Masts, manufacturing and meetings – 2021 so far in the global smaller companies universe
World in Motion – Global equities blog

Masts, manufacturing and meetings – 2021 so far in the global smaller companies universe

One of the many joys of investing in smaller companies is that we get to meet a wide range of interesting businesses that most people haven’t heard of.
We are always flush with fantastic ideas on which we’ve collaborated with our regional Smaller Companies teams, and we have bought a few of these over the last quarter. JTOWER provides shared mobile communications infrastructure in Japan for the country’s various mobile networks. After researching the company for some months we were satisfied that it fulfilled our focus on long-term, high-quality growth. One of the interesting things we learned when doing this is that there are no established cell tower businesses in Japan. Such companies tend to align well with our sustainable competitive advantage framework given relatively high barriers to entry, a high rate of technological advancement and integrated customer relationships. Hence our positions in Cellnex and INWIT in Europe. But in Japan, mobile carriers traditionally built their own towers to try to differentiate based on mobile network coverage. This is not a particularly prudent use of capital and leads to a lot of replication. With the rollout of 5G, which requires a higher density of towers versus 4G, the Japanese government pushed for a towers business to help improve efficiency. JTOWER’s traditional business had been providing shared mobile communications equipment in large buildings such as train stations. But with these wider industry developments the company is looking to build out its tower network, supported by telecommunications company NTT, which has taken an equity stake in the business. It is early days, but the opportunity to build Japan’s leading tower network and convert this into high returns on its capital over time is extremely appealing: a true fit of our investment philosophy.

Another name is Simpson Manufacturing, which makes structural connectors used in wooden frame homes in the US. We established this position at the start of 2021 and, in our view, Simpson is a hidden gem waiting to be uncovered by the market: dominant in its niche – it has built up more than 70% market share¹ – but with very weak analytical coverage. Its products are critical to the structural integrity of a home and are often approved by building code evaluation agencies – a strong barrier to entry. Another point of note is the cost of these connectors: around $1,000, against the overall average cost of building a home at around $450,000. It is not a huge priority for a builder to switch to something that is, say, 25% cheaper if it would require them to change building plans and make sure it still meets code, especially when it relates to a relatively low-cost item critical to the structural integrity of the home they are building. A combination of strong brand loyalty (the company works closely with architects and engineers to make sure its products are specified in building plans), engineering focus and customer service has enabled the company to build a strong competitive position within this niche, which has yielded strong pricing power. One of the things I look for in high-quality businesses is the ability to raise prices in inflationary environments and maintain them in deflationary times – and that is exactly what Simpson can do.

In a relatively concentrated portfolio of best ideas, the other side of the equation is selling businesses. Sometimes, this is because we see a deterioration in the company’s competitive positioning, or because of valuation, or that simply the company has grown above our upper market cap limit of $10 billion and reached its price target. Nordson is an example of the latter. We were holders of the company since 2018. Nordson is a manufacturer of adhesive dispensing systems and, like Simpson, had poor analytical coverage, dominated its niche and had strong pricing power. The company crossed the $10 billion threshold last year and reached our price target during Q1. At this point we decided to sell.
Q1 was another busy month in terms of corporate access. Working from home has meant a lot more companies offering meetings since they don’t have to travel. I attended around 50 such meetings across a broad range of geographies and sectors, from Finnish pet food stores to fine wine brands. One of the more interesting meetings was with the new CEO of Ritchie Brothers Auctioneers, the largest auctioneer of used industrial equipment globally. Think Sotheby’s or Christie’s but excavators instead of Picassos. One of the most interesting takeaways from the meeting was the company making better use of data. Clearly, from years of selling used industrial equipment it has built up an unrivalled database, which it is now exploring ways of monetising.
As we move into Q2, it will be business as usual for us. Markets have been turbulent of late, with reopening optimism and inflation expectations driving style and sector rotations. But we remain laser-focused on the long-term: holding the 70-90 companies with the strongest, most sustainable competitive advantages we can find.

The mention of any specific shares or bonds should not be taken as a recommendation to deal.

15 June 2021
Scott Woods
Scott Woods
Portfolio Manager
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June 2021
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1 As of April 2021

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