SORBUS VECTOR: Manager commentary February 2024

January was an unusually active month for trading within the VECTOR portfolio. Markets are better pricing the risks posed by inflation and interest rates and opportunities in the small and mid cap space are emerging. We are more confident of our ability to outperform than we have been for over a year.

We have added two new holdings to the fund this month: Ashtead Technologies (a small cap) and Cranswick (a mid cap). In order to facilitate these new purchases we trimmed our positions in Unilever, Diageo and Reckitt Benckiser.

We also added to our holding in Burberry on 12th January, following a fall in its share price on the back of its second profits warning. Most investors would consider the short term setback in valuation as a result of the trading statement as regrettable. In some dimensions it, of course, is. However we are delighted to be able to buy even more of this excellent brand at even cheaper prices. Despite the short term troubles facing the company, Burberry is a global luxury brand – particularly in its iconic outerwear franchise – with a strong track record of long term growth. The company is currently trading on 5.7x EV/EBITDA compared to a 10 year average of around 11x and it is also offering a dividend yield of 4.9%. This is a terrific investment opportunity and, once the short term trading issues dissipate, we expect this holding to deliver excellent value for the fund. 

We also want to share our rationale for buying Ashtead Technologies and Cranswick: 

Ashtead Technologies
Ashtead is an excellent example of where principles need to be tested against context. Ashtead came onto the stock exchange (an initial public offering or IPO) in 2021 (relatively recently) and its seller was a private equity firm. These are two major red flags for us as investors as, in simple terms, IPOs tend to deliver poor performance for investors and private equity firms are often underinvested and arrive pregnant with the need for substantial remedial investment. As is often the case, we were wrong. What we should have done is ignore these heuristics and looked more closely at what we now know is a superb company and investment.

Ashtead Technologies is a subsea rental and solutions provider covering survey, robotics and mechanical solutions for the global offshore energy/wind sector. It is the largest player in a highly fragmented market. This is an excellent dynamic. It is also gaining market share at the same time as the market is growing. This is most applaudable (and rare). 

It has made smart acquisitions and continues to fund CAPEX at 15% of revenues. 

At some point rental markets mature and participants suffer from increasing competition and sharply diminishing profitability, but we are many years or even decades from this being the case. Market demand is being driven by two factors: an increase in geopolitical risks, leading nations to seek greater energy security; and the transition to renewable energy sources. Both of these factors are leading to increased investment into the offshore oil & gas and renewable energy sectors. This has led to greater pricing power for suppliers as demand has exceeded available supply.

Ashtead is a great investment opportunity; it is a shame we did not see that earlier, but we believe we remain in the foothills of what it can achieve. 

Cranswick
Cranswick has been a quoted company for decades. It is in the unsexy business of supplying pork (and other meat), or, if you prefer, it is a UK food producer and supplier of premium, fresh and added-value food products.

It is not a high margin business and underlying growth is not stellar, but it has two qualities that are outstanding: consistency and competence. Cranswick has an unbroken record of increasing its dividends that stretches back 33 years. That is a phenomenally consistent business. This is a business model that has proven highly resistant to changing market conditions, inflation, and economic shocks. 

Some businesses pride themselves on their dividend record. This can be dangerous as management focus becomes defensive and priority is given to protecting this record. Cranswick is focused on the future, not the past. It has spent over £600m since 2016 on capital expenditure – from its profits, not debt – to modernise, make efficient and drive growth. It will continue this depth of investing (around 50% of profits) for the next three years on its operations and to expand into new areas. 

Much as Bonnie Tyler’s song “Holding out for a hero” achieves greatness through sheer musical force, Cranswick achieves greatness through sheer force of competence. It has turned what many would consider a mediocre at best market into a company delivering exceptional returns. I first looked at Cranswick in 1996 when its shares were below 100p and have been a periodic investor in it. My only regret is, in hindsight, ever having sold it. While its share price is much higher today it continues to look excellent value, and while in no way criticising the competence of its historic custodians, it looks as well managed as it has ever been.