Trustnet Magazine Issue 21 September 2016 | Page 30

STOCKPICKER

SUBJECT TO CHANGE
Alan Custis, manager of the Lazard UK Omega fund, highlights three stocks
undergoing a structural transformation in order to improve their financial productivity

W

e approach stockpicking from a simple
position: the more financially productive a
company, the higher the valuation the
market should be willing to pay for it. The
most obvious way to look for alpha is to
identify companies where we feel this relationship
between financial productivity has come undone and to
buy good businesses at attractive valuations. However,
we also look for companies making changes that will
enable them to become better businesses. By improving
their financial productivity (measured by return on

GLOBAL CATERING AND
SUPPORT SERVICES BUSINESS
COMPASS GROUP is a longstanding holding. Today we
would describe it as a quality
compounder with high barriers to
entry and structural growth drivers.
However, this wasn’t always the
case – a change in management in
2006 led to a large restructuring
programme in which the company
pulled out of 48 underperforming
countries and changed 70 per
cent of management in six years.
This resulted in an expansion in
EBIT margins, which in turn led
to a considerable improvement in
return on capital employed.
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equity or return on capital employed, for example), we
believe that over time they will increase in value. There
are many changes that can bring about improved
returns: management change, acquisitions, introducing
new product lines and selling underperforming
businesses are just a few examples.
Structural change does not always run smoothly, so
we believe it is important to stay close to management
and ensure they achieve the expected milestones
along the way. However, when it goes well, the upside
opportunity can offer real value.

PROVIDENT FINANCIAL IS AN
EXAMPLE OF A COMPANY at
an earlier stage in the process.
Its 130-year history as a homecollected credit business has
moved with the times and its
non-standard credit card division
has grown phenomenally over
the past five years. At the same
time, Provident Financial’s
management has consistently
reduced the rate of nonperforming loans. We believe
that it can repeat this success
with its Satsuma business,
disrupting the payday lending
market and increasing its
automotive loans business.

EVEN EARLIER IN THE
JOURNEY IS AUTO TRADER, the
UK’s dominant digital automotive
marketplace. Its strong market
position means it has pricing power
and high operating leverage in a
capital-light business model. We
believe that by taking advantage
of opportunities such as crossselling, it can raise revenues,
improving returns. As the market
leader it is also well-positioned to
benefit from industry change, such
as growth in personal contract
financing. Structural change is
often challenging, but it rewards
investors who understand the
transformational potential.
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