Business growth blocks

Written by Jennifer Hill

April, 2021

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J. P. Morgan managers capitalise on smaller company activity

A pick-up in share placings, IPO activity and beaten-up companies moving down the market capitalisation scale has the managers of JPMorgan UK Smaller Companies spoilt for choice.

Georgina Brittain and Katen Patel have invested selectively with a focus on capturing the economic rebound from the pandemic and resurgence of the UK consumer. We spoke to Patel about some of their latest stock picks:

Share placings

The UK ranks third globally for the number of Covid-19 vaccine doses administered per 100 people, causing companies to take steps to strengthen their positions ahead of the reopening of economies.

‘With recovery in sight, companies don’t want to be hampered by how much debt they have on their balance sheets – they want to be on the front foot,’ said Patel.

One placing the fund participated in was by travel group Jet2. It raised gross proceeds of £422 million in a significantly oversubscribed equity issue in February. The JPMorgan UK Smaller Companies fund was already a shareholder in the company having retained it last year in the belief that it would not only survive the pandemic but thrive post-pandemic.

‘It remains to be seen whether recovery [for the package holiday sector] will come this summer or next,’ said Patel. ‘But Jet2 is in a good position. It’s handled refunds for cancelled holidays very admirably and has the balance sheet to take advantage of the easing of restrictions – getting its planes and crews up and running as quickly as possible,’ added Patel.

The company has prepared three scenarios for the resumption of flying on 22 May, 16 July and 1 September.

Initial public offerings

Companies wary of floating in the volatile conditions of last year are flocking to the stock market. The IPO market ‘took off’ at the end of last year and shows no signs of slowing down, according to Patel.

The fund initiated a position in Bytes Technology Group when it listed on the London Stock Exchange in December. The float saw the company demerge from its South African parent Altron while taking a secondary listing on the Johannesburg Stock Exchange.

One of the UK’s largest software resellers, it has been a big beneficiary of working-from-home trends and stands to benefit further from corporate demand for security upgrades and the ongoing shift to cloud computing. It boasts several blue-chip customers and is one of Microsoft’s largest UK partners by revenue.

The shares were priced at 270p at listing and within hours of conditional first-day trading had risen more than 20% to 330p. They have since climbed to more than 400p, netting the JPMorgan fund a paper profit of 50%.

‘A lot of capital expenditure is going into technology,’ said Patel. ‘The company has historically grown its revenues by double digits and its valuation still looks attractive.’

New constituents

Companies hit the hardest by lockdown measures have been indiscriminately sold off and some have moved down into the fund’s benchmark, the Numis Smaller Companies plus Aim index. National Express is among them.

The managers bought the coach operator in January. ‘Because we also run a mid-cap fund, it was a company we knew well so could take a position quite quickly,’ said Patel.

A sharp downturn in commuting and leisure travel have hampered its share price, as have school closures – its school bus business in north America accounts for around 30% of total revenues.

However, certain revenues are linked to local authority contracts and based on the number of buses it runs, not passenger numbers. The company’s decision to scrap its dividend and use government support schemes have helped it build cash reserves.

‘It’s a very well-run company,’ said Patel. ‘School buses will resume, travel will return – and its share price will recover.’

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