Buy, hold or sell: Neptune UK Mid Cap

Published by on 14 September 2016.
Last updated on 14 September 2016

Stock market numbers

Buy: Genus (LON:GNS)

Neptune UK Mid Cap first bought into animal genetics company Genus in March 2014 at 1,000p a share, and has been adding to its position intermittently ever since, usually on share price weakness.

The share traded at 1,550p at close of play on the day of the referendum on EU membership. It fell in value to 1,410p after the Brexit vote, but it has more than made up for that fall since, having risen by 35 per cent to trade at 1,910p currently.

Genus helps farmers improve the productivity of pork, beef and milk production, so it has been able to tap into growing demand for protein in emerging markets.


Martin says: “I can say with confidence that in 20 years' time, the amount of protein being consumed - almost irrespective of economic growth - will be significantly higher than it is today.”

The firm is working on three investment stories: gene editing, which involves cutting out the part of the genetic code responsible for animals getting "horrible diseases"; in vitro fertilisation, which enables farmers to breed animals that produce more meat and dairy products; and sexed semen.

The latter, Martin says, gives farmers a high degree of confidence in determining the sex of the animals they breed.

Genus is involved in a court case with a firm called Inguran over sexed semen technology and Genus's royalty fees.

However, Martin believes Genus will win its case and "be able to develop sexed semen further in cattle, and its technology generally in other species as well".


Hold: Devro (LON:DVO)

Sausage casing maker Devro is another pork-focused emerging markets growth story. The company has been a long-term hold for the fund. Martin first bought shares in August 2011 at around 250p.

It is currently the second-biggest holding in the portfolio, at 7.8%. Devro was trading at 317p as recently as March of this year, but it slipped to a 52-week low of 238p on 8 August.

The firm was hit by the Brexit vote because it has some non-sterling debts, which has resulted in its level of net debt to earnings before interest, taxes, depreciation and amortisation spiking to 2.9 times.

The market has become unnerved about the short term, which is why the company is only a hold, says Martin.

However, he believes that over the long term, Devro will be a beneficiary of the Brexit-related fall in sterling, as it operates within an oligopoly and its main competitor is Spanish firm Viscofan.

“Overnight, Devro is much more competitive than Viscofan because of this currency story,” says Martin. “The long-term story is very strong, and actually stronger after the Brexit vote than it was before.”

The company's debt has risen because of a big investment programme it has put in place - something Martin approves of.

It has spent roughly a third of its market capitalisation on building new factories in China and the US, which will help it tap into “very visible long-term growth [in demand for sausage casings] in China and Latin America”.

Sell: Barratt Developments (LON:BDEV)

Neptune UK Mid Cap was heavily overweight in housebuilders from the beginning of 2010 through to 2013, and it added Barratt Developments in September 2011 at around 80p.

The fund sold out of the sector in 2013, at a time when Barratt was trading at around the 300p mark.

The shares rose to a high of 673p in late 2015, leading Martin to admit he was “obviously quite a bit premature”; but he still believes the housebuilding sector is a sell, particularly after the Brexit vote.

He questions the wisdom, albeit shareholder-friendly, of paying out special dividends when what the UK needs more than anything is more housebuilding, and he is worried that the government or local authorities will get more involved in building new houses, “because ultimately that's what the UK needs and, for whatever reason, it's what the housebuilders haven't been providing”.

He is also worried about the culture of senior management teams at housebuilders - which echoes that of banking in 2008/09.

Some are being paid eight-figure bonuses “when the average man on the street is seriously struggling to build up a deposit to buy a house, never mind buy a house outright”.

This story was originally written for our sister magazine, Money Observer.

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