BAE Systems
Equity Market Cap (M) £37,253
Industrials
Charles Woodburn, CEO
Since we last met, BAE’s CEO Charles Woodburn has been busy integrating a new acquisition. In February BAE acquired Ball Aerospace (now renamed Systems Space & Mission Systems). The acquisition came with a hefty price tag, but Woodburn explained that the integration was going well. This acquisition comes at a time when BAE’s order book is swelling, as their global customer base attempts to replenish arsenals and modernise militaries in response to growing geopolitical threats.
This order book provides visibility to the business and management were keen to stress the long-term nature of some of these projects. BAE holds commanding positions in the AUKUS submarine building pact between Australia, the US and the UK and also in the next generation Tempest European fighter jet programme in the UK. These projects should provide revenue streams well into the 2030s – and the recent recommitment to Tempest ahead of the government's first strategic defence review is testament to its importance.
Contracts of this length are not without risk, and in the past BAE has not been immune from cost overruns. Since joining BAE in 2016, Woodburn has tightened restrictions on fixed price contracts and the third of revenue derived from these contract types tend to be de-risked before a contract is accepted.
Looking forward, we were keen to understand management’s approach to capital allocation. Mergers and acquisitions are usually bolt-ons, however Ball Aerospace was more opportunistic. The business is cash generative and much of this is now returned to shareholders. The focus now is on execution. Thus far, Woodburn seems to have implemented the right controls but only time will tell.
DiscoverIE
Equity Market Cap (M) £599
Industrials
Nick Jefferies, CEO, Simon Gibbins, CFO
DiscoverIE is a UK-based design and manufacturing holding company specialising in niche customised components sold into a range of end markets including renewables, medical and industrial. The past 12 months have not been easy; customers have sought to unwind excess inventories, resulting in negative organic sales growth for the period. Nick admitted that destocking has been painful, but that customer stock and order levels are finally approaching normal levels. The obvious concern here would be demand weakness being misconstrued as destocking. Nick suggested visibility on customer stock levels is good and that destocking has mostly abated for all but a select few large customers, as evidenced by an improving book-to-bill ratio of 0.98x (for reference, a book-to-bill higher than 1x signifies growth).
There have however been some bright spots in this period. The business continues to improve its operating margins, achieving this through a combination of accretive acquisitions and disposals, higher margin design wins and operational efficiencies. The latter point is the most impressive given volumes have been weak, which would normally be associated with operational deleverage and downward margin pressure. Design wins have also been positive and are expected to be up +8% in the first half, providing reassurance that DiscoverIE continues to fuel its future growth engine. Part of this figure is attributable to DiscoverIE’s newly defined ‘security’ target market, with a large spec having been won to produce cabinet locks for individual computer units within data centres.
Despite tricky conditions, DiscoverIE has continued to acquire businesses. Simon highlighted DiscoverIE’s balance sheet strength with Net debt/EBITDA at 1.5x, comfortably within the target range of 1.5-2x, offering firepower for further acquisitions should opportunities arise.
LondonMetric Property
Equity Market Cap (M) £3,947
Utilities
Andrew Jones, CEO, Gareth Price, Head of Investor Relations
LondonMetric Property (LMP) has experienced significant growth, culminating in its inclusion in the FTSE 100 Index. The growth has been driven by a series of successful mergers and acquisitions, whilst also delivering organic rental growth.
In our recent meeting with Andrew Jones, he discussed what they feel sets LMP apart from other Real Estate Investment Trusts (REITs) – the main deviation is that they do not operate through a fixed speciality but rotate in and out of their chosen thematic. A decade ago, as much as a quarter of its portfolio was in office buildings, however, due to changing market dynamics, LMP actively chose to rotate out of the sector.
We discussed the two recent transformative acquisitions of the last two years. The first was the £200 million acquisition of CT Property Trust, which gave LMP greater exposure to urban logistics, whilst also being very attractive financially. The second was the all-share merger with LXI REIT, which elevated LMP to a top four UK REIT, significantly boosting its portfolio value to over £6 billion.
While the portfolio remains diversified across multiple end markets, logistics still forms the core; however, the convenience, healthcare, leisure, and entertainment sectors now constitute substantial portions.
LMP’s investment strategy has been focused on the triple-net model – where tenants assume responsibility for operating expenses, rent, and utilities. This allows LMP to run a more streamlined and leaner operation, allowing management to have more control in decision making at group level. It was clear throughout the meeting however that being purely triple-net or having long lease terms are not enough alone to drive growth: the most important factor is a presence in the winning sectors where LMP can deliver organic rental growth.
CONSUMER DISCRETIONARYGreggs
CONSUMER SERVICESAuto Trader
FINANCIALSMastercard
HEALTH CAREGenus
INDUSTRIALSBAE Systems
DiscoverIE
Spirax Group
Melrose
IMI
Diploma
MATERIALSCroda International
INFORMATION TECHNOLOGYHalma
Kainos Group
REAL ESTATESegro
LondonMetric Property
Jack Summers, Research Assistant
William McCubbin, Assistant Research Analyst
