
DX plc is a leading independent mail, parcels and logistics network operator in the UK and Ireland
delivering in excess of 200 million items annually. The company has a large exposure to the fast
growing parcels market (over 50% of revenue is derived from the Freight and Parcels division), which
is forecast by PWC to increase at between 4-5% annually. The company was floated on the AIM
market in February and was heavily oversubscribed by institutions. As regular readers of our
commentary will know, we shy away from investing in IPO’s unless they are either demonstrably
cheaper than existing peers or offer something different. DX was floated on a single digit P/E for
2014 and a yield of 6% for its first full year in 2015. This appears to offer very good value.
Morgan Advanced Materials is a world leader in its chosen field - it uses a wide range of specialist,
high specification materials which are engineered into products which then deliver enhanced
performance, often under extreme conditions. The company’s products go into a wide range of end
markets such as energy, electronics, transportation and healthcare. Although the company
produces a variety of different products for industrial and geographical markets, there are unifying
themes. It specialises in bringing science and engineering expertise to meet demanding technical
requirements and looks to position itself in growth markets. The company works with their
customers at every stage from concept and feasibility to prototyping and full production.
Revenue prospects for the group look promising as management has moved the company into faster
growing areas such as transport, healthcare and industrials, over the course of the last six years.
Historically, the company has grown 1.5 - 3 times faster than GDP - consensus expectations for GDP
growth are 3% per annum for the next 2 years. Management has a goal of achieving mid-teens
operating margin by 2015 and are doing a reasonable job, having earned margins of 12.4% during,
what they believe to be, a low point in the cycle.
The stock was purchased on a valuation of only 12x 2013 earnings which we felt was incredibly low
for a company which has transformed itself over the last six years into a much higher quality, less
cyclical business.
Our final purchase in February was First Group, a leading transport operator in the UK and North
America. First Group has five main operating divisions comprising rail and bus operations and is
diversified by geography and customer base.
First Group shares have nosedived since buying Laidlaw of the US at the top of the market and have
fallen from 800p to 140p today (post a 3 for 2 rights issues at 85p). A combination of an
overstretched balance sheet, poor strategy and an unaffordable dividend policy resulted in capital
expenditure being cut. This company is most definitely a ‘turnaround situation’. Management has
begun turning the business around (rebased UK bus prices, increasing capex to a sensible level from
a significantly under invested position and winning market share) and on our internal forecasts we
believe earnings will more than double over the next five years. In addition, it is likely the dividend
will be reinstated in two years’ time.
Craig Yeaman
Disclaimer
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