Sunday share tips: Kerry Group, Fidelity Japan Trust
In his ‘Inside the City’ column for the Sunday Times, Sam Chambers started by describing activist short sellers as “financial vigilantes”, who spend months poring over a firm’s books before publishing a “damning dossier”, in a bid to put the kibosh on its share price.
Irish food giant Kerry Group did not suffer the same fate, however, after activist fund Shadowfall Capital told the market that it believed the firm was inflating its profits.
Shadowfall questioned how Kerry’s earnings could have more than doubled in the last decade, in a time when its growth had been driven by the acquisition of what the activists suggested were either loss-making, or just scraping by in terms of profits.
Kerry Group was quick to take the high road, dismissing the report as “fundamentally accurate and misinformed”, with its share price continuing to rise to close near an all-time high of €109 (£94) on Friday, valuing the group at €19bn.
The firm, founded in 1972, is best known for its Cheestrings and Richmond sausages brands, but Chambers contended that its taste and nutrition division - “where there is no place for cheap bangers or processed cheese” - that was exciting investors the most, with that operation accounting for almost 90% of last year’s €806m trading profit.
Kerry has hundreds of food technologists and scientists in its employ, developing ingredients for the kind of healthy and more environmentally-friendly foods demanded by today’s consumers.
Chambers wrote that, while such shopping trends could damage Kerry’s traditional product lines, analysts thought the company had the right kind of expertise in place to make the most of such “tectonic shifts” in the industry.
Indeed, it had made early moves in the plant-based sector, buying Netherlands-based protein manufacturer Ojah in 2018, and rolling out the vegan burger range ‘Naked Glory’ in Tesco, with analysts at Barclays saying the shift to plant-based diets would be a positive for Kerry’s margins going forward.
Kerry has spent more than £2bn on acquisition deals in the last 10 years, and going forward, was looking to make bolt-on deals to fill the gaps it still had in terms of products or expertise.
But that was still a risk, Chambers said, explaining that acquisition accounting was “notoriously opaque”, with Kerry often not disclosing the multiples it pays.
While that did keep its rivals conveniently in the dark, it also made it more difficult for investors to work out whether they were getting the right kind of deal.
“Shadowfall’s research may not have meaningfully dimmed investor appetite for Kerry, but its has raised some pertinent questions,” Sam Chambers wrote.
“With the shares now trading at almost 35 times earnings, investors should rein in their appetite.”
Over in the Mail on Sunday, Joanne Hart turned her attention to the Far East for her ‘Midas’ column, noting that the “huge” Japanese stock market was filled with small firms, presenting an opportunity for those prepared to dig a bit deeper, such as Fidelity Japan Trust and its head Nicholas Price.
Hart said Price has lived and worked in the country for more than a quarter of a century, speaks the language fluently, and had amassed an “extensive network” of contacts across the island nation.
He reportedly meets with representatives of more than 350 companies each year, and since taking over the Japan Trust in 2015, had seen around 1,500 firms, with the trust today investing in just 82.
That, Hart contended, means Price “casts the net wide in his search for pearls”.
The approach seemed to be working for its investee companies, with the value of firms in the trust improving by an average of 20% since September 2015 - although that performance was still not reflected in its share price.
Fidelity Japan Trust stock closed at 155p on Friday, with the assets within it worth the equivalent of 173p per share - with Hart noting that kind of discount was bigger than almost all of its peers, even though its performance was reportedly better.
“The discrepancy may be frustrating for Price and his team,” Hart wrote, adding that “for investors, however, it presents an opportunity, especially with all eyes on Japan this weekend,” referring to the final rounds of the Rugby World Cup currently taking place in the country.
Fidelity is the world’s largest investment firm, and has been operating in Japan for 50 years - longer than its presence in the UK.
Price is helped in his quest by a team of 13 analysts, as well as colleagues across Asia, with those researchers working to discover investment opportunities while talking to suppliers and customers, seeking a balanced idea of a business’s prospects before adding them to the portfolio.
Its components ranged from well-known companies, such as musical instruments and equipment manufacturer Yamaha, to nich firms such as online gravestone and funeral service provider Kamakura Shinsho.
Hart said Japanese families tend to spend an average of £7,700 on funerals, with Kamakura Shinsho acting like an online comparison platform, showing all options available, including price and location.
The Fidelity Japan Trust invested in the stock in 2017, and since then, it had almost tripled in value.
Its other top investments also included the likes of cosmetics group Kose, and large bicycle components maker Shimano, with Hart saying such companies had been selected because of their likelihood to succeed regardless of the economic conditions.
Price was also reportedly big on certain technology firms, with the 5G rollout in Japan and beyond expected to give some of them a big boost.
The trust was constantly aiming to find companies that had been overlooked by others and were likely to increase substantially in value, with Price and his team also monitoring the portfolio on an ongoing basis, and not shying away from selling off investments if there were better gains to be had elsewhere.
“The Japanese stock market has a reputation for poor performance, with its principal index, the Nikkei slumping from 26,000 in 1991 to below 8,000 in 2009,” Joanne Hart wrote.
“Since then, however, prices have picked up and the index is now flirting with 23,000. Fidelity Japan Trust aims to use its expertise to beat that index, beat competitors and deliver consistent growth for shareholders.
“On the ground, the trust is making good progress but the shares are lagging. That should change. At £1.55, the shares are a buy.”