In an ideal world, investors would buy shares in a market-leading company during its infancy and reap the rewards as it balloons in size and influence. But identifying a company that will become a future household name is a difficult skill that requires a lot of market knowledge. We asked five fund managers which small and mid-cap companies they expect to become some of the biggest names in the UK market over the next five years.
TP ICAP
Market cap: £1.7bn
Financial services company TP ICAP could become a regular name spoken by UK investors in the coming years, according to Gervais Williams, manager of Premier Miton’s Diverse Income trust. It owns a number of companies, but there is one in particular that could significantly bolster its profile in the UK market – Liquidnet.
This business has already found success in connecting institutional investors who want to trade equities. What excites Williams is the next stage of its development. It is now using the same framework in its equity marketplace to connect buyers and sellers of credit.
“We complain about liquidity in the UK equity market, which has not been marvellous, but it’s worse in a lot of these very detailed tranches of the credit sector,” Williams says.
“I think Liquidnet will become hugely valuable when dealing in credit – it will make the company an enormous amount of money. The share price is now ridiculously cheap, so if its earnings grow as much as I hope, it could easily double in share price and get into the FTSE 100.”
Liquidnet can take this step into the credit market with relative ease, thanks to its existing structure dealing in equities. It would take new entrants to the market, without this framework, years to build the necessary repertoire, placing Liquidnet in an advantageous position with high barriers to entry.
Williams says: “It already has links with all the institutions from the institutional equity side, so now they can plug exactly the same software into the credit side. It has a huge commercial advantage.”
But with past successes under its belt and a lucrative future to look forward to, why is Liquidnet not at the top of other fund managers’ buylists?
The manager says markets are waiting for it to partner with more major banks – of which it already has three – before investing on scale. Once it acquires partnerships with five major banks, he expects money to pour into its shares.
“It’s got all the right ingredients – it’s just a matter of seeing how quickly it rolls out,” he explains. “It needs to convince the major banks who then have to put the software in, which has taken some time. People have been a little frustrated that it hasn’t been quicker, but it doesn’t matter a bit to be honest.”
4imprint
Market cap: £1.7bn
Another company with a fortified market position that could find its way into the FTSE 100 is 4imprint. This customised promotional product company is the top holding in the Invesco Perpetual UK Smaller Companies trust, run by Jonathan Brown, who says its high barriers to entry give it “enormous potential” for growth.
However, printing designs onto shirts, mugs and pens is hardly a specialised area. There are thousands of small local businesses doing just this, but 4imprint’s dominance online has soaked up a large portion of the market share. Many customers wanting to buy customised merchandise now look online, where 4imprint has the advantage.
“It’s not a market that is undersupplied. There are tonnes of competitors out there but 4imprint has managed to transition online much better than its competitors and is therefore significantly bigger,” Brown says. “Anybody could do this, but the advantage 4imprint has is scale – not just in terms of marketing spend, but also the volume discounts from suppliers that others can’t match. Being the biggest in the space gives it a cost advantage over smaller players and that scale factor is the main barrier to entry.”
It may be a big player in its field, but Brown says 4imprint still has a great deal of scalability yet to come, thanks to its lack of overheads. The company does not manufacture any of the products itself – it simply prints onto them, meaning it has less to spend on premises, machinery and staff. This makes 4imprint “incredibly cash generative” and could help it grow rapidly in future.
Trainline
Market cap: £1.5bn
Another company that is a few positive earnings reports away from entering the FTSE 100 is Trainline. This online train ticketing service may draw feelings of contempt from UK commuters who have had their journeys hampered by delays and cancellations in recent years, but TM Tellworth UK Smaller Companies manager Paul Marriage says Trainline’s business model is world leading.
Using digital tickets is standard in the UK, but many countries across Europe still use physical tickets, which is a far more laborious process for rail users. This provides Trainline with the opportunity to lead this transition across Europe and gain a key characteristic shared by most FTSE 100 companies – global revenues.
Marriage says: “While UK rail may be much maligned by many, our electronic ticketing and ‘tap in, tap out’ process is world leading and one that many are seeking to emulate. In Europe, as long-distance routes open up for competition and short-haul air travel is being shunned, Trainline is in pole position to be the aggregator of choice.”
Ticket sales from Europe accounted for a fifth (20.8%) of Trainline’s £327m of revenue last year – which was a 73.5% year-on-year increase in itself – with the UK still being its major income generator. Continued expansion across Europe could triple its profits over the next five years according to Marriage, making it the “holy grail” for investors seeking a small-cap company that could go from a “niche market leader to a globally relevant scale”.
JTC
Market cap: £1.5bn
Fund administration services company JTC is another rapidly growing stock that could find its way into the FTSE 100 if its speedy scalability is maintained, according to Chris McVey, deputy manager of the Octopus UK Micro Cap Growth fund.
When it listed publicly in 2018, JTC made an ambitious pledge to double its revenue, which it achieved within three years. So it did the same again in 2021, aiming to rapidly double the size of the company – a target it quickly met for a second time last year. This year, JTC embarked on its third mission to double the company’s size. If it meets this goal by 2027 as it intends, McVey says JTC could easily take a place in the FTSE 100.
Organic growth at JTC has been strong, but it aims to accelerate growth over the coming years through acquisitions. This has been a key driver of its sizable development in the past, with JTC having made 16 acquisitions since listing. Additional purchases could account for two-thirds of its growth over the next three years.
McVey says: “Going forward, the group is looking to broaden its service offering and geographical reach. Management recently laid out clear plans to double revenues and profits again to 2027, which if achieved, and assuming the business retains its current price to earnings multiple, could leave the stock well on its way toward FTSE 100 inclusion.”
Trustpilot
Market cap: £920m
Like many of the companies steamrolling towards the FTSE 100, customer review website Trustpilot has a long runway for growth with few competitors in its path. Though small in size, Gresham House UK Smaller Companies manager Ken Wotton says the company has “limited direct competition, a compelling value proposition and is a trusted brand”.
Shares in Trustpilot trade at a steep discount compared with other global markets like many small-cap companies listed in the UK, but it could skyrocket into the FTSE 100 once its price catches up to its real value.
Wotton says: “It is profitable, generates cash and is well funded for expansion. If it can deliver the growth and partially close its rating discount to US listed software peers, that would be sufficient to pilot itself into the top tier of the UK equity markets.”
This article originally appeared in the July/August issue of Portfolio Adviser magazine
