30th January 2015
Neil Woodford, manager of the Elite Rated Woodford Equity Income
Fund managers often talk about the importance of management meetings and site visits, when it comes to making a decision as to whether to invest in a company or not. But what do these meetings and visits actually entail? Here, Stephen Lamacraft, a fund manager with Woodford Investment Management, gives us an insight into a recent visit he and the team made.
“Our investment approach sometimes requires us to visit company premises to get a better understanding of the breadth and depth of part of that company’s operations. This is particularly important and illuminating where a company has manufacturing or engineering expertise. After several decades of manufacturing decline, the UK investment universe now offers fewer opportunities where this sort of visit is necessary. There are still some, however, including Babcock International, in which we started to build a position for the Elite Rated Woodford UK Equity Income [link to fund fact sheet on FundCalibre] portfolio in October last year.
“In January 2015, we met with the senior management of Babcock’s Marine & Technology division and had a tour around its Devonport Royal Dockyard facilities. The purpose of the meeting was to further our knowledge of Babcock’s biggest division, which contributes almost 40% of the group’s revenues and, due to its higher margins, an even greater proportion of profits. With a history dating back to 1690, Devonport is an enduring reminder of Britain’s glorious shipbuilding and naval past.”
“During our tour of the site, we were fortunate to see some of the Royal Navy’s fleet of warships and submarines undergoing refits and got an insightful glimpse into the complexity of the overhaul services that Babcock undertakes. For example, it takes 15 months to complete a mid-life refit of a Type 23 frigate, which includes significant changes to the ships’ superstructure, several major technological upgrades and a deep maintenance programme, all designed to return the ships to active service with improved sustainability and fighting capability. A key benefit of Babcock’s relationship with the Ministry of Defence (MoD) is its ability to help maintain a smaller fleet but keep it at sea for longer, whilst delivering efficiencies at the same time.
“We saw some unique facilities at Devonport, which allow Babcock to perform duties that nobody else can. For example, there is nowhere else in the world where the Royal Navy’s nuclear submarines can be refuelled and refitted. Having the opportunity to take a tour round one of these subs, HMS Vengeance, was the icing on the cake of an enlightening and useful day.”
Blue-chip commercial customers
“Babcock’s marine operations aren’t just supporting the Royal Navy, however. All of the things that make it the right partner for the Royal Navy also make it attractive to blue-chip commercial customers. By way of example, Babcock carried out the marine engineering design for the world’s first Floating Liquefied Natural Gas (FLNG) platform, for Royal Dutch Shell, which is now making its way towards Australia. This is the biggest ship in the world, standing the height of Big Ben and, at 600,000 tonnes, nearly ten times the weight of the HMS Queen Elizabeth aircraft carrier.
Building investment conviction
“All in all, the visit was really helpful in further building our conviction in the Babcock International investment case. This is a business with very strong relationships with its key customers such as the MoD, because it has proven its technical capabilities over a long period of time and is trusted to deliver. As a result of these strong customer relationships and the nature of its business, it benefits from very long-term contracts which affords great visibility for planning and investment.
“Indeed, the closer Babcock gets to the MoD, the more it can identify further efficiency opportunities from which both parties can gain. Austerity has solidified the relationship between the MoD and private sector businesses like Babcock, and the need to find further public sector cost savings will continue, regardless of the outcome of May’s General Election. Austerity therefore has and will continue to mean that Babcock has become ‘Mission Critical’. “
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Stephen's views are his own and do not constitute financial advice. Mention of a specific company does not constitute a recommendation to buy or sell that company.