FIVE SHARES

TO WATCH IN 2019
GEORGE SALMON & NICHOLAS HYETT
Equity Analysts

We thought picking five shares to watch in

2019 would be a daunting task.
Should we prepare for a Brexit bounce, or
buckle in for some serious turbulence?
In the end, all that uncertainty has actually made
for some clear decisions. We’ve leant towards
high-quality, long-run growth stories with
management track records we feel we can trust.

This factsheet isn’t personal advice or a

recommendation to buy, sell or hold any
investment. No view is given on the present
or future value or price of any investment,
and investors should form their own view on
any proposed investment.
Unless otherwise stated, all information
correct as at 30 November 2018.
Estimates, including prospective yields, are
a consensus of analyst forecasts provided
by Thomson Reuters.
These estimates are not a reliable indicator
of future performance. Yields are variable
and not guaranteed. Past performance is not
a guide to the future. Investments rise and
fall in value so investors could make a loss.
INTERTEK
Where quality counts
Intertek is all about quality. That’s because it
tests and certifies the quality of products from
children’s toys to grizzly oil and gas components.
There are lots of reasons this is a good place
to be.
Take food standards, for example, Intertek’s
services are crucial to complying with
increasingly demanding regulation – from
calorie counts to allergens. Through its rapidly
expanding assurance division, it‘s able to make
money in an advisory capacity too.

UK trademark registrations
jumped in 2017 by almost

30%
The core product quality business is being
boosted by continued product innovation. More
products mean more quality control checks.
And with UK trademark registrations jumping
almost 30% between 2016 and 2017, the
appetite for new brands continues to grow.
The part of the business aimed at natural
resources is more cyclical, and profits drained
away on the back of the oil price crash.

INTERTEK DIVIDEND PER SHARE (GBp)

140
120
100
80
60
40
20
0
2009 10 11 12 13 14 15 16 17 18 19 2020
(EST)(EST)(EST)

Source: Lipper IM 28/9/2018

But with big oil companies stepping up

spending, there’s hope for a recovery.
Intertek is aiming to both increase revenue and
restore margins.
Intertek generates plenty of cash, some of
which is used to fund bolt-on acquisitions, such
as capital-light staff management business
Alchemy. That will positively impact margins,
but the core businesses demand lots of highly
skilled labour, so moving operating margins
beyond the current 16.9% is unlikely to be rapid.
Intertek trades on a price to earnings (PE) ratio
of 22.7, above its long run average. Still, we think
that reflects its solid track record, good growth
prospects and resilient revenue streams.
These factors, and the potential to inch margins
up, underpin analysts’ confidence profits can
rise by over 8% a year in 2019 and 2020.
A new dividend policy of paying out half
of earnings means investors can expect
that to feed through to a rising dividend,
although there are no guarantees. Next year’s
prospective yield is 2.2%.

INTERTEK SHARE PRICE,

CHARTS AND RESEARCH
GVC
Rolling the dice
You might know GVC as an online gaming
specialist. But it recently bought the Ladbrokes
and Coral brands, so it’s now an unusual mix
of established high street name and digital
disruptor.

Legislative change in the US offers an

exciting growth opportunity.

It’s not all plain sailing though. UK in-shop

trends haven’t been great, and tighter
restrictions on gambling machines look set to
make things worse. The move to cap staking
on fixed odds betting terminals (FOBTs) will
hopefully make society richer, but the lost
profits will make GVC poorer, at least in the
short term. Hence the shares trade for just 10
times expected earnings.
However, the dividend remains well-
underpinned by earnings and cash flow,
and there are plenty of longer-term growth
opportunities.
The prospective yield is 4.8%.
Despite the increasing regulation, there are
underlying tailwinds, especially online. GVC
has impressively surfed the online wave.
Gaming and sports betting revenues have
risen strongly.

GROSS GAMING REVENUES (€BN)

60

50

40

30

20

10

0
2010 11 12 13 14 15 16 17 18 19 2020
(EST) (EST) (EST)

Source: H2 Gambling Capital study in 2017

Playtech Annual report

But what’s really exciting about GVC is on the

other side of the pond. A US Supreme Court
judgement has paved the way for legal sports
betting nationwide.
The illegal sports betting market in the US sees
an estimated $150bn change hands every year.
The chance to snap up market share in such a
populous, affluent and sports-mad country, is a
once in a generation opportunity - although of
course there are no guarantees.
European bookmakers are piling in left right
and centre. But we think GVC has given itself a
good chance of success.
At least initially, casinos will be the go-to
location for sports betting, and GVC has
teamed with a US high roller, MGM Resorts.
There’s a lot to like about the prospect of
combining GVC’s experience with MGM’s well-
established brand.
The American dream could more than replace
lost FOBT profits, although of course there’ll
be fierce competition for a seat at the table.
That makes the next 12 months crucial.

GVC SHARE PRICE,

CHARTS AND RESEARCH
PRIMARY HEALTH
PROPERTIES
Looking healthy
Primary Health Properties (PHP) owns and
rents out primary care buildings, like GP
surgeries, in the UK and Ireland.
With an above-market yield, and some pretty
secure revenues, we think it’s worth taking
a closer look. Especially given the Brexit
uncertainty around.
GPs in England get over 300m visits a year.
And with just two visits to A&E costing more
than a whole year’s worth of GP care, investing
in community services is both vital, and
cost-effective.
In England, the government’s aiming to have
5,000 more GPs by 2020. Other community
services, like mental health and community
nursing, are also being tied more closely to
surgeries. This means the facilities needed
to keep everything running are getting
more complex.

22 YEARS
of annual dividend growth

PHP’s purpose-built properties are in demand,

and asset values have been climbing steadily.
The expansion into Ireland provides more
room for growth too.
99.7% of its 313 buildings are occupied,
while an average lease that has 12.9 years
to run until first break means future rental
income is very visible. More importantly, 90%
of its rental income comes either directly or
indirectly from the NHS or its Irish equivalent.
Governments make for very reliable tenants.
As a Real Estate Investment Trust, or REIT,
PHP has to return 90% of its rental profits to
investors as dividends, making for a potentially
attractive income. The result is a prospective
yield of 5.1% next year.

DIVIDEND PER SHARE (GBp)

6.00

5.00

4.00

3.00

2.00

1.00

0
1997 2002 2007 2012 2017

Source: PHP interim results presentation 2018

Unfortunately a large payout also limits PHP’s

ability to fund new properties, so the company
frequently turns to shareholders for extra cash.
That will remain a major feature in the future.
The group’s been reducing its level of debt
recently, with total loan-to-value falling from
48.2% at the end of the last financial year to
40.5% at the half year stage.
That might suggest management have
become more cautious, but also means it’s
well placed for future investments. Given the
opportunities available both in the UK and
Ireland, we suspect it’s the latter.

PHP SHARE PRICE,

CHARTS AND RESEARCH
UNILEVER
No one trick pony
After abandoning its shift to the Netherlands,
2019 could, ironically, be the year consumer
goods giant Unilever finally gets where it
wants to be.
That’s because the struggling spreads business
has been sold off, and another power brand is on
the brink of being added to the portfolio.

Unilever products are used by

2.5bn
consumers every day

Believe it or not, that brand is Horlicks. It’s

incredibly popular in India, Unilever’s most
important emerging market. After outbidding
Coca-Cola and Nestlé, Unilever is currently in
pole position to land the business.
Long-term trends in the developing world should
see populations rise and wealth increase. Both
should provide tailwinds for Unilever. Still, progress
can come in fits and starts. Weak growth in South
America, on the back of economic strife, is a
reminder these markets can be volatile.

UNILEVER REVENUE BY GEOGRAPHY

Asia, Africa, Middle East,

Russia, Ukraine Belarus 43%
The Americas 33%
Europe 24%

Source: Thomson Reuters Eikon - 1

December 2018

With long-serving CEO Paul Polman stepping

aside in January, 2019 will also bring a change
of leadership. Polman did a sterling job, but we
think his departure comes with only limited
risk. The new boss, Alan Jope, has successfully
run Unilever’s largest division since 2014.
In any case, the group’s already got a proven
formula for success. A multi-billion pound
innovation and marketing spend means
its household brands, which include Dove,
Magnum and Persil, are used by 2.5bn
consumers every day.
We expect sales to rise again this year, while
plans to increase efficiency should boost
margins. That combination would see profits
grow, giving room for another dividend
increase. As ever though, nothing
is guaranteed.
The prospective yield is 3.4%, and the shares
trade on 19.4 times expected earning, above
the longer-run average, but below the more
premium ratings of recent years.

UNILEVER SHARE PRICE,

CHARTS AND RESEARCH
ACTIVISION
BLIZZARD
Where it pays to play
Activision Blizzard’s been caught up in the
wider US tech sell-off, with its price to earnings
ratio falling from 28.4 to 18.9. But we still think
it’s got long-run appeal.
The computer game developer is best known
for Call of Duty and World of Warcraft, but also
owns mobile developer King. Its 200+ mobile
games, including Candy Crush, attract 262m
users every month.
Global gaming spend is expected to hit
$138bn this year. And with 2.3bn gamers
worldwide, it’s a very attractive market.

GLOBAL GAMES MARKET SPENDING

FORECASTS ($BN)
200
180
160
140
120
100
80
60
40
20
0
2017 2018 (EST) 2019 (EST) 2020 (EST) 2021 (EST)
l Smartphone l Tablet l Console
l Browser PC l Boxed/Downloaded PC

Source: Newzoo, October 2018

Call of Duty, World of Warcraft and Candy

Crush, are among the most successful
gaming franchises going. And, along with
Activision’s Overwatch, they accounted for
$4.7bn of revenue last year.
We particularly like the mix of console, PC
and mobile gaming. In a rapidly changing
industry the group has fingers in every pie,
and that’s delivered profit growth of 8.8% a
year since 2008.
Unlike some rivals, Activision Blizzard owns its
most powerful brands outright, so it doesn’t
have to share success with licence holders.
The group’s looking to make the most of that
through the development of esports.

Global gaming spend is expected to hit

$138bn
this year

Esports see professional gamers compete

live, with fans watching on TV, online or in
stadiums. Audiences have been growing – up
19.3% last year.
Activision’s Major League Gaming is a leading
organiser of events, including the recently
launched Overwatch League. The league grand
finals attracted millions of online viewers, 70%
of whom fall in the 18-34 year old age bracket.
Millennials are a difficult group for marketing
teams to reach, since they consume less
traditional media than older generations. That
makes esports attractive to advertisers.
A possible concern is in-game purchases,
which have attracted some very negative
press. Some see ‘loot-boxes’, where players
pay for a randomly generated in-game benefit,
as a gateway to gambling for children, and
regulators have started to take note
Fortunately Activision is less exposed than
some rivals, and its biggest titles target adults
in any case. A regulatory crack down would still
see the shares stumble, but for the patient
investor, Activision Blizzard could represent a
long-term opportunity.

ACTIVISION BLIZZARD SHARE

PRICE, CHARTS AND RESEARCH
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