Buy, hold or sell: Jeremy Thomas


Jeremy Thomas started buying London-listed testing, inspection and certification specialist Intertek in October last year at 2,600p a share and continued buying in December down to 2,300p.

The manager says this was an attractive entry point for what has been a top-performing stock over the past 10 years.

According to Thomas, this correction, which saw the firm's share price tumble steadily from 3,100p in May last year to a low of 2,149p in December, was largely due to Intertek's exposure to the oil and gas sector, and therefore the plummeting oil price. Nonetheless, he believes the firm has strong prospects.

He says: "Intertek managed to grow its revenues, even through the troughs of 2008, because the underlying drivers for a company like this are very strong. Many are regulatory: you have to have things tested - you can't sell toys to children if they haven't been tested for pollutants, for example."

Intertek also has a strong balance sheet and delivers a high return on capital. According to Thomas the firm produces something akin to a 20% cash flow return on investment. He believes its long-term revenue growth will therefore 'comfortably' surpass UK GDP growth over a given period.

Thomas says: "The stock accounts for 1.2% of our portfolio, and we will look to buy more. The question is: when will the industry return to growth?

"[That will happen] when the drag of the oil price begins to wane and you start to see underlying growth in economies, companies innovating and trade picking up. Then it will do very well."


UK infrastructure and engineering firm Balfour Beatty is a turnaround bet for Thomas, who increased a small holding in the firm to 1.3% of his portfolio last October when current chief executive Leo Quinn was appointed.

"The UK infrastructure and construction industry has been awful for quite some time, and Balfour Beatty dropped the ball by not executing big changes in management. Now you have Leo Quinn, who turned around QinetiQ, coming in, and we think there could be substantial upside," says Thomas.

He is very keen on the company's private finance initiative assets and on the substantial amount of net cash sitting on the company's balance sheet following the sale of its professional services division, Parsons Brinckerhoff, for £820 million last September. This, he says, helps offset the low profit margins that currently tend to be seen across the construction industry.

"If we saw margins for the whole business getting up to near 3%, which includes UK margins getting back up to only about 2%, we could see the stock price double.

"It's slightly high risk, but we think that's offset by the value of the assets the company has, its cash and its ability to get margins back up," Thomas says.


British defence company BAE Systems was a long-term holding for Thomas up until January this year, when he sold out of the stock between 512p and 520p.

Although the firm has done well over the past three years in managing to keep its profit margins up at 10%, despite reductions in global defence spending, Thomas believes it faces a number of headwinds.

He says: "It's very difficult as a government-facing business to get more than a 10% profit margin, and that's where it is now. Also it has quite a big pension deficit that doesn't seem to be improving, while its yield has dropped below 4% - a negative for a traditional yield stock."

Perhaps more importantly, the manager feels the investment industry is being far too optimistic about the long-term prospects for BAE, particularly in regard to the likelihood of a boost in defence spending in the US should the Republicans win the next US election in 2016.

"The plummeting oil price, which shows little sign of returning to the $100 a barrel mark anytime soon, may also affect BAE's biggest customer - Saudi Arabia - and Thomas says the country is more likely to scale back than increase its spending on defence as a result.

"All in all, BAE was a successful investment for us, but it has re-rated to what we think is over-valuation territory. I think people are getting too optimistic, and that there are some new and significant pressures around the oil price," says Thomas.

This feature was written for our sister publication Money Observer