Defensive plays for volatile times
Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Sam Barton, manager of Unicorn UK Smaller Companies fund
Unicorn’s team has a wealth of experience investing in Aim, fledgling and small-cap companies. With exceptional market volatility at present, we would like to suggest a few defensive shares to calm the nerves.
In 1996, Mears Group (MER) became one of the first companies to list on Aim. Since then, its share price has risen from 10p to 240p, an excellent return for long-term shareholders such as Unicorn.
Mears provides services to communities in the UK. Its largest division is the market leader in social housing repairs and maintenance for local authorities and housing associations. The mechanical and engineering division offers building services to residential developments.
Careforce, bought in June this year, provides home help on behalf of local authorities. Management is excited about Careforce’s potential, attracted by industry consolidation, the potential to drive operating efficiencies and the long-term contracts available.
Such contracts are a feature across the group, as one can see from an order book that stands at more than £1.2bn. This gives visibility – 89% of forecast turnover for the year to December 2009 has been contracted to date. Operating margins are robust at 5.2% and the business has a good profile of cash generation, with net cash on the balance sheet. A p/e ratio of 14.7 for the year to December 2007 looks too cheap for a defensive growth business in these market conditions.
Synergy Healthcare (SYR) also benefits from a substantial order book. With around 80% of 2008 revenues already contracted, investors have a fair degree of confidence that the company will achieve its forecasts. The order book stretches out 15 years and stood at £765m in September.
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Synergy provides sterilisation and infection control services to healthcare providers and medical device manufacturers. These services remain high on the political agenda and there is a long history of outsourcing them.
The business is split into three: ‘Patient Care’ provides wound care services, linen management and infection control services; ‘Surgical’ sterilises medical instruments and endoscopes; and ‘Commercial’ provides gamma ray treatments for larger medical devices.
Synergy has achieved compound annual growth rate in earnings per share of 30% over the past four years. This is set to continue at around 20% in 2008 and 2009, helped by the acquisition of Isotron and a push into China. At 731p, the shares trade on a p/e of 21.1, which does not look expensive given Synergy’s historic and forecast growth profile, market-leading positions and strong order book.
Last but not least, Dechra Pharmaceuticals (DPH) manufactures, markets and sells veterinary medicines and runs laboratories offering a range of testing services. The main focus is on horses, dogs and cats. The market is relatively non-cyclical, and management has grown earnings at a steady rate, averaging 15% a year over the last three years. This is expected to continue over the next two years.
Dechra’s main defensive qualities are its own intellectual property in the form of patented products and its exclusive licence deals to market and sell other patented drugs. The experienced management team holds more than 3% of the issued share capital. While not the cheapest business, at 18.4 times forecast earnings, Dechra should remain fairly immune to fluctuations in the economy as a whole and is a good long-term investment.
The stocks Sam Barton likes
| Stock | 12mth high | 12mth low | Now |
| Mears Group | 380p | 231.75p | 245p |
| Synergy Healthcare | 902p | 656p | 770p |
| Dechra Pharmaceuticals | 407.25p | 235.25p | 335.25p |
