As investors face a number of challenges, notably climate change, Geneva-based asset management company Quaero Capital outlines its top stock picks this month.
As the United Nations Climate Change Conference starts in Dubai this week, Adrian Bignell (pictured), portfolio manager at Quaero Capital, discusses his top stock picks included in the recently-launched Quaeronaut Small and Mid-Cap fund. The fund, which comes under Article 8 of the EU’s Sustainable Financial Disclosure Regulation, invests in European small and mid-cap stocks.
As an Article 8 fund, Quaeronaut’s philosophy is to engage with the companies in the fund to drive positive change by dialogue and encouragement.
In ESG terms, Bignell believes that there are winners and losers and in the middle, there are a host of companies waking up to and embracing the new challenges. He is keen to help these companies to go as fast as they can in terms of improving their existing business and even to go as far as adapting to new business models if it makes sense. He singles out three firms in the fund that encapsulate a willingness to pioneer a more sustainable way of doing things in their respective niches.
Fugro is a Dutch seismic data collection company which, historically,, has mainly served the oil and gas sector. The oil and gas clients require an accurate knowledge of where and how to install infrastructure on land and, more importantly, on the ocean seabed. Knowing where to dig trenches, install pipes and position oil and gas production equipment needs a detailed understanding of the geo-technical data. But from 2017, the company has undergone a profound change. They have sought to pivot the business away from oil and gas and towards the offshore wind industry.
By using its vessels, engineers and data processing capability, Fugro is able to drill and analyse the ocean bed core samples that allow it to advise where to position the monopiles that hold the wind turbines in place on the sea floor. And every single wind turbine requires its own individual core sample to ensure it doesn’t end up being positioned in a weak structure or on a hard boulder. With some windfarms holding more than 200 individual turbines, there is a lot of work for Fugro. As a result, Fugro now has over 30 per cent of group sales coming from renewables. The business is better balanced and well positioned to benefit from the growth in offshore wind in the years ahead. Bignell sees good opportunities for the stock to re-rate accordingly in light of the improved business mix and strong growth outlook.
With population growth and climate change, a significant challenge is how we will feed a growing global population with sustainable, healthy food. Due to its efficient feed conversion ratio (the amount of feed to produce a kilo of protein), salmon stands out as one of the most efficient ways of producing protein. A little more than 1 kilo of feed is needed to grow 1 kilo of salmon. For chicken, the ratio is less efficient at over 2 kilos, and for beef much less efficient at 10 kilos. Just shy of 600 kilometres north of Norway (the largest salmon farming country in the world), Bakkafrost farms salmon in the Faroe Islands.
A near-death experience in the years 2005 to 2006 (high mortality of fish due to disease and conditions) spurred them on to greater innovation for rearing salmon. Following on from a significant investment in new hatchery facilities and technology, Bakkafrost now boasts the lowest salmon mortality amongst Norwegian peers. And by having a fish feed with 50 per cent higher omega 3 and vitamin D than the average, the feed conversion is a sector-leading 1.06x versus an average in the industry of 1.24x.
As a result, Bakkafrost successfully raises larger salmon. The bigger the salmon, the better it is for profitability as the larger salmon attract higher prices in the sushi bars of Tokyo and Beijing. Bakkafrost is able to leverage its industry-leading standards by buying businesses that are less well run; the recent acquisition of the Scottish Salmon company should yield good revenue and cost synergies in the coming two to four years. In Bakkafrost's words, the business was like theirs was back in the 80s – there are lots of improvements to make.
Befesa is a global steel dust waste collector. As the world shifts away from the old way of producing steel (coal powered blast furnaces fed with iron ore) to electric arc furnaces (renewable electricity powered furnaces fed with scrap steel), their addressable market rises year-by-year. Whilst their home market Europe is the most advanced market by penetration, the US and Asia are catching up fast as they move away from traditional blast furnaces. Befesa has done a good job at consolidating the market. In addition to Europe, Bignall said that they are now number one in the US, having bought the big US incumbent and are the biggest player in China too.
However, their timing has not been as good. The global macro weakness has weighed on commodity prices and the key waste streams (zinc and aluminium) that they refine and ultimately sell have seen a weak price environment in recent times. When will the macro pick up and when will the commodity prices recover? It is hard to guess but Bignell thinks his patience will be rewarded in the medium term.
See more here about COP 28 and what wealth managers expect and what they hope for.