market folly

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Alex Wright of Fidelity Special Situations Fund who pitched two longs: Ladbrokes Coral Group (LON: LCL) and Ultra Electronics (LON: ULE).


Alex Wright's Presentation at London Value Investor Conference

Long Ladbrokes Coral Group (LON: LCL)

Ladbrokes has been underperforming. It botched the introduction of a new IT system a few years ago. The merger with Coral that was announced about a year ago has created a bigger player and significant cost savings should be achieved. It will also strengthen Ladbrokes’s online presence. At present 70% of revenues come from offline, from the retail estate – 3000 bookmaker shops. Expect margins to improve. Coral delivered 36% CAGR between 2008-2015.

The stock is cheap due to the potential regulation of online gambling. The government is investigating Fixed Odds Betting Terminals (FOBTs).  His worst-case scenario is that the government could ban B2 games completely.  B2 games have the highest stakes and are very profitable. If banned they could lead to a 12% loss in the company’s value. In this scenario in the longer term, he believes the betting shops would remain profitable and that online would restructure and come back over time. If government regulation is less draconian Ladbrokes Coral could see anything between 50-70% upside.

Over time expect the online share of Ladbrokes’s business to grow to about 50%.


Long Ultra Electronics (LON: ULE)

Defence spending has been falling as a percentage of GDP since the withdrawals from Afghanistan and Iraq – it is at post-war low in the US and UK. Going forward there are long-term proposals put forward by governments to increase spending. It is possible that the Trump administration will bring about much higher spending.

Wright thinks that future spending will be focused on more sophisticated foes in the areas of cyber, communication & surveillance and underwater. These are key areas for Ultra.

Ultra had a setback in 2014 when its largest contract in Oman fell through. Today, free cash flow is beginning to recover. Ultra’s business had been built via M&A resulting in duplication of cost centres. Their S3 programme will better integrate the units and achieve cost savings.

The company is not particularly cheap trading on a P/E 15 but it is cheaper than most of the market.


Be sure to check out the rest of the presentations from the London Value Investor Conference.