Financial specialists Intermediate Capital and Burford Capital as well as drinks maker Fever-Tree are three stocks that may be flying under the radar of investors, according to analysts at Jefferies.
In its latest note, the firm highlighted stocks offering greater upside potential to active managers that are less constrained by mainstream benchmarks but that may be less well-known due to low sell-side analyst coverage.
First up is drinks maker Fever-Tree, which despite its popularity among the fund management industry is only covered by a handful of analysts.
The company is a leading supplier of premium carbonated mixers for the alcoholic spirits industry –by retail sales value – distributing its mixers to 70 countries internationally.
Around 75 per cent of its sales are from the tonic water range with 20 per cent from ginger beer and 5 per cent from other soft drinks.
Listing in 2014, the stock has exceeded expectations, returning 2,164 per cent since inception – 2,126 percentage points ahead of the FTSE All Share.
Performance of stock vs index since launch
Source: FE Analytics
Despite the rapid share price rise, analysts at Jefferies said there is still an investment case for investors to take a look at the stock.
Equity analyst Ed Mundy noted that expansion into the US – a relatively untapped market for the company – could be a game changer.
“The US is the largest growth opportunity for Fever-Tree over the medium term given premiumisation trends in spirits and culture of long drink mixability,” he said.
While in the UK premium mixers account for around 39 per cent of the market, in the US it is just 5 per cent.
“Assuming that the current premium mixer market can grow from current 5 per cent to 20 per cent, this represents a potential £167m incremental opportunity versus 2017 group sales of £170m. This implies that if the US is successful, Fever-Tree’s group sales could double,” Mundy noted.
Meanwhile, non-tonic sales, which currently account for 25 per cent of the business, could be more lucrative, with the firm launching a dark spirits range.
“We estimate that the premium dark spirits market (e.g. whiskey, brandy and rum) is 10x the size of the premium gin market,” the analyst said.
However, there are risks for the business. Indeed, competitor Schweppes remains the market leader in tonic water with a market share of 37 per cent in the UK.
Although the premium gin recovery is expected to grow over the next few years, changes in consumer choices or lifestyle could also negatively impact sales.
Overall, he said the underlying core business has a valuation of around 3,300p per share assuming average group revenue growth of 23 per cent between 2018 and 2021.
However, if an integration to the US is successful it could add another 3,000p of value per share. Currently the stock has a share price of 3,586p per share.
Up next is Intermediate Capital Group, a specialist asset manager investing in mezzanine finance and leveraged credit. The firm is split between its investment company and fund management business= and at the end of 2018 it had total assets under management (AUM) of €28.7bn.
The firm has been a market darling in recent years having been a solid performer since listing in 1995. Indeed, over the last five years the stock is up 238.44 per cent while the FTSE All Share has gained 43.38 per cent.
Performance of stock vs index over 5yrs
Source: FE Analytics
Like Fever-Tree however, there are reasons that the investment case remains compelling, according to the Jefferies analysts.
Analyst Phil Dobbins noted: “The growth of the alternative asset management industry is driven by several structural factors including increasing global wealth, diversification away from ‘traditional’ asset classes (e.g. equity, fixed income), a differentiated returns profile and a stabilisation in economic conditions since the global financial crisis.
“Alongside growing demand, rising complexities of investor requirements are providing many opportunities to expand the existing product range towards more customised financing solutions.”
The firm’s AUM has also grown significantly, particularly in the fund management business, while the fee rates have also been broadly stable over the last five years at an average fee of 86 basis points.
“Recent growth in AUM has been driven within higher-margin product lines, and ongoing capital deployment will support a visible shift in the quality of earnings over the coming years and provide support to cash flows,” Dobbins said.
Finally, income is a key part of the business, which focuses on shareholder returns and pays out 80-100 per cent of the fund management business’ profit.
However, the risks to the firm include a failure to raise assets, which could impact the gearing levels of the underlying vehicles and would slow growth and profitability.
Additionally, performance risk, new product failures and ‘deployment risk’ (funds not finding new ideas for the current €7.1bn of AUM yet to be invested) also are issues.
Overall, Jefferies has a valuation of 902p for the company, based on a number of metrics. The company itself has a current share price of 1,066p.
Last up is specialist asset manager Burford Capital, which provides capital to fund the pursuit of legal claims, in return receiving a portion of any eventual damages or settlement paid by the defendant or their insurers.
It is another stock that has had a strong run more recently, up by 1,857.58 per cent since its launch in 2009 with much of this performance witnessed during the last three years.
Performance of stock since launch
Source: FE Analytics
Dobbins said: “It works with more than 40 law firms with 82 ongoing investments, with no defendant exceeding 5 per cent of commitments. We believe there is significant scope to grow both with existing and new customers.”
Like Intermediate Capital, the returns are uncorrelated to other asset classes, with the firm giving investors access to an attractive portfolio of investments yielding high returns.
“We note that portfolio returns on invested capital in 2017 were 75 per cent – up from 60 per cent two-year average – and that high returns can be sustained into the future, driven by their significant competitive advantages,” he said.
“We believe that the litigation market is not as price sensitive as other finance markets because, for confidentiality reasons, litigation matters are not presented to a wide range of capital partners.”
With the ability to broaden out its skill-set and offer more complex revenue streams with higher barriers to entry driving the potential for future claims, the company could be well set for the future.
However, risks include losing cases, which could lead to significant write-offs. And even successful cases can take years to settle, meaning that realisation of investments is impossible to predict, the analyst noted.
Finally, regulation may be a factor and litigation finance may be made illegal, or otherwise restricted in the company’s key markets – although this is unlikely.
Overall, the analyst has a base case valuation for the company of 2,138p. Its current share price is 1,854p.